<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1997
REGISTRATION NO. 333-37609
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
APPLIED MICRO CIRCUITS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3674 94-2586591
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
--------------
6290 SEQUENCE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 450-9333
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
DAVID M. RICKEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
APPLIED MICRO CIRCUITS CORPORATION
6290 SEQUENCE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 450-9333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
COPIES TO:
<TABLE>
<S> <C>
MARK A. MEDEARIS THOMAS W. KELLERMAN
GLEN R. VAN LIGTEN CHRISTINA B. ROBINSON
CARL L. SPATARO, JR. PATRICIA MONTALVO
MITCHELL S. ZUKLIE BROBECK, PHLEGER & HARRISON LLP
VENTURE LAW GROUP TWO EMBARCADERO PLACE
A PROFESSIONAL CORPORATION 2200 GENG ROAD
2800 SAND HILL ROAD PALO ALTO, CA 94303
MENLO PARK, CA 94025
</TABLE>
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1997
[LOGO OF AMCC]
5,650,000 SHARES
COMMON STOCK
Of the 5,650,000 shares of Common Stock offered hereby, 2,700,000 shares are
being sold by Applied Micro Circuits Corporation, ("AMCC" or the "Company"),
and 2,950,000 shares are being sold by certain stockholders of the Company. See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholders. Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price per share will
be between $8.00 and $10.00. See "Underwriting" for information relating to the
method of determining the initial public offering price.
-----------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
============================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
- --------------------------------------------------------------------------------------------
Total(2)................... $ $ $ $
============================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $700,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 847,500 shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
-----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES, INC.
COWEN & COMPANY
The date of this Prospectus is , 1997
<PAGE>
AMCC's silicon solutions for high-bandwidth connectivity
SONET/SDH/ATM
.Three generations of products with increasing levels of integration
.Low power, low jitter and low cost
[Picture of group of six AMCC integrated circuits layered on a triangular
background.]
FIBRE CHANNEL/GIGABIT ETHERNET
.Evolution to fully integrated transceiver
.One chip for two standards
[Picture of group of six AMCC integrated circuits layered on a triangular
background.]
SERIAL BACKPLANE
.Crosspoint switches
.Serializers/deserializers
.Fast acquisition and fast reconfiguration times
[Picture of group of four AMCC integrated circuits.]
[Picture of cluster of optical fiber lines.]
[Picture of AMCC integrated circuits, a computer keyboard, a CD-ROM, a digital
video disk and a computer.]
[Picture of personal computer monitor.]
[Picture of an AMCC integrated circuit on top of a wafer.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
2
<PAGE>
AMCC's silicon solutions for the
advanced telecommunications and data communications solutions
This 3Com switch uses AMCC's S3028 OC-12 transceiver chip in an ATM optical
interface card
[Picture of a computer switch, an ATM optical interface card and an AMCC
transceiver chip.]
ROUTER
BRIDGE
ETHERNET
SWITCH
LAN BACKBONE
[Three symbols organized into a pictorial depiction of a LAN backbone.]
Nortel's S/DMS Transport Node OC-48 ring uses AMCC's ASIC products
[Picture of Nortel's S/DMS Transport Node OC-48 ring.]
METROPOLITAN AREA NETWORK
[Graphical depiction of a row of eight skyscrapers.]
Alcatel uses AMCC's ASICs in OC-48 (2.4 GHz) and OC-192(9.6GHz) transmission
equipment.
[Picture of Alcatel's OC-48 transmission equipment.]
Alcatel uses AMCC's S3017/18 transmitter/receiver pair in an OC-12, 622 Mbps,
cross-connect switch.
[Picture of Alcatel's OC-12 cross-connect switch and two AMCC.]
WAN SONET/SDH
<PAGE>
World's communications infrastructure
solutions AMCC provides high-performance, high-bandwidth products to worldwide
industry leaders such as 3Com, Alcatel, GPT, Nortel (Northern Telecom), Sun
Microsystems and Vixel.
RAID
DESKTOP PC
FIBRE CHANNEL
ATM
SERVER
WORKSTATION
DATA NETWORK
[Four symbols organized into a pictorial depiction of a data network.]
A Sun Microsystems server with an OC-3/12 ATM interface uses AMCC's S3020/21
transmitter/receiver pair.
[Picture of a Sun Microsystems' server and an AMCC transmitter/receiver
pair.]
WORKSTATION
SERVER
DISK DRIVE
FIBRE CHANNEL
FIBRE CHANNEL
WORKSTATION
ENGINEERING NETWORK
[Four symbols organized into a pictorial depiction of an Engineering
Network.]
Vixel's optical modules for the 1 GHz Fibre Channel interface use AMCC's
S2044/45 transmitter/receiver pair.
[Picture of Vixel optical modules and an AMCC transmitter/receiver pair.]
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY
PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................ 4
Risk Factors........................................................... 6
Use of Proceeds........................................................ 19
Dividend Policy........................................................ 19
Capitalization......................................................... 20
Dilution............................................................... 21
Selected Consolidated Financial Data................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 23
Business............................................................... 30
Management............................................................. 45
Certain Transactions................................................... 54
Principal and Selling Stockholders..................................... 56
Description of Capital Stock........................................... 59
Shares Eligible for Future Sale........................................ 61
Underwriting........................................................... 63
Legal Matters.......................................................... 65
Experts................................................................ 65
Additional Information................................................. 65
Index to Consolidated Financial Statements............................. F-1
</TABLE>
----------------
The Company intends to furnish its stockholders with annual reports
containing audited financial statements examined by independent auditors and
make available to its stockholders unaudited quarterly information for the
first three quarters of each fiscal year.
AMCC(R) is a registered trademark of the Company. All rights are fully
reserved. This Prospectus also includes trademarks of companies other than the
Company.
The Company was incorporated in California in 1979 and reincorporated in
Delaware in 1987. The Company's principal executive offices are located at
6290 Sequence Drive, San Diego, California 92121 and its telephone number is
(619) 450-9333.
3
<PAGE>
SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements and from the results
historically experienced. Factors that may cause or contribute to such
differences include, but are not limited to, those under "Risk Factors" and
elsewhere in this Prospectus. The following summary is qualified in its
entirety by the more detailed information, including "Risk Factors" and the
Consolidated Financial Statements and Notes thereto, appearing elsewhere in
this Prospectus.
THE COMPANY
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency, mixed-signal design
expertise, system-level knowledge and multiple silicon process technologies to
offer IC products for the telecommunications markets that address the SONET/SDH
and ATM transmission standards and for the data communications markets that
address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. The
Company also leverages its technology to provide solutions for the ATE, high-
speed computing and military markets. Customers of the Company include 3Com,
Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems
and Teradyne.
Substantial growth in the Internet, World Wide Web and cellular and facsimile
communications, the emergence of new applications such as video conferencing
and the growing demand for remote network access and higher speed, data
intensive communication between local area networks have caused current network
system infrastructures to become bandwidth constrained due to the increasing
volume and complexity of data types transmitted. In order to meet these
increased bandwidth demands, communications systems OEMs must utilize
increasingly complex ICs, which account for a greater portion of the value-
added proprietary content of these systems. This trend has created a
significant opportunity for IC suppliers with mixed-signal and system-level
expertise that are capable of designing solutions that enable the transmission
of increasing volumes of complex data at increasingly higher speeds. Dataquest
estimates that the worldwide SONET/SDH market for ICs was approximately $240
million in 1996 and will increase to approximately $700 million in 2000 and
that the ATM market for ICs was approximately $130 million in 1996 and will
increase to approximately $700 million in 2000. The Fibre Channel and Gigabit
Ethernet markets for ICs were relatively small in 1996, and Dataquest estimates
these combined markets will be approximately $300 million in 2000.
The Company addresses these market opportunities by leveraging its advanced
bipolar and BiCMOS process technologies at its internal wafer fabrication
facility, complemented by advanced CMOS processes from external foundries, to
offer high-performance, high-frequency solutions optimized for specific
applications and customer requirements. The Company believes silicon-based
processes tend to be less expensive, more predictable with respect to yields
and better able to ramp to high-volume production than non-silicon processes.
By using its silicon-based processes and extensive design libraries, the
Company is able to offer products that provide significant cost, power,
performance and reliability advantages for communications systems OEMs.
The Company has developed multiple generations of many of its products. In
the telecommunications market, the Company provides ATM and SONET/SDH physical
layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC-
12 standards and is currently developing an OC-48 chip set. In the data
communications market, the Company provides physical layer transceivers for
Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches
for serial backplanes. In the high-speed computing market, the Company provides
PCI controllers and high-frequency clock drivers and clock generators. In
addition, the Company also provides high-performance, low-power ASIC products
for the ATE and military markets.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company............. 2,700,000 shares
Common Stock Offered by the Selling Stockhold-
ers............................................ 2,950,000 shares
Common Stock Outstanding after the Offering..... 19,801,750 shares(1)
Use of Proceeds................................. For capital expenditures related to
expansion of the Company's manufacturing
operations, working capital and general
corporate purposes
Proposed Nasdaq National Market Symbol.......... AMCC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $27,955 $35,208
Gross profit............ 17,735 20,499 19,437 16,095 27,411 12,201 18,674
Operating income
(loss)(4).............. 1,319 1,713 (783) (3,420) 7,004 2,895 5,942
Net income (loss)(4).... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share(2)............... $ 0.33 $ 0.30
======= =======
Shares used in pro forma
net income per share
calculation(2)......... 18,983 19,586
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital............................................. $18,965 40,864
Total assets................................................ 44,382 66,281
Long-term capital lease obligations, less current portion... 2,096 2,096
Total stockholders' equity.................................. 30,118 52,017
</TABLE>
- -------
(1) Based on the pro forma number of shares of Common Stock outstanding at
September 30, 1997. Excludes, as of September 30, 1997: (i) 157,968 shares
of Common Stock issuable upon exercise of options outstanding under the
Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan") at a
weighted average exercise price of $0.46 per share; (ii) 2,057,975 shares
of Common Stock issuable upon exercise of options outstanding under the
Company's 1992 Stock Option Plan (the "1992 Plan") at a weighted average
exercise price of $1.08 per share; (iii) 2,544,714 shares reserved for
future issuance under the 1992 Plan; (iv) 200,000 shares reserved for
future issuance under the Company's 1997 Directors' Plan (the "Directors'
Plan"); (v) 400,000 shares of Common Stock reserved for issuance under the
Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"); (vi)
83,807 shares of Common Stock issuable upon exercise of certain warrants at
a weighted average exercise price of $2.91 per share; and (vii) 24,720
shares of Common Stock issuable upon exercise of certain other outstanding
options at a weighted average exercise price of $0.48 per share.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the method used to determine the number of shares used to compute the
pro forma net income per share amounts.
(3) Adjusted to give effect to the sale of 2,700,000 shares of Common Stock by
the Company at an assumed initial public offering price of $9.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
(4) The Company's results of operations during fiscal 1994 includes a net gain
of approximately $9.5 million on contract settlement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
for discussion of the net losses in fiscal 1995 and 1996.
Unless otherwise indicated, all information in this Prospectus (i) reflects a
2-for-3 reverse stock split of the Preferred Stock and Common Stock to be
effected upon the closing of this offering, (ii) reflects the conversion of
each share of Preferred Stock into Common Stock upon the closing of this
offering and (iii) assumes no exercise of the Underwriters' over-allotment
option. See "Underwriting."
5
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective purchasers of the Common Stock offered hereby
should review carefully the following risk factors as well as the other
information set forth in this Prospectus. This Prospectus contains forward-
looking statements based upon current expectations that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
FLUCTUATIONS IN OPERATING RESULTS
AMCC has experienced and may in the future experience fluctuations in its
operating results. The Company had fluctuating revenues and incurred net
losses in fiscal 1995 and 1996. The Company's quarterly and annual operating
results are affected by a wide variety of factors that could materially and
adversely affect revenues, gross profit and operating income, including, but
not limited to: the rescheduling or cancellation of orders by customers;
fluctuations in the timing and amount of customer requests for product
shipments; fluctuations in manufacturing yields and inventory levels; changes
in product mix; the Company's ability to introduce new products and
technologies on a timely basis; the announcement or introduction of products
and technologies by the Company's competitors; the availability of external
foundry capacity, purchased parts and raw materials; competitive pressures on
selling prices; the timing of investments in research and development; market
acceptance of the Company's and its customers' products; the timing of
depreciation and other expenses to be incurred by the Company in connection
with the expansion of its existing manufacturing facility and in connection
with its proposed new wafer fabrication facility; costs associated with
compliance with applicable environmental regulations; costs associated with
future litigation, if any, including without limitation, litigation relating
to the use or ownership of intellectual property; general semiconductor
industry conditions; and general economic conditions.
The Company's expense levels are relatively fixed and are based, in part, on
its expectations of future revenues. Because the Company is continuing to
increase its operating expenses for personnel and new product development and
is limited in its ability to reduce expenses quickly in response to any
revenue shortfalls, the Company's business, financial condition and operating
results would be adversely affected if increased revenues are not achieved.
Furthermore, sudden shortages of raw materials or production capacity
constraints can lead producers to allocate available supplies or capacity to
customers with resources greater than those of the Company, which could
interrupt the Company's ability to meet its production obligations. Finally,
average selling prices in the semiconductor industry historically have
decreased over the life of a product, and as a result, the average selling
prices of the Company's products may be subject to significant pricing
pressures in the future. In response to such pressures, the Company may take
pricing or other actions that could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company's business is characterized by short-term orders and shipment
schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, the Company typically plans its production and
inventory levels based on internal forecasts of customer demand, which is
highly unpredictable and can fluctuate substantially. In addition, from time
to time, in response to anticipated long lead times to obtain inventory and
materials from its outside foundries, the Company may order materials in
advance of anticipated customer demand, which might result in excess inventory
levels or unanticipated inventory write-downs if expected orders fail to
materialize or other factors render the customer's products less marketable.
Furthermore, the Company currently anticipates that an increasing portion of
its revenues in future periods will be derived from sales of application-
specific standard products ("ASSPs"), as compared to application-specific
integrated circuits ("ASICs"). Customer orders for ASSPs typically have
shorter lead times than orders for ASICs, which may make it increasingly
difficult for the Company to predict its revenues and inventory levels and
adjust production appropriately in future periods. A failure by the Company to
plan inventory and production levels effectively could have a material adverse
effect on the Company's business, financial condition and operating results.
6
<PAGE>
As a result of the foregoing or other factors, the Company may experience
fluctuations in future operating results on a quarterly or annual basis that
could materially and adversely affect its business, financial condition and
operating results. For example, as a result of the termination of a
relationship with a strategic foundry partner, decreased orders from two major
customers, charges associated with a reduction in the Company's workforce and
charges for excess inventory, the Company experienced revenue fluctuations and
incurred net losses in fiscal 1995 and 1996. Accordingly, the Company believes
that period-to-period comparisons of its operating results should not be
relied upon as an indication of future performance. In addition, the results
of any quarterly period are not indicative of results to be expected for a
full fiscal year. There can be no assurance that the Company will be able to
achieve increased sales or maintain its profitability in any future period. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
MANUFACTURING YIELDS
The fabrication of semiconductors is a complex and precise process. Minute
levels of contaminants in the manufacturing environment, defects in masks used
to print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. In addition, the
planned expansion of the clean room in the Company's existing wafer
fabrication facility could increase the risk to the Company of contaminants in
such facility. Many of these problems are difficult to diagnose, time
consuming and expensive to remedy and can result in shipment delays. As a
result, semiconductor companies often experience problems in achieving
acceptable wafer manufacturing yields, which are represented by the number of
good die as a proportion of the total number of die on any particular wafer,
particularly in connection with the commencement of production in a new
fabrication facility or the transfer of manufacturing operations between
fabrication facilities. Because the majority of the Company's costs of
manufacturing are relatively fixed, maintenance of the number of shippable die
per wafer is critical to the Company's results of operations. Yield decreases
can result in substantially higher unit costs and may result in reduced gross
profit and net income. The Company has in the past experienced yield problems
in connection with the manufacture of its products. For example, in the second
quarter of fiscal 1997 the Company experienced a decrease in internal yields
primarily due to the Company's increasing volume production of a single
product at less than normal production yields in support of a customer's
delivery requirements. This decrease in internal yields adversely impacted the
Company's gross margin for the quarter by approximately $600,000. The Company
estimates yields per wafer in order to estimate the value of inventory. If
yields are materially different than projected, work-in-process inventory may
need to be revalued. The Company has in the past and may in the future from
time to time take inventory write-downs as a result of decreases in
manufacturing yields. There can be no assurance that the Company will not
suffer periodic yield problems in connection with new or existing products or
in connection with the commencement of production in the Company's proposed
new manufacturing facility or the transfer of the Company's manufacturing
operations to such facility, any of which problems could cause the Company's
business, financial condition and operating results to be materially and
adversely affected. See "-- Manufacturing Capacity Limitations; New Production
Facility."
Semiconductor manufacturing yields are a function both of product design and
process technology. In cases where products are manufactured for the Company
by an outside foundry, the process technology is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As
a result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the Company and the manufacturer. In some cases this
risk could be compounded by the offshore location of certain of the Company's
manufacturers, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems.
7
<PAGE>
If the Company develops relationships with additional outside foundries,
yields could be adversely affected due to difficulties associated with
adapting the Company's technology and product design to the proprietary
process technology and design rules of such new foundries. Because of the
Company's limited access to wafer fabrication capacity from its outside
foundries for certain of its products, any decrease in manufacturing yields of
such products could result in an increase in the Company's per unit costs for
such products and force the Company to allocate its available product supply
among its customers, thus potentially adversely impacting customer
relationships as well as revenues and gross margin. There can be no assurance
that the Company's outside foundries will achieve or maintain acceptable
manufacturing yields in the future. Furthermore, the Company also faces the
risk of product recalls resulting from design or manufacturing defects which
are not discovered during the manufacturing and testing process. Any of the
foregoing factors could have a material adverse effect on the Company's
business, financial condition and operating results. See "Business --
Manufacturing."
RISKS ASSOCIATED WITH INCREASING DEPENDENCE ON TELECOMMUNICATIONS AND DATA
COMMUNICATIONS MARKETS AND INCREASING DEPENDENCE ON APPLICATION-SPECIFIC
STANDARD PRODUCTS
An important part of the Company's strategy is to continue its focus on the
telecommunications market and to leverage its technology and expertise to
penetrate further the data communications market for high-speed ICs. The
Company anticipates that sales to its other traditional markets will grow more
slowly or not at all and, in some instances, as in the case of military
markets, may decrease over time. The telecommunications and data
communications markets are characterized by extreme price competition, rapid
technological change, industry standards that are continually evolving and, in
many cases, short product life cycles. These markets frequently undergo
transitions in which products rapidly incorporate new features and performance
standards on an industry-wide basis. If, at the beginning of each such
transition, the Company's products are unable to support the new features or
performance levels being required by OEMs in these markets, the Company would
be likely to lose business from an existing or potential customer and,
moreover, would not have the opportunity to compete for new design wins until
the next product transition occurs. There can be no assurance that the Company
will be able to penetrate the telecommunications or data communications market
successfully. A failure by the Company to develop products with required
features or performance standards for the telecommunications or data
communications markets, a delay as short as a few months in bringing a new
product to market or a failure by the Company's telecommunications or data
communications customers to achieve market acceptance of their products by
end-users could significantly reduce the Company's revenues for a substantial
period, which would have a material adverse effect on the Company's business,
financial condition and operating results. See " -- Risks Associated with
Dependence on High-Speed Computing Market."
A significant portion of the Company's revenues in recent periods has been,
and is expected to continue to be, derived from sales of products based on the
Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH")
transmission standards and the Asynchronous Transfer Mode ("ATM") transmission
standard. If the communications market evolves to new standards, there is no
assurance the Company will be able to successfully design and manufacture new
products that address the needs of its customers or that such new products
will meet with substantial market acceptance. Although the Company has
developed some initial products for the emerging Gigabit Ethernet and Fibre
Channel communications standards, sales of these products have been minimal to
date, and there is no assurance AMCC will be successful in addressing the
market opportunities for products based on these standards. See " -- Rapid
Technological Change; Necessity to Develop and Introduce New Products."
The Company has under development a number of ASSPs for the
telecommunications and data communications markets, from which it expects to
derive an increasing portion of its future revenues. The Company has a limited
operating history in selling ASSPs, particularly to customers in the
telecommunications and data communications markets, upon which an evaluation
of the Company's prospects in such markets can be based. In addition, the
Company's relationships with certain customers in these markets have been
established recently. The Company's future success in selling ASSPs, and in
particular, selling ASSPs to
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customers in the telecommunications and data communications markets, will
depend in large part on whether the Company's ASSPs are developed on a timely
basis and whether such products achieve market acceptance among new and
existing customers, and on the timing of the commencement of volume production
of the OEMs' products, if at all. The Company has in the past encountered
difficulties in introducing new products in accordance with customers'
delivery schedules and the Company's initial expectations. There can be no
assurance the Company will not encounter such difficulties in the future or
that the Company will be able to develop and introduce ASSPs in a timely
manner so as to meet customer demands. Any such difficulties or a failure by
the Company to develop and timely introduce such ASSPs could have a material
adverse effect on the Company's business, financial condition and operating
results. See "-- Rapid Technological Change; Necessity to Develop and
Introduce New Products."
RISKS ASSOCIATED WITH DEPENDENCE ON HIGH-SPEED COMPUTING MARKET
The Company historically has derived significant revenues from product sales
to customers in the high-speed computing market and currently anticipates that
it will continue to derive significant revenues from sales to customers in
this market in the near term. The market for high-speed computing IC products
is subject to extreme price competition. The Company believes that the average
selling prices of the Company's IC products for the high-speed computing
market will decline in future periods and that the Company's gross margin on
sales of such products also will decline in future periods. There can be no
assurance that the Company will be able to reduce the costs of manufacturing
its high-speed computing IC products in response to declining average selling
prices. Even if the Company successfully utilizes new processes or
technologies to reduce the manufacturing costs of its high-speed computing
products in a timely manner, there can be no assurance that the Company's
customers in the high-speed computing market will purchase such new products.
A failure by the Company to reduce its manufacturing costs sufficiently or a
failure by the Company's customers to purchase such products could have a
material adverse effect on the Company's business, financial condition and
operating results. Furthermore, the Company expects that certain of its
competitors may seek to develop and introduce products that integrate the
functions performed by the Company's high-speed computing IC products on a
single chip. In addition, one or more of the Company's customers may choose to
utilize discrete components to perform the functions served by the Company's
high-speed computing IC products or may use their own design and fabrication
facilities to create a similar product. In either case, the need for high-
speed computing customers to purchase the Company's IC products could be
eliminated, which could adversely affect the Company's business, financial
condition and operating results. See "-- Intense Competition."
RAPID TECHNOLOGICAL CHANGE; NECESSITY TO DEVELOP AND INTRODUCE NEW PRODUCTS
The markets for the Company's products are characterized by rapidly changing
technologies, evolving and competing industry standards, short product life
cycles, changing customer needs, emerging competition, frequent new product
introductions and enhancements and rapid product obsolescence. The Company's
future success will depend, in large part, on its ability to develop, gain
access to and use leading technologies in a cost-effective and timely manner
and on its ability to continue to develop its technical and design expertise.
The Company's ability to have its products designed into its customers' future
products, to maintain close working relationships with key customers in order
to develop new products, particularly ASSPs, that meet customers' changing
needs and to respond to changing industry standards and other technological
changes on a timely and cost-effective basis will also be a critical factor in
the Company's future success. Furthermore, once a customer has designed a
supplier's product into its system, the customer typically is extremely
reluctant to change its supply source due to significant costs associated with
qualifying a new supplier. Accordingly, the failure by the Company to achieve
design wins with its key customers could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Research and Development."
Products for telecommunications and data communications applications, as
well as for high-speed computing applications are based on industry standards
that are continually evolving. The Company's ability
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to compete in the future will depend on its ability to identify and ensure
compliance with evolving industry standards. The emergence of new industry
standards could render the Company's products incompatible with products
developed by major systems manufacturers. As a result, the Company could be
required to invest significant time and effort and to incur significant
expense to redesign the Company's products to ensure compliance with relevant
standards. If the Company's products are not in compliance with prevailing
industry standards for a significant period of time, the Company could miss
opportunities to achieve crucial design wins. There can be no assurance that
the Company will be successful in developing or using new technologies or in
developing new products or product enhancements on a timely basis, or that
such new technologies, products or product enhancements will achieve market
acceptance. In the past, the Company has encountered difficulties in
introducing new products and product enhancements in accordance with
customers' delivery schedules and the Company's initial expectations. The
Company could encounter such difficulties in the future. The Company's pursuit
of necessary technological advances may require substantial time and expense.
A failure by the Company, for technological or other reasons, to develop and
introduce new or enhanced products on a timely basis that are compatible with
industry standards and satisfy customer price and performance requirements
could have a material adverse effect on the Company's business, financial
condition and operating results. See "-- Fluctuations in Operating Results,"
and "-- Risks Associated with Increasing Dependence on Telecommunications and
Data Communications Markets and Increasing Dependence on Application-Specific
Standard Products."
INTENSE COMPETITION
The semiconductor market is highly competitive and subject to rapid
technological change, price erosion and heightened international competition.
The telecommunications, data communications, ATE and high-speed computing
industries in particular are intensely competitive. The Company believes that
the principal factors of competition in its markets are price, product
performance, product quality and time-to-market. The ability of the Company to
compete successfully in its markets depends on a number of factors, including
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the
efficiency of production, design wins for its IC products, ramp up of
production of the Company's products for particular systems manufacturers,
end-user acceptance of the systems manufacturers' products, market acceptance
of competitors' products and general economic conditions. In addition, the
Company's competitors may offer enhancements to existing products or offer new
products based on new technologies, industry standards or customer
requirements that are available to customers on a more timely basis than
comparable products from the Company or that have the potential to replace or
provide lower-cost alternatives to the Company's products. The introduction of
such enhancements or new products by the Company's competitors could render
the Company's existing and future products obsolete or unmarketable.
Furthermore, once a customer has designed a supplier's product into its
system, the customer is extremely reluctant to change its supply source due to
the significant costs associated with qualifying a new supplier. Finally, the
Company expects that certain of its competitors and other semiconductor
companies may seek to develop and introduce products that integrate the
functions performed by the Company's IC products on a single chip, thus
eliminating the need for the Company's products. Each of these factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Risks Associated with Dependence on High-
Speed Computing Market."
In the telecommunications and data communications markets, the Company
competes primarily against gallium arsenide ("GaAs") based companies such as
Giga, TriQuint and Vitesse, and bipolar silicon based products from companies
such as Hewlett-Packard, Maxim and Sony. In certain circumstances, most
notably with respect to ASICs supplied to Nortel, AMCC's customers or
potential customers have internal IC manufacturing capabilities, and this
internal source is an alternative available to the customer. In the ATE
market, the Company competes primarily against Vitesse and silicon ECL and
BiCMOS products offered principally by semiconductor manufacturers such as
Analog Devices, Lucent Technologies and Maxim. In the high-speed computing
market, the Company competes primarily against Chrontel and PLX. Many of these
companies and potential new competitors have significantly greater financial,
technical, manufacturing and
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marketing resources than the Company. In addition, in lower-frequency
applications, the Company faces increasing competition from CMOS-based
products, particularly as the performance of such products continues to
improve. There can be no assurance that the Company will be able to develop
new products to compete with new technologies on a timely basis or in a cost-
effective manner. Any failure by the Company to compete successfully in its
target markets, particularly in the telecommunications and data communications
markets, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "--Risks Associated with
Increasing Dependence on Telecommunications and Data Communications Markets
and Increasing Dependence on Application-Specific Standard Products."
MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY
The Company currently manufactures a majority of its IC products at its
four-inch wafer fabrication facility located in San Diego, California. The
Company believes that, upon the completion of the planned expansion of the
clean room in its existing fabrication facility, it will be able to satisfy
its production needs of products produced in its fabrication facility through
the end of 2001. The Company plans to use a portion of the proceeds of this
offering to purchase equipment and make leasehold improvements related to the
expansion in 1997 and 1998. In addition, the Company will be required to hire,
train and manage additional production personnel in order to increase its
production capacity as scheduled. In the event the Company's plans to expand
the manufacturing capacity of its fabrication facility are not implemented on
a timely basis, the Company could face production capacity constraints, which
could have a material adverse effect on the Company's business, financial
condition and operating results.
The Company is currently in the process of planning construction of a new
six-inch wafer fabrication facility, initially to complement, and potentially
to replace, its existing facility in San Diego. The Company currently plans to
acquire, or acquire rights to, a site no later than mid-1998, to initiate
construction of the new facility during 1999 and to complete the physical
plant during 2000. Following the completion of the physical plant, the Company
must install equipment and perform necessary testing prior to commencing
commercial production at the facility, a process which the Company anticipates
will take at least nine months. Accordingly, the Company believes the new
facility will not begin commercial production prior to late 2001. This new
fabrication facility will have room for additional equipment and manufacturing
capacity. The Company estimates that the cost of the new wafer fabrication
facility will be at least $60.0 million, of which approximately $25.0 million
relates to the purchase of land and construction of the building and
approximately $35.0 million relates to capital equipment purchases necessary
to establish the initial manufacturing capacity of the facility. The Company
currently anticipates that it will incur a significant portion of the expense
related to these capital equipment purchases prior to the end of 1999. The
Company intends to fund approximately $15.0 million of the total estimated
$60.0 million cost of the new facility with a portion of the proceeds of this
offering. The balance of the cost of this facility will be funded through a
combination of cash from operations and additional debt or equity financing.
There can be no assurance that the Company will be able to obtain the
additional financing necessary to fund the construction and completion of the
new manufacturing facility. Any failure by the Company to obtain on a timely
basis such financing could delay the completion of the facility and have a
material adverse effect on the Company's business, financial condition and
results of operations. To date, the Company has not acquired, or acquired
rights to, a suitable site for its proposed new manufacturing facility. There
can be no assurance that the Company will be able to acquire rights to such a
site in a timely manner, if at all. Any significant delay by the Company in
finding such a site could have a material adverse effect on the Company's
business, financial condition and operating results. In addition, the
Company's existing wafer fabrication facility is, and its proposed new wafer
fabrication facility will be, located in California. There can be no assurance
that these facilities will not be subject to natural disasters such as
earthquakes or floods. In addition, the depreciation and other expenses to be
incurred by the Company in connection with the expansion of its existing
manufacturing facility and in connection with its proposed new wafer
fabrication facility may adversely effect the Company's gross margin in any
future fiscal period. See "-- Need For Additional Capital."
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The construction of the new wafer fabrication facility entails significant
risks, including shortages of materials and skilled labor, unavailability or
late delivery of process equipment, unforeseen environmental or engineering
problems, work stoppages, weather interferences and unanticipated cost
increases, any of which could have a material adverse effect on the building,
equipping and production start-up of the new facility. In addition, unexpected
changes or concessions required by local, state or federal regulatory agencies
with respect to necessary licenses, land use permits, site approvals and
building permits could involve significant additional costs and delay the
scheduled opening of the facility and could reduce the Company's anticipated
revenues. As a result of the foregoing and other factors, there can be no
assurance that the project will be completed within its current budget or
within the period currently scheduled by the Company, which could have a
material adverse effect on its business, financial condition and operating
results. Furthermore, if the Company is unable to achieve adequate
manufacturing yields in its proposed new fabrication facility in a timely
manner or if the Company's revenues do not increase commensurate with the
anticipated increase in manufacturing capacity associated with the new
facility, the Company's business, financial condition and operating results
could also be materially adversely affected. In addition, in the future, the
Company may be required for competitive reasons to make capital investments in
its existing wafer fabrication facility or to accelerate the timing of the
construction of its new wafer fabrication facility in order to expedite the
manufacture of products based on more advanced manufacturing processes. To the
extent such capital investments are required, the Company's gross profit and,
as a result, its business, financial condition and operating results, could be
materially and adversely affected. See "-- Manufacturing Yields."
The successful operation of the Company's proposed new wafer fabrication
facility, if completed, as well as the Company's overall production
operations, will also be subject to numerous risks. The Company has no prior
experience with the operation of the equipment or the processes involved in
producing finished six-inch wafers, which differ significantly from those
involved in the production of four-inch wafers. The Company will be required
to hire, train and manage production personnel in order to effectively operate
the new facility. The Company does not have sufficient excess production
capacity at its existing San Diego facility to fully offset any failure of the
proposed new wafer fabrication facility to meet planned production goals. The
Company may transfer its current San Diego manufacturing operations into the
proposed new wafer fabrication facility subsequent to its completion. Should
this transfer occur, there can be no assurance that the Company will not
experience delays in completing product testing and documentation required by
customers to qualify or requalify the Company's products from this facility as
being from an approved source as a result of this transfer, which could
materially adversely affect the Company's business, financial condition and
operating results. The Company will also have to effectively coordinate and
manage two manufacturing facilities to successfully meet its overall
production goals. The Company has no experience in coordinating and managing
production facilities that are located at different sites or in the transfer
of manufacturing operations from one facility to another. As a result of these
and other factors, the failure of the Company to successfully operate the
proposed new wafer fabrication facility, to successfully coordinate and manage
the two sites or to transfer the Company's manufacturing operations could
adversely affect the Company's overall production and could have a material
adverse effect on its business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Manufacturing."
TRANSITION TO NEW PROCESS TECHNOLOGIES
The markets for the Company's products are characterized by rapid changes in
manufacturing process technologies. To provide competitive products to its
target markets, the Company must develop improved process technologies. The
Company's future success will depend, in large part, upon its ability to
continue to improve its existing process technologies, develop new process
technologies, and adapt its process technologies to emerging industry
standards. The Company may in the future be required to transition one or more
of its products to process technologies with smaller geometries, other
materials or higher speeds in order to reduce costs and/or improve product
performance. There can be no assurance that the Company will be able to
improve its process technologies and develop new process technologies,
including, but not limited to silicon
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germanium process technologies, in a timely or affordable manner or that such
improvements or developments will result in products that achieve market
acceptance. A failure by the Company to improve its existing process
technologies or processes or develop new process technologies in a timely or
affordable manner could adversely affect the Company's business, financial
condition and operating results. See " -- Rapid Technological Change;
Necessity to Develop and Introduce New Products," " -- Manufacturing Capacity
Limitations; New Production Facility" and "Business -- Research and
Development."
DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SUPPLY RELATIONSHIPS
The Company relies on outside foundries for the manufacture of certain of
its products, including all of its products designed on CMOS processes. The
Company generally does not have long-term wafer supply agreements with its
outside foundries that guarantee wafer or product quantities, prices or
delivery lead times. Instead, the Company's products that are manufactured by
outside foundries are manufactured on a purchase order basis. The Company
expects that, for the foreseeable future, certain of its products will be
manufactured by a single outside foundry. Because establishing relationships
with new outside foundries takes several months, there is no readily available
alternative source of supply for these products. A manufacturing disruption
experienced by one or more of the Company's outside foundries would impact the
production of the Company's products for a substantial period of time, which
could have a material adverse effect on the Company's business, financial
condition and operating results. Furthermore, in the event that the transition
to the next generation of manufacturing technologies at one or more of the
Company's outside foundries is unsuccessful or delayed, the Company's
business, financial condition and operating results could be materially and
adversely affected.
There are additional risks associated with the Company's dependence upon
third party manufacturers for certain of its products, including, but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on wafers or products supplied to
the Company, increases in prices and potential misappropriation of the
Company's intellectual property. With respect to certain of its products, the
Company depends upon external foundries to produce wafers and, in some cases,
finished products of acceptable quality, to deliver those wafers and products
to the Company on a timely basis and to allocate to the Company a portion of
their manufacturing capacity sufficient to meet the Company's needs. On
occasion, the Company has experienced difficulties in causing these events to
occur satisfactorily. The Company's wafer and product requirements typically
represent a very small portion of the total production of these external
foundries. The Company is subject to the risk that a producer will cease
production on an older or lower-volume process that is used to produce the
Company's parts. Additionally, there can be no assurance that such external
foundries will continue to devote resources to the production of the Company's
products or continue to advance the process design technologies on which the
manufacturing of the Company's products are based. Any such difficulties could
have a material adverse effect on the Company's business, financial condition
and operating results. See "-- Manufacturing Yields."
Certain of the Company's products are assembled and packaged by third-party
subcontractors. The Company does not have long-term agreements with any of
these subcontractors. Such assembly and packaging is conducted on a purchase
order basis. As a result of its reliance on third-party subcontractors to
assemble and package its products, the Company cannot directly control product
delivery schedules, which could lead to product shortages or quality assurance
problems that could increase the costs of manufacturing, assembly or packaging
of the Company's products. In addition, the Company may, from time to time, be
required to accept price increases for such assembly or packaging services
that could have a material adverse effect on the Company's business, financial
condition and operating results. Due to the amount of time normally required
to qualify assembly and packaging subcontractors, product shipments could be
delayed significantly if the Company is required to find alternative
subcontractors. In the future, the Company may contract with third parties for
the testing of its products. Any problems associated with the delivery,
quality or cost of the assembly, testing or packaging of the Company's
products could have a material adverse effect on the Company's business,
financial condition and operating results.
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Due to an industry transition to six-inch wafer fabrication facilities,
there is a limited number of suppliers of the four-inch wafers used by the
Company to build products in its existing manufacturing facility, and the
Company relies on a single supplier for such wafers. Although the Company
believes that it will have sufficient access to four-inch wafers to support
production in its existing fabrication facility for the foreseeable future,
there can be no assurance that the Company's current supplier will continue to
supply the Company with four-inch wafers on a long-term basis. Additionally,
the availability of manufacturing equipment needed for a four-inch process is
limited and certain new equipment required for more advanced processes may not
be available for a four-inch process. If the Company is not able to obtain a
sufficient supply of four-inch wafers or to obtain the requisite equipment for
a four-inch process, the Company's business, financial condition and operating
results would be materially adversely affected. See "Business --
Manufacturing."
CUSTOMER CONCENTRATION
Historically, a relatively small number of customers has accounted for a
significant portion of the Company's revenues in any particular period. The
Company has no long-term volume purchase commitments from any of its major
customers. In fiscal 1996 and 1997 and for the first six months of fiscal
1998, the Company's five largest customers accounted for approximately 44%,
44% and 41% of the Company's revenues, respectively, and sales to Nortel
accounted for approximately 20%, 20% and 19% of the Company's revenues,
respectively. The Company anticipates that sales of its products to relatively
few customers will continue to account for a significant portion of its
revenues. In the event of a reduction, delay or cancellation of orders from
one or more significant customers or if one or more of its significant
customers select products manufactured by one of the Company's competitors for
inclusion in future product generations, the Company's business, financial
condition and operating results could be materially and adversely affected.
There can be no assurance that the Company's current customers will continue
to place orders with the Company, that orders by existing customers will
continue at current or historical levels or that the Company will be able to
obtain orders from new customers. The loss of one or more of the Company's
current significant customers could materially and adversely affect the
Company's business, financial condition and operating results. See "-- Intense
Competition," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Business -- Products and Customers."
MANAGEMENT OF GROWTH
The Company has experienced, and may continue to experience, periods of
rapid growth and expansion, which have placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources. To
manage these expanded operations effectively, the Company will be required to
continue to improve its operational, financial and management systems and to
successfully hire, train, motivate and manage its employees. In particular,
certain of the Company's senior management personnel recently joined the
Company. The Company's ability to manage growth successfully will require such
personnel to work together effectively. In addition, the expansion of the
Company's current wafer fabrication facility, the construction and operation
of the Company's planned wafer fabrication facility, the initial integration
of the proposed new wafer fabrication facility with the Company's current
facility and the subsequent potential transfer of the Company's manufacturing
operations to the proposed new wafer fabrication facility will require
significant management, technical and administrative resources. There can be
no assurance that the Company will be able to manage its growth or effectively
integrate its planned wafer fabrication facility into its current operations,
and a failure to do so could have a material adverse effect on the Company's
business, financial condition and operating results.
DEPENDENCE ON QUALIFIED PERSONNEL
The Company's future success depends in part on the continued service of its
key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel. There is intense
competition for qualified personnel in the semiconductor industry, in
particular design engineers,
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and there can be no assurance that the Company will be able to continue to
attract and train such engineers or other qualified personnel necessary for
the development of its business or to replace engineers or other qualified
personnel that may leave the Company's employ in the future. The Company's
anticipated growth is expected to place increased demands on the Company's
resources and will likely require the addition of new management personnel and
the development of additional expertise by existing management personnel.
Although the Company has entered into an "at-will" employment agreement with
David M. Rickey, the Company's President and Chief Executive Officer, the
Company has not entered into fixed term employment agreements with any of its
executive officers. In addition, the Company has not obtained key-man life
insurance on any of its executive officers or key employees. Loss of the
services of, or failure to recruit, key design engineers or other technical
and management personnel could be significantly detrimental to the Company's
product and process development programs or otherwise have a material adverse
effect on the Company's business, financial condition and operating results.
See "Certain Transactions."
NEED FOR ADDITIONAL CAPITAL
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes that the net proceeds of this offering,
together with its available cash, cash equivalents and short-term investments
and cash generated from operations, will be sufficient to meet the Company's
capital requirements through the next 12 months, although the Company could be
required, or could elect, to seek to raise additional financing during such
period. The Company's future capital requirements will depend on many factors,
including the costs associated with the expansion of its manufacturing
operations, the rate of revenue growth, the timing and extent of spending to
support research and development programs and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. The
Company expects that it will need to raise additional debt or equity financing
in the future, primarily for purposes of financing the acquisition of property
for its proposed new wafer fabrication facility, the construction of the
proposed new wafer fabrication facility and the purchase of equipment for the
proposed new wafer fabrication facility. There can be no assurance that such
additional debt or equity financing will be available on commercially
reasonable terms or at all. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS
The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued 14 patents, which
principally cover certain aspects of the design and architecture of the
Company's IC products and have expiration dates ranging from 2004 to 2009. In
addition, the Company has three patent applications pending in the United
States Patent and Trademark Office (the "PTO"). There can be no assurance that
the Company's pending patent applications or any future applications will be
approved, or that any issued patents will provide the Company with competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar products or processes, duplicate the Company's
products or processes or design around any patents that may be issued to the
Company.
To protect its intellectual property, the Company also relies on a
combination of mask work protection under the Federal Semiconductor Chip
Protection Act of 1984, trademarks, copyrights, trade secret laws, employee
and third-party nondisclosure agreements and licensing arrangements. A mask
work refers to the intangible information content of the set of masks or mask
databases used to make a semiconductor chip product. Despite these efforts,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and operating results.
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As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been and in the future may be notified
that it may be infringing the intellectual property rights of third parties.
The Company has certain indemnification obligations to customers with respect
to the infringement of third-party intellectual property rights by its
products. There can be no assurance that infringement claims by third parties
or claims for indemnification by customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition or operating results. In
March 1997, the Company received a written notice from legal counsel for Dr.
Chou Li asserting that the Company manufactures certain of its products in
ways that appear to such counsel to infringe a United States patent held by
Dr. Li (the "Li Patent"). After a review of its technology in light of such
assertion, the Company believes that the Company's processes do not infringe
any of the claims of this patent. However, there can be no assurance that Dr.
Li will not file a lawsuit against the Company or that the Company would
prevail in any such litigation. Any litigation relating to the intellectual
property rights of third parties, including, but not limited to the Li Patent,
whether or not determined in the Company's favor or settled by the Company,
would at a minimum be costly and could divert the efforts and attention of the
Company's management and technical personnel, which could have a material
adverse effect on the Company's business, financial condition or operating
results. In the event of any adverse ruling in any such matter, the Company
could be required to pay substantial damages, which could include treble
damages, cease the manufacturing, use and sale of infringing products,
discontinue the use of certain processes or obtain a license under the
intellectual property rights of the third party claiming infringement. There
can be no assurance, however, that a license would be available on reasonable
terms or at all. Any limitations on the Company's ability to market its
products, any delays and costs associated with redesigning its products or
payments of license fees to third parties or any failure by the Company to
develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on the Company's business, financial
condition and operating results.
INTERNATIONAL SALES
International sales (including sales to Canada) accounted for 44%, 40% and
41% of revenues in fiscal 1996, fiscal 1997 and the first six months of fiscal
1998, respectively. The Company anticipates that international sales may
increase in future periods and may account for an increasing portion of the
Company's revenues. As a result, an increasing portion of the Company's
revenues may be subject to certain risks, including changes in regulatory
requirements, tariffs and other barriers, timing and availability of export
licenses, political and economic instability, difficulties in accounts
receivable collections, natural disasters, difficulties in staffing and
managing foreign subsidiary and branch operations, difficulties in managing
distributors, difficulties in obtaining governmental approvals for
telecommunications and other products, foreign currency exchange fluctuations,
the burden of complying with a wide variety of complex foreign laws and
treaties and potentially adverse tax consequences. The Company is also subject
to the risks associated with the imposition of legislation and regulations
relating to the import or export of high technology products. The Company
cannot predict whether quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of the Company's products will be
implemented by the United States or other countries. Because sales of the
Company's products have been denominated to date primarily in United States
dollars, increases in the value of the United States dollar could increase the
price of the Company's products so that they become relatively more expensive
to customers in the local currency of a particular country, leading to a
reduction in sales and profitability in that country. Future international
activity may result in increased foreign currency denominated sales. Gains and
losses on the conversion to United States dollars of accounts receivable,
accounts payable and other monetary assets and liabilities arising from
international operations may contribute to fluctuations in the Company's
results of operations. Some of the Company's customer purchase orders and
agreements are governed by foreign laws, which may differ significantly from
United States laws. Therefore, the Company may be limited in its ability to
enforce its rights under such agreements and to collect damages, if awarded.
Any of the foregoing factors could have a material adverse effect on the
Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
16
<PAGE>
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations with
respect to such funding efforts have not been material and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results.
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California have resulted in restrictions being
placed on water use by manufacturers and residents in California. In the event
of future drought, reductions in water use may be mandated generally, and it
is unclear how such reductions will be allocated among California's different
users. There can be no assurance that near term reductions in water
allocations to manufacturers will not occur, which could have a material
adverse affect on the Company's business, financial condition or operating
results.
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained. The initial offering price for Common Stock to be sold by the
Company was determined by negotiations among the Company and the Underwriters
and may bear no relationship to the price at which the Common Stock will trade
after completion of this offering. See "Underwriting" for factors considered
in determining such offering price. The market price of the Common Stock could
be subject to significant fluctuations in response to quarter-to-quarter
variations in the Company's anticipated or actual operating results;
announcements or introductions of new products; technological innovations or
setbacks by the Company or its competitors; conditions in the semiconductor,
telecommunications, data communications, ATE, high-speed computing or military
markets; the commencement of litigation; changes in estimates of the Company's
performance by securities analysts; and other events or factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have affected the market prices of many high technology
companies, particularly semiconductor companies, and that have often been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may affect
adversely the market price of the Common Stock. Furthermore, the shares of the
Company's Common Stock that were outstanding immediately prior to this
offering are held by a large number of individual stockholders. Upon the
expiration of lock-up agreements between the Underwriters and certain of these
stockholders, which lock-up agreements expire upon the later of (i) 180 days
after the effectiveness of this offering or (ii) three days after the public
release of the Company's earnings for the fiscal period ending on or
immediately prior to the completion of such 180-day period (as applicable, the
"Lock-Up Period"), substantially all of the Company's outstanding Common Stock
held by stockholders immediately prior to this offering will be eligible for
sale in the public market, subject in some cases to the volume and other
restrictions of Rule 144 and Rule 701 under the Securities Act of 1933 (the
"Securities Act"). There can be no assurance that sales of Common Stock by
such stockholders upon expiration of the Lock-Up Period will not adversely
affect the market price of the Common Stock. See "-- Shares Eligible for
Future Sale" and "Shares Eligible for Future Sale."
17
<PAGE>
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in
approximately two years, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000"
requirements. Significant uncertainty exists concerning the potential effects
associated with such compliance. Any Year 2000 compliance problem of either
the Company, its suppliers, its service providers or its customers could
result in a material adverse effect on the Company's business, financial
condition and operating results.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock (including shares
issued upon the exercise of outstanding options and warrants) in the public
market following this offering could adversely affect the market price for the
Common Stock. Such sales could also make it more difficult for the Company to
sell its equity or equity-related securities in the future at a time and price
that the Company deems appropriate. Upon completion of this offering, the
Company will have 19,801,750 shares of Common Stock outstanding. The 5,650,000
shares offered hereby will be immediately tradable without restriction. The
14,151,750 remaining shares of Common Stock outstanding upon completion of
this offering will be "restricted securities" as that term is defined in Rule
144 under the Securities Act ("Restricted Shares"). Of the Restricted Shares,
approximately 556,000 will be eligible for immediate sale in the public market
upon completion of this offering without restriction under Rule 144(k) under
the Securities Act, and approximately 607,000 additional shares will be
eligible for sale 90 days after the effective date of the registration
statement filed pursuant to this offering (the "Effective Date") under Rule
144 under the Securities Act, subject in some cases to volume and other
restrictions. As a result of lock-up agreements between certain stockholders
and the Company or the Representatives of the Underwriters, the remaining
approximately 12,988,750 Restricted Shares will not be available for immediate
sale in the public market until the expiration of the 180 day period following
the Effective Date, subject in some cases to the volume and other restrictions
of Rule 144 and Rule 701 under the Securities Act. However, BancAmerica
Robertson Stephens may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to
volume and other restrictions. The Company intends to register the Common
Stock to be issued pursuant to the Company's 1997 Employee Stock Purchase Plan
on the Effective Date, and intends to register all of the shares of Common
Stock to be issued pursuant to the Company's other employee benefit plans
approximately 90 days after the Effective Date.
EFFECT OF ANTI-TAKEOVER PROVISIONS
Immediately after the closing of this offering, the Company's Board of
Directors will have the authority to issue up to 2,000,000 shares of Preferred
Stock and to determine the price, rights, preferences and privileges and
restrictions, including voting rights, of those shares without any further
vote or action by the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any shares of Preferred Stock that may be issued in the
future. The issuance of Preferred Stock may delay, defer or prevent a change
in control of the Company, as the terms of the Preferred Stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of Preferred Stock. In addition, the issuance of Preferred
Stock could have a dilutive effect on stockholders of the Company. Section 203
of the Delaware General Corporation Law, to which the Company is subject,
restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may delay, defer or prevent a change of
control of the Company.
DILUTION
Purchasers of the Common Stock in this offering will suffer immediate and
substantial dilution of $6.37 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options and warrants to purchase the Common Stock are exercised,
there will be further dilution.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,700,000 shares of Common
Stock offered hereby, at an estimated offering price of $9.00 per share, are
estimated to be $21,899,000 ($28,992,575 assuming the Underwriters' over-
allotment option is exercised in full), after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company currently expects that approximately $5.0 million of the
net proceeds will be used to fund the expansion of the manufacturing capacity
of the Company's existing manufacturing facility, that approximately $15.0
million will be used for the construction of and the purchase of equipment for
a proposed new wafer fabrication facility and that the balance of the net
proceeds will be used for working capital and other general corporate
purposes. The amounts actually expended for each purpose and the timing of
such expenditures may vary significantly depending on numerous factors,
including the amount of costs associated with the expansion of the Company's
manufacturing operations, the rate of revenue growth, the timing and extent of
spending to support research and development programs and expansion of sales
and marketing, the timing of introduction of new products and product
enhancements and market acceptance of the Company's products. The Company
believes that its available cash and cash equivalents and cash generated from
operations, together with the net proceeds of this offering, will be
sufficient to meet its capital requirements through the next 12 months.
However, there can be no assurance that the Company will not require
additional debt or equity financing prior to such time or that such additional
debt or equity financing, if required, will be available upon terms acceptable
to the Company, or at all. The Company may also use a portion of the proceeds
for the acquisition of or investment in complementary businesses, products or
technologies, although no acquisitions are currently being planned or
negotiated as of the date of this Prospectus, and no portion of the net
proceeds has been allocated for any specific acquisition. Pending such uses,
the Company intends to invest the net proceeds from this offering in short-
term, interest-bearing, investment-grade securities. The Company will not
receive any proceeds from the sale of the shares being offered by the Selling
Stockholders. See "Risks Factors--Need For Additional Capital."
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use
in its business, and does not anticipate paying any cash dividends in the
foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) actual
as of September 30, 1997, (ii) pro forma to reflect the automatic conversion
of all outstanding shares of the Company's Preferred Stock into Common Stock
upon the closing of this offering and (iii) as adjusted to give effect to the
receipt of the estimated net proceeds from the sale by the Company of
2,700,000 shares of Common Stock offered hereby, at an assumed initial public
offering price of $9.00 per share, after deducting the underwriting discounts
and commissions and estimated offering expenses payable by the Company. This
table should be read in conjunction with Management's Discussion and Analysis
of Financial Condition and Results of Operations and the Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of capital lease obligations(1). $ 2,641 $ 2,641 $ 2,641
======= ======= =======
Long-term capital lease obligations, less cur-
rent portion................................... 2,096 2,096 2,096
Stockholders' equity:
Preferred Stock, $.01 par value, 1,350,000
shares authorized; 1,051,294 shares issued
and outstanding, actual; 2,000,000 shares au-
thorized, none issued and outstanding, pro
forma and as adjusted........................ 11 -- --
Common Stock, $.01 par value, 34,500,000
shares authorized; 6,392,660 shares issued
and outstanding, actual; 17,101,750 shares
issued and outstanding, pro forma; 60,000,000
shares authorized, 19,801,750 shares issued
and outstanding, as adjusted(2).............. 64 171 198
Additional paid-in capital.................... 34,655 34,559 56,431
Deferred compensation......................... (552) (552) (552)
Accumulated deficit........................... (3,559) (3,559) (3,559)
Notes receivable from stockholders............ (501) (501) (501)
------- ------- -------
Total stockholders' equity................... 30,118 30,118 52,017
------- ------- -------
Total capitalization........................ $32,214 $32,214 $54,113
======= ======= =======
</TABLE>
- --------
(1) See Note 6 of Notes to Consolidated Financial Statements for a description
of the Company's obligations under capital leases.
(2) Excludes, as of September 30, 1997: (i) 157,968 shares of Common Stock
issuable upon exercise of options outstanding under the 1982 Plan at a
weighted average exercise price of $0.46 per share; (ii) 2,057,975 shares
of Common Stock issuable upon exercise of options outstanding under the
1992 Plan at a weighted average exercise price of $1.08 per share;
(iii) 2,544,714 shares of Common Stock reserved for future issuance under
the 1992 Plan; (iv) 200,000 shares of Common Stock reserved for future
issuance under the Directors' Plan; (v) 400,000 shares of Common Stock
reserved for issuance under the Purchase Plan; (vi) 83,807 shares issuable
upon exercise of certain warrants at a weighted average exercise price of
$2.91 per share; and (vii) 24,720 shares of Common Stock issuable upon the
exercise of certain other outstanding options at a weighted average
exercise price of $0.48 per share. See "Management --1982 Employee
Incentive Stock Option Plan" and "-- 1992 Stock Option Plan" and Note 4 of
Notes to Consolidated Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
September 30, 1997, which includes assumed proceeds to be received from the
exercise of exercisable options and warrants to purchase an aggregate of
2,324,470 shares of Common Stock at a weighted average exercise price of $1.09
per share, was approximately $32.6 million, or $1.68 per share. Pro forma net
tangible book value per share represents the amount of the Company's total
tangible assets and the assumed proceeds from exercisable options and warrants
less total liabilities, divided by the pro forma number of shares of Common
Stock outstanding at September 30, 1997, including all shares of Common Stock
issuable upon the exercise of options and warrants exercisable at September
30, 1997. Pro forma net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the offering made hereby and the pro forma net tangible book value
per share immediately after completion of this offering. After giving effect
to the estimated net proceeds from the sale by the Company of 2,700,000 shares
of Common Stock offered hereby at an assumed initial public offering price of
$9.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by the Company, the Company's pro
forma net tangible book value at September 30, 1997 would have been $54.5
million, or $2.46 per share of Common Stock. This represents an immediate
increase in net tangible book value of $0.78 per share to existing
stockholders and option and warrant holders and an immediate dilution in net
tangible book value of $6.54 per share to new investors purchasing shares in
this offering at the assumed initial public offering price. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price........................... $9.00
Pro forma net tangible book value at September 30, 1997....... $1.68
Increase attributable to new investors........................ 0.78
-----
Pro forma net tangible book value after offering................ 2.46
-----
Dilution to new investors....................................... $6.54
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares in this offering at an
assumed public offering price of $9.00 per share (before deducting
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
TOTAL
SHARES(1) CONSIDERATION(1) AVERAGE
------------------ ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 17,101,750 77.3% $34,957,000 56.6% $2.04
New investors.............. 2,700,000 12.2 24,300,000 39.3 9.00
Existing option and warrant
holders(1)................ 2,324,470 10.5 2,529,000 4.1 1.09
---------- ----- ----------- -----
Total.................... 22,126,220 100.0% $61,786,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The foregoing table includes, as of September 30, 1997: (i) 157,968 shares
of Common Stock issuable upon exercise of options outstanding under the
1982 Plan at a weighted average exercise price of $0.46 per share; (ii)
2,057,975 shares of Common Stock issuable upon exercise of options
outstanding under the 1992 Plan at a weighted average exercise price of
$1.08 per share; (iii) 83,807 shares of Common Stock issuable upon
exercise of certain warrants outstanding at a weighted average exercise
price of $2.91 per share and (iv) 24,720 shares of Common Stock issuable
upon exercise of certain other outstanding options at a weighted average
exercise price of $0.48 per share. All of the foregoing options and
warrants are currently exercisable; however, shares of Common Stock
issuable upon the exercise of unvested options are subject to repurchase
rights in favor of the Company. The foregoing table excludes, as of
September 30, 1997: (i) 2,544,714 shares of Common Stock reserved for
future issuance under the 1992 Plan; (ii) 200,000 shares of Common Stock
reserved for future issuance under the Directors' Plan and (iii) 400,000
shares of Common Stock reserved for future issuance under the Purchase
Plan. See "Management--1982 Employee Incentive Stock Option Plan" and "--
1992 Stock Option Plan" and Note 4 of Notes to Consolidated Financial
Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statements of operations data set forth below for
the fiscal years ended March 31, 1995, 1996 and 1997 and the consolidated
balance sheet data at March 31, 1996 and 1997 are derived from the
consolidated financial statements of the Company audited by Ernst & Young LLP,
independent auditors, that are included elsewhere in this Prospectus. The
consolidated statements of operations data for the fiscal years ended
March 31, 1993 and 1994 and the consolidated balance sheet data as of March
31, 1993, 1994 and 1995 are derived from consolidated financial statements
audited by Ernst & Young LLP, which are not included in this Prospectus. The
consolidated balance sheet data at September 30, 1997 and the consolidated
statements of operations data for the six months ended September 30, 1996 and
1997 are derived from unaudited consolidated financial statements included
elsewhere in this Prospectus. The unaudited consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the Company's
consolidated financial position and consolidated results of operations for
these periods. Operating results for the six months ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire fiscal year ending March 31, 1998. The following selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $27,955 $35,208
Cost of revenues........ 20,561 29,187 27,513 34,169 30,057 15,754 16,534
------- ------- ------- ------- ------- ------- -------
Gross profit............ 17,735 20,499 19,437 16,095 27,411 12,201 18,674
Operating expenses:
Research and develop-
ment.................. 8,617 9,273 10,108 8,283 7,870 3,412 6,002
Selling, general and
administrative........ 7,799 9,513 10,112 11,232 12,537 5,894 6,730
------- ------- ------- ------- ------- ------- -------
Total operating ex-
penses................ 16,416 18,786 20,220 19,515 20,407 9,306 12,732
------- ------- ------- ------- ------- ------- -------
Operating income (loss). 1,319 1,713 (783) (3,420) 7,004 2,895 5,942
Gain on contract settle-
ment................... -- 9,530 -- -- -- -- --
Net interest income (ex-
pense)................. (308) (464) (358) (242) (29) 24 151
------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................. 1,011 10,779 (1,141) (3,662) 6,975 2,919 6,093
Provision (benefit) for
income taxes........... 18 575 (70) 32 659 276 159
------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
share(1)............... $ 0.33 $ 0.30
======= =======
Shares used in pro forma
net income per share
calculation(1) ........ 18,983 19,586
======= =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital.......... $11,338 $19,867 $16,753 $13,977 $19,364 $18,965
Total assets............. 26,585 45,124 40,180 37,836 41,814 44,382
Long-term obligations,
less current portion.... 3,632 7,493 6,516 4,447 3,192 2,096
Total stockholders' equi-
ty...................... 15,523 25,829 24,805 21,512 27,743 30,118
</TABLE>
- -------
(1) See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used to
compute the pro forma net income per share amounts.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by using a
combination of high-frequency, mixed-signal design expertise, system-level
knowledge and multiple silicon process technologies. AMCC believes that its
internal bipolar and BiCMOS processes, complemented by advanced CMOS processes
from external foundries, enable the Company to offer high-performance, high-
speed solutions optimized for specific applications and customer requirements.
The Company further believes that its products provide significant cost,
power, performance and reliability advantages for systems OEMs in addition to
accelerating time-to-market. The Company also leverages its technology to
provide products for the automated test equipment ("ATE"), high-speed
computing and military markets.
Since inception, the Company has focused primarily on the design,
manufacture and sale of high-performance silicon integrated circuits ("ICs").
The Company's first significant revenues were derived from sales of high-speed
application-specific integrated circuits ("ASICs") to military and ATE
customers. The Company subsequently utilized its high-performance mixed-signal
design and process technologies to diversify into the telecommunications and
high-speed computing markets and, more recently, the data communications
market. Commencing in fiscal 1992, the Company adopted a strategy in which
much of its next-generation technology and products were based on a process
under development with a strategic foundry partner. In fiscal 1994, the
strategic partner elected to end this relationship and paid the Company $10.0
million in connection with termination of the proposed foundry relationship.
In fiscal 1995, the Company redirected its strategy to concentrate on the
development of application-specific standard products ("ASSPs") for the high-
performance telecommunications and high-speed computing markets. As a result
of the termination of the relationship with the strategic partner, decreased
orders from two major customers, charges associated with reductions in the
Company's work force of approximately $626,000 in fiscal 1995 and charges
taken for excess inventories of approximately $3.7 million in fiscal 1996 the
Company had fluctuating revenues and incurred net losses in fiscal 1995 and
1996.
In fiscal 1997, the Company substantially reorganized its management team
and increased its focus on becoming the leading supplier of high-performance,
high-bandwidth connectivity ICs for the world's communications infrastructure.
Accordingly, the Company accelerated the pace of development of new products
for high-performance telecommunications and data communications markets.
Following the reorganization of the Company's management team in fiscal 1997
and its renewed focus on ASSPs for the telecommunications and data
communications markets, the Company returned to profitability and its revenues
have increased in each of the last six fiscal quarters.
The Company derives its revenues principally through product sales, which
are recognized upon shipment to customers. Revenues from sales to distributors
that are made under agreements allowing for price protection and right of
return on products unsold by the distributor are not recognized until the
distributor ships the product to its customer. The Company also derives a
small portion of its revenues from non-recurring engineering contracts, which
revenues are recognized using the percentage-of-completion method. All
international sales are denominated in United States dollars.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statements of
operations data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED
ENDED MARCH 31, SEPTEMBER 30,
--------------------- --------------
1995 1996 1997 1996 1997
----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........................ 58.6 68.0 52.3 56.4 47.0
----- ----- ----- ------ ------
Gross profit............................ 41.4 32.0 47.7 43.6 53.0
Operating expenses:
Research and development.............. 21.5 16.5 13.7 12.2 17.0
Selling, general and administrative... 21.6 22.3 21.8 21.1 19.1
----- ----- ----- ------ ------
Total operating expenses............ 43.1 38.8 35.5 33.3 36.1
----- ----- ----- ------ ------
Operating income (loss)................. (1.7) (6.8) 12.2 10.3 16.9
Net interest income (expense)........... (0.7) (0.5) (0.1) 0.1 0.4
----- ----- ----- ------ ------
Income (loss) before provision for in-
come taxes............................. (2.4) (7.3) 12.1 10.4 17.3
Provision (benefit) for income taxes.... (0.1) 0.0 1.1 0.9 0.4
----- ----- ----- ------ ------
Net income (loss)....................... (2.3)% (7.3)% 11.0% 9.5% 16.9%
===== ===== ===== ====== ======
</TABLE>
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 1997 TO THE SIX MONTHS ENDED
SEPTEMBER 30, 1996
Net Revenues. Net revenues for the six months ended September 30, 1997 were
approximately $35.2 million, representing an increase of 26% over net revenues
of approximately $28.0 million for the six months ended September 30, 1996.
Revenues from sales of communications products increased from 43% of net
revenues for the six months ended September 30, 1996 to 47% of net revenues
for the six months ended September 30, 1997, reflecting unit growth in
shipments of existing products, as well as the introduction of new products
for these markets. Revenues from sales of products to other markets,
consisting of the ATE, high-speed computing and military markets, decreased
from 57% of net revenues during the six months ended September 30, 1996, to
53% of net revenues for the six months ended September 30, 1997 although
revenues from sales to other markets increased in absolute dollars. The
increase in absolute dollars was primarily due to an increase in shipments of
PCI bus products for high speed computing applications. Sales to Nortel
accounted for 19% and 20% of net revenues for the six months ended September
30, 1997 and 1996, respectively. Sales outside of North America accounted for
24% and 23% of net revenues for the six months ended September 30, 1997 and
1996, respectively.
Gross Margin. In addition to the costs of internal wafer fabrication and the
costs of procuring wafers and finished goods from external foundries, the
Company's cost of revenues includes costs associated with packaging, assembly,
testing, procurement and quality assurance functions, some of which are
performed by third-party vendors. Gross margin (gross profit as a percentage
of revenues) was 53.0% for the six months ended September 30, 1997, as
compared to 43.6% for the six months ended September 30, 1996. The increase in
gross margin resulted from increased utilization of the Company's wafer
fabrication facility, as well as improved manufacturing yields. The Company's
gross margin is primarily impacted by factory utilization, wafer yields and
product mix. Although AMCC does not expect its gross margin to continue to
increase at the rate reflected above, its strategy is to maximize factory
utilization whenever possible, maintain or improve its manufacturing yields,
and focus on the development and sales of high-performance products that can
have higher gross margins. There can be no assurance, however, that the
Company will be successful in achieving these objectives. In addition, these
factors can vary significantly from quarter to quarter, which would likely
result in fluctuations in quarterly gross margin and net income. See "Risk
Factors -- Fluctuations in Operating Results."
24
<PAGE>
Research and Development. Research and development ("R&D") expenses consist
primarily of compensation and associated costs relating to new product
development and new process development. These costs include design and
process engineering costs, design tools and prototyping costs (including non-
recurring engineering charges from foundries) and photomask and pre-production
wafer costs. R&D expenditures are expensed as incurred. R&D expenses increased
to approximately $6.0 million, or 17.0% of revenues, for the six months ended
September 30, 1997, from approximately $3.4 million, or 12.2% of net revenues,
for the six months ended September 30, 1996. The increase in R&D expenses was
due to accelerated new product and process development efforts, including
additions to the Company's engineering staff and related expenses as well as
increased prototyping costs. The Company expects R&D expenses in absolute
dollars to increase significantly in the future due to planned increases in
personnel, prototyping costs and depreciation resulting from increased capital
investment for process development and design tools. Currently, R&D expenses
are primarily focused on the development of products for the
telecommunications and data communications markets, and the Company expects to
continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses consist primarily of compensation for sales, marketing and
administrative personnel, commissions paid to third-party sales
representatives and expenses associated with product promotion. SG&A expenses
were approximately $6.7 million, or 19.1% of revenues, for the six months
ended September 30, 1997, as compared to approximately $5.9 million, or 21.1%
of net revenues, for the six months ended September 30, 1996. The increase in
SG&A expenses in the six months ended September 30, 1997 primarily reflected
an increase of $253,000 in compensation costs, a $176,000 increase in
commissions earned by third-party sales representatives and a $149,000
increase in its provision for doubtful accounts due to the Company's expanding
customer base. The decrease in SG&A expenses as a percentage of net revenues
in the six months ended September 30, 1997 was a result of net revenues
increasing more rapidly than SG&A expenses. The Company expects SG&A expenses
to increase in the future due to additional staffing in its sales and
marketing departments and additional expenses related to being a public
company.
Net Interest Income. Net interest income consists of interest income
generated from the Company's cash, cash equivalents and short-term
investments, net of interest expense paid on the Company's debt and capital
lease obligations. Net interest income increased to $151,000 for the six
months ended September 30, 1997 from $24,000 for the six months ended
September 30, 1996, reflecting interest income from larger cash and short-term
investment balances during the six months ended September 30, 1997 and a
decrease in interest expense associated with outstanding capital lease and
debt obligations.
Income Taxes. The Company's estimated annual effective tax rate used for the
six months ended September 30, 1997 was 2.6% due to the reduction of a
valuation allowance recorded against deferred tax assets. This reduction
results from the projected level of income for fiscal 1998, which makes the
realization of these deferred tax assets more likely than not. The effective
tax rate of 9.5% for the six months ended September 30, 1996 was a result of
alternative minimum taxes ("AMT"). The Company expects its effective tax rate
to be closer to statutory rates in fiscal 1999.
Deferred Compensation. In connection with the grant of certain stock options
to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the deemed fair value of the Common Stock at the date of
grant for accounting purposes and the option exercise price of such options.
Such amount is presented as a reduction of stockholders' equity and amortized
ratably over the vesting period of the applicable options. Amortization of
deferred compensation recorded for the six months ended September 30, 1997 was
$47,000. The Company currently expects to record amortization of deferred
compensation with respect to these option grants of approximately $127,000,
$159,000, $159,000, $129,000 and $25,000 during the fiscal years ended March
31, 1998 (including the amount set forth above for the six months ended
September 30, 1997), 1999, 2000, 2001 and 2002, respectively.
25
<PAGE>
YEARS ENDED MARCH 31, 1997, 1996 AND 1995
Net Revenues. Net revenues for fiscal 1997 increased to approximately $57.5
million from approximately $50.3 million in fiscal 1996 and $47.0 million in
fiscal 1995. Revenues from sales of communications products increased from 32%
of net revenues in fiscal 1995 to 41% of net revenues in fiscal 1996 and 44%
of net revenues in fiscal 1997, reflecting unit growth in shipments of
existing products, as well as the introduction of new products for the
communications market. Revenues from sales of products to other markets
decreased from 68% of net revenues in fiscal 1995 to 59% of net revenues in
fiscal 1996 and to 56% of net revenues in fiscal 1997. In fiscal 1997, 1996
and 1995, sales to Nortel accounted for 20%, 20% and 17%, respectively, of net
revenues. Sales to customers outside of North America accounted for 21%, 24%
and 14% of net revenues in fiscal 1997, 1996 and 1995, respectively,
reflecting an increase in revenues from sales to such customers, but
fluctuating percentages of net revenues. The Company is focused on increasing
the percentage of net revenues derived from sales to customers outside of
North America.
Gross Margin. Gross margin was 47.7%, 32.0% and 41.4% in fiscal 1997, 1996
and 1995, respectively. The decrease in gross margin in fiscal 1996 was
attributable primarily to a decrease in the utilization of the Company's wafer
fabrication facility, as well as an approximately $3.7 million charge taken
for excess inventory, primarily of clock products for the high-speed computing
market. In addition, decreases in average selling prices ("ASPs") for clock
products also contributed to the decrease in gross margin in fiscal 1996. The
increase in gross margin in fiscal 1997 resulted primarily from a significant
reduction in charges related to excess inventory, as well as from increased
utilization of the Company's wafer fabrication facility. See "Risk Factors --
Fluctuations in Operating Results."
Research and Development. R&D expenses were approximately $7.9 million, $8.3
million and $10.1 million in fiscal 1997, 1996 and 1995, respectively. R&D
expenses accounted for 13.7%, 16.5% and 21.5% of net revenues for fiscal 1997,
1996 and 1995, respectively. The decrease in R&D expenses in fiscal 1996 was
due primarily to a $445,000 decrease in payroll and other costs associated
with reductions in the Company's research and development engineering staff
and to a decrease in prototyping costs of approximately $400,000. The decrease
in R&D expense in fiscal 1997 was primarily due to a decrease of $315,000 in
prototyping costs. During fiscal 1997, the Company began significant efforts
to increase the R&D staff and to accelerate new product development efforts.
These efforts resulted in higher R&D expenses during the six months ended
March 31, 1997 and September 30, 1997.
Selling, General and Administrative. SG&A expenses were approximately $12.5
million, $11.2 million and $10.1 million in fiscal 1997, 1996 and 1995,
respectively. SG&A expenses accounted for 21.8%, 22.3% and 21.6% of revenues
for fiscal 1997, 1996 and 1995, respectively. The increase in SG&A expenses in
fiscal 1996 was primarily due to $1.1 million of charges related to the
turnover of executive personnel and $500,000 of costs associated with
implementing a comprehensive management information system, offset by
decreases in certain other expenses. SG&A expenses increased in fiscal 1997
primarily due to a $1.3 million increase in compensation expenses and a
$300,000 increase in product promotion expenses, offset by decreases in
certain other expenses.
Net Interest Expense. Net interest expense was $29,000, $242,000 and
$358,000 in fiscal 1997, 1996 and 1995, respectively. The decreases in net
interest expense were attributable primarily to decreasing levels of capital
lease and debt obligations over the three-year period and to increases in
interest income as a result of increasing levels of cash, cash equivalents and
short-term investments.
Income Taxes. The Company's effective tax rate for fiscal 1997 was 9.5%,
which was comprised primarily of AMT reduced by net operating loss and
research and development tax credits. The tax provision (benefit) for fiscal
1996 and 1995 were not material due to losses incurred during those fiscal
years.
26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
financial information in dollars and as a percentage of revenues for the six
fiscal quarters ended September 30, 1997. The Company believes that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to state fairly the selected
quarterly information when read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere herein. The operating
results for any quarter are not necessarily indicative of results for any
future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Net revenues............ $13,845 $14,110 $14,509 $15,004 $17,053 $18,155
Cost of revenues........ 7,682 8,072 7,046 7,257 8,156 8,378
------- ------- ------- ------- ------- -------
Gross profit............ 6,163 6,038 7,463 7,747 8,897 9,777
Operating expenses:
Research and develop-
ment................. 1,797 1,615 2,256 2,202 2,525 3,477
Selling, general and
administrative....... 2,917 2,977 3,092 3,551 3,339 3,391
------- ------- ------- ------- ------- -------
Total operating ex-
penses............. 4,714 4,592 5,348 5,753 5,864 6,868
------- ------- ------- ------- ------- -------
Operating income........ 1,449 1,446 2,115 1,994 3,033 2,909
Net interest income (ex-
pense)................. (17) 41 (19) (34) 66 85
------- ------- ------- ------- ------- -------
Income before provisions
for income taxes....... 1,432 1,487 2,096 1,960 3,099 2,994
Provision for income
taxes.................. 135 141 198 185 81 78
------- ------- ------- ------- ------- -------
Net income.............. $ 1,297 $ 1,346 $ 1,898 $ 1,775 $ 3,018 $ 2,916
======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET
REVENUES:
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues........ 55.5 57.2 48.6 48.4 47.8 46.1
------- ------- ------- ------- ------- -------
Gross profit............ 44.5 42.8 51.4 51.6 52.2 53.9
Operating expenses:
Research and develop-
ment................. 13.0 11.4 15.5 14.7 14.8 19.2
Selling, general and
administrative....... 21.1 21.1 21.3 23.6 19.6 18.7
------- ------- ------- ------- ------- -------
Total operating ex-
penses............. 34.1 32.5 36.8 38.3 34.4 37.9
------- ------- ------- ------- ------- -------
Operating income........ 10.4 10.3 14.6 13.3 17.8 16.0
Net interest income (ex-
pense)................. (0.0) 0.2 (0.1) (0.2) 0.4 0.5
------- ------- ------- ------- ------- -------
Income before provisions
for income taxes....... 10.4 10.5 14.5 13.1 18.2 16.5
Provision for income
taxes.................. 1.0 1.0 1.4 1.3 0.5 0.4
------- ------- ------- ------- ------- -------
Net income.............. 9.4% 9.5% 13.1% 11.8% 17.7% 16.1%
======= ======= ======= ======= ======= =======
</TABLE>
The Company's net revenues have increased in each of the six quarters ended
September 30, 1997, primarily due to increased unit shipments of the Company's
products as well as the introduction of new products primarily for the
communications market. Although gross margin has fluctuated, it generally
increased over this period as increased utilization of the Company's wafer
fabrication facility resulted in decreased per unit costs. The decrease in
gross margin for the three months ended September 30, 1996 was principally due
to a decrease in manufacturing yields during that quarter, which adversely
impacted the Company's gross profit during the quarter by approximately
$600,000. This decrease in manufacturing yields was primarily due to the
Company increasing volume production of a single product at less than normal
production yields in support of a customer's delivery requirements. The
increase in gross margin for the three
27
<PAGE>
months ended December 31, 1996 and subsequent quarters was primarily due to
improved yields and increased utilization of the Company's wafer fabrication
facility. Although R&D expenses fluctuated both in actual amounts and as a
percentage of revenues, R&D expenses generally increased over this period as
the Company increased its engineering staff and accelerated new product
development efforts. In particular, the increase in R&D expenses for the three
months ended December 31, 1996 primarily reflected increased recruiting,
relocation and compensation expenses for development personnel, as well as
prototyping costs related to new product development. The level of R&D
expenses increased significantly again in the three months ended September 30,
1997 due to expenses associated with increases in engineering staff and to
increased prototyping expenses. The Company believes R&D expenses in absolute
dollars will continue to increase significantly in the future. SG&A expenses
remained relatively stable over this period, except in the three months ended
March 31, 1997. The increase in SG&A expenses in the three months ended March
31, 1997 reflected, in particular, expenditures for product promotion. In the
three months ended September 30, 1997, costs associated with moving the
Company's administration, engineering, test and assembly operations to a new
facility contributed to increases in cost of revenues, SG&A and R&D expenses.
The Company's quarterly results of operations have varied significantly in
the past and may continue to do so in the future. These variations have been,
and may in the future be, due to a number of factors, any of which could have
a material adverse effect on the Company's business, financial condition and
results of operations. These factors include, but are not limited to: the
rescheduling or cancellation of orders by customers; fluctuations in the
timing and amount of customer requests for product shipments; fluctuations in
manufacturing yields and inventory levels; changes in product mix; the
Company's ability to introduce new products and technologies on a timely
basis; the introduction of products and technologies by the Company's
competitors; the availability of external foundry capacity, purchased parts
and raw materials; competitive pressures on selling prices; the timing of
investments in research and development; market acceptance of the Company's
and its customers' products; the timing of depreciation and other expenses to
be incurred by the Company in connection with the expansion of its existing
manufacturing facility and in connection with its proposed new manufacturing
facility; the timing and amount of recruiting and relocation expenses,
prototyping costs and product promotional expenses; costs associated with
future litigation, if any, including without limitation, litigation relating
to the use or ownership of intellectual property; costs associated with
compliance with applicable environmental regulations; general semiconductor
industry conditions; and general economic conditions. Historically, average
selling prices in the semiconductor industry have decreased over the life of a
product, and as a result, the average selling prices of the Company's products
may be subject to significant pricing pressures in the future. Because the
Company is continuing to increase its operating expenses for personnel and new
product development, and because the Company is limited in its availability to
reduce expenses quickly in response to any revenue short falls, the Company's
business, financial condition and operating results would be adversely
affected if increased sales are not achieved. In addition, the Company's
operating results may be below the expectations of public market analysts or
investors, which could have a material adverse effect on the market price of
the Common Stock. See "Risk Factors -- Fluctuations in Operating Results," "--
Manufacturing Yields," "-- Risks Associated with Increasing Dependence on
Telecommunications and Data Communications Markets and Increasing Dependence
on Application-Specific Standard Products," "-- Risks Associated with
Dependence on High-Speed Computing Market," "-- Rapid Technological Change;
Necessity to Develop and Introduce New Products," "-- Manufacturing Capacity
Limitations; New Production Facility," "-- Transition to New Process
Technologies," "-- Customer Concentration," "-- Intense Competition," "--
Management of Growth" and "-- International Sales."
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity as of September 30, 1997
consisted of $11.4 million in cash, cash equivalents and short-term
investments and a $900,000 loan commitment to finance the purchase of
fabrication equipment currently expected to occur prior to the end of fiscal
1998. The loan commitment, if used, will have an interest rate of LIBOR plus
0.2% and will be due in sixty monthly installments of equal principal plus
interest in arrears, and will be secured by the fabrication equipment. Working
capital as of September 30, 1997 was $19.0 million compared to $19.4 million
as of March 31, 1997. This decrease in
28
<PAGE>
working capital was primarily due to the repurchase of certain shares of the
Company's Preferred Stock, offset by cash provided by operations. During the
fiscal years ended March 31, 1997, 1996 and 1995 and the six months ended
September 30, 1997, the Company financed its operations primarily through cash
provided by operations and equipment lease financing.
During the six months ended September 30, 1997, the Company generated $6.9
million of cash from operating activities, compared to $6.6 million in the six
months ended September 30, 1996. The increase in cash provided by operating
activities was primarily due to the increase in profitability. For the fiscal
years ended March 31, 1997, 1996 and 1995, net cash provided by operating
activities was $11.9 million, $6.5 million and $1.4 million, respectively. Net
cash provided by operating activities in fiscal 1997 primarily reflected net
income before depreciation and amortization expense. Net cash provided by
operating activities in fiscal 1996 differed from the net loss primarily due
to adjustments for depreciation and amortization expense, a reduction in
inventory levels and an increase in accounts payable and accrued liabilities.
Net cash provided by operating activities in fiscal 1995 differed from the net
loss primarily due to adjustments for depreciation and amortization expense
and reduction of accounts receivable, partially offset by funding of increased
levels of inventories and reduction of accounts payable and accrued
liabilities.
Capital expenditures totalled $4.1 million, $2.6 million and $6.2 million
for fiscal 1997, 1996 and 1995, respectively, of which $1.2 million, $1.2
million and $3.4 million for fiscal 1997, 1996 and 1995, respectively, were
financed using capital leases. During the six months ended September 30, 1997,
capital expenditures totalled $4.3 million, of which approximately $282,000
was financed by capital leases. The Company intends to increase its capital
expenditures for manufacturing equipment, test equipment and computer hardware
and software. The Company currently plans to expand the clean room in its
existing fabrication facility. The Company anticipates that the aggregate cost
of this expansion and the purchase of equipment and leasehold improvements
related thereto will be approximately $15.0 million, which the Company plans
to finance through a combination of cash from operations, debt and lease
financing and approximately $5.0 million of the net proceeds of this offering.
The Company currently expects to spend approximately $4.8 million on capital
expenditures in the second half of fiscal 1998, of which $2.1 million is
related to the expansion. The Company also plans to initiate construction of a
new six-inch wafer fabrication facility during 1999 and to complete the
physical plant during 2000. The Company believes the new facility will not
begin commercial production prior to late 2001. The Company estimates that the
cost of the new wafer fabrication facility will be at least $60.0 million, of
which approximately $25.0 million relates to the purchase of land and
construction of the facility and approximately $35.0 million relates to
capital equipment purchases. The Company plans to finance the new wafer
fabrication facility through a combination of cash from operations, debt and
lease financing and approximately $15.0 million of the net proceeds of this
offering. Although the Company believes that it will be able to obtain
financing for a significant portion of the planned capital expenditures at
competitive rates and terms from its existing and new financing sources, there
can be no assurance that the Company will be successful in these efforts. See
"Risk Factors -- Manufacturing Capacity Limitations; New Production Facility,"
"-- Dependence on Third-Party Manufacturing and Supply Relationships" and "--
Need For Additional Capital."
The Company has not raised financing from sales of equity (other than option
exercises under employee stock plans) since September 1987, and as a financing
strategy has used cash flow from operating activities and equipment debt and
lease financing. In June 1997, the Company repurchased 172,300 shares of
Preferred Stock (convertible into 2,119,435 shares of Common Stock) for
approximately $3.9 million.
The Company believes that the net proceeds of this offering, together with
its available cash, cash equivalents and short-term investments, and cash
generated from operations, will be sufficient to meet the Company's capital
requirements for the next 12 months, although the Company could be required,
or could elect, to seek to raise additional capital during such period. The
Company expects that it will need to raise additional debt or equity financing
in the future. There can be no assurance that such additional debt or equity
financing will be available on commercially reasonable terms or at all. See
"Risk Factors -- Need for Additional Capital" and "Use of Proceeds."
29
<PAGE>
BUSINESS
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency mixed-signal design
expertise, system-level knowledge and multiple silicon process technologies to
offer IC products for the telecommunications markets that address the
SONET/SDH and ATM transmission standards and for the data communications
markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission
standards. The Company also leverages its technology to provide solutions for
the ATE, high-speed computing and military markets. Customers of the Company
include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun
Microsystems and Teradyne.
The Company has developed multiple generations of many of its products. In
the telecommunications market, the Company provides ATM and SONET/SDH physical
layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC-
12 standards, and is currently developing an OC-48 chip set. In the data
communications market, the Company provides physical layer transceivers for
Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches
for serial backplanes. In the high-speed computing market, the Company
provides PCI controllers and high-frequency clock drivers and clock
generators. In addition, the Company also provides high-performance, low-power
application-specific integrated circuit ("ASIC") products for the ATE and
military markets.
INDUSTRY BACKGROUND
The Communications Industry
Communications technology has evolved from simple analog voice signals
transmitted over networks of copper telephone lines to complex analog and
digital voice and data transmitted over hybrid networks of media such as
copper, coaxial and fiber optic cables. This evolution has been driven by
enormous increases in the number of users and the complexity of the data types
transmitted over networks. In addition, the substantial growth in the
Internet, the World Wide Web and cellular and facsimile communications; the
emergence of new applications such as video conferencing; and the increase in
demand for remote network access and higher speed, higher bandwidth
communication between local area networks and local and wide area networks
have increased network bandwidth requirements. This increase has made current
systems architectures inadequate.
In the telecommunications market, service providers and equipment suppliers
in particular have been impacted by the inadequacy of systems architectures
caused by the current public network infrastructure. This infrastructure was
designed to optimize voice communications and is not well suited for the high-
throughput requirements of data transmission that is transmitted in "bursts."
The volume and complexity of this data has led to the increasing deployment of
fiber optic technology for use in wide area networks ("WANs"). This technology
has substantially greater transmission capacity and is less error prone and
easier to maintain than copper networks. The Synchronous Optical Network
("SONET") standard in North America, and the Synchronous Digital Hierarchy
("SDH") standard in the rest of the world, have emerged as the standards for
the transmission of signals over optical fiber. The SONET/SDH standards
facilitate high data integrity and improved network reliability, while
reducing maintenance and other operation costs by standardizing
interoperability among equipment from different vendors. A transmission
standard complementary to SONET/SDH, Asynchronous Transfer Mode ("ATM"), has
emerged to optimize bandwidth utilization. ATM is a network transmission
standard that packages data and reduces network delays, enabling the support
of not only data traffic, but delay-sensitive voice, video and imaging
applications.
In the data communications market, similar bandwidth issues have arisen as
the convergence of the LAN and WAN as well as the greater computational power
of PCs have enabled powerful network applications such as video conferencing
and Web communications. However, these new applications and the increasing
number of computers on networks have significantly increased the volume of
data traffic and, as a result, the network
30
<PAGE>
has now become the bottleneck in the delivery of integrated video, audio and
data. Ethernet is currently the most widespread LAN standard, operating at 10
to 100 megabits per second. However, LAN backbones are rapidly being upgraded
to Gigabit Ethernet and ATM in order to increase available bandwidth. These
network protocols, which enable expanded bandwidth in excess of one gigabit
per second, are emerging as the new standards for LAN backbones. In addition,
the Fibre Channel standard, which also facilitates data transmission at rates
exceeding one gigabit per second, has emerged as a practical, cost-effective
and expandable method for achieving high-speed, high-volume data transfer
among workstations, mainframes, data storage devices and other peripherals.
Fibre Channel and Gigabit Ethernet are complementary and compatible
transmission standards, and the emergence of Gigabit Ethernet has accelerated
the growth of the Fibre Channel standard.
The Communications IC Opportunity
In order to address the growing requirements of communications networks,
equipment suppliers are having to develop and introduce increasingly
sophisticated systems at a rapid rate. To achieve the performance and
functionality required by such systems, these OEMs must utilize increasingly
complex integrated circuits ("ICs"), which now account for a larger portion of
the value-added proprietary content of such systems. As a result of the rapid
pace of new product introductions, the proliferation of standards to be
accommodated and the difficulty of designing and producing requisite ICs,
equipment suppliers increasingly outsource these ICs to semiconductor firms
with specialized expertise. These trends have created a significant
opportunity for IC suppliers that can design cost-effective solutions for the
transmission of high-frequency data. Dataquest estimates that the worldwide
SONET/SDH markets for ICs were approximately $240 million in 1996 and will
increase to approximately $700 million in 2000, and that the ATM markets for
ICs were approximately $130 million in 1996 and will increase to approximately
$700 million in 2000. The Fibre Channel and Gigabit Ethernet markets were
relatively small in 1996 and Dataquest estimates that such combined markets
will be approximately $300 million in 2000.
IC suppliers must utilize a variety of skills and technologies to satisfy
the requirements of communications equipment OEMs. These OEMs require IC
suppliers that possess system-level expertise and can quickly bring to market
high-performance, highly reliable, power-efficient ICs. Additionally, these
OEMs seek suppliers with both analog and digital expertise to provide high-
frequency, mixed-signal solutions to bridge the analog physical world and the
digital computing environment. In particular, telecommunications OEMs require
IC suppliers to provide solutions that minimize jitter (a measure of the
stability and crispness of a signal), which degrades transmission quality over
distance. Data communications products typically have substantially shorter
life cycles than telecommunications products, and the rate of new product
introductions is very high. Therefore, data communications OEMs specifically
require IC suppliers that can provide IC solutions that accommodate these
increased time-to-market demands. Furthermore, the data communications market
is highly cost driven and generally involves large volumes. Therefore, OEMs in
this market require IC suppliers that can provide increasingly lower cost IC
solutions that can quickly be ramped into high-volume production.
In the high-performance IC market, a number of process technologies are used
to produce ICs. Traditionally, designers have relied on silicon-based
manufacturing process technologies for the development of high-speed, mixed-
signal analog and digital circuits with precision timing. In some cases, OEMs
utilize discrete components or IC solutions based on non-silicon processes
such as gallium arsenide ("GaAs") to meet the high-frequency requirements of
certain communications products. However, non-silicon processes tend to be
more expensive, less predictable with respect to yields and less able to ramp
to high-volume production than silicon processes.
The Automated Test Equipment Industry
Automated test equipment ("ATE") is used for the comprehensive testing of
ICs, printed circuit boards and electronic systems. Increasing worldwide
demand for ICs has led to a corresponding increase in the demand for IC test
equipment. IC manufacturers continue to increase the pace of introduction of
increasingly
31
<PAGE>
complex and higher speed ICs. Thus, ATE OEMs must provide new systems that are
capable of testing ICs and electronic systems with increasingly higher
frequencies and that are introduced rapidly enough to support the increased
pace at which new ICs and electronic systems are being introduced. In
addition, very accurate timing, utilizing precision analog verniers, is
critical for the testing of today's advanced microprocessors and other ICs.
Furthermore, ATE OEMs differentiate their systems and optimize speed and
timing performance through the use of customized ICs. Accordingly, ATE OEMs
require IC suppliers that possess the combination of ASIC methodologies, high-
performance process technologies and high-speed, mixed-signal design expertise
that can deliver ICs with the requisite speeds and precision timing.
Generally, ATE equipment requires ICs that operate at faster speeds and have
more precise timing than the ICs being tested. This need for speed and
precision timing requires that IC suppliers use high-performance processors
that are similar to the high-performance processes required to service the
advanced telecommunications market. Finally, ATE OEMs require IC suppliers
that deliver timely solutions, enabling the OEMs to satisfy their increasingly
rapid time-to-market requirements. In today's environment, there are declining
numbers of IC suppliers that satisfy these requirements.
The High-Speed Computing Industry
Increasing worldwide demand for high-performance computing equipment has led
to a corresponding increase in the demand for ICs for the high-speed computing
industry. High-speed computing equipment manufacturers must deliver increased
computational performance that is compatible with, and driven by, rapidly
increasing microprocessor speeds. The peripheral devices that communicate with
the computer processor must keep pace with the processor to enable the system
to deliver optimal performance. The pace of new product introductions in this
industry continues to accelerate, and product life cycles continue to shorten.
As a result, a premium is placed on time-to-market. High-performance computing
equipment manufacturers must rely on suppliers of cost-effective, increasingly
complex, standard ICs that can be designed, produced and delivered in time to
meet rapidly changing market demands.
AMCC SOLUTION
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by utilizing a
combination of high-frequency mixed-signal design expertise, system-level
knowledge and multiple process technologies. AMCC believes that its internal
bipolar and BiCMOS processes, complemented by advanced CMOS processes from
external foundries, enable the Company to offer high-performance, high-
frequency solutions optimized for specific applications and customer
requirements. By using its proven silicon-based processes and extensive design
libraries, the Company is able to offer products that provide significant
cost, power, performance and reliability advantages for communications systems
OEMs. In addition, this enables the Company to accelerate its time-to-market
as well as quickly ramp into high-volume production. The Company also
leverages its technology to provide solutions for the ATE, high-speed
computing and military markets.
In the telecommunications market, the Company provides IC products for the
SONET/SDH and ATM standards. The Company's customers in the telecommunications
market include Alcatel, ECI, GPT, Nortel and SAT. In the data communications
market, the Company supplies products targeted at Gigabit Ethernet, ATM and
Fibre Channel applications. The Company's customers in this market include
3Com, Cabletron, Cisco Systems, Compaq, Fujikura and Vixel. In the ATE market,
the Company provides high-speed products for both memory and logic testers.
The Company's ATE customers include Hewlett-Packard, LTX, Schlumberger,
Teradyne and Texas Instruments. Finally, in the high-speed computing market,
the Company supplies PCI bus controllers as well as precision timing products.
The Company's customers for this market include Ericsson, Intel and NEC. The
Company has developed multiple generations of many of its products and has
maintained long-term relationships with many of its customers.
32
<PAGE>
STRATEGY
AMCC's objective is to be the leading supplier of high-performance, high-
bandwidth connectivity IC solutions for the world's communications
infrastructure. To achieve this objective, the Company employs the following
strategies:
Focus on High-Growth Telecommunications Markets
AMCC targets key high-growth telecommunications markets, including those for
SONET/SDH and ATM products. The Company has built substantial competencies
focused on the specific requirements of these markets in the areas of process
technology and mixed-signal design and substantial expertise in systems
architecture and applications support. The Company believes that the
integration of these capabilities enables it to optimize solutions addressing
the high-bandwidth connectivity requirements of telecommunications systems
OEMs.
Leverage Telecommunication Capabilities in High-Bandwidth Data Communications
Markets
AMCC leverages its mixed-signal design expertise, process technologies and
systems capabilities in telecommunications to address specific customer
requirements in high-bandwidth data communications markets. The Company
believes that this strategy enables it to provide data communications OEMs
with cost-effective IC solutions that can be introduced and produced rapidly.
The Company has targeted, in particular, Gigabit Ethernet, ATM and Fibre
Channel applications. Consistent with this strategy, the Company has
introduced serial backplane ICs to address the growing demand for high-
bandwidth switching.
Exploit Established Markets
The Company believes it has developed a strong presence in specific segments
of the ATE, high-speed computing and military markets, where it maintains
established customer relationships and many competitive products. AMCC
believes that its high-performance design expertise is directly applicable to
the product requirements of these markets. Furthermore, the Company believes
that its process technologies are well-suited for the ATE and military
applications that are being served by a decreasing number of suppliers. AMCC
believes that continued participation in these markets provides it with an
opportunity for revenue diversification and stability.
Capitalize on Multiple Silicon-Process Technologies to Provide Optimized
Solutions
The Company is dedicated to utilizing the best silicon process technology
available to offer solutions optimized for specific applications and customer
requirements. The Company has successfully developed multiple generations of
its processes and believes that it will be able to continue the evolution of
its processes to deliver the performance required of future communications
ICs. AMCC believes its current and future bipolar and BiCMOS processes,
complemented by advanced CMOS processes from external foundries, together with
its mixed-signal design expertise, provide the Company with the flexibility to
design and manufacture products that are tailored to its customers' individual
needs. Through this flexible approach, AMCC is better able to transition
products over time to new manufacturing processes as product performance
requirements and process technologies evolve.
Capitalize on Established Silicon-Process Technologies to Provide Cost-
Effective Solutions
The Company applies its systems expertise and its mixed-signal analog and
digital design techniques to architect high-performance products based on
established silicon process technologies. The Company believes that these
silicon-based processes are proven, stable and predictable relative to non-
silicon processes and benefit from the extensive semiconductor industry
infrastructure devoted to the support of silicon processes. The process
technologies employed by AMCC are designed to deliver high-performance
products while being
33
<PAGE>
substantially less capital intensive than other advanced semiconductor
processes. In addition, the Company's ASIC methodology enables the use of
cells that have been successfully characterized and manufactured previously.
As a result, the Company believes it is well-positioned to deliver products on
time and to meet the rapidly increasing production requirements of its
customers.
Continue to Develop Internal Wafer Fabrication Capability
The Company believes that the continued development of its internal bipolar
and BiCMOS wafer fabrication capability provides an important competitive
advantage. AMCC believes that this capability improves the Company's ability
to design and manufacture new products with short development cycles. It also
gives AMCC greater control over its manufacturing process characteristics and
costs, and enhances its ability to leverage existing design libraries and
methodologies for future products.
PRODUCTS AND CUSTOMERS
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company's current IC products address the needs of two primary segments of the
communications market: the telecommunications market and the data
communications market. The Company's products for the telecommunications and
the data communications markets are designed to respond to the growing demand
for high-speed networking applications for established WAN standards such as
SONET/SDH and ATM and emerging LAN standards such as Gigabit Ethernet, ATM and
Fibre Channel. The Company also markets and sells IC products that address the
needs of the ATE, high-speed computing and military markets. The Company
utilizes its high-performance digital and mixed-signal design expertise and
systems knowledge, together with its internal bipolar and BiCMOS processes and
CMOS processes from outside foundries, to design and manufacture products that
are tailored to its customers' individual needs.
The Company has used its design methodologies to successfully develop
products ranging from ASSPs designed for industry-wide applications, to ASICs
that are custom solutions for specific customer applications. These
complementary products enable the Company to provide optimal solutions for its
customers' applications. For example, the earlier generation of the Company's
standard SONET products used ASIC platforms for quick time-to-market.
Recently, the Company used the S2052, its ASSP designed for the Gigabit
Ethernet market, as a platform to develop its S2053 and S2054 products, two
customer-specific devices that are expected to eventually become standard
products. As the Company develops special macros such as Phase Locked Loops
("PLLs") to support a customers' application needs, they become part of the
Company's ASIC library, which in turn can be used for other ASICs or ASSPs.
The Company believes that it has a particularly strong competence in the
design of high-speed, low-jitter PLLs, which are key elements in its mixed-
signal transceivers and precision timing products.
AMCC's products for SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel
applications are primarily focused on very high-speed digital and mixed-signal
circuits called physical layer circuits. These circuits consist of a
transmitter and receiver that, when integrated, is called a transceiver chip.
Most of these circuits are very high-speed, mixed-signal circuits that convert
parallel digital inputs into a single analog bit stream that is up to 20 times
faster than the original signal. The diagram below illustrates the manner in
which a physical layer circuit takes parallel digital data from an overhead
processor clocked at speeds of up to 33 MHz and converts it into high-speed
digital signals with clock rates of up to 125 MHz. This digital data is then
converted into an analog/serial data stream for transmission at clock speeds
of up to 1.25 GHz, representing a tenfold increase in speed, to an optical
transmitter or other physical media interfaces. The diagram also illustrates
the manner in which a high-speed analog serial data stream from an optical
receiver is converted into lower speed parallel digital data for transmission
to an overhead processor.
34
<PAGE>
[Diagram labeled "Figure 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK
DIAGRAM" is comprised of headings, boxes and arrows. The headings "Slow Speed
Digital," "High Speed Digital Interface" and "High Speed Digital Analog
Interface" appear from left to right across the top of the diagram, below
which the staggered headings "Overhead Processor," "Physical Interface" and
"Physical Media Interface" appear. Directly below the heading "Overhead
Processor" is a rectangular box labeled "Processing Unit" that is connected to
a parallel box labeled "Digital I/O" by a line labeled 33 Mhz. The upper half
of this box is connected, by several arrows pointing to the right, to a third
rectangular box labeled "Transmitter." The "Transmitter" box is connected by a
line labeled "Up to 1250 MHz" to a rectangular box labeled "Optical
Transmitter." Below the "Optical Transmitter" box is an identical box labeled
"Optical Receiver," which, in turn, is connected by an arrow pointing to the
left to a box labeled "Receiver." The "Receiver" box is connected by several
arrows pointing to the left, to the "Digital I/O" box. Below these arrows, in
the center of the diagram, is the heading "AMCC Products." The headings
"Digital," "Mixed Signal" and "Analog" appear from left to right across the
bottom of the diagram.]
FIGURE 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK DIAGRAM
Telecommunications Products
The following table describes the Company's telecommunications products:
<TABLE>
<CAPTION>
DATE OF
PRODUCTION
PRODUCTS RELEASE(1) APPLICATION
- -------------------------------------------------------------------------------
<C> <C> <S>
S3005/6 June 1993 ATM physical layer transceiver products
for OC-3
S3020/21 December 1994 (155 Mbps) and/or OC-12 (622 Mbps).
- -------------------------------------------------------------------------------
S3015/16 March 1995 ATM/E-4 & STM-1 physical layer
transmitter/receiver pair (155 Mbps).
- -------------------------------------------------------------------------------
S3017/18 June 1995 SONET/SDH physical layer transceiver
products for OC-3
S3028 January 1997 (155 Mbps) and/or OC-12 (622 Mbps).
- -------------------------------------------------------------------------------
S3014 December 1993 Clock Recovery and Synthesis Units for
SONET/ATM
S3025/26/27 March 1997 Modules for OC-3 (155 Mbps) and/or OC-
12 (622 Mbps).
</TABLE>
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
AMCC introduced its first generation OC-3 (155 Mbps) physical layer products
in 1993. The Company has since developed two additional generations of these
products, each integrating greater functionality on each chip while improving
jitter performance. "Jitter" is a measure of the degradation in the quality of
the signal being transmitted or received. Jitter can be caused by the presence
of noise in the system and increases with the distance over which the signal
is transmitted. Jitter is usually controlled by special analog circuit
techniques that separate the noise in the system from the valid data. Low
jitter devices enable the system designer to transmit the signal over longer
distances or use less expensive optical devices, thus reducing the
35
<PAGE>
overall system cost. The Company's first generation of these products
consisted of transmitter/receiver pairs with dual voltage. The second
generation consisted of products that are compatible with single +5V optical
modules. The Company's third generation physical layer product, the S3028, is
a single chip transceiver designed to be compatible with the system needs of
optical links. This product offers systems OEMs selectable reference
frequencies, a 4 or 8-bit data path, a PECL or TTL level interface, a
diagnostic mode and special failure indicators. The Company has under
development additional ATM physical layer transceiver products compatible with
the OC-3 and OC-12 standard, as well as additional SONET/SDH physical layer
transceiver products for OC-12 and OC-48 applications.
AMCC's products for the OC-12 (622 Mbps) standard are highly integrated
products that consist of parallel-to-serial converters ("Mux"), serial-to-
parallel converters ("DeMux"), transmit and receive Phase Locked Loops
("PLLs"), Clock Synthesis Units ("CSU") and Clock Recovery Units ("CRU") with
low power dissipation and low output jitter. The superior jitter performance
of these products enables customers to use less expensive optical components.
The Company has also successfully integrated five PLLs on a single product at
155 Mbps. The power dissipation of this multichannel device is less than 1
watt (less than 200 milliwatt per PLL). All of the Company's
telecommunications devices are supported with evaluation boards and design
aids for easy implementation by engineers with limited knowledge of high
performance circuit layout techniques.
The Company's Micropower bipolar standard cell ASIC products are well-suited
for high performance telecommunications applications that require up to 20,000
equivalent gates, a high-speed digital interface, low jitter, and PLL macros
operating at speeds of up to 2.5 GHz. The Company also uses its Micropower
technology for its ASSPs for the SONET/SDH market.
Current customers for the Company's telecommunications products include
Alcatel, ECI, Fujitsu, GPT, Nortel and SAT. The Company has achieved design
wins for its ASIC and ASSP products with certain other customers in the
telecommunications market, including DSC Communications, IBM, NEC and Nokia.
There can be no assurance that these design wins will result in volume
shipments to any of such customers. Sales to Nortel accounted for
approximately 17%, 20%, 20% and 19%, of the Company's net revenues in fiscal
1995, 1996, 1997 and for the six months ended September 30, 1997,
respectively. No other customer represented greater than 10% of the Company's
net revenues during such periods.
Data Communications Products
The following table describes the Company's data communications products:
<TABLE>
<CAPTION>
DATE OF
PRODUCTION
PRODUCTS RELEASE(1) APPLICATION
- -------------------------------------------------------------------------------
<S> <C> <C>
S2046/47................ October 1996 Transceivers/physical layer ICs for Gigabit Ethernet
S2052................... June 1997 backbone and Fibre Channel.
- -------------------------------------------------------------------------------
S2036................... February 1995 Serial chip sets, GLM Transceivers for Fibre
S2042/43................ August 1996 Channel (1.0625 Gbps, 533 and 265 Mbps) and
S2044/45................ August 1996 Redundant Array of Independent Disks ("RAID")
drives.
- -------------------------------------------------------------------------------
S2016................... October 1995 High density switches, physical layer ICs, multi-port
S2024................... September 1995 crosspoint switches and transceivers for backplanes
S2025................... May 1996 in ISP networks.
S2052................... June 1997
S2042/43................ August 1996
</TABLE>
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
36
<PAGE>
LAN Products. AMCC introduced its first generation of data communications
physical layer devices in 1995. The Company has since developed two additional
generations of products that support both +5V and +3.3V applications. The
Company's first two generations of physical layer devices consisted of
transmitter/receiver pairs with 10-bit interfaces or industry-standard 20-bit
interfaces for Giga-Link Modules ("GLM") and open fiber control for the Fibre
Channel standard. The Company's most recent data communications IC product,
the S2052, is a single chip transceiver that supports both the Fibre Channel
and Gigabit Ethernet transmission standards. This product is compatible with
the Fibre Channel pin-out configuration and is capable of directly driving
fiber optic or twinaxial cables. Some of the Company's customers also use
derivatives of the S2052 for their specific application needs. All of the
Company's data communications IC products are supported with evaluation boards
and design aids for easy implementation by engineers with limited knowledge of
high performance circuit layout techniques. The Company has under development
additional physical layer ICs for Gigabit Ethernet and Fibre Channel
applications.
Serial Backplane Products. In addition to the WAN and LAN network equipment
and standards developed to address the issue of network bandwidth, network
equipment OEMs must also ensure that once high-frequency signals exit the
transmission network, they can be switched efficiently, while taking full
advantage of the available bandwidth. Backplanes (the boards that distribute
signals to various ports of a switching system) are currently emerging as a
serious constraint for systems OEMs because redesigning the traditional
architecture of parallel channels to accommodate higher frequency signals is
prohibitively expensive. Therefore, serial channels, which can accommodate
much higher frequencies, are being increasingly employed. The Company believes
that this transition has created a significant opportunity for suppliers that
can design IC solutions enabling the transmission of high-frequency data
through a serial backplane.
Data communications system designers use three different backplane
architectures. All of these architectures use serializer and deserializer
chips such as the Company's S2052 and S2042/43 chip sets, and one of these
architectures uses crosspoint switches. Based upon the system design, 16-bit
or 32-bit crosspoint switches are currently required and, in the future, 64-
bit crosspoint switches may be required. AMCC introduced its first generation
of crosspoint-based serial backplane products in 1995. These products included
16-bit and 32-bit crosspoint switches with fast reconfiguration time and the
S2042/43 serializer/deserializer pair with fast acquisition time. The Company
currently offers its second generation 32-bit crosspoint switch and the S2052
single chip serializer/deserializer, as a serial backplane solution. The
Company has under development additional multi-port products for backplane
applications.
Current customers of the Company's IC products in the data communications
market include 3Com, Cabletron Systems, Compaq, Digital Equipment Corporation,
Fujikura and Vixel. The Company has achieved design wins with certain other
customers in this market, including Adaptec, Cisco Systems, FORE Systems and
Sun Microsystems. There can be no assurance that these design wins will result
in volume shipments to any of such customers.
ATE
AMCC introduced its current generation gate array Q20000 family of products
in 1991 and its Micropower-based standard cell products in 1993. Micropower,
one of the first products to offer +3.3V operation for high performance ASICs,
uses AMCC's proprietary bipolar process. The high-performance and low-power
characteristics of this family of products make it particularly suitable for
high performance semiconductor ATE applications that require approximately
4,000 equivalent gates, low jitter and precision circuits. Current customers
for the Company's products for the ATE market include Hewlett-Packard, LTX,
Schlumberger and Teradyne. The Company has achieved design wins with Teradyne
and Texas Instruments for circuits using these products. There can be no
assurance that these design wins will result in volume shipments to any of
such customers.
37
<PAGE>
High-Speed Computing Products
The following table describes the Company's high-speed computing products:
<TABLE>
<CAPTION>
DATE OF
PRODUCTION
PRODUCT FAMILY RELEASE(1) APPLICATION
- -------------------------------------------------------------------------------
<S> <C> <C>
S5933................... March 1997 PCI controllers.
SC3000 Series........... 1992-96 Clock drivers for servers.
SC4400 Series........... 1992-96 Clock generators for servers.
S4506................... January 1997 250 MHz Clock generator for Rambus-based systems.
S4507................... June 1997 300 MHz Clock generator for Rambus-based systems.
</TABLE>
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
AMCC offers two product lines that address the high-speed computing market.
The S5933 is a standard master/slave PCI controller chip that is the first in
the Company's line of PCI controller chips. This device is supported with a
comprehensive development kit and third-party driver software. The Company
sells these products to a very large and diverse customer base. Current
customers of the Company's products include Cisco Systems, Ericsson, IBM and
SAT. The Company's S5933 PCI controller chip is also used in reference designs
with C-Cube Microsystems for digital video disk products.
AMCC's second line of high-speed computing products consists of clocking
devices that use the Company's PLL technology for precision clock generation
for applications in the workstation, telecommunications and data
communications markets. AMCC's 250 MHz and 300 MHz clock generators are being
used in Rambus-based systems. The Company's customers with Rambus-based
systems also include Chromatic Research, Gateway 2000, LG Semiconductor,
Micron Electronics, NEC and STB. The Company has under development additional
PCI controller chips.
Military
The Company introduced its Q20000 gate array family of ASIC products in
1991. These devices are well suited for military applications and as
replacements for ECLinPSTM logic from Motorola. The Company sells ASICs to
military customers such as Hughes Electronics, Northrop Grumman, Raytheon,
Rockwell International and Texas Instruments.
TECHNOLOGY
The Company utilizes its technological and design expertise to solve the
unique problems of high-speed digital and mixed-signal circuit designs for the
world's communications infrastructure. The Company's competencies include the
design and manufacture of high-performance digital and mixed-signal ICs, in-
depth knowledge of the architecture and functioning of high-bandwidth
telecommunications and data communications systems, proven ASIC design
methodologies and libraries, and high-performance semiconductor manufacturing
and packaging expertise.
Design of High-Performance Digital and Mixed-Signal ICs
AMCC has developed multiple generations of products that integrate both
analog and digital elements on the same chip, while balancing the difficult
trade-offs of speed, power and timing inherent in high-speed applications.
AMCC was one of the first companies to embed analog PLLs in bipolar chips with
digital logic for high-speed data transmission and receiver applications.
Since the introduction of AMCC's first on-chip clock recovery and clock
synthesis products in 1993 (the S3005/S3006 chip set), the Company has refined
these key circuits and has successfully integrated multiple analog functions
and multiple channels on the same
38
<PAGE>
chip. For example, the Company has under development a quad transceiver with a
PLL clock recovery and PLL clock multiplier. The mixing of digital and analog
signals poses difficult challenges for IC designers, particularly at high
frequencies. The Company has built significant expertise in mixed-signal IC
designs through the development of multiple generations of products. The
Company believes that one of its primary skills is its ability to integrate
increasingly complex analog functions with high-speed digital logic on a
single chip. The Company also applies this expertise, developed using bipolar
process technology, to IC designs on CMOS processes.
Systems and Architecture Expertise
AMCC believes that its systems architects, design engineers and technical
marketing and applications engineers have a thorough understanding of the
telecommunications and data communications systems for which the Company
designs and builds ASSPs. Using this systems expertise, AMCC develops
semiconductor devices to meet OEMs' high-bandwidth systems requirements. By
understanding the systems into which its products are designed, the Company
believes that it is better able to anticipate and develop optimal solutions
for the various cost, power and performance trade-offs faced by its customers.
AMCC believes that its systems knowledge also enables the Company to design
its IC products to provide the most cost-effective and performance-optimized
solution available using proven process technologies. For example, in its IC
design for OC-48 applications, AMCC applied its systems knowledge and mixed-
signal design expertise to partition the solution into bipolar and high-speed
CMOS chips, which enabled AMCC to offer a substantially lower power
alternative and provide the customer with added flexibility in its future
design plans.
Design Methodology
The Company believes that its extensive experience in the use of ASIC design
methodologies (gate arrays and standard cells), enables its designers to
accelerate the design of new standard products. The Company also has extensive
experience in using ASIC methodologies in collaborative product development
efforts with its customers. The Company uses extensive libraries of analog and
digital blocks that have been well characterized and previously used, which
the Company believes decreases design costs and cycle time and minimizes any
final redesign that may be required once the circuit is implemented in
silicon. The Company's design methodology utilizes advanced computer aided
design ("CAD") tools for each of the following phases of the implementation
process: design capture, logic synthesis, simulation, physical layout and chip
composition and verification. AMCC uses industry-standard CAD tool sets
whenever possible, but augments these tool sets with certain proprietary tools
that enable its designers to optimize mixed-signal performance at very high
frequencies. Industry standard Verilog/VHDL models, developed at the
behavioral and the gate level, are given to key customers for system level
simulation and verification, and feedback from these customers is used to
finalize the Company's device designs to ensure that AMCC's devices will
interface appropriately with the OEM's system. The Company believes that this
process results in shortened design cycle time and greater first-time
correctness of production-worthy devices.
Process Technology
AMCC utilizes its own internal wafer fabrication facility and has developed
and produced multiple generations of cost-effective, high-performance bipolar
and BiCMOS processes. Bipolar processes are widely recognized as the
technology of choice for circuits that require high-speed, analog-intensive
circuitry with low to moderate levels of density (number of gates or functions
per chip). Nevertheless, the Company believes that the number of companies
possessing this advanced bipolar process capability and applying it to the
markets targeted by AMCC is limited. The proven internal silicon-based process
technologies employed by the Company have not required the highly capital-
intensive facilities needed by certain advanced microprocessor, memory or CMOS
ASIC suppliers. The Company believes that its bipolar-based processes are the
optimal choice for the performance (speed, timing and stability), power and
cost trade-offs that must be made in providing the mixed-signal ICs required
by its targeted markets.
39
<PAGE>
Packaging
AMCC has substantial experience in the development and use of plastic and
ceramic packages for high-performance applications. The selection of the
optimal package solution is a vital element of the delivery of high-
performance products, and involves balancing cost, size, thermal management
and technical performance. AMCC's products are designed to reduce power
dissipation and die size to enable the use of industry standard packages. AMCC
employs a wide variety of package types, and is currently designing products
using ball grid arrays, tape ball grid arrays and multi-chip modules with pin
counts in excess of 200 pins. The Company's experience with a variety of
packages is one of the factors that enables it to provide optimal high-
performance IC solutions to its customers.
RESEARCH AND DEVELOPMENT
AMCC's research and development expertise and efforts are focused on the
development of high-performance, mixed-signal ASSPs for advanced
communications applications, as well as ASIC products and methodologies for
communications and ATE applications. The Company also focuses on the
development of silicon wafer fabrication processes that are optimized for
these applications.
Product Development
The Company's product development is focused on building high-performance,
analog-intensive design expertise that is incorporated into well-documented
blocks that can be reused by AMCC's design group for multiple products. The
Company has, and continues to make, significant investments in advanced CAD
tools to leverage its design engineering staff, reduce design cycle time and
increase first-time design correctness. AMCC is consistently seeking to add
engineers with high-performance, mixed-signal experience in both its bipolar
and CMOS design groups. The Company's product development is driven by the
imperatives of reducing design cycle time, increasing first-time design
correctness, adhering to disciplined, well documented design processes and
continuing to be responsive to customer needs.
Process Development
The Company's process development is focused on enhancing its current
bipolar processes and developing new processes optimized for high-performance
digital and mixed-signal communications applications. These new processes are
being designed to provide higher transistor speeds and improved parasitics to
address higher frequency communications requirements, as well as the need to
constantly improve jitter performance in the circuits, while maintaining low
power dissipation and enabling high yields in volume production. AMCC's
process engineers are also involved with the selection and management of the
Company's relationships with outside foundries to provide the advanced CMOS
processes required by certain of AMCC's products. The Company is also
developing high-performance packages for its products in collaboration with
its packaging suppliers and its customers.
The Company's research and development expenses in fiscal years 1995, 1996,
1997 and the six months ended September 30, 1997 were $10.1, $8.3, $7.9 and
$6.0 million, respectively, which were 21.5%, 16.5%, 13.7% and 17.0%,
respectively, of revenues for such periods. The Company has 86 employees
engaged in engineering and product development related activities.
A failure by the Company to improve its existing process technologies in a
timely or affordable manner could adversely affect the Company's business,
financial condition and operating results. See "Risk Factors--Transition to
New Process Technologies," "--Rapid Technological Change; Necessity to Develop
and Introduce New Products" and "--Manufacturing Capacity Limitations; New
Production Facility."
MANUFACTURING
Wafer Fabrication
AMCC manufactures products at its four-inch wafer fabrication facility in
San Diego, California in a 7,600 square foot clean room. The Company is
currently expanding the clean room by approximately 600 square feet to
accommodate new equipment that will expand capacity and will be used for
process
40
<PAGE>
development. The Company believes that its wafer fabrication facility has
competitive yields, cycle times and costs, produces large die at acceptable
yields and operates on a flexible basis of multiple products and variable lot
sizes. However, there can be no assurance that the Company will achieve or
obtain acceptable manufacturing yield levels in the future. The Company is
currently running several different bipolar and BiCMOS processes in this
facility. See "Risk Factors -- Manufacturing Yields" and "Business --
Technology."
The Company is currently in the initial stages of planning the construction
of a new six-inch wafer fabrication facility that it believes will be located
in San Diego, California. AMCC believes that it will need such a facility to
be operational in approximately four years in order to support the Company's
growth and to build certain new products. The Company currently plans to
acquire or acquire rights to a site for this new facility by the end of 1998.
There can be no assurance that the Company will be able to manage its growth
or effectively integrate its proposed new wafer fabrication facility into its
current operations. See "Risk Factors -- Manufacturing Yields," "--
Manufacturing Capacity Limitations; New Production Facility" and "--
Management of Growth."
AMCC currently utilizes four outside foundries, AMI Semiconductor ("AMI"),
IBM, Kawasaki CSI Japan ("Kawasaki") and Taiwan Semiconductor Manufacturing
Corporation ("TSMC") for the production of products designed on CMOS
processes. The Company does not plan to fabricate its own CMOS wafers.
Most of the Company's PCI Bus products are currently produced by AMI on a
five-inch CMOS process. Certain of the Company's other PCI Bus products are
being designed to be produced in Japan by Kawasaki on a six-inch CMOS process.
Additionally, certain of AMCC's products are being produced by TSMC on
six-inch CMOS and BiCMOS processes. Some of the Company's products are being
designed to be produced by IBM on eight-inch CMOS processes. Although the
Company has a long term agreement with IBM that provides that AMCC will be
able to purchase certain minimum quantities of wafers through March 2000, the
Company does not have long-term wafer supply agreements with its other outside
foundries that guarantee wafer or product quantities, prices or delivery lead
times. There are certain risks associated with the Company's dependence upon
external foundries for certain of its products, including reduced control over
delivery schedules, quality assurance, manufacturing yields and costs, the
potential lack of adequate capacity during periods of excess demand, limited
warranties on wafers or products supplied to the Company, increases in prices
and potential misappropriation of the Company's intellectual property. See
"Risk Factors -- Dependence on Third-Party Manufacturing and Supply
Relationships."
Components and Raw Materials
AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic
Corporation ("WSC"). While most silicon wafers now being supplied to the
semiconductor industry are larger than four inches, AMCC believes that WSC
will continue to supply AMCC's needs for the foreseeable future. AMCC also
carries a significant inventory of raw wafers to cushion any interruption in
supply. AMCC purchases its ceramic packages from Kyocera America and NTK
Ceramics and its plastic packaging from ASAT. See "Risk Factors -- Dependence
on Third-Party Manufacturing and Supply Relationships."
Assembly and Test
The Company assembles prototypes and modest production volumes of specific
products in its internal assembly facility in San Diego, California. Most of
the Company's production assembly, however, is performed by multiple assembly
subcontractors located in the Far East, Europe and the United States.
Following assembly, the packaged units are returned to the Company for burn-in
(in some cases), final testing and marking prior to shipment to customers.
From time to time, some testing is performed by subcontractors. See "Risk
Factors -- Dependence on Third-Party Manufacturing and Supply Relationships."
SALES AND MARKETING
The Company sells its products principally through a direct sales
organization consisting of a network of independent manufacturers'
representatives in specified territories that work under the direction of the
Company's direct sales force and distributors.
41
<PAGE>
The Company has a total of 12 direct sales personnel and field applications
engineers. The direct sales force is technically trained and is supported by
applications engineers in the field as well as applications and design
engineers at the Company's headquarters. The Company believes that this
"engineering-intensive" relationship with its customers results in strong,
long-term customer relationships beneficial to both the Company and its
customers. The Company augments this strategic account sales approach with
domestic and foreign distributors, which service primarily smaller accounts
purchasing ASSPs.
In North America, the Company's direct sales effort is supported by 20
independent manufacturers' representatives and one distributor. The Company
sells its products through 11 distributors in Europe and eight distributors
throughout the rest of the world. In fiscal 1996 and 1997 and during the six
months ended September 30, 1997, approximately 24%, 21% and 24% of the
Company's revenues were derived from sales to customers located outside of
North America.
The Company's sales headquarters is located in San Diego, California. The
Company maintains sales offices in Burlington, Massachusetts; Raleigh, North
Carolina; San Clemente, California; and Plano, Texas.
PROPRIETARY RIGHTS
The Company relies in part on patents to protect its intellectual property.
In the United States, the Company has been issued 14 patents, which
principally cover certain aspects of the design and architecture of the
Company's IC products and have expiration dates ranging from 2004 to 2009. In
addition, the Company has three patent applications pending in the United
States Patent and Trademark Office (the "PTO"). There can be no assurance that
the Company's pending patent applications or any future applications will be
approved, or that any issued patents will provide the Company with competitive
advantages or will not be challenged by third parties, or that the patents of
others will not have an adverse effect on the Company's ability to do
business. Furthermore, there can be no assurance that others will not
independently develop similar products or processes, duplicate the Company's
products or processes or design around any patents that may be issued to the
Company.
To protect its intellectual property, the Company also relies on a
combination of mask work protection under the Federal Semiconductor Chip
Protection Act of 1984, trademarks, copyrights, trade secret laws, employee
and third-party nondisclosure agreements and licensing arrangements. A mask
work refers to the intangible information content of the set of masks or mask
databases used to make a semiconductor chip product. Despite these efforts,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been and in the future may be notified
that it may be infringing the intellectual property rights of third parties.
The Company has certain indemnification obligations to customers with respect
to the infringement of third party intellectual property rights by its
products. There can be no assurance that infringement claims by third parties
or claims for indemnification by customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition or operating results. In
March 1997, the Company received a written notice from legal counsel for Dr.
Chou Li asserting that the Company manufactures certain of its products in
ways that appear to such counsel to infringe a United States patent held by
Dr. Li (the "Li Patent"). After a review of its technology in light of such
assertion, the Company believes that the Company's processes do not infringe
any of the claims of this patent. However, there can be no assurance that Dr.
Li will not file a lawsuit against the Company or that the Company would
prevail in any such litigation. Any litigation relating to the intellectual
property rights of third parties, including, but not limited to the Li Patent,
whether or not determined in the Company's favor or settled by the Company,
would at a minimum be costly and
42
<PAGE>
could divert the efforts and attention of the Company's management and
technical personnel, which could have a material adverse effect on the
Company's business, financial condition or operating results. In the event of
any adverse ruling in any such matter, the Company could be required to pay
substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or obtain a license under the intellectual property rights
of the third-party claiming infringement. There can be no assurance, however,
that a license would be available on reasonable terms or at all. Any
limitations on the Company's ability to market its products, any delays and
costs associated with redesigning its products or payments of license fees to
third parties or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary
Rights."
COMPETITION
The semiconductor market, particularly the high-performance semiconductor
market, is highly competitive and subject to rapid technological change, price
erosion and heightened international competition. The telecommunications, data
communications, ATE and high-speed computing industries are also becoming
intensely competitive due in part to deregulation and heightened international
competition. The ability of the Company to compete successfully in its markets
depends on a number of factors, including product performance, success in
designing and subcontracting the manufacture of new products that implement
new technologies, product quality, reliability, price, the efficiency of
production, design wins for its IC products, ramp up of production of the
Company's products for particular system manufacturers, end-user acceptance of
the system manufacturers' products, market acceptance of competitors' products
and general economic conditions. In addition, the Company's competitors may
offer enhancements to existing products, or offer new products based on new
technologies, industry standards or customer requirements, that are available
to customers on a more timely basis than comparable products from the Company
or that have the potential to replace or provide lower cost alternatives to
the Company's products. The introduction of such enhancements or new products
by the Company's competitors could render the Company's existing and future
products obsolete or unmarketable. Furthermore, once a customer has designed a
supplier's product into its system, the customer is extremely reluctant to
change its supply source due to the significant costs associated with
qualifying a new supplier. Finally, the Company expects that certain of its
competitors and other semiconductor companies may seek to develop and
introduce products that integrate the functions performed by the Company's IC
products on a single chip, thus eliminating the need for the Company's
products. Each of these factors could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Risks Associated with Dependence on High-Speed Computing Market."
In the telecommunications and data communications markets, the Company
competes primarily against GaAs-based companies such as Giga, TriQuint and
Vitesse, and bipolar silicon-based products from companies such as Hewlett-
Packard, Maxim and Sony. In certain circumstances, most notably with respect
to ASICs supplied to Northern Telecom, AMCC's customers or potential customers
have internal IC manufacturing capability, and this internal source is an
alternative available to the customer. In the ATE market, the Company competes
primarily against Vitesse and silicon ECL and BiCMOS products offered
principally by semiconductor manufacturers such as Analog Devices, Lucent
Technologies and Maxim. In the high-speed computing market, the Company
competes against companies such as Chrontel and PLX. Many of these companies
and potential new competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. In addition, in lower-
frequency applications, the Company faces increasing competition from other
CMOS-based products, particularly as the performance of such products
continues to improve. There can be no assurance that the Company will be able
to develop new products to compete with new technologies on a timely basis or
in a cost-effective manner. Any failure by the Company to compete successfully
in its target markets, particularly in the telecommunications and data
communications markets, would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk Factors--
Intense Competition" and "Risks Associated with Dependence on
Telecommunications and Data Communications Markets and Increasing Dependence
on Application-Specific Standard Products."
43
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations with
respect to such funding efforts have not been material, and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results. See "Risk Factors -- Environmental Regulations."
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of
the date of this Prospectus, the Company is not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition or
operating results.
FACILITIES
The Company's executive offices, research and development and engineering
functions are located in San Diego, California in a 90,000 square foot
building that is leased by the Company under a lease that expires in 2007. In
addition, the Company occupies a 21,000 square foot building in San Diego,
which houses the Company's manufacturing facilities under a lease that expires
in 1998, but provides the Company with options to extend the lease for up to
two additional five year periods. The Company leases additional space for
sales offices in Burlington, Massachusetts; Los Angeles, California; Plano,
Texas; Raleigh, North Carolina and San Jose, California.
EMPLOYEES
As of September 30, 1997, the Company had 287 employees: 29 in
administration, 86 in engineering and product development, 135 in operations
and 37 in marketing and sales. The Company's ability to attract and retain
qualified personnel is essential to its continued success. None of the
Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. The Company believes its
employee relations are good. Loss of the services of, or failure to recruit,
key design engineers or other technical and management personnel could be
significantly detrimental to the Company's product and process development
programs or otherwise have a material adverse effect on the Company's
business, financial condition, and operating results. See "Risk Factors --
Dependence on Qualified Personnel."
44
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company, and their ages as of
November 10, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ --- -------------------------------------------------
<S> <C> <C>
David M. Rickey......... 41 President, Chief Executive Officer and Director
Joel O. Holliday........ 58 Vice President, Finance and Administration,
Treasurer, Chief Financial Officer and Secretary
Thomas L. Tullie........ 33 Vice President, Sales
Anil K. Bedi............ 47 Vice President, Marketing
Laszlo V. Gal........... 49 Vice President, Engineering
Roger A. Smullen, Sr.
(1).................... 61 Chairman of the Board of Directors
Kenneth L. Clark........ 49 Vice President, Operations
William K. Bowes,
Jr.(1)................. 71 Director
Franklin P. Johnson,
Jr.(1)(2).............. 69 Director
Arthur B. Stabenow(2)... 58 Director
R. Clive Ghest(2)....... 60 Director
</TABLE>
- -------
(1) Member of Audit Committee
(2) Member of Compensation Committee
David M. Rickey has served as President, Chief Executive Officer and
Director since February 1996. From August 1993 to May 1995, Mr. Rickey served
as the Company's Vice President of Operations. From May 1995 to February 1996,
Mr. Rickey served as Vice President of Operations at NexGen, a semiconductor
company. Previously, Mr. Rickey spent more than eight years with Nortel, a
telecommunications manufacturer, where he led the wafer fab engineering and
manufacturing operations in both Ottawa, Canada and San Diego, California. Mr.
Rickey also worked in various engineering positions with IBM from 1981 to
1985. Mr. Rickey has earned B.S. degrees from both Marietta College (summa cum
laude) and Columbia University. In addition, Mr. Rickey received an M.S. in
Materials Science and Engineering from Stanford University.
Joel O. Holliday has served as the Vice President, Finance and
Administration, Treasurer, Chief Financial Officer and Secretary of the
Company since November 1981. He has previously served as the Director of
Finance during the reorganization of Westgate-California Corporation and as
Vice President, Finance of Spin Physics, Inc., an electronics company. Mr.
Holliday received a B.A. from Claremont McKenna College and an M.B.A. from
Harvard Business School.
Thomas L. Tullie joined the Company as Vice President, Sales in August 1996.
Prior to joining the Company, from 1989 to 1996 Mr. Tullie held several
strategic sales management positions, most recently as Director of East Coast
Sales, at S-MOS Systems, a semiconductor company. Prior to joining S-MOS
Systems, Mr. Tullie was a designer in the workstations group of Digital
Equipment Corporation. Mr. Tullie earned a B.S. from the University of
Massachusetts and an M.B.A. from Clark University.
Anil K. Bedi joined the Company in August 1996 as Vice President, Marketing.
Prior to joining the Company, Mr. Bedi worked at Philips Semiconductor from
October 1993 to July 1996, where he served as Director of Strategic Marketing
and General Manager of the Mass Storage Product Group. Prior to joining
Philips Semiconductor, from 1984 to 1993 Mr. Bedi served in senior marketing
and management positions at Oki Semiconductor and Gazelle and TriQuint
Semiconductor (two GaAs-based semiconductor companies). Mr. Bedi has also held
marketing and sales positions at Xerox Corporation and National Semiconductor.
Mr. Bedi earned his B.S.E.E. and M.S.E.E. degrees from the University of
Wisconsin and his M.B.A. from the University of Utah.
Laszlo V. Gal joined the Company in January 1997 as Vice President,
Engineering. From September 1994 to December 1996, he served in various senior
management positions, including Director of Product Development at Motorola,
Inc. Mr. Gal served as the manager of IC Designs at Burroughs/Unisys from 1983
to 1994 and worked as a staff scientist at the IBM Research Center from 1981
to 1982. From 1979 to 1981 Mr. Gal was a member of the technical staff at
Rockwell Corporation, where he worked on GaAs development. Mr. Gal was
educated at the Budapest Technical University in Hungary, where he received a
B.S. and M.S. and Ph.D in Electrical Engineering. He holds 12 U.S. patents in
VLSI design and applications.
45
<PAGE>
Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of
Directors since October 1982. Mr. Smullen has served as Acting Vice President,
Operations of the Company from August 1997 through October 1997. From April
1983 until April 1987, Mr. Smullen served as the Company's Chief Executive
Officer. Previously, he was senior vice president of operations of Intersil,
Inc.'s semiconductor division. In 1967, Mr. Smullen co-founded National
Semiconductor. Prior to that, he was director of integrated circuits at
Fairchild Semiconductor. Mr. Smullen is currently a director of Micro Linear
Corporation, a manufacturer of integrated circuits. He holds a B.S. in
Mechanical Engineering from the University of Minnesota.
Kenneth L. Clark joined the Company in November 1997 as Vice President,
Operations. Prior to joining the Company, Mr. Clark worked at Integrated
Device Technologies, Inc., a semiconductor company, from February 1995 to
October 1997, where he served as Director, Fab Operations. From 1990 to 1995,
Mr. Clark served in various senior management positions including Director,
Fab Operations at Silicon Systems, Inc., a semiconductor company. From 1987 to
1990, Mr. Clark served as Director, Fab Operations at National Semiconductor
Corp. Mr. Clark has also held manufacturing and engineering management
positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and
American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the
University of Washington.
William K. Bowes, Jr. has served as a director of the Company since April
1980. He has been a general partner of U.S. Venture Partners, a venture
capital investment entity, since July 1981. Mr. Bowes serves as a director of
Amgen, Inc., XOMA Corporation and several privately-held U.S. Venture Partners
portfolio companies. Mr. Bowes holds a B.A. from Stanford University and an
M.B.A. from Harvard Business School.
Franklin P. Johnson, Jr. has served as a director of the Company since April
1980. He is the general partner of Asset Management Partners, a venture
capital partnership. In addition, Mr. Johnson is a general partner of the
general partner of Asset Management Associates, a venture capital limited
partnership. Mr. Johnson has been a venture capital investor for more than
five years. Mr. Johnson is also Chairman of the Board of Boole and Babbage,
Inc., and a director of Amgen, Inc. and IDEC Pharmaceuticals Corporation. Mr.
Johnson holds a B.S. from Stanford University and an M.B.A. from Harvard
Business School.
Arthur B. Stabenow has served as a director of the Company since July 1988.
Mr. Stabenow has been Chairman, President and Chief Executive Officer of Micro
Linear Corporation, a manufacturer of integrated circuits, since April 1986.
Mr. Stabenow has over 35 years of experience in the semiconductor industry.
From January 1979 to March 1986, he was employed as a vice president and
general manager at National Semiconductor Corporation. Mr. Stabenow is
currently a director of Zoran, Inc. and Micro Linear Corporation. Mr. Stabenow
holds an M.B.A. from the University of New Haven.
R. Clive Ghest has served as a director of the Company since July 1997.
Since January 1997, Mr. Ghest has been a principal of Ghest Associates
Consulting. Mr. Ghest was the Vice President of Business Development at
Advanced Micro Devices Inc. from February 1986 to December 1996. He has more
than 35 years of experience in various capacities in the computer,
communications and semiconductor industries. Mr. Ghest holds an M.S.E.E. from
the University of Santa Clara and an Hons. B.Sc. from the University of
London.
BOARD COMPOSITION
The Company currently has authorized six directors. Each director is elected
for a period of one year at the Company's annual meeting of stockholders and
serves until the next annual meeting or until his or her successor is duly
elected and qualified. The executive officers serve at the discretion of the
Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
BOARD COMPENSATION
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. Directors who are employees of
the Company are eligible to participate in the Company's 1992 Stock Option
Plan and, beginning in 1997, they will also be eligible to participate in the
Company's 1997 Employee Stock Purchase Plan. Beginning in 1997, directors who
are not employees of the Company will be eligible to participate in the
Company's 1997 Directors' Stock Option Plan. See "-- 1982 Employee Incentive
Stock Option Plan," " -- 1992 Stock Option Plan" and " -- 1997 Directors'
Stock Option Plan." The Chairman of the Company's Board of Directors is
compensated for certain services provided to the Company. See "Management--
Executive Compensation."
46
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established a Compensation Committee
and an Audit Committee. The Board of Directors does not maintain a Nominating
Committee or a committee performing similar functions. The Compensation
Committee recommends salaries, incentives and other forms of compensation for
directors, officers and other employees of the Company, administers (with the
Board of Directors) the various incentive compensation and benefit plans
(including the 1992 Plan and the 1997 Employee Stock Purchase Plan) of the
Company and recommends policies relating to such incentive compensation and
benefit plans. The Audit Committee reviews the need for internal auditing
procedures and the adequacy of internal controls. The Audit Committee meets
periodically with management and the independent auditors. The Board of
Directors may also establish additional committees from time to time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Company's Board of
Directors are currently Mr. Ghest, Mr. Johnson and Mr. Stabenow. None of these
directors has at any time been an officer or employee of the Company or any
subsidiary of the Company. During fiscal 1997, David M. Rickey and Roger A.
Smullen served as members of the Compensation Committee of the Company's Board
of Directors. During fiscal 1997, Mr. Smullen was a member of the Board of
Directors of Micro Linear Corporation. During fiscal 1997, Arthur B. Stabenow,
the Chairman, President and Chief Executive Officer of Micro Linear
Corporation, served as a member of the Compensation Committee of the Company's
Board of Directors. No other interlocking relationship exists between the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company nor has such an
interlocking relationship existed in the past.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned or paid for services rendered to the Company during the
fiscal year ended March 31, 1997 by the Chief Executive Officer, the Chairman
of the Board of Directors and each of the other four most highly compensated
executive officers (the "Named Officers"), each of whose aggregate
compensation during the Company's last fiscal year exceeded, or would exceed
on an annualized basis, $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND PRINCIPAL -------------------------- UNDERLYING ALL OTHER
POSITION SALARY BONUS OPTIONS (#) COMPENSATION
- ------------------ ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
David M. Rickey
President and Chief
Executive Officer....... $277,215(1) $61,500 -- $133,826(2)
Joel O. Holliday
Vice President, Finance
and Administration,
Treasurer, Chief
Financial Officer and
Secretary............... 162,208(1) 41,500 33,333 2,000(3)
Roger A. Smullen
Chairman of the Board of
Directors............... 208,000 41,500 33,333 --
Thomas Tullie
Vice President, Sales... 124,934(1)(4) 60,500 133,333 38,863(5)
Anil Bedi
Vice President,
Marketing............... 106,346(1) 56,500 206,666 8,560(6)
Laszlo Gal(7)
Vice President,
Engineering............. 22,885(1) 46,500 206,666 8,522(8)
</TABLE>
- --------
(1) Includes pre-tax contributions to the AMCC 401(k) Plan.
47
<PAGE>
(2) Includes $128,706 paid to Mr. Rickey in the form of relocation expenses, a
matching contribution in the amount of $2,000 that the Company made on Mr.
Rickey's behalf to the AMCC 401(k) Plan and annual premiums in the amount
of $3,120 paid by the Company on a term life insurance policy.
(3) Includes a matching contribution in the amount of $2,000 that the Company
made on Mr. Holliday's behalf to the AMCC 401(k) Plan.
(4) Includes commissions earned by Mr. Tullie in the amount of $38,396, of
which $25,191 was paid to Mr. Tullie in fiscal 1997 and $13,205 was paid
to Mr. Tullie in fiscal 1998.
(5) Includes a matching contribution in the amount of $565 that the Company
made on Mr. Tullie's behalf to the AMCC 401(k) Plan and $38,298 paid to
Mr. Tullie for relocation expenses.
(6) Includes a matching contribution in the amount of $1,171 that the Company
made on Mr. Bedi's behalf to the AMCC 401(k) Plan and $7,389 paid to Mr.
Bedi for relocation expenses.
(7) Mr. Gal joined the Company in January 1997, and his annualized base salary
for the fiscal year ended March 31, 1997 year was $175,000.
(8) Includes $8,522 paid to Mr. Gal for relocation expenses.
EMPLOYMENT AGREEMENT
In January 1996, the Company entered into a letter agreement with David M.
Rickey, the Company's President and Chief Executive Officer. This agreement
entitles Mr. Rickey to a salary of $275,000 per year and term life insurance
purchased by the Company for the benefit of Mr. Rickey's estate. Pursuant to
the terms of the agreement, if the Company enters into certain change-of-
control transactions, the vesting of Mr. Rickey's options to purchase shares
of the Company's Common Stock will accelerate. In addition, the agreement
provides that if the Company is acquired and the per share value of the
Company's Common Stock is less than $3.00 per share, the Company will
compensate Mr. Rickey for the difference between $3.00 per share and the per
share merger or sale price determined by the Company's Board of Directors. The
letter agreement provides that Mr. Rickey's employment is at will and
terminable by the Company or Mr. Rickey for any reason, with or without cause,
and with or without notice. See "Certain Transactions."
OPTION GRANTS
The following table provides certain summary information regarding stock
options granted to the Named Officers during the fiscal year ended March 31,
1997. No stock appreciation rights were granted during such fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
--------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR(2) ($/SHARE)(3) DATE 5% 10%
---- ----------- -------------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David M. Rickey......... 0 0% N/A N/A N/A N/A
Joel O. Holliday........ 33,333 2.35 $0.53 07/17/2006 $ 28,505 $ 45,390
Roger A. Smullen........ 33,333 2.35 $0.53 07/17/2006 28,505 45,390
Thomas Tullie........... 133,333 9.39 $0.53 06/30/2006 114,022 181,562
Anil Bedi............... 206,666 14.55 $0.53 07/17/2006 176,735 281,420
Laszlo Gal.............. 206,666 14.55 $0.53 01/30/2007 176,735 281,420
</TABLE>
- --------
(1) Consists of options granted pursuant to the 1992 Plan. See "-- 1992 Stock
Option Plan."
(2) An aggregate of 1,457,285 options to purchase shares of Common Stock of
the Company were granted during fiscal year ended March 31, 1997, of which
1,420,619 shares were granted to employees.
(3) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of shares that are already owned or by offset of the
underlying shares, subject to certain conditions.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the SEC. There can be no assurance that the
actual stock price appreciation over the ten-year option term will be at
the assumed 5% and 10% levels or at any other defined level. Unless the
market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants made to the Named Officers.
48
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides certain summary information concerning the
shares of Common Stock represented by outstanding stock options held by each
of the Named Officers as of March 31, 1997. No stock appreciation rights were
exercised during such fiscal year and no stock appreciation rights were
outstanding at the end of such fiscal year.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT MARCH 31, 1997(1) AT MARCH 31, 1997(3)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2)
---- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
David M. Rickey... 800,000 0 $ 0 $ 0
Joel O. Holliday.. 83,333 0 2,500 0
Roger A. Smullen.. 53,333 0 0 0
Thomas Tullie..... 133,333 0 0 0
Anil Bedi......... 206,666 0 0 0
Laszlo Gal........ 206,666 0 0 0
</TABLE>
- --------
(1) No Named Officer exercised options during the fiscal year ended March 31,
1997.
(2) Options granted under the 1982 Plan and 1992 Plan are generally
immediately exercisable, but subject to a right of repurchase pursuant to
the vesting schedule of each such grant. Accordingly, the table reflects
those options that are exercisable, not those options that are vested. See
"-- 1982 Employee Incentive Stock Option Plan" and "-- 1992 Stock Option
Plan."
(3) There was no public trading market for the Company's Common Stock as of
March 31, 1997. Accordingly, this value has been calculated based on a
price of $0.525 per share, the Board of Directors' determination of the
fair market value of the Company's Common Stock as of March 31, 1997,
minus the applicable per share exercise price.
1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN
The Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan")
was adopted by the Board of Directors in November 1982 and approved by the
stockholders in July 1983. A total of 5,338,666 shares of Common Stock has
been reserved for issuance under the 1982 Plan. The 1982 Plan expired by its
own terms on November 1, 1992; however, options granted under the 1982 Plan
remain outstanding as of the date of this offering.
The purposes of the 1982 Plan are to encourage selected employees to accept
or continue employment with the Company, to provide additional incentives to
the Company's employees and to increase the interest of employees in the
Company's welfare. The 1982 Plan provides for the granting to employees
(including officers and employee directors) of "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The 1982 Plan is administered by the Board of Directors,
which determines the terms of options granted under the 1982 Plan, including
the exercise price, number of shares subject to the option and the
exercisability thereof. Subject to the discretion of the Board of Directors,
options granted under the 1982 Plan generally are immediately exercisable in
full and 1/5th of the shares subject to the options vest each year over the
five year period measured from the grant date. Unvested shares purchased upon
exercise of such options are subject to repurchase by the Company, at its
option, upon an optionee's termination of employment. No options granted under
the 1982 Plan are transferable by the optionee other than by will or the laws
of descent and distribution, and each option is exercisable during the
lifetime of the optionee only by such optionee.
The exercise price of all stock options granted under the 1982 Plan must be
at least equal to the fair market value of the shares subject to such options
on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting rights of the Company's outstanding
capital stock, the exercise price must equal at least 110% of the fair market
value on the grant date. Incentive stock options granted to a participant, may
not, on an aggregate basis, become exercisable for more than $100,000 (valued
at the time of grant) per calendar year. No options have been granted to date
at prices less than 100% of the
49
<PAGE>
fair market value on the date of grant. Options granted under the 1982 Plan
may not have a term in excess of ten years. However, all stock options granted
to an optionee who, at the time of grant, owns stock representing more than
10% of the Company's outstanding capital stock, may not have a term in excess
of five years.
In the event of a merger of the Company with or into another corporation or
a sale of substantially all of the Company's assets, the options shall become
immediately exercisable or an equivalent option substituted by the successor
corporation. The Plan Administrator has the discretion to accelerate the
vesting of the option shares at any time.
Under the 1982 Plan, as of September 30, 1997, options to purchase 4,140,173
shares of Common Stock had been exercised, options to purchase an aggregate of
157,968 shares of Common Stock were outstanding at a weighted average exercise
price of $0.46 per share and no shares remain available for future grant as
the 1982 Plan expired in November 1992.
The Board of Directors may at any time amend, alter, suspend or discontinue
the 1982 Plan as long as such action does not adversely affect any outstanding
option and provided that stockholder approval shall be required for an
amendment to increase the number of shares of Common Stock reserved for
issuance under the 1982 Plan, extend the duration of the 1982 Plan, extend the
period over which options may be exercised under the 1982 Plan or change the
class of persons eligible to receive options under the 1982 Plan.
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted by the
Board of Directors in July 1992 and approved by the stockholders in September
1992 and subsequently amended. A total of 6,027,304 shares of Common Stock
have been reserved for issuance under the Stock Plan. As of September 30,
1997, options to purchase 1,424,615 shares of Common Stock had been exercised,
options to purchase a total of 2,057,975 shares at a weighted average exercise
price of $1.08 per share were outstanding and 2,544,714 shares remained
available for future option grants.
The 1992 Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Code and for the granting to employees and consultants, including nonemployee
directors, of nonstatutory stock options. To the extent an optionee would have
the right in any calendar year to exercise for the first time one or more
incentive stock options for shares having an aggregate fair market value
(under all plans of the Company and determined for each share as of the date
the option to purchase the shares was granted) in excess of $100,000, any such
excess options shall be treated as nonstatutory stock options. If not
terminated earlier, the 1992 Plan will terminate in July 2002.
The 1992 Plan may be administered by the Board of Directors or a committee
of the Board (the "Administrator"). The Administrator determines the terms of
options granted under the 1992 Plan, including the number of shares subject to
the option, exercise price, term and exercisability. The exercise price of all
incentive stock options granted under the 1992 Plan must be at least equal to
the fair market value of the Common Stock on the date of grant. The exercise
price of any incentive stock option granted to an optionee who owns stock
representing more than 10% of the total combined voting power of all classes
of outstanding capital stock of the Company or any parent or subsidiary
corporation of the Company (a "10% Stockholder") must equal at least 110% of
the fair market value of the Common Stock on the date of grant. The exercise
price of all nonstatutory stock options must equal at least 85% of the fair
market value of the Common Stock on the date of grant; provided, however, that
the exercise price of any nonstatutory stock option granted to a Named
Executive of the Company must equal at least 100% of the fair market value of
the Common Stock on the date of grant. Payment of the exercise price may be
made in cash or other consideration, including promissory notes, as determined
by the Administrator. The Plan Administrator has the discretion to implement
one or more repricing programs whereby outstanding options under the 1992 Plan
with exercise prices above the current market price of the Common Stock will
be cancelled, and new options will be granted in replacement with an exercise
price based on such current market value.
50
<PAGE>
The Administrator determines the term of options, which may not exceed 10
years (5 years in the case of an incentive stock option granted to a 10%
Stockholder). No option may be transferred by the optionee other than by will
or the laws of descent or distribution. Each option may be exercised during
the lifetime of the optionee only by such optionee. The Administrator
determines when options become exercisable. Subject to the discretion of the
Board of Directors, options granted under the 1992 Plan generally are
immediately exercisable in full, and (i) for the initial option grant to each
optionee (the "Initial Option"), 1/4th of the number of such shares subject to
the option generally vest as of the one year anniversary of the vesting
commencement date and 1/48th of the remainder vest at the end of each month
thereafter; and (ii) for option grants subsequent to the Initial Option,
1/48th of the number of such shares subject to the option generally vest at
the end of each month after the vesting commencement date.
In the event of the merger of the Company with another corporation, in which
the Company is not the surviving entity, then each option shall immediately
vest as to one year of additional vesting. Each option may be thereafter
assumed or an equivalent option substituted by the successor corporation,
otherwise the options will terminate. The Administrator has the authority to
amend or terminate the 1992 Plan as long as such action does not adversely
affect any outstanding option and provided that, to the extent necessary and
desirable to comply with Rule 16b-3 under the Securities Exchange Act of 1934,
as amended, (the "Exchange Act") or with Section 162(m) or 422 of the Code (or
any other applicable law or regulation, including the requirements of the NASD
or an established stock exchange), the Company shall obtain stockholder
approval of any amendment to the 1992 Plan in such a manner and to such a
degree as required.
1997 DIRECTORS' STOCK OPTION PLAN
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors in October 1997, subject to stockholder
approval. A total of 200,000 shares of Common Stock has been reserved for
issuance under the Directors' Plan. The Directors' Plan provides for the grant
of nonstatutory stock options to nonemployee directors of the Company. The
Directors' Plan is designed to work automatically, without administration;
however, to the extent administration is necessary, it will be provided by the
Board of Directors. To the extent they arise, it is expected that conflicts of
interest will be addressed by abstention of any interested director from both
deliberations and voting regarding matters in which such director has a
personal interest.
The Directors' Plan provides that each person who is or becomes a
nonemployee director of the Company will be granted a nonstatutory stock
option to purchase 12,500 shares of Common Stock (the "First Option") on the
date on which the optionee first becomes a nonemployee director of the
Company. Thereafter, on April 1 each year (starting in 2000 for nonemployee
directors who are serving as directors as of the date of the closing of this
offering), each nonemployee director of the Company will be granted an option
to purchase 12,500 shares of Common Stock (a "Subsequent Option") if, on such
date, he or she has served on the Company's Board of Directors for at least
six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares
for which options may be granted to any one nonemployee director, but does
specify the number of shares that may be included in any grant and the method
of making a grant. No option granted under the Directors' Plan is transferable
by the optionee other than by will or the laws of descent or distribution or
pursuant to a qualified domestic relations order, and each option is
exercisable, during the lifetime of the optionee, only by such optionee. The
Directors' Plan provides that the First Option shall become exercisable in
installments as to 1/12th of the total number of shares subject to the First
Option on each monthly anniversary of the date of grant of the First Option.
Each Subsequent Option shall become exercisable in installments as to 1/12th
of the total number of shares subject to the Subsequent Option on each monthly
anniversary of the grant date of that Subsequent Option. If a nonemployee
Director ceases to serve as a Director for any reason other than death or
disability, he or she may, but only within 90 days after the date he or she
ceases to be a Director of the Company, exercise options granted under the
Directors' Plan to the extent that he or she was entitled to exercise it at
51
<PAGE>
the date of such termination. To the extent that he or she was not entitled to
exercise any such option at the date of such termination, or if he or she does
not exercise such option (which he or she was entitled to exercise) within
such 90 day period, such option shall terminate. The exercise price of all
stock options granted under the Directors' Plan shall be equal to the fair
market value of a share of the Common Stock on the grant date of the option.
Options granted under the Directors' Plan have a term of ten years.
In the event of the dissolution or liquidation of the Company, a sale of all
or substantially all of the assets of the Company, the merger of the Company
with or into another corporation or any other reorganization of the Company in
which more than 50% of the shares of the Company entitled to vote are
exchanged, each outstanding option will become exercisable for all the option
shares as fully vested shares immediately prior to the effectiveness of such
dissolution, liquidation, sale, merger or reorganization, at the end of which
time the option shall terminate, unless the option is assumed by the
corporation succeeding the Company or acquiring its business by reason of such
dissolution, liquidation, sale, merger or reorganization. The Board of
Directors may amend or terminate the Directors' Plan; provided, however, that
no such action may adversely affect any outstanding option. If not terminated
earlier, the Directors' Plan will have a term of ten years.
1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in September 1997, subject to stockholder
approval. A total of 400,000 shares of Common Stock are reserved for issuance
under the Purchase Plan.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by an offering periods of 24 months duration with
new offering periods (other than the first offering period) commencing on or
about February 1 and August 1 of each year. Each offering period will consist
of four consecutive purchase periods of six months duration, with the last day
of each period being designated a purchase date. However, the first offering
period is expected to commence on the date of the Offering and continue
through January 31, 2000, with the first purchase date occurring on July 31,
1998, and subsequent purchase dates to occur every six months thereafter). The
Purchase Plan will be administered by the Compensation Committee (comprised of
Messrs. Ghest, Johnson and Stabenow, outside directors of the Company who are
not eligible to participate in the Purchase Plan). Employees (including
officers and employee directors) of the Company, or of any majority-owned
subsidiary designated by the Board, are eligible to participate in the
Purchase Plan if they are employed by the Company or any such subsidiary for
at least 20 hours per week and more than five months per year. The Purchase
Plan permits eligible employees to purchase Common Stock through payroll
deductions, which may not exceed 20% of an employee's compensation, at a price
equal to the lower of 85% of the fair market value of the Company's Common
Stock at the beginning of the offering period or the purchase date. If the
fair market value of the Common Stock on a purchase date is less than the fair
market value at the beginning of the Offering period, a new 24-month offering
period will automatically begin on the first business day following the
purchase date with a new fair market value. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the
Company. If not terminated earlier, the Purchase Plan will have a term of 20
years.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of all or substantially all of the
Company's assets, each right to purchase stock under the Purchase Plan will be
assumed or an equivalent right substituted by the successor corporation unless
the Board of Directors shortens the offering period so that employees' rights
to purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder.
52
<PAGE>
401(K) PLAN
Effective January 1, 1986, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all full-time
employees with greater than three months service. The Retirement Plan provides
for voluntary employee contributions from 1% to 20% of annual compensation,
subject to a maximum limit allowed by Internal Revenue Service guidelines. The
Company may contribute such amounts as determined by the Board of Directors.
Employer contributions vest to participants at a rate of 20% per year of
service, provided that after five years of service all past and subsequent
employer contributions are 100% vested. During the years ended March 31, 1997,
1996 and 1995, the Company contributed $318,000, $182,000 and $116,000,
respectively.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law (the "Delaware Law"),
the Company has included in its Restated Certificate of Incorporation a
provision to eliminate the personal liability of its directors for monetary
damages for breach or alleged breach of their fiduciary duties as officers or
directors, respectively, subject to certain exceptions. This provision does
not affect a director's responsibilities under federal securities laws. In
addition, the Company's Bylaws provide that the Company is required to
indemnify its officers and directors under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors
as incurred in connection with proceedings against them for which they may be
indemnified. The Company has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware Law.
The indemnification agreements require the Company, among other things, to
indemnify such officers and directors against certain liabilities that may
arise by reason of their status or service as officers and directors (other
than liabilities arising from willful misconduct of a culpable nature), to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified, and to obtain directors' and officers'
insurance if available on reasonable terms. The Company has also obtained
directors' and officers' liability insurance. The Company believes that its
charter provisions and indemnification agreements are necessary to attract and
retain qualified persons as directors and officers.
53
<PAGE>
CERTAIN TRANSACTIONS
In January 1996, the Company entered into a letter agreement with David
Rickey, the Company's President and Chief Executive Officer. This agreement
entitles Mr. Rickey to a salary of $275,000 per year and term life insurance
purchased by the Company for the benefit of Mr. Rickey's estate. Pursuant to
the terms of the agreement, if the Company enters into certain change-of-
control transactions, the vesting of Mr. Rickey's options to purchase shares
of the Company's Common Stock will accelerate. In addition, the agreement
provides that if the Company is acquired and the per share value of the
Company's Common Stock is less than $3.00 per share, the Company will
compensate Mr. Rickey for the difference between $3.00 per share and the per
share merger or sale price determined by the Company's Board of Directors. The
letter agreement provides that Mr. Rickey's employment is at will and
terminable by the Company or Mr. Rickey for any reason, with or without cause,
and with or without notice.
In February 1996 the Company entered into a loan arrangement with Mr.
Rickey, pursuant to which the Company loaned to Mr. Rickey $150,000 ("Note No.
1") and $53,000 ("Note No. 2") at an annual interest rate of 5.32%. Note No. 1
was a full recourse, unsecured real estate bridge loan with accrued interest
and principal payable upon the earlier of February 12, 1999 or the sale of the
house in which Mr. Rickey lived prior to relocating to San Diego to accept
employment as the Company's President and Chief Executive Officer. Note No. 2
was the reinstatement of a loan which had been made previously to Mr. Rickey
in connection with the exercise of incentive stock options while serving as
Vice President, Manufacturing for the Company. Note No. 2 was a full recourse,
unsecured promissory note with accrued interest and principal payable no later
than February 12, 1999. Note No. 1 and Note No. 2 may be declared payable in
full by the Company in the event that Mr. Rickey ceases to be employed by the
Company. In May 1996, the Company entered into a loan agreement with Mr.
Rickey pursuant to which the Company loaned $750,000 ("Note No. 3") to Mr.
Rickey at an interest rate of 5.76% per annum compounded annually. The
proceeds of the loan were used to exercise options granted by Mr. Rickey's
former employer, which were expiring as a result of Mr. Rickey's termination
of employment with the former employer in order to join the Company. The loan
is evidenced by a non-recourse promissory note, which is secured by 46,500
shares of Common Stock of Advanced Micro Devices, Inc. The principal and
accrued interest on Note No. 3 are due and payable in full on May 1, 1999,
unless accelerated in whole or in part in the event of (i) a default under the
loan agreement or pledge agreement for Note No. 3, (ii) a default in payment
under Note No. 3 or any other promissory note issued to the Company by Mr.
Rickey, (iii) the voluntary or involuntary termination of Mr. Rickey's
employment with the Company or (iv) the sale of any portion of the Common
Stock securing Note No. 3. Each of Note No. 1, Note No. 2 and Note No. 3 were
approved by the Board of Directors of the Company pursuant to the approval of
Mr. Rickey's offer of employment with the Company. In September 1996, Mr.
Rickey repaid approximately $142,000 of the principal on Note No. 1, and in
April 1997 Mr. Rickey delivered a full recourse, unsecured promissory note
with a principal amount of $12,392 and an interest rate of 5.91% per annum in
payment of the balance of the amount owing under Note No. 1. The aggregate
principal balance outstanding under such note and Notes No. 2 and No. 3 at
September 30, 1997 was $815,392. Mr. Rickey is current in his payments under
all such notes.
In July 1997, Mr. Rickey exercised stock options granted under the 1992
Plan. In payment of the purchase price for the exercised shares, Mr. Rickey
delivered promissory notes in principal amounts of approximately $400,000,
$20,000 and $35,000 bearing interest at rates of 5.98%, 5.98% and 6.54%,
respectively. The notes and accrued interest thereon are payable in full in
February 2000, February 2000 and April 2001, respectively.
The Company has entered into indemnification agreements with its officers
and directors containing provisions that may require the Company, among other
things, to indemnify its officers and directors against certain liabilities
that may arise by reason of their status or service as officers or directors
(other than liabilities arising from willful misconduct of a culpable nature)
and to advance their expenses incurred as a result of any proceeding against
them as to which they could be indemnified. For a description of limitations
of liability and certain indemnification arrangements with respect to the
Company's directors and officers, see "Management -- Limitation of Liability
and Indemnification Matters."
54
<PAGE>
Certain stockholders are entitled to certain registration rights in respect
of the Common Stock issued or issuable upon conversion thereof. See
"Description of Capital Stock -- Registration Rights of Certain Holders."
For a description of compensation of officers and directors of the Company
and the eligibility of officers and directors of the Company to participate in
the Company's employee benefit plans, see "Management --Board Compensation"
and "-- Executive Compensation."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal stockholders and affiliates
will be approved by a majority of the Board of Directors, including a majority
of the independent and disinterested outside directors on the Board of
Directors, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
55
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of September 30, 1997 and as
adjusted to reflect the sale of the Common Stock offered by the Company
pursuant to this Prospectus and conversion of all outstanding shares of
Preferred Stock into shares of Common Stock by (i) each of the Company's
directors and Named Officers, (ii) all directors and executive officers as a
group and (iii) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO OFFERING(1) OWNED AFTER OFFERING(1)
-------------------- NUMBER OF -----------------------
NUMBER PERCENT(2) SHARES OFFERED NUMBER PERCENT(2)
--------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
David M. Rickey (3)..... 893,332 5.22% -- 893,332 4.51%
Joel O. Holliday (4).... 505,261 2.94 -- 505,261 2.54
Roger A. Smullen (5).... 557,412 3.26 -- 577,412 2.82
Thomas Tullie (6)....... 166,665 * -- 166,665 *
Anil K. Bedi (7)........ 226,666 1.31 -- 226,666 1.13
Laszlo V. Gal (8)....... 213,332 1.23 -- 213,332 1.07
William K. Bowes, Jr.,
including shares held
by affiliates of U.S.
Venture Partners (9)... 973,429 5.69 -- 850,226 4.29
Franklin P. Johnson,
Jr., including shares
held by Asset Manage-
ment Partners and Asset
Management Associates
(10)................... 650,398 3.80 -- 650,398 3.28
Arthur B. Stabenow (11). 86,663 * -- 86,663 *
R. Clive Ghest (12)..... 50,000 * -- 50,000 *
Sequoia Capital (13).... 1,199,992 7.02 -- 1,199,992 6.06
3000 Sand Hill Road
Menlo Park, CA 94025
U.S. Venture Partners
(14)................... 904,196 5.29 123,203 780,993 3.94
2180 Sand Hill Road
Menlo Park, CA 94025
Albert J. Martinez (15). 709,996 4.15 354,998 354,998 1.79
1366 Via Alta
Del Mar, CA 92014
Harrison Capital, Inc. . 277,881 1.62 277,881 -- --
2000 Westchester Ave.
White Plains, NY 10650
Lumbermens Mutual
Casualty Company (16).. 255,519 1.49 255,519 -- --
c/o Zurich Investment
Management, Inc.,
222 S. Riverside Plaza
Chicago, IL 60606
Robert Fleming Nominees
Ltd. .................. 245,435 1.43 114,289 131,146 *
c/o Fleming Capital
Management
320 Park Avenue, 12th
Floor
New York, NY 10022-6815
Entities affiliated with
Venture Capital Fund of
America (17)........... 228,191 1.33 228,191 -- --
509 Madison Avenue,
Suite 812
New York, NY 10022
Entities affiliated with
Landmark Ventures,
Inc.(18)............... 204,767 1.20 199,763 5,004 *
760 Hopmeadow Street
Simsbury, CT 06070-0188
Additional Selling
Stockholders
(100 stockholders),
each holding less than
1.0% of the Common
Stock prior to this
offering (19).......... 1,821,318 10.65 1,396,156 425,162 2.15
All directors and execu-
tive officers as a
group (10 persons)
(20)(21)............... 4,323,158 25.28 123,203 4,199,955 21.21
</TABLE>
56
<PAGE>
- --------
* Less than 1% of the outstanding shares
(1) Assumes no exercise of the Underwriters' over-allotment option. Except
pursuant to applicable community property laws or as indicated in the
footnotes to this table, to the Company's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
(2) Applicable percentage of ownership for each stockholder is based on
17,101,750 shares of Common Stock outstanding as of September 30, 1997.
Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power with respect to the shares.
In computing the shares beneficially owned by a person and the percentage
of ownership of that person, shares of Common Stock subject to options
held by that person that are currently exercisable or exercisable within
60 days of September 30, 1997 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purposes of computing the
percentage ownership of each other person.
(3) Includes 385,000 shares that are no longer subject to repurchase by the
Company.
(4) Includes 321,931 shares held in the name of Joel O. Holliday and Rosanne
R. Holliday, Co-Trustees of the Joel O. Holliday Family Trust dated April
1, 1985 and 66,666 shares held in the name of the Holliday Children 1985
Trust. Includes 55,556 shares of Common Stock issuable upon the exercise
of immediately exercisable options which are subject to repurchase rights
in favor of the Company, of which 4,166 shares are no longer subject to
repurchase by the Company.
(5) Includes 508,338 shares of Common Stock that are no longer subject to
repurchase by the Company.
(6) Includes 48,611 shares that are no longer subject to repurchase by the
Company.
(7) Represents Common Stock issuable upon the exercise of immediately
exercisable options which are subject to repurchase rights in favor of
the Company, of which 58,472 shares are no longer subject to repurchase
by the Company.
(8) Represents Common Stock issuable upon the exercise of immediately
exercisable options which are subject to repurchase rights in favor of
the Company of which 833 shares are no longer subject to repurchase by
the Company.
(9) William K. Bowes, Jr., a director of the Company, holds 5,901 shares of
Common Stock directly. In addition, Mr. Bowes holds immediately
exercisable options to purchase 63,332 shares of Common Stock which are
subject to repurchase rights in favor of the Company, of which 23,054
shares, are no longer subject to repurchase by the Company. In addition,
Mr. Bowes is a partner of the general partner of U.S. Venture Partners,
which holds 393,374 shares; U.S. Venture Partners III which holds 327,616
shares; Second Ventures, L.P. which holds 53,336 shares; and U.S.
Ventures, S.A. which holds 129,870 shares. Mr. Bowes disclaims beneficial
ownership of the shares held by U.S. Venture Partners, U.S. Venture
Partners III, Second Ventures, L.P. and U.S. Ventures, S.A. except to the
extent of his pecuniary interest therein. See Note 14.
(10) Includes 63,332 shares of Common Stock issuable upon the exercise of
immediately exercisable options which are subject to repurchase rights,
of which 23,054 shares are no longer subject to repurchase by the
Company. Mr. Johnson is the general partner of Asset Management Partners,
which holds 236,449 shares. In addition, Mr. Johnson is a general partner
of AMC Partners, a general partner of Asset Management Associates, which
holds 350,617 shares. Mr. Johnson disclaims beneficial ownership with
respect to the shares held by Asset Management Partners and Asset
Management Associates except to the extent of his pecuniary interest
therein.
(11) Includes 45,552 shares that are no longer subject to repurchase by the
Company.
(12) Represents shares of Common Stock issuable upon exercise of immediately
exercisable options which are subject to repurchase rights in favor of
the Company, of which 5,555 shares are no longer subject to repurchase by
the Company.
(13) Includes 1,142,856 shares held by Sequoia Capital Growth Fund and 57,136
shares held by Sequoia Technology Partners III.
(14) Includes 393,374 shares held by U.S. Venture Partners, 327,616 shares
held by U.S. Venture Partners III, 53,336 shares held by Second Ventures
L.P. and 129,870 shares held by U.S. Ventures, S.A. William
57
<PAGE>
K. Bowes, Jr., a director of the Company, is a general partner of the
general partner of each of these partnerships. Mr. Bowes disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest therein. See Note 9.
(15) All of these shares represent shares held in the name of Albert J.
Martinez and S. Gay Hugo-Martinez, Co-Trustees for the Martinez Family
Trust dated August 26, 1992.
(16) Zurich Investment Management, Inc. (with Zurich Kemper Investments, Inc.
as sub-advisor) acts as investment manager to Lumbermens Mutual Casualty
Insurance Company, American Manufacturers Mutual Insurance Company and
American Motorists Insurance Company and in such capacity may be deemed
to be the beneficial owner of the shares held by such entities. American
Manufacturers Mutual Insurance Company and American Motorists Insurance
Company, each of which beneficially owns less than 1.0% of the Company's
outstanding Common Stock prior to this offering, are each selling 28,567
shares of Common Stock in the offering. After the offering, each such
entity will no longer hold shares of the Company's Common Stock.
(17) Includes 218,871 shares held by VCFA Investment II, Ltd. and 9,320 shares
held by VCFA Investment Secondaries, Ltd.
(18) Includes 120,952 shares held by Landmark Venture Partners, L.P., 49,620
shares held by Landmark Direct Equities, L.P. and 34,195 shares held by
Landmark Equity Partners II, L.P.
(19) Consists of 100 Stockholders, each of which beneficially owns less than
1.0% of the Company's outstanding Common Stock prior to the offering.
(20) Includes 1,491,262 shares held by entities affiliated with certain
directors as described in Notes 9, 10 and 14. Also includes 115,134
shares subject to immediately exercisable options and for which the
repurchase rights have lapsed.
(21) Does not include 100,000 shares of Common Stock issuable upon exercise of
immediately exercisable options granted to Kenneth L. Clark, the
Company's Vice President, Operations. Mr. Clark joined the Company in
November 1997. All of the shares issuable upon exercise of the options
held by Mr. Clark are subject to repurchase rights in favor of the
Company.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, the authorized capital stock of the
Company will consist of 60,000,000 shares of Common Stock, $.01 par value, and
2,000,000 shares of undesignated Preferred Stock, $.01 par value, after giving
effect to the amendment of the Company's Certificate of Incorporation to
delete references to the Series 1 Preferred Stock, Series 2 Preferred Stock
and Series 3 Preferred Stock, which will occur upon conversion of such
Preferred Stock into Common Stock upon the closing of this offering.
COMMON STOCK
As of September 30, 1997, there were 17,101,750 shares of Common Stock
outstanding (as adjusted to reflect the conversion of all outstanding shares
of Series 1 Preferred Stock, Series 2 Preferred Stock and Series 3 Preferred
Stock into Common Stock upon the completion of this offering), held of record
by 877 stockholders, and options to purchase an aggregate of 2,240,663 shares
of Common Stock were also outstanding. There will be 19,801,750 shares of
Common Stock outstanding (assuming no exercise of the Underwriter's
overallotment option) after giving effect to the sale of the shares of Common
Stock to the public offered hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferential rights with respect to any outstanding Preferred Stock, holders
of Common Stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities and satisfaction of
preferential rights of any outstanding Preferred Stock. The Common Stock has
no preemptive or conversion rights or other subscription rights. The
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued upon completion of this offering will be, fully paid and non-
assessable.
PREFERRED STOCK
Upon the closing of the offering, all outstanding shares of Preferred Stock
will automatically be converted into Common Stock. Thereafter, the Board of
Directors is authorized to issue Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series or the designation of such series, without
further vote or action by the stockholders. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control
of the Company without further action by the stockholders. The issuance of
Preferred Stock with voting and conversion rights may adversely affect the
voting power of the holders of Common Stock, including voting rights, of the
holders of Common Stock. In certain circumstances, such issuance could have
the effect of decreasing the market price of the Common Stock. As of the
closing of the offering, no shares of Preferred Stock will be outstanding and
the Company currently has no plans to issue any shares of Preferred Stock.
REGISTRATION RIGHTS
Upon the closing of the offering, the holders of 10,709,090 shares of Common
Stock (the "Registrable Securities"), and 83,807 shares issuable pursuant to
the exercise of certain warrants to purchase Common Stock, or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of agreements between the Company and the holders of the Registrable
Securities. Subject to certain limitations in the agreement, the holders of at
least 40% of the Registrable Securities (the "Initiating Holders") may
require, on two occasions after the closing of the offering, that the Company
use its best efforts to register the Registrable Securities for public resale
provided that a minimum of $5,000,000 in Common Stock must be sold by the
Initial Holders in such public
59
<PAGE>
resale. If the Company registers any of its Common Stock either for its own
account or for the account of other security holders, the holders of
Registrable Securities are entitled to include their shares of Common Stock in
such registration, subject to the ability of the underwriters to limit the
number of shares included in this offering. The holders of Registrable
Securities may also require the Company to register all or a portion of their
Registrable Securities on Form S-3 when use of such form becomes available to
the Company. All registration expenses must be borne by the Company and all
selling expenses relating to the Registrable Securities must be borne by the
holders of the securities being registered.
WARRANTS
As of September 30, 1997 the Company had outstanding warrants to purchase
83,807 shares of Common Stock. Of these, warrants exercisable for an aggregate
of 64,760 shares of Common Stock have an exercise price of $3.00 per share.
Each of these warrants will terminate, if not exercised, five years from the
date of the closing of this offering and under the terms of these warrants,
the Company may require the holders of these warrants to exercise such
warrants immediately prior to the closing of this offering. The Company has
also issued a warrant exercisable for 19,047 shares of Common Stock at an
exercise price of $2.63 per share. This warrant will terminate, if not
exercised, five years from the date of the closing of this offering.
TRANSFER AGENT AND REGISTRAR
The name and address of transfer agent and registrar for the Company's
Common Stock is Harris Trust Company of California, 601 South Figueroa St.,
Ste. 4900, Los Angeles, California, 90017. Its telephone number at that
address is (213) 239-0671.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol AMCC. The Company has not applied to list its
Common Stock on any other exchange. See "Risk Factors--Absence of Prior Public
Market and Possible Volatility of Stock Price."
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect prevailing market prices. Furthermore, since a
limited number of shares will be available for sale shortly after this
offering because of certain contractual and legal restrictions on resale (as
described below), sales of substantial amounts of Common Stock of the Company
in the public market after the restrictions lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of the offering, the Company will have outstanding
19,801,750 shares of Common Stock (assuming no exercise of the Underwriters'
over-allotment option and no exercise of options outstanding under the
Company's 1982 Plan and 1992 Plan or warrants outstanding or other options
outstanding after September 30, 1997). Of these shares, the 5,650,000 shares
sold in the offering (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction under the Securities Act, unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.
The remaining 14,151,750 shares of Common Stock outstanding are "restricted
securities" within the meaning of Rule 144 under the Securities Act
("Restricted Shares"). Restricted Shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act, which are
summarized below. Sales of the Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price
of the Common Stock.
The holders of approximately 12,988,750 shares of the remaining Common
Stock, including officers and directors of the Company have entered into lock-
up agreements (the "Lock-Up Agreements") with the Company or the
Representatives of the Underwriters generally providing that they will not
offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of the shares of Common Stock of the Company or any securities
exercisable for or convertible into the Company's Common Stock owned by them
for a period of 180 days after the effective date of the registration
statement filed pursuant to this offering (the "Effective Date"), without the
prior written consent of BancAmerica Robertson Stephens, the designated
representative of the Underwriters. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144 (as described below), 144(k) and 701, shares subject
to Lock-Up Agreements will not be saleable until such agreements expire or are
waived by the designated Underwriters' representative. Taking into account the
Lock-Up Agreements, and assuming the designated Underwriters' representative
does not release stockholders from these agreements, the following shares will
be eligible for sale in the public market at the following times: beginning on
the Effective Date, only the shares sold in the offering and approximately
556,000 shares pursuant to Rule 144(k), will be immediately available for sale
in the public market; beginning 90 days after the Effective Date,
approximately 607,000 additional shares will be eligible for sale pursuant to
Rule 144(k); and beginning 180 days after the Effective Date approximately
12,988,750 additional shares will be freely tradeable, subject in some cases
to the volume and other restrictions of Rule 144.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the Lock-Up Period, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of: (i) one percent of the number of shares
of Common Stock then outstanding (which will equal approximately 198,000
shares immediately after the offering); or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information
about the Company. Under Rule 144(k), a person who is not deemed to have been
an affiliate of the Company at any time during the three months preceding a
sale, and who has beneficially owned the shares proposed to be sold for at
least two years, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
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<PAGE>
All Company employees who acquire Common Stock pursuant to stock option
grants under the 1992 Plan are restricted from selling securities of the
Company until 180 days after the Effective Date. The 1982 Plan contains no
such lock-up provisions. Therefore, beginning 90 days after the Effective
Date, any employee, officer or director of or consultant to the Company who
purchased his or her shares pursuant to the 1982 Plan and who has not entered
into a Lock-Up Agreement may be entitled to rely on the resale provisions of
Rule 701 to the extent that such shares were purchased after May 20, 1988. In
addition, beginning 180 days after the Effective Date, any employee, officer
or director of or consultant to the Company who purchased his or her shares
after May 20, 1988 pursuant to options that were granted under the Company's
1982 Plan and who has entered into a Lock-Up Agreement, or who purchased his
or her shares pursuant to options that were granted under the Company's 1992
Plan may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, the Company intends
to file a registration statement under the Securities Act to register the
shares of Common Stock to be issued pursuant to the Company's 1997 Employee
Stock Purchase Plan on the Effective Date and to file registration statements
under the Securities Act approximately 90 days after the Effective Date to
register all of the shares to be issued pursuant to the Company's other
employee benefit plans. As a result, any options exercised under the 1992 Plan
or any other benefit plan after the effectiveness of such registration
statement will also be freely tradeable in the public market, except that
shares held by affiliates will still be subject to the volume limitation,
manner of sale, notice and public information requirements of Rule 144 unless
otherwise resaleable under Rule 701. As of September 30, 1997, there were
outstanding options for the purchase of 2,240,663 shares, of which options for
2,240,663 shares were exercisable, subject in certain cases to repurchase
rights of the Company. No shares have been issued to date under the Company's
Purchase Plan or Directors Plan. See "Risk Factors -- Shares Eligible for
Future Sale," "Management -- 1982 Employee Incentive Stock Option Plan," "--
1992 Stock Option Plan," "1997 Directors' Plan" and "-- 1997 Employee Stock
Purchase Plan" and "Description of Capital Stock -- Registration Rights."
62
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities, Inc. and
Cowen & Company (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock set
forth opposite their respective names below. The Underwriters are committed to
purchase and pay for all such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BancAmerica Robertson Stephens.....................................
NationsBanc Montgomery Securities, Inc.............................
Cowen & Company ...................................................
---------
Total............................................................ 5,650,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price, less a concession of not
more than $ per share, of which $ per share may be
reallowed to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
Representatives. No such reduction shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 847,500 shares of Common Stock at the same price per share as the
Company and the Selling Stockholders receive for the 5,650,000 shares that the
Underwriters have agreed to purchase. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage of such additional shares that the
number of shares of Common Stock to be purchased by it shown in the above
table represents as a percentage of the 5,650,000 shares offered hereby. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 5,650,000 shares are being sold. The Company will
be obligated, pursuant to the option, to sell shares to the Underwriters to
the extent the option is exercised. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of shares of
Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, and liability arising from breaches of representations and warranties
contained in the Underwriting Agreement.
Pursuant to the terms of lock-up agreements, the holders of 12,988,750
shares of the Company's Common Stock, including the officers and directors
have agreed with the Company or the Representatives that, until the expiration
of the 180 day period following the effective date of the registration
statement filed pursuant to this offering (the "Effective Date"), subject to
certain limited exceptions, they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase, pledge, or otherwise
dispose of or transfer, any shares of Common Stock, or any securities
convertible into or exchangeable for, or any rights to purchase or acquire,
shares of Common Stock, now owned or hereafter acquired by such holders or
with respect to which they have or hereafter acquire the power of disposition,
without the prior written consent of BancAmerica Robertson Stephens.
BancAmerica Robertson Stephens may, in its sole discretion, without notice,
release all or any portion of the securities subject to lock-up agreements.
See "Shares Eligible for Future Sale." Approximately 12,988,750 shares of
Common Stock subject to lock-up agreements will be eligible for immediate
public sale following the expiration of the 180 day period following the
Effective Date,
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<PAGE>
subject to Rule 144. In addition, the Company has agreed that, until the
expiration of the 180 day period following the Effective Date, the Company
will not, without the prior written consent of BancAmerica Robertson Stephens,
subject to certain exceptions, sell or otherwise dispose of any shares of
Common Stock, any options or warrants to purchase any shares of Common Stock
or any securities convertible into, exercisable for or exchangeable for shares
of Common Stock other than the Company's sale of shares in this offering, the
issuance of Common Stock upon the exercise of outstanding options and
warrants, or the Company's grant of options and issuance of stock under
existing stock option or stock purchase plans. See "Shares Eligible for Future
Sale."
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters do not intend to confirm sales to accounts over which
they exercise discretionary authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids which may have the effect of
stabilizing or maintaining the market price of Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is
a bid for or the purchase of the Common Stock on behalf of the Underwriters
for the purpose of fixing or maintaining the price of the Common Stock. A
"syndicate covering transaction" is the bid for or the purchase of the Common
Stock on behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the Representatives to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with
this offering if the Common Stock originally sold by such Underwriter or
syndicate member is purchased by the Representatives in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter
or syndicate member. The Representatives have advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
The Underwriters have reserved for possible sale, at the initial public
offering price, a maximum of 5.0% of the shares of Common Stock offered hereby
for certain individuals approved by the Company and who have expressed an
interest in purchasing shares of Common Stock in this offering. The number of
shares available for sale to the general public will be reduced to the extent
any such persons are offered and purchase such reserved shares. Any reserved
shares not so purchased will be offered by the Underwriters to the general
public on the same basis as other shares offered hereby.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiations among the Company, the Selling
Stockholders and the Representatives. The material factors to be considered in
such negotiations are prevailing market conditions, certain financial
information of the Company for recent periods, market valuations of other
companies that the Company, the Selling Stockholders and the Representatives
believe to be comparable to the Company, estimates of the business potential
of the Company, the present state of the Company's development, the Company's
management and other factors deemed relevant. The estimated initial public
offering price range set forth on the cover of this preliminary prospectus is
subject to change as a result of market conditions and other factors. There
can be no assurance that an active or orderly trading market will develop for
the Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial trading price. See "Risk
Factors -- Absence of Prior Market and Possible Volatility of Stock Price" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
64
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Venture Law Group, A Professional Corporation, Menlo Park,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo
Alto, California.
EXPERTS
The consolidated financial statements of Applied Micro Circuits Corporation
at March 31, 1996 and 1997, and for each of the three years in the period
ended March 31, 1997, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto, the
"Registration Statement") under the Securities Act with respect to the shares
of Common Stock offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete; with respect to each such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits thereto may be
inspected, without charge, at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices at 500 West Madison Street,
Chicago, IL 60661, and 7 World Trade Center, New York, New York 10048. Copies
of such material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Registration Statement and the exhibits thereto may also be
accessed through the EDGAR terminals in the Commission's public reference
facilities in Washington, D.C. or through the World Wide Web at
http://www.sec.gov.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
APPLIED MICRO CIRCUITS CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997 and September
30, 1997 (Unaudited)..................................................... F-3
Consolidated Statements of Operations for each of the three years in the
period ended March 31, 1997 and for the six months ended September 30,
1996 and 1997 (Unaudited)................................................ F-4
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended March 31, 1997 and for the six months ended
September 30, 1997 (Unaudited)........................................... F-5
Consolidated Statements of Cash Flows for each of the three years in the
period ended March 31, 1997 and for the six months ended September 30,
1996 and 1997 (Unaudited)................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Applied Micro Circuits Corporation
We have audited the accompanying consolidated balance sheets of Applied
Micro Circuits Corporation as of March 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Micro Circuits Corporation at March 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Diego, California
April 25, 1997, except for Note 11, as to which the date is
November 19, 1997
F-2
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY AT
MARCH 31, SEPTEMBER 30, SEPTEMBER 30,
----------------- ------------- -------------
1996 1997 1997 1997
-------- ------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 4,277 $ 5,488 $ 2,041
Short-term investments --
available-for-sale.......... 4,541 8,109 9,361
Accounts receivable, net of
allowance for doubtful ac-
counts of $90 and $200 at
March 31, 1996 and 1997, re-
spectively, and $350 at Sep-
tember 30, 1997 (unaudited).. 9,476 8,418 9,809
Inventories................... 6,836 7,530 7,961
Deferred income taxes......... -- -- 1,096
Notes receivable from officer. 150 8 12
Other current assets.......... 574 690 853
-------- ------- -------
Total current assets......... 25,854 30,243 31,133
Notes receivable from officer
and employees.................. 53 803 922
Property and equipment, net..... 11,929 10,768 12,327
-------- ------- -------
Total assets................... $ 37,836 $41,814 $44,382
======== ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 3,981 $ 2,428 $ 4,730
Accrued payroll and related
expenses..................... 1,291 3,102 2,647
Other accrued liabilities..... 2,130 1,881 1,221
Deferred revenue.............. 831 806 929
Current portion of long-term
debt......................... 582 37 --
Current portion of capital
lease obligations............ 3,062 2,625 2,641
-------- ------- -------
Total current liabilities.... 11,877 10,879 12,168
Long-term debt, less current
portion........................ 37 -- --
Long-term capital lease obliga-
tions, less current portion.... 4,410 3,192 2,096
Commitments and contingencies
(Notes 6 and 10)
Stockholders' equity:
Preferred Stock, $0.01 par
value:
2,000,000 shares authorized
pro forma, none issued and
outstanding pro forma
Convertible preferred stock,
$0.01 par value:
Authorized shares --
1,350,000...................
Issued and outstanding
shares -- 1,223,594 at
March 31, 1996 and 1997 and
1,051,294 at September 30,
1997 (unaudited) (none pro
forma, unaudited)............
Liquidation value -- $25,695
at March 31, 1996 and 1997
and $22,077 at September 30,
1997 (unaudited)............. 12 12 11 $ --
Common stock, $0.01 par value:
Authorized shares --
34,500,000..................
Issued and outstanding
shares -- 4,968,316 and
5,025,357 at March 31, 1996
and 1997, respectively, and
6,392,660 at September 30,
1997, (unaudited) (17,101,750
pro forma, unaudited)........ 49 50 64 171
Additional paid-in capital.... 36,971 36,974 34,655 34,559
Deferred compensation......... -- -- (552) (552)
Accumulated deficit........... (15,444) (9,235) (3,559) (3,559)
Notes receivable from stock-
holders...................... (76) (58) (501) (501)
-------- ------- ------- -------
Total stockholders' equity... 21,512 27,743 30,118 $30,118
-------- ------- ------- =======
Total liabilities and stock-
holders' equity............... $ 37,836 $41,814 $44,382
======== ======= =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues........................ $46,950 $50,264 $57,468 $27,955 $35,208
Cost of revenues.................... 27,513 34,169 30,057 15,754 16,534
------- ------- ------- ------- -------
Gross profit........................ 19,437 16,095 27,411 12,201 18,674
Operating expenses:
Research and development.......... 10,108 8,283 7,870 3,412 6,002
Selling, general and administra-
tive............................. 10,112 11,232 12,537 5,894 6,730
------- ------- ------- ------- -------
Total operating expenses........ 20,220 19,515 20,407 9,306 12,732
------- ------- ------- ------- -------
Operating income (loss)............. (783) (3,420) 7,004 2,895 5,942
Interest income (expense), net...... (358) (242) (29) 24 151
------- ------- ------- ------- -------
Income (loss) before income taxes... (1,141) (3,662) 6,975 2,919 6,093
Provision (benefit) for income tax-
es................................. (70) 32 659 276 159
------- ------- ------- ------- -------
Net income (loss)................... $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934
======= ======= ======= ======= =======
Pro forma net income per share...... $ 0.33 $ 0.30
======= =======
Shares used in pro forma net income
per share calculation.............. 18,983 19,586
======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
----------------- ----------------- PAID-IN DEFERRED ACCUMULATED FROM STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCKHOLDERS EQUITY
--------- ------ --------- ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1994................. 1,223,594 $12 4,247,977 $42 $36,655 $ -- $(10,646) $(234) $25,829
Issuance of stock
pursuant to exer-
cise of stock op-
tions.............. -- -- 204,558 2 91 -- -- -- 93
Repurchase of common
stock.............. -- -- (26,278) -- (13) -- (33) -- (46)
Net loss............ -- -- -- -- -- -- (1,071) -- (1,071)
--------- --- --------- --- ------- ----- -------- ----- -------
Balance, March 31,
1995................. 1,223,594 12 4,426,257 44 36,733 -- (11,750) (234) 24,805
Issuance of stock
pursuant to exer-
cise of stock op-
tions.............. -- -- 547,767 5 251 -- -- -- 256
Repurchase of common
stock.............. -- -- (5,708) -- (13) -- -- -- (13)
Payments on and for-
giveness of notes.. -- -- -- -- -- -- -- 158 158
Net loss............ -- -- -- -- -- -- (3,694) -- (3,694)
--------- --- --------- --- ------- ----- -------- ----- -------
Balance, March 31,
1996................. 1,223,594 12 4,968,316 49 36,971 -- (15,444) (76) 21,512
Issuance of stock
pursuant to exer-
cise of stock op-
tions.............. -- -- 92,680 1 41 -- -- -- 42
Repurchase of common
stock.............. -- -- (35,639) -- (38) -- (107) -- (145)
Payment on notes.... -- -- -- -- -- -- -- 18 18
Net income.......... -- -- -- -- -- -- 6,316 -- 6,316
--------- --- --------- --- ------- ----- -------- ----- -------
Balance, March 31,
1997................. 1,223,594 12 5,025,357 50 36,974 -- (9,235) (58) 27,743
Issuance of stock
pursuant to exer-
cise of stock op-
tions. (unaudited). -- -- 1,367,303 14 700 -- -- (455) 259
Payments on notes
(unaudited)........ -- -- -- -- -- -- -- 12 12
Repurchase of pre-
ferred stock on
June 20, 1997
(unaudited)........ (172,300) (1) -- -- (3,618) -- (258) -- (3,877)
Deferred compensa-
tion related to
stock options
(unaudited)........ -- -- -- -- 599 (599) -- -- --
Amortization of de-
ferred compensation
(unaudited)........ -- -- -- -- -- 47 -- -- 47
Net income (unau-
dited)............. -- -- -- -- -- -- 5,934 -- 5,934
--------- --- --------- --- ------- ----- -------- ----- -------
Balance at September
30, 1997 (unaudited). 1,051,294 $11 6,392,660 $64 $34,655 $(552) $ (3,559) $(501) $30,118
========= === ========= === ======= ===== ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------- --------------
1995 1996 1997 1996 1997
------- ------- ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income (loss).................. $(1,071) $(3,694) $ 6,316 $2,643 $5,934
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 5,092 5,311 5,185 2,744 2,731
Write-offs of inventories......... 1,227 3,663 452 307 598
Amortization of deferred compensa-
tion............................. -- -- -- -- 47
Loss on debt forgiveness.......... -- 150 -- -- --
Changes in assets and liabilities:
Accounts receivable.............. 2,021 (594) 1,058 569 (1,391)
Inventories...................... (2,312) (1,776) (1,146) 482 (1,029)
Other current assets............. (224) 320 (116) (75) (163)
Accounts payable................. (2,079) 1,853 (1,553) (840) 2,302
Accrued payroll and other accrued
liabilities..................... (1,290) 1,047 1,562 558 (1,115)
Deferred income taxes............ -- -- -- -- (1,096)
Deferred revenue................. 30 416 (25) 48 123
------- ------- ------- ------ ------
Net cash provided by operating
activities..................... 1,394 6,696 11,733 6,436 6,941
Investing activities
Proceeds from sales and maturities
of short-term investments......... 1,500 11,238 7,944 3,466 6,463
Purchase of short-term investments. (1,677) (10,859) (11,512) (5,073) (7,715)
Notes receivable from officer and
employees......................... -- (203) (608) (608) (123)
Purchase of property and equipment. (2,761) (1,427) (2,855) (948) (4,008)
------- ------- ------- ------ ------
Net cash used for investing ac-
tivities........................ (2,938) (1,251) (7,031) (3,163) (5,383)
Financing activities
Proceeds from issuance of common
stock............................. 93 256 42 15 259
Repurchase of common stock......... (46) (13) (145) -- --
Repurchase of preferred stock...... -- -- -- -- (3,877)
Payments on notes receivable from
stockholders...................... -- 8 18 18 12
Payments on capital lease obliga-
tions............................. (3,224) (2,750) (2,824) (1,789) (1,362)
Payments on long-term debt......... (800) (864) (582) (337) (37)
------- ------- ------- ------ ------
Net cash used for financing ac-
tivities........................ (3,977) (3,363) (3,491) (2,093) (5,005)
------- ------- ------- ------ ------
Net increase (decrease) in cash
and cash equivalents............ (5,521) 2,082 1,211 1,180 (3,447)
Cash and cash equivalents at begin-
ning of period..................... 7,716 2,195 4,277 4,277 5,488
------- ------- ------- ------ ------
Cash and cash equivalents at end of
period............................. $ 2,195 $ 4,277 $ 5,488 $5,457 $2,041
======= ======= ======= ====== ======
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest........................... $ 799 $ 715 $ 656 $ 286 $ 261
======= ======= ======= ====== ======
Income taxes....................... $ 48 $ 48 $ 770 $ 271 $1,700
======= ======= ======= ====== ======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of approximately $3.4 million, $1.2 million and
$1.2 million were incurred during fiscal years 1995, 1996 and 1997,
respectively, and $215,000 and $282,000 during the six month periods ended
September 30, 1996 and 1997, respectively. During the six months ended
September 30, 1997, notes were received for the exercise of stock options
totalling $455,000.
See accompanying notes.
F-6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Interim Financial Information (Unaudited)
The accompanying financial statements at September 30, 1997 and for the six
months ended September 30, 1996 and 1997 are unaudited but include all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the financial position and
the operating results and cash flows for the interim date and periods
presented. Results for the interim period ended September 30, 1997 are not
necessarily indicative of results for the entire year or future periods.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of highly liquid debt instruments with
original maturities of three months or less at date of acquisition, or money
market type funds. Short-term investments consist of United States treasury
notes, obligations of U.S. government agencies and corporate bonds. The
Company maintains its excess cash in financial institutions with strong credit
ratings and has not experienced any significant losses on its investments. The
estimated fair value of each investment security approximates cost and,
therefore, no unrealized gains or losses existed as of March 31, 1997 and 1996
or at September 30, 1997.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
-------------
1996 1997
------ ------
<S> <C> <C>
U.S. treasury securities and obligations of U.S. government
agencies.................................................. $2,502 $4,189
U.S. corporate debt securities............................. 1,743 3,628
Other...................................................... 296 292
------ ------
$4,541 $8,109
====== ======
</TABLE>
Available-for-sale securities at March 31, 1997 by contractual maturity are
as follows (in thousands):
<TABLE>
<S> <C>
Due in one year or less............................................ $5,005
Due after one year through two years............................... 3,104
------
$8,109
======
</TABLE>
F-7
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Concentration of Credit Risk
The Company believes that the concentration of credit risk in its trade
receivables is mitigated by the Company's credit evaluation process,
relatively short collection terms and dispersion of its customer base. The
Company generally does not require collateral. The Company has not experienced
significant losses on trade receivables from any particular customer or
geographic region for any period presented.
The Company invests its excess cash in debt instruments of the U.S.
Treasury, governmental agencies and corporations with strong credit ratings.
The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant losses on its
cash equivalents or short-term investments.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. These
estimates include assessing the collectability of accounts receivable, the use
and recoverability of inventory, estimates to complete engineering contracts,
costs of future product returns under warranty and provisions for
contingencies expected to be incurred. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. The Company's inventory valuation process is done
on a part-by-part basis. Lower of cost to market adjustments, specifically
identified on a part-by-part basis, reduce the carrying value of the related
inventory and take into consideration reductions in sales prices, excess
inventory levels and obsolete inventory. Once established, these adjustments
are considered permanent and are not reversed until the related inventory is
sold or disposed.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (3 to 7 years) using the straight-line method.
Leasehold improvements are stated at cost and amortized over the shorter of
the useful life of the asset or the lease term. Property and equipment under
capital leases are recorded at the net present value of the minimum lease
payments and are amortized over the shorter of the useful life of the assets
or the lease term. Leased assets purchased at the expiration of the lease term
are capitalized at acquisition cost.
Impairment of Long-Lived Assets
On April 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. The adoption of SFAS No. 121 did
not impact the financial position or results of operations of the Company.
Advertising Cost
Advertising costs are expensed as incurred.
F-8
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Revenues
Revenues related to product sales are generally recognized when the products
are shipped to the customer. Recognition of revenues and the related cost of
revenues on shipments to distributors that are made under agreements allowing
for price protection and right of return on products unsold by the distributor
are deferred until the distributor ships the product to its customer. Revenues
on engineering design contracts are recognized using the percentage-of-
completion method based on actual cost incurred to date compared to total
estimated costs of the project. Deferred revenue represents the margin on
shipments of products to distributors that will be recognized when the
distributors ship the products to their customers and billings in excess of
costs and estimated earnings on uncompleted engineering design contracts.
Warranty Reserves
Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual
experience.
Research and Development
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to new product development,
designing significant improvements to existing products and new process
development.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee and director stock options
because the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123") requires the use of option valuation models that
were not developed for use in valuing employee and director stock options. As
a result, deferred compensation is recorded for the excess of the fair value
of stock on the date of the option grant, over the exercise price of the
option. The deferred compensation is amortized over the vesting period of the
option.
Reclassification
Certain prior period amounts have been reclassified to conform with the
current period presentation.
Pro Forma Net Income Per Share and Unaudited Pro Forma Stockholders' Equity
Pro forma net income per share is computed using the weighted average number
of shares of common stock and common stock equivalents outstanding during the
periods presented. Common stock equivalents result from outstanding
convertible preferred stock and options and warrants to purchase common stock.
The Securities and Exchange Commission requires stock issued during the twelve
months immediately preceding the initial public offering, plus the number of
equivalent shares of common stock granted or issued during the same period, be
included in the calculation of shares used in computing net income per share
as if these shares were outstanding for all periods presented (using the
treasury stock method and the assumed initial public offering price).
F-9
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
As discussed in Note 4, at September 30, 1997, the Company has 1,051,294
shares of convertible preferred stock which is convertible into a total of
10,709,090 shares of common stock, assuming no antidilution adjustments are
necessary. Upon the consummation of the offering contemplated by this
Prospectus, all of the convertible preferred stock will be converted into
common stock. Unaudited pro forma stockholders' equity as of September 30,
1997 is adjusted for the conversion of preferred stock into common stock.
Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings per Share, which is required to be adopted on March 31, 1998. At
that time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The application of the statement to the six
month period ended September 30, 1997 would result in primary pro forma
earnings per share of $0.33 compared to $0.30 as reported. The impact on fully
diluted earnings per share has not been determined.
2. CERTAIN FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
MARCH 31,
------------------ SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
<S> <C> <C> <C>
Inventories (in thousands):
Finished goods.......................... $ 2,631 $ 1,076 $ 2,648
Work in process......................... 2,651 4,279 4,172
Raw materials........................... 1,554 2,175 1,141
-------- -------- --------
$ 6,836 $ 7,530 $ 7,961
======== ======== ========
Property and equipment (in thousands):
Machinery and equipment................. $ 19,168 $ 21,211 $ 21,272
Leasehold improvements.................. 5,588 5,789 6,538
Computers, office furniture and equip-
ment................................... 11,396 11,701 13,930
-------- -------- --------
36,152 38,701 41,740
Less accumulated depreciation and amorti-
zation................................... (24,223) (27,933) (29,413)
-------- -------- --------
$ 11,929 $ 10,768 $ 12,327
======== ======== ========
</TABLE>
The cost and accumulated amortization of machinery and equipment under
capital leases at March 31, 1997 were approximately $12.2 million and $7.3
million, respectively ($14.9 million and $7.8 million, at March 31, 1996).
Amortization of assets held under capital leases is included with depreciation
expense.
During the years ended March 31, 1995, 1996 and 1997 and the six month
periods ended September 30, 1996 and 1997 the Company earned interest income
of $441,000, $473,000, $627,000, $283,000 and $411,000, respectively, and
incurred interest expense of $799,000, $715,000, $656,000, $259,000 and
$260,000, respectively.
F-10
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31
------------
1996 1997
----- -----
<S> <C> <C>
Notes payable with interest rates ranging from 8.3% to 10.5%,
paid in January 1997........................................ $ 162 $ --
10.0% notes payable, paid in April 1997...................... 457 37
----- -----
619 37
Less current portion......................................... (582) (37)
----- -----
$ 37 $ --
===== =====
</TABLE>
4. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
A summary of the shares of convertible preferred stock issued and
outstanding at March 31, and September 30, 1997 is as follows (in thousands,
except share data):
<TABLE>
<CAPTION>
MARCH 31, 1997 SEPTEMBER 30, 1997
----------------------------- -----------------------
SHARES PREFERENCE SHARES PREFERENCE
PAR ISSUED AND IN ISSUED AND IN
VALUE OUTSTANDING LIQUIDATION OUTSTANDING LIQUIDATION
----- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Series 1.............. $ 4 408,692 $ 8,582 312,803 $ 6,569
Series 2.............. 2 238,096 5,000 211,040 4,432
Series 3.............. 6 576,806 12,113 527,451 11,076
--- --------- ------- --------- -------
Total............... $12 1,223,594 $25,695 1,051,294 $22,077
=== ========= ======= ========= =======
</TABLE>
Each share of Series 1, 2 and 3 preferred stock is convertible at the option
of the holder into approximately 16, 7.0 and 8 shares of common stock,
respectively, subject to certain anti-dilution adjustments. The Series 1, 2
and 3 preferred shares may be redeemed upon approval of the Company's Board of
Directors and only with the vote of 60% of the outstanding preferred stock at
a redemption price of $23.10 per share.
Conversion is automatic immediately upon the closing of an underwritten
public offering in which aggregate gross proceeds equal or exceed $10 million
and the price per share is not less than $6.30.
Each share of preferred stock is entitled to one vote for each share of
common stock into which it would convert. No dividends may be paid to common
stockholders unless equivalent dividends are paid to preferred stockholders.
Additionally, the preferred stockholders have certain rights of first refusal
on any new securities offering (other than certain securities issued to
employees), which rights of first refusal terminate upon completion of the
Company's initial public offering, and certain registration rights.
F-11
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Stock Options
The Company's 1992 Stock Option Plan provides for the granting of incentive
stock options to employees. Generally, options are granted at prices at least
equal to fair value of the Company's common stock on the date of grant as
determined by the Company's Board of Directors. In addition, certain officers
and directors have been granted nonqualified stock options. The Company's 1982
Employee Incentive Stock Option Plan expired in 1992, however, options to
purchase an aggregate of 157,968 shares of common stock remain outstanding as
of September 30, 1997.
Options under both plans expire not more than ten years from the date of
grant and are immediately exercisable after the date of grant but are subject
to certain repurchase rights by the Company, at the Company's option, until
such ownership rights have vested. Vesting generally occurs over four years.
At March 31, 1997 and September 30, 1997, 267 shares and 655,483 shares of
common stock were subject to repurchase, respectively.
Pursuant to an executive employment agreement between the Company and an
executive, the Company granted an option to purchase 800,000 shares of the
Company's common stock at $0.53 per share under the 1992 Stock Option Plan.
The option vests ratably over four years. In the event the Company is
acquired, the agreement stipulates that under certain circumstances the
executive is eligible for certain additional compensation. These options as
well as 66,667 additional options issued in April 1997 were exercised in July
1997. The exercise was paid for with various notes which aggregate $455,000 at
interest rates between 5.98% and 6.54% which are due at the earlier of
February 12, 2000 ($420,000) and April 9, 2001 ($35,000) or the termination of
employment.
Certain other option agreements provide for the exercise of stock options
with long-term promissory notes. These notes bear interest at rates ranging
from 5.32% to 5.91%, are payable at the earlier of termination of employment
or January 1998 and are secured by the shares of common stock purchased with
the notes.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by Statement 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that statement. The fair value of these options was estimated at the date of
grant using the minimum value method using the following weighted average
assumptions for fiscal year 1997 and 1996, respectively: risk free interest
rate of 6.20% and 6.15%; an expected option life of four years; and no annual
dividends.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expenses over the vesting period of such options. The
effects of applying Statement 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into consideration pro forma compensation
expenses related to grants made prior to 1996, The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Pro forma net income (loss)............................ $(3,670,000) $6,225,000
Pro forma net income (loss) per share.................. $ (0.22) $ 0.33
Weighted average fair value of options granted during
the year.............................................. $ 0.12 $ 0.15
</TABLE>
F-12
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information are as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
1995 1996 1997 SEPTEMBER 30, 1997
-------------------- -------------------- -------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- --------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 1,911,566 $0.48 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51
Granted............... 195,332 0.53 1,017,000 0.53 1,457,285 0.53 1,010,478 2.25
Exercised............. (204,558) 0.45 (547,767) 0.47 (92,680) 0.45 (1,367,303) 0.52
Forfeited............. (269,286) 0.50 (412,127) 0.51 (212,472) 0.53 (244,805) 0.52
--------- ----- --------- ----- --------- ----- ---------- -----
Outstanding at end of
period................. 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51 2,240,663 $1.02
========= ===== ========= ===== ========= ===== ========== =====
Vested at end of period. 917,449 $0.48 349,337 $0.51 851,764 $0.51 641,432 $0.51
========= ===== ========= ===== ========= ===== ========== =====
</TABLE>
The weighted-average remaining contractual life of the options outstanding
at March 31, 1997 is 8.4 years. Exercise prices of all options outstanding as
of March 31, 1997 range from $0.45 to $0.53. The weighted-average remaining
contractual life of the vested options is 6.5 years as of March 31, 1997. The
range of exercise prices for options outstanding as of September 30, 1997 was
$0.45 to $8.25 per share.
Through September 30, 1997, the Company recorded deferred compensation
expense for the difference between the exercise price and the deemed fair
value for financial statement presentation purposes of the Company's common
stock, as determined by the Board of Directors, for all options granted in the
first and second quarters of fiscal 1998. This deferred compensation
aggregates to $599,000, which will be amortized over the four year vesting
period of the related options.
Warrants
In connection with certain notes payable secured by equipment, capital
leases for equipment and revolving lines of credit issued in 1989 and 1990,
the Company has outstanding warrants to purchase 83,807 shares of common stock
at $2.63 to $3.00 per share, subject to certain anti-dilution adjustments and
adjustments in the event of certain mergers or acquisitions. No value was
placed on the warrants at the time of issuance as it was deemed to be
immaterial. These warrants expire not more than ten years from date of grant
or five years after the Company's initial public offering, whichever is later.
F-13
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Common Shares Reserved for Future Issuance
At September 30, 1997, shares of the Company's common stock are reserved for
issuance upon the conversion or exercise of the following equity instruments
(unaudited):
<TABLE>
<S> <C>
Conversion of preferred stock..................................... 10,709,090
Stock options:
Issued and outstanding.......................................... 2,240,663
Authorized for future grants.................................... 344,714
----------
2,585,377
Warrants.......................................................... 83,807
----------
13,378,274
==========
</TABLE>
5. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
CURRENT
Federal............................................... $ -- $ 27 $ 380
State................................................. (70) 5 279
----- ------- -------
$ (70) $ 32 $ 659
===== ======= =======
The provision (credit) for income taxes reconciles to the amount computed by
applying the federal statutory rate (35%) to income before income taxes as
follows (in thousands):
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1995 1996 1997
----- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate......................... $(399) $(1,282) $ 2,441
Net operating loss without benefit.................... 399 1,282 --
Utilization of net operating loss and research and de-
velopment tax credit carryforwards................... -- -- (2,061)
State taxes, net of federal benefit and credits....... (70) 5 279
Federal alternative minimum tax....................... -- 27 --
----- ------- -------
$ (70) $ 32 $ 659
===== ======= =======
</TABLE>
F-14
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 1997 and 1996 are as shown
below. As of March 31, 1997, a valuation allowance had been recognized to
offset the deferred tax assets as realization of such assets was uncertain.
The estimated annualized effective tax rate for fiscal 1998, which was used to
determine the provision for the six month period ended September 30, 1997, is
computed based on the Company's projected 1998 income which will allow for a
full reduction of the valuation allowance and realization of the deferred tax
asset.
<TABLE>
<CAPTION>
MARCH 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets (in thousands):
Reserves................................................... $ 2,512 $ 2,233
Capitalization of inventory and research and development
costs..................................................... 334 226
Research and development credit carryforwards.............. 2,405 1,667
Depreciation and amortization.............................. 335 200
Net operating loss carryforwards........................... 2,102 --
Other credit carryforwards................................. 886 768
------- -------
Subtotal..................................................... 8,574 5,094
Valuation allowance.......................................... (8,574) (5,094)
------- -------
Net deferred taxes........................................... $ -- $ --
======= =======
</TABLE>
At March 31, 1997, the Company has federal alternative minimum tax,
investment and research and development tax credit carryforwards of
approximately $366,000, $270,000 and $1.6 million, respectively, which will
begin to expire in 1998 unless previously utilized.
Under Internal Revenue Code Section 382, the Company's use of its tax credit
carryforwards could be limited in the event of certain cumulative changes in
the Company's stock ownership.
For the six months ended September 30, 1996 and 1997, income taxes have been
provided based on the estimated annual effective tax rate applied to pre tax
income for the interim period.
6. LEASE COMMITMENTS
The Company leases its present manufacturing facilities under a long-term
operating lease expiring in March 1998. The lease expiring is renewable for up
to ten years. This lease requires the Company to pay property taxes and
incidental maintenance expenses and contains escalation clauses based upon
increases in the Consumer Price Index.
In September 1997, the Company moved into a new administration and
manufacturing facility which is leased under a long-term operating lease. This
lease expires in September 2007, requires the Company to pay property taxes
and incidental maintenance expenses and is renewable for up to ten years. The
lease provides for defined rent increases over the term of the lease.
F-15
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
Annual future minimum lease payments, including machinery and equipment
under capital leases and the Company's commitment relating to its new
administration and manufacturing facility, as of March 31, 1997 are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
FISCAL YEAR ENDING MARCH 31, LEASES LEASES
---------------------------- --------- -------
<S> <C> <C>
1998..................................................... $1,037 $2,980
1999..................................................... 848 2,170
2000..................................................... 848 759
2001..................................................... 870 320
2002..................................................... 889 225
Thereafter............................................... 5,070 --
------ ------
Total minimum lease payments........................... $9,562 6,454
======
Less amount representing interest......................... 637
------
Present value of remaining minimum capital lease payments
(including current portion of $2,625).................... $5,817
======
</TABLE>
Rent expense (including short-term leases and net of sublease income) for
the years ended March 31, 1995, 1996 and 1997 was $1.7 million, $2.3 million
and $1.2 million, respectively. Rent expense for the six months ended
September 30, 1996 and 1997 was $600,000 and $573,000, respectively. Included
in the 1996 rent expense is an accrual of $565,000 for losses on facilities
for which sublease income was expected to be less than the remaining minimum
lease payments. Sublease income was $16,000, $0 and $208,000 for the years
ended March 31, 1995 1996 and 1997, respectively.
7. RELATED PARTY TRANSACTIONS
As of March 31, 1996, the Company had advanced $203,000 to an officer of the
Company. During 1997, an additional $750,000 was advanced to this officer and
$142,000 of the advances made during 1996 were repaid. Notes were received by
the Company providing for interest on the balance at rates from 5.32% to
5.76%. Principal and interest under the notes are due on or before February
28, 1999 and $750,000 of the balance is secured by marketable securities owned
by the officer.
8. EMPLOYEE RETIREMENT PLAN
Effective January 1, 1986, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all full-time
employees with greater than three months of service. The Retirement Plan
provides for voluntary employee contributions from 1% to 20% of annual
compensation, subject to a maximum limit allowed by Internal Revenue Service
guidelines. The Company may contribute such amounts as determined by the Board
of Directors. Employer contributions vest to participants at a rate of 20% per
year of service, provided that after five years of service all past and
subsequent employer contributions are 100% vested. The contributions charged
to operations totalled $116,000, $182,000 and $318,000 for the years ended
March 31, 1995, 1996 and 1997, respectively, and $157,000 and $180,000 for the
six months ended September 30, 1996 and 1997, respectively.
F-16
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
9. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
During the years ended March 31, 1995, 1996 and 1997 and the six month
periods ended September 30, 1996 and 1997, 17%, 20% and 20% and 20% and 19%,
respectively, of net revenues were from one customer. No other customer
accounted for more than 10% of revenues in any period.
Revenue by geographic region for the years ended March 31, 1995, 1996 and
1997, and the six months ended September 30, 1996 and 1997 were as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
----------------------- ---------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net revenues:
United States...................... $32,554 $28,134 $34,424 $15,682 $20,857
Canada............................. 8,030 10,116 10,943 5,727 5,866
Europe and Israel.................. 4,075 6,525 8,216 4,466 6,373
Asia............................... 2,291 5,489 3,885 2,080 2,112
------- ------- ------- ------- -------
Total............................ $46,950 $50,264 $57,468 $27,955 $35,208
======= ======= ======= ======= =======
</TABLE>
10. CONTINGENCIES
The Company is party to various legal actions arising in the normal course
of business. In addition, since 1993 the Company has been named as a
potentially responsible party ("PRP") along with a large number of other
companies that used Omega Chemical Corporation ("Omega") in Whittier,
California to handle and dispose of certain hazardous waste material. The
Company is a member of a large group of PRPs that has agreed to fund certain
remediation efforts at the Omega site for which the Company has accrued
approximately $50,000. Although the ultimate outcome of these matters is not
presently determinable, management believes that the resolution of all such
pending matters, net of amounts accrued, will not have a material adverse
affect on the Company's financial position or results of operations.
11. SUBSEQUENT EVENTS
Repurchase of Convertible Preferred Stock
On April 24, 1997 the Board authorized the Company to repurchase up to $4
million of convertible preferred stock, with priority given to the holders of
convertible preferred stock that submitted bids for the sale of their shares
of convertible preferred stock at the lowest price per share. On June 20, 1997
the Company repurchased an aggregate of 172,300 shares of convertible
preferred stock for approximately $3.9 million at prices between $1.20 and
$2.61 per share on an as converted to common stock basis.
Stock Split and Increase in Shares Authorized
On October 6, 1997, the Board of Directors authorized, subject to
stockholder approval, a two for three reverse stock split of all outstanding
common stock. All share and per share amounts and stock option data have been
restated to retroactively reflect a stock split. Additionally, on October 6,
1997, the Board of Directors modified, subject to the closing of the public
offering and stockholder approval, the Company's capital structure to
authorize 60 million shares of common stock, ($0.01 par value) and 2 million
shares of preferred stock ($0.01 par value) and the shares reserved for
issuance under the 1992 Stock Option Plan were increased by 2.2 million
shares.
F-17
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE
SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 6, 1997, subject to
stockholder approval. A total of 400,000 shares of Common Stock are reserved
for issuance under the 1997 Purchase Plan.
1997 Directors' Stock Option Plan
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors on October 6, 1997, subject to stockholder
approval. A total of 200,000 shares of Common Stock are reserved for issuance
under the Directors' Plan. The Directors' Plan provides for the grant of non-
statutory options to nonemployee directors of the Company.
Preferred Stock
On October 6, 1997, the Board of Directors adopted, subject to stockholder
approval, an amendment to the Certificate of Incorporation to allow, upon the
closing of the initial public offering, the issuance of up to 2,000,000 shares
of preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders.
F-18
<PAGE>
High-Speed Computing Products
AMCC's S5933 is used for DVD, communications and industrial computer
applications.
[Picture of AMCC integrated circuits, a computer keyboard, a CD-ROM, a
digital video disk and a computer.]
Automated Test Equipment
[Picture of a man working on a computer.]
[Picture of wafer in the process of being manufactured.]
Teradyne high-speed logic and mixed-signal testers use AMCC's Micropower ASICs
with high-precision timing elements.
[Picture of a Teradyne high-speed logic and mixed-signal tester, a computer
and an integrated circuit.]
<PAGE>
(22)[Picture of fiber optic cables.]
(23)[Picture of fiber optic cables.]
(24)[Picture of AMCC integrated circuits and wafers.]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee.......................................... $ 19,689
NASD filing fee............................................... 6,020
Nasdaq National Market listing fee............................ 50,000
Printing and engraving expenses............................... 100,000
Legal fees and expenses....................................... 300,000
Accounting fees and expenses.................................. 185,000
Blue Sky qualification fees and expenses...................... 5,000
Transfer Agent and Registrar fees............................. 10,000
Miscellaneous fees and expenses............................... 24,291
--------
Total....................................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "Delaware Law")
authorizes a court to award, or a corporation's Board of Directors to grant,
indemnity to directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article Seven of the Company's Certificate
of Incorporation (Exhibit 3.2 hereto) and Article IX of the Company's Bylaws
(Exhibit 3.3 hereto) provide for indemnification of the Company's directors,
officers, employees and other agents to the maximum extent permitted by
Delaware Law. In addition, the Company has entered into Indemnification
Agreements (Exhibit 10.1 hereto) with its officers and directors. The
Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification
among the Company, the Selling Stockholders and the Underwriters with respect
to certain matters, including matters arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since September 30, 1994, the Registrant has issued and sold (without
payment of any selling commission to any person) the following unregistered
securities (as adjusted to reflect the Registrant's 2-for-3 reverse stock
split of the Preferred Stock and Common Stock to be effected prior to the
closing of this offering):
(1) As of September 30, 1997, 657,090 shares of Common Stock had been
issued upon exercise of options with an average exercise price of $0.45 per
share, all of which were paid for in cash, and 157,968 shares of Common
Stock were issuable upon exercise of outstanding options with an average
exercise price of $0.46 per share pursuant to grants to certain employees
and directors of the Company under the Company's 1982 Plan.
(2) As of September 30, 1997, 1,407,016 shares of Common Stock had been
issued upon exercise of options, each with an exercise price of $0.53 per
share, paid for by cash or full recourse promissory notes secured by the
underlying Common Stock of the Company, pursuant to grants to certain
employees and directors of the Company under the Company's 1992 Plan. In
addition, 2,049,309 shares of Common Stock were issuable upon exercise of
outstanding options with an average exercise price of $0.95 per share
pursuant to grants to certain employees and directors of the Company under
the Company's 1992 Plan.
II-1
<PAGE>
(3) As of September 30, 1997, 13,332 shares of Common Stock had been issued
upon exercise of options with an average exercise price of $0.30 per share,
paid for by cash or full recourse promissory notes secured by the
underlying Common Stock of the Company, and 24,755 shares of Common Stock
were issuable upon exercise of outstanding options with an average exercise
price of $0.48 per share pursuant to grants to certain employees, directors
and consultants of the Company.
(b) There were no underwritten offerings employed in connection with any of
the transactions set forth in Item 15(a).
The issuances described in Items 15(a)(1) and 15(a)(2) were deemed to be
exempt from registration under the Securities Act in reliance upon Rule 701
promulgated thereunder in that they were offered and sold pursuant to a
written compensatory plan. In addition, such issuances were deemed to be
exempt from registration under the Securities Act under Section 4(2) of the
Securities Act as transactions not involving any public offering. The
issuances described in Item 15(a)(3) were deemed to be exempt from
registration under the Securities Act under Section 4(2) of the Securities Act
as transactions not involving any public offering. The recipients of
securities in each of the transactions described in Item 15(a)(1) through
15(a)(3) represented their intentions to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1(3) Form of Underwriting Agreement (subject to negotiation).
3.1(3) Restated Certificate of Incorporation of the Company.
3.2(3) Form of Amended and Restated Certificate of Incorporation of the
Company (to be filed with the Delaware Secretary of State upon the
closing of the Offering).
3.3(3) Amended and Restated Bylaws of the Company.
3.4(3) Form of Amended and Restated Bylaws of the Company (to be
effective upon the closing of the Offering).
4.1(3) Specimen Stock Certificate.
5.1(3) Opinion of Venture Law Group regarding the legality of the Common
Stock being registered.
10.1(3) Form of Indemnification Agreement between the Company and each of
its Officers and Directors.
10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of
Option Agreement.
10.3(3) 1992 Stock Option Plan as proposed to be amended, and form of
Option Agreement.
10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement.
10.6(3) 401(k) Plan, effective April 1, 1985 and form of Enrollment
Agreement.
10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase
Agreement, dated December 8, 1983.
10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated
September 16, 1987.
10.9(3) Industrial Real Estate Lease, dated October 29, 1996 between the
Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive
Lease).
10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the
Registrant and Mira Mesa Business Park (the Oberlin Drive Lease).
10.11(3) Security Agreements, dated January 30, 1992 by and between the
Registrant and Roger Smullen.
10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and
between the Registrant and Roger Smullen.
10.13(3) Loan Agreement, dated May 1, 1996 and Exercise Notice and
Restricted Stock Purchase Agreements dated July 23, 1997 by and
between Registrant and David Rickey.
10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1,
1997 and July 23, 1997 by and between the Registrant and David
Rickey.
10.15(2)(3) Patent License Agreement, dated January 1, 1988, as amended by and
between Registrant and Motorola, Inc.
10.16(2)(3) Patent License Agreement, dated March 1, 1991, as amended, by and
between Registrant and International Business Machines
Corporation.
10.17(2)(3) Patent License Agreement, dated June 1, 1997 by and between
Registrant and International Business Machines Corporation.
10.18(3) Letter Agreement, dated January 30, 1996 by and between the
Registrant and David Rickey.
10.19(2)(3) Patent License Agreement, dated October 19, 1992, as amended by
and between Registrant and Alcatel Network Systems, Inc.
11.1(3) Computation of Pro Forma Earnings Per Share.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
23.1 Consent of Independent Auditors (see page II-6)
23.2(3) Consent of Counsel (included in Exhibit 5.1)
24.1(3) Power of Attorney
27.1(3) Financial Data Schedules
</TABLE>
- --------
(1) To be supplied by amendment.
(2) Confidential treatment requested. This Exhibit omits certain confidential
information which has been filed separately with the Commission.
(3) Previously filed.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of San
Diego, State of California on November 19, 1997.
APPLIED MICRO CIRCUITS CORPORATION
By: /s/ Joel O. Holliday
---------------------------------
JOEL O. HOLLIDAY
CHIEF FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
David M. Rickey* President and Chief November 19, 1997
- ------------------------------------ Executive Officer (Principal
DAVID M. RICKEY Executive Officer)
/s/ Joel O. Holliday Chief Financial Officer November 19, 1997
- ------------------------------------ (Principal Financial and
JOEL O. HOLLIDAY Accounting Officer)
Roger A. Smullen, Sr. * Director and Chairman of the November 19, 1997
- ------------------------------------ Board of Directors
ROGER A. SMULLEN, SR.
William K. Bowes, Jr. * Director November 19, 1997
- ------------------------------------
WILLIAM K. BOWES, JR.
R. Clive Ghest * Director November 19, 1997
- ------------------------------------
R. CLIVE GHEST
Franklin P. Johnson, Jr.* Director November 19, 1997
- ------------------------------------
FRANKLIN P. JOHNSON, JR.
Arthur B. Stabenow* Director November 19, 1997
- ------------------------------------
ARTHUR B. STABENOW
*By: /s/ Joel O. Holliday
-------------------------------
JOEL O. HOLLIDAY
(ATTORNEY-IN-FACT)
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
April 25, 1997 (except Note 11, as to which the date is November 19, 1997), in
Amendment No. 4 to the Registration Statement (Form S-1 No. 333-37609) and
related Prospectus of Applied Micro Circuits Corporation for the registration
of 6,497,500 shares of its common stock.
Our audits also included the financial statement schedule of Applied Micro
Circuits Corporation for the three years ended March 31, 1997 listed in Item
16(b). This schedule is the responsibility of Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
November 19, 1997
II-6
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------
ADDITIONS
-------------------------
(1) (2)
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS- DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1997: $200 $154 $ -- $ 4 $350
Allowance for doubtful accounts
- -----------------------------------------------------------------------------------------------------
Year ended March 31, 1997: $ 90 $198 $ 88 $ -- $200
Allowance for doubtful accounts
- -----------------------------------------------------------------------------------------------------
Year ended March 31, 1996: $115 $ -- $ -- $ 25 $ 90
Allowance for doubtful accounts
- -----------------------------------------------------------------------------------------------------
Year ended March 31, 1995 $ 60 $ 81 $ -- $ 26 $115
Allowance for doubtful accounts
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1(3) Form of Underwriting Agreement (subject to negotiation).
3.1(3) Restated Certificate of Incorporation of the Company.
3.2(3) Form of Amended and Restated Certificate of Incorporation of the
Company (to be filed with the Delaware Secretary of State upon the
closing of the Offering).
3.3(3) Amended and Restated Bylaws of the Company.
3.4(3) Form of Amended and Restated Bylaws of the Company (to be
effective upon the closing of the Offering).
4.1(3) Specimen Stock Certificate.
5.1(3) Opinion of Venture Law Group regarding the legality of the Common
Stock being registered.
10.1(3) Form of Indemnification Agreement between the Company and each of
its Officers and Directors.
10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of
Option Agreement.
10.3(3) 1992 Stock Option Plan as proposed to be amended, and form of
Option Agreement.
10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement.
10.6(3) 401(k) Plan, effective April 1, 1985 and form of Enrollment
Agreement.
10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase
Agreement, dated December 8, 1983.
10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated
September 16, 1987.
10.9(3) Industrial Real Estate Lease, dated October 29, 1996 between the
Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive
Lease).
10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the
Registrant and Mira Mesa Business Park (the Oberlin Drive Lease).
10.11(3) Security Agreements, dated January 30, 1992 by and between the
Registrant and Roger Smullen.
10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and
between the Registrant and Roger Smullen.
10.13(3) Loan Agreement, dated May 1, 1996 and Exercise Notice and
Restricted Stock Purchase Agreements dated July 23, 1997 by and
between Registrant and David Rickey.
10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1,
1997 and July 23, 1997 by and between the Registrant and David
Rickey.
10.15(2)(3) Patent License Agreement, dated January 1, 1988, as amended by and
between Registrant and Motorola, Inc.
10.16(2)(3) Patent License Agreement, dated March 1, 1991, as amended, by and
between Registrant and International Business Machines
Corporation.
10.17(2)(3) Patent License Agreement, dated June 1, 1997 by and between
Registrant and International Business Machines Corporation.
10.18(3) Letter Agreement, dated January 30, 1996 by and between the
Registrant and David Rickey.
10.19(2)(3) Patent License Agreement, dated October 19, 1992, as amended by
and between Registrant and Alcatel Network Systems, Inc.
11.1(3) Computation of Pro Forma Earnings Per Share.
23.1 Consent of Independent Auditors (see page II-6)
23.2(3) Consent of Counsel (included in Exhibit 5.1)
24.1(3) Power of Attorney
27.1(3) Financial Data Schedules
</TABLE>
- --------
(1) To be supplied by amendment.
(2) Confidential treatment requested. This Exhibit omits certain confidential
information which has been filed separately with the Commission.
(3) Previously filed.
