<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1997, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 000-23193
___________
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 450-9333
___________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
YES [x] * NO ___
-----
As of February 13, 1998, 20,995,115 shares of the Registrant's Common Stock
were issued and outstanding.
* The Registrant has been subject to such filing requirements since November
24, 1997, the effective date of the Registrant's Registration Statement on Form
8-A.
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION:
Item 1. a) Condensed Consolidated Balance Sheets at December 31, 1997
(unaudited) and March 31, 1997................................ 3
b) Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended December 31, 1997
and December 31, 1996......................................... 4
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended December 31, 1997 and
December 31, 1996............................................. 5
d) Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds......................... 25
Item 4. Submission of Matters to a Vote of Security Holders............... 26
Item 6. Exhibits.......................................................... 26
================================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1997
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 9,923 $ 5,488
Short-term investments - available-for-sale.................................... 26,307 8,109
Accounts receivable, net of allowance for doubtful accounts
of $350 and $200 at December 31, 1997 (unaudited) and March 31, 1997,
respectively................................................................. 10,529 8,418
Inventories.................................................................... 8,002 7,530
Deferred income taxes.......................................................... 1,813 -
Notes receivable from officer and employee..................................... 21 8
Other current assets........................................................... 927 690
------------ ------------
Total current assets............................................. 57,522 30,243
Notes receivable from officer and employees.................................... 908 803
Property and equipment, net.................................................... 15,427 10,768
------------ ------------
Total assets $.............................................................. $73,857 $41,814
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 5,010 $ 2,428
Accrued payroll and related expenses........................................... 3,407 3,102
Other accrued liabilities...................................................... 934 1,881
Deferred revenue............................................................... 1,261 806
Current portion of long-term debt.............................................. - 37
Current portion of capital lease obligations................................... 2,215 2,625
------------ ------------
Total current liabilities........................................ 12,827 10,879
Long-term capital lease obligations, less current portion...................... 1,675 3,192
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000,000 shares authorized, none issued and outstanding................... - -
Convertible preferred stock, $0.01 par value:
Authorized shares - 1,350,000
Issued and outstanding shares - 1,223,594 at March 31, 1997
Liquidation value - $25,695 at March 31, 1997 and none at December
31, 1997.................................................................. - 12
Common Stock, $0.01 par value:
Authorized shares - 60,000,000 and 34,500,000 at December 31, 1997
(unaudited) and March 31, 1997, respectively
Issued and outstanding shares - 20,870,368 at December 31, 1997
(unaudited) and 5,025,357 at March 31, 1997, respectively................. 208 50
Additional paid-in capital................................................... 59,716 36,974
Deferred compensation........................................................ (512) -
Retained earnings (deficit).................................................. 444 (9,235)
Notes receivable from stockholders........................................... (501) (58)
------------ ------------
Total stockholders' equity....................................... 59,355 27,743
Total liabilities and stockholders' equity............................ $73,857 $41,814
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
1997 1996 1997 1996
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues..................................................... $19,666 $14,509 $54,874 $42,464
Cost of revenues................................................. 8,836 7,046 25,370 22,800
----------- ----------- ----------- -----------
Gross Profit..................................................... 10,830 7,463 29,504 19,664
Operating expenses:
Research and development..................................... 3,337 2,256 9,339 5,668
Selling, general and administrative.......................... 3,530 3,092 10,260 8,986
----------- ----------- ----------- -----------
Total operating expenses............................. 6,867 5,348 19,599 14,654
----------- ----------- ----------- -----------
Operating income................................................. 3,963 2,115 9,905 5,010
Interest income (expense),net.................................... 143 (19) 294 5
----------- ----------- ----------- -----------
Income before income taxes....................................... 4,106 2,096 10,199 5,015
Provision for income taxes....................................... 103 198 262 474
----------- ----------- ----------- -----------
Net income....................................................... $ 4,003 $ 1,898 $ 9,937 $ 4,541
=========== =========== =========== ===========
Pro forma basic earnings per share:
Earnings per share........................................... $ 0.22 $ 0.11 $ 0.57 $ 0.25
=========== =========== =========== ===========
Shares used in calculating basic earnings per share.......... 18,463 17,847 17,499 17,824
=========== =========== =========== ===========
Diluted earnings per share:
Earnings per share........................................... $ 0.20 $ .011 $ 0.51 $ 0.25
=========== =========== =========== ===========
Shares used in calculating diluted earnings per share........ 20,383 17,920 19,306 17,897
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................................................................... $ 9,937 $ 4,541
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................................. 4,053 3,999
Write-offs of inventories..................................................................... 598 378
Amortization of deferred compensation......................................................... 87 -
Changes in assets and liabilities:
Accounts receivables.......................................................................... (2,111) 451
Inventories................................................................................... (1,070) (630)
Other current assets.......................................................................... (237) (1,066)
Accounts payable.............................................................................. 2,582 (905)
Accrued payroll and other accrued liabilities................................................. (642) 1,274
Deferred income taxes......................................................................... (1,813) -
Deferred revenue.............................................................................. 455 128
-------- -------
Net cash provided by operating activities................................................ 11,839 8,170
INVESTING ACTIVITIES
Proceeds from sales and maturities of short-term investments..................................... 23,268 6,466
Purchase of short-term investments............................................................... (41,466) (8,061)
Notes receivable from officer and employees...................................................... (118) (608)
Purchase of property and equipment............................................................... (8,431) (1,907)
-------- -------
Net cash used for investing activities................................................... (26,747) (4,110)
FINANCING ACTIVITIES
Net proceeds from issuance of common stock, net.................................................. 25,454 29
Repurchase of common stock....................................................................... - (24)
Repurchase of preferred stock.................................................................... (3,877) -
Payments on notes receivable from stockholders................................................... 12 18
Payments on capital lease obligations............................................................ (2,209) (2,594)
Payments on long-term debt....................................................................... (37) (337)
-------- -------
Net cash provided by (used for) financing activities..................................... 19,343 (2,908)
-------- -------
Net increase in cash and cash equivalents................................................ 4,435 1,152
Cash and cash equivalents at beginning of period................................................... 5,488 4,277
Cash and cash equivalents at end of period......................................................... $ 9,923 $ 5,429
======== =======
Supplemental disclosure of cash flow information:
Cash paid for
Interest......................................................................................... $ 358 $ 459
======== =======
Income taxes..................................................................................... $ 2,559 $ 411
======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of approximately $1.2 million and $282,000 were incurred during the nine month periods ended
December 31, 1996 and 1997, respectively. During the nine months ended December 31, 1997, notes were received for the exercise of
stock options totalling $455,000.
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
sales, expenses and net income or losses will continue.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on February 11, 1998.
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 December 31, 1997 or at March 31, 1997
and 1996 or at December 31, 1997.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ---------
<S> <C> <C>
U.S. treasury securities and obligations of
U.S. government agencies.................... $12,683 $4,189
U.S. corporate debt securities............... 13,124 3,628
Other........................................ 500 292
------- ------
$26,307 $8,109
======= ======
</TABLE>
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
<S> <C> <C>
Due in one year or less.......................... $21,860 $5,005
Due after one year through two years............. 3,047 3,104
Greater than two years........................... 1,400 --
------- ------
$26,307 $8,109
======= ======
</TABLE>
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128.
"Earnings per Share," which supersedes APB Opinion No. 15. SFAS 128 replaces
the presentation of primary earnings per share (EPS) with "Basic EPS" which
includes no dilution and is based on weighted-average common shares
outstanding for the period. Companies with complex capital structures,
including AMCC, are also required to present "Diluted EPS" that reflects the
potential dilution of securities such as employee stock options and warrants
to purchase common stock. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. On February 3, 1998, the
SEC issued Staff Accounting Bulletin (SAB) No. 98 which revised the previous
instructions for determining the dilutive effects in earnings per share
computations of common stock and common stock equivalents issued at prices
below the Company's initial public offering (the "IPO") price prior to the
effectiveness of the IPO.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of
these standards are effective for fiscal years beginning after December 15,
1997. SFAS No. 130 requires that all components of comprehensive income,
including net income, be reported in the financial statements in the period in
which they are recognized. Comprehensive income is defined as the change in
equity during a period from transactions and other events and circumstances
from non-owner sources. Net income and other comprehensive income, including
foreign currency translation adjustments, and unrealized gains and losses on
investments, shall be reported, net of their related tax effect, to arrive at
comprehensive income. The Company does not believe that comprehensive income
or loss has been materially different than net income or loss. SFAS No. 131
amends the requirements for public enterprises to report financial and
descriptive information about its reportable operating segments. Operating
segments, as defined in SFAS No. 131, are components of an enterprise for
which separate financial information is available and is evaluated regularly
by the Company in deciding how to allocate resources and in assessing
performance. The financial information is required to be reported on the basis
that is used internally for evaluating the segment performance. The Company
believes it operates in one business and operating segment and does not
believe adoption of SFAS No. 131 will have a material impact on the Company's
financial statements.
-6-
<PAGE>
2. CERTAIN FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
DECEMBER MARCH 31,
31,1997 1997
Inventories (in thousands):
<S> <C> <C>
Raw materials $ 1,311 $ 2,175
Work in process 4,344 4,279
Finished goods 2,347 1,076
---------- ----------
$ 8,002 $ 7,530
========== ----------
</TABLE>
3. INITIAL AND SECONDARY PUBLIC OFFERING
During the quarter ending December 31, 1997, the Company completed its
initial public offering of 3,538,448 shares of common stock (including an
exercised underwriters' over-allotment option for 832,950 shares) at a price of
$8.00 per share, providing the Company with net proceeds of approximately $25.1
million, after deducting underwriting discounts and commissions of approximately
$2.0 million and offering costs of approximately $1.2 million. During December
1997, all shares of convertible preferred stock converted into 10,717,317 shares
of common stock. During November 1997, the certificate of incorporation of the
Company was amended to provide that the authorized number of shares of common
and preferred stock issuable by the Company was 60,000,000 shares of common
stock ($0.01 par value) and 2,000,000 shares of preferred stock ($0.01 par
value). On February 11, 1998 the Company filed a registration statement on Form
S-1 for the sale of up to 6,000,000 shares of Common Stock of which 1,000,000
shares are being sold by the Company and up to 5,000,000 shares by certain
stockholders. Certain selling stockholders of the Company have granted the
underwriters an overallotment option to purchase up to an additional 900,000
shares of Common Stock.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations that are included in
Applied Micro Circuit Corporation's (the "Company" or "AMCC") Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on
February 11, 1998. This quarterly report on Form 10-Q, and in particular
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding future events or the
future performance of the Company that involve certain risks and uncertainties
including those discussed in "Risk Factors" below. In this report, the words
"anticipates," "believes," "expects," "future" and similar expressions identify
forward-looking statements. Actual events or the actual future results of the
Company may differ materially from any forward-looking statements due to such
risks and uncertainties. The Company assumes no obligation to update these
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking assumptions. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's analysis only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revision to these forward-
looking statements, which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
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 seven 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. In December 1997,
the Company completed the initial public offering of its Common Stock, which
raised net proceeds of approximately $25.1 million.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net revenues................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................ 44.9% 48.6% 46.2% 53.7%
----- ----- ----- -----
Gross profit................................ 55.1% 51.4% 53.8% 46.3%
Operating expenses:
Research and development.............. 17.0% 15.5% 17.0% 13.3%
Selling, general and administrative... 17.9% 21.3% 18.7% 21.2%
----- ----- ----- -----
Total operating expenses............ 34.9% 36.8% 35.7% 34.5%
----- ----- ----- -----
Operating income............................ 20.2% 14.6% 18.1% 11.8%
Net interest income (expense)............... 0.7% (0.1%) 0.5% -
----- ----- ----- -----
Income before provisions for income taxes... 20.9% 14.5% 18.6% 11.8%
Provision for income taxes.................. 0.5% 1.4% 0.5% 1.1%
----- ----- ----- -----
Net income.................................. 20.4% 13.1% 18.1% 10.7%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues for the three months and nine months ended
December 31, 1997 were approximately $19.7 million and $54.9 million,
representing increases of 36% and 29%, respectively, over net revenues of
approximately $14.5 million and $42.5 million for the three months and nine
months ended December 31, 1996, respectively. Revenues from sales of
communications products increased from 45% and 43% of net revenues for the three
months and nine months ended December 31, 1996, respectively, to 49% and 47% of
net revenues for the three months and nine months ended December 31, 1997,
respectively, 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 55% and 57% of net revenues during the three
months and nine months ended December 31, 1996, respectively, to 51% and 53% of
net revenues for the three months and nine months ended December 31, 1997,
respectively, although revenues from sales to these other markets increased in
absolute dollars. The increase in absolute dollars in revenues attributable to
these other markets was primarily due to an increase in
-8-
<PAGE>
shipments of PCI bus products for high speed computing applications and to
increased shipments of products to the ATE market. Sales to Nortel accounted for
21% and 20% of net revenues for the three months and nine months ended December
31, 1997, respectively. Sales outside of North America accounted for 23% and 24%
of net revenues for the three months and nine months ended December 31, 1997,
respectively. Although less than seven percent of the Company's revenues were
attributable to sales in Asia during the nine months ended December 31, 1997,
the recent economic instability in certain Asian countries could
adversely affect the Company's business, financial condition and operating
results, particularly to the extent that this instability impacts the sales of
products manufactured by the Company's customers. See "--Risk Factors--
International Sales."
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 55.1% for the three months ended December 31, 1997, as compared to
51.4% for the three months ended December 31, 1996, and 53.8% for the nine
months ended December 31, 1997, as compared to 46.3% for the nine months ended
December 31, 1996. In each case, the increase in gross margin resulted from
increased utilization of the Company's wafer fabrication facility. Improved
manufacturing yields also contributed to the improved gross margin for the nine
months ended December 31, 1997. 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 rates 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 or that the trend of increasing gross margins will continue. 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."
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 $3.3 million, or 17.0% of net revenues, for the three months ended
December 31, 1997, from approximately $2.3 million, or 15.5% of net revenues,
for the three months ended December 31, 1996 and increased to approximately $9.3
million, or 17.0% of net revenues, for the nine months ended December 31, 1997
from approximately $5.7 million, or 13.3% of net revenues for the nine months
ended December 31, 1996. In each case, 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 and as a
percentage of net revenues to increase significantly in the future and that R&D
expenses will increase as a percentage of net revenues 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
$3.5 million, or 17.9% of net revenues, for the three months ended December 31,
1997, as compared to approximately $3.1 million, or 21.3% of net revenues, for
the three months ended December 31, 1996 and increased to approximately $10.3
million, or 18.7% of net revenues, for the nine months ended December 31, 1997
from approximately $9.0 million, or 21.2% of net revenues, for the nine months
ended December 31, 1996. The increase in SG&A expenses in both the three months
and nine months ended December 31, 1997, respectively, primarily reflected
increases of $92,000 and $229,000, respectively, in compensation costs,
increases of $153,000 and $363,000, respectively, in commissions earned by
third-party sales representatives, increases of $131,000 and $146,000 in product
promotion expenses, and a $157,000 increase in the Company's provision for
doubtful accounts due to the Company's expanding customer base for the nine
months ended December 31, 1997. The decrease in SG&A expenses as a percentage of
net revenues in both the three months and nine months ended December 31, 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 (expense) increased to $143,000 for the three
months ended December 31, 1997 from
-9-
<PAGE>
($19,000) for the three months ended December 31, 1996 and increased to $294,000
for the nine months ended December 31, 1997 from $5,000 for the nine months
ended December 31, 1996, reflecting interest income from larger cash and short-
term investment balances during the three months and nine months ended December
31, 1997, respectively, 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 nine months ended December 31, 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 nine months ended December 31, 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 nine months ended December 31, 1997 was
$87,000. 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 nine months ended December
31, 1997), 1999, 2000, 2001 and 2002, respectively.
Backlog. The Company's sales are made primarily pursuant to standard
purchase orders for delivery of products. Quantities of the Company's products
to be delivered and delivery schedules are frequently revised to reflect changes
in customer needs, and customer orders can be canceled or rescheduled without
significant penalty to the customer. For these reasons, the Company's backlog as
of any particular date is not representative of actual sales for any succeeding
period, and the Company therefore believes that backlog is not a good indicator
of future revenue. The Company's backlog for products scheduled to be shipped
and non-recurring engineering services to be completed in the next six months
was $28.2 million on December 31, 1997, compared to $18.7 million on December
31, 1996. See "Risk Factors--Fluctuations in Operating Results."
Year 2000 Compliance. Certain of the Company's internal computer systems
are not Year 2000 compliant, and the Company utilizes third-party equipment and
software that may not be Year 2000 compliant. The Company has commenced taking
actions to correct such internal systems and is in the early stages of
conducting an audit of its third-party suppliers as to the Year 2000 compliance
of their systems. The Company does not believe that the cost of these actions
will have a material adverse affect on the Company's business, financial
condition or operating results. However, there can be no assurance that a
failure of the Company's internal computer systems or of third-party equipment
or software used by the Company, or of systems maintained by the Company's
suppliers, to be Year 2000 compliant will not have a material adverse effect on
the Company's business, financial condition or operating results. In addition,
there can be no assurance that adverse changes in the purchasing patterns of the
Company's customers or potential customers as a result of Year 2000 issues
affecting such customers will not have a material adverse effect on the
Company's business, financial condition or results of operations. See "Risk
Factors--Year 2000 Compliance."
Liquidity and Capital Resources
The Company's principal sources of liquidity as of December 31, 1997
consisted of $36.2 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 December
31, 1997 was $44.7 million compared to $19.4 million as of March 31, 1997. This
increase in working capital was primarily due to the $25.1 million net proceeds
from the initial public offering and cash provided by operations offset by the
repurchase of certain shares of the Company's Preferred Stock. During the nine
months ended December 31, 1997, the Company financed its operations primarily
through cash provided by operations.
During the nine months ended December 31, 1997, the Company generated $11.8
million of cash from operating activities, compared to $8.2 million in the nine
months ended December 31, 1996. The increase in cash provided by operating
activities was primarily due to the increase in profitability.
During the nine months ended December 31, 1997, capital expenditures
totalled $8.4 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 is in the process of expanding the manufacturing capacity of its
existing fabrication facility. The Company anticipates that an additional $15.0
million will be spent on this expansion and the purchase of equipment and
leasehold improvements related thereto. The Company plans to finance this
expansion through a combination of available cash, cash equivalents and short
term investments, cash from operations and debt and lease financing. The Company
currently expects to spend approximately $26.0 million on capital expenditures
in the last quarter of fiscal 1998 and fiscal 1999, of which approximately $12.0
million will be related to the expansion. The Company also plans to initiate
construction of a new six-inch wafer fabrication facility during fiscal 1999 and
to complete the physical plant during 2000. The Company believes the new
facility will not begin commercial production prior to late 2000. The Company
estimates that the cost of the new wafer fabrication facility will be at least
$80.0 million, of which approximately $30.0 million relates to the purchase of
land and construction of the facility and at least $50.0 million relates to
capital equipment purchases. The Company plans to finance the new wafer
fabrication facility through a combination of available cash, cash equivalents
and short term investments, cash from operations, debt and lease financing and
approximately $24.0 million of the net proceeds from an offering currently being
undertaken by the Company and the Company's IPO. The Company is also exploring
other alternatives for the expansion of its manufacturing capacity, including
purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. 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 or that the new facility will be completed and in volume
production within its current budget or within the period currently scheduled by
the Company. Furthermore, there can be no assurance that other alternatives to
constructing a new wafer fabrication facility will be available on a timely
basis or at all. See "Risk Factors --Manufacturing Capacity Limitations; New
Production Facility," "-- Dependence on Third-Party Manufacturing and Supply
Relationships" and "-- Need For Additional Capital."
With the exception of the approximately $25.1 million in net proceeds from
the IPO, 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
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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 from the initial public offering
and the secondary offering expected to occur March 1998, 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."
RISK FACTORS
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, including, but not
limited to, economic conditions in Asia.
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.
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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.
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--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
Company's ongoing expansion of the manufacturing capacity of its 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
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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. 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.
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, volume sales of these products have only
recently commenced, 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
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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 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.
Products for telecommunications and data communications applications, as
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well as for high-speed computing applications are based on industry standards
that are continually evolving. The Company's ability 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, Rockwell International, TriQuint and Vitesse, and bipolar silicon based
products from companies such as Giga, Hewlett-Packard, Maxim, Philips 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's products compete primarily against
GaAs based products offered by 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, Cypress, ICS, PLX and Tundra. Many of these
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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
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 capacity expansion of its
existing fabrication facility, it will be able to satisfy its production needs
of products produced in its fabrication facility through 2000, although this
date may vary depending on, among other things, the Company's rate of growth.
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 expansion of the manufacturing capacity of its fabrication
facility is not completed 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.
Based on the Company's current forecasts of its future need for
manufacturing capacity, the Company is planning for the construction of a new
six-inch wafer fabrication facility, initially to complement, and potentially
to replace, its existing facility in San Diego. The Company is also exploring
other alternatives for the expansion of its manufacturing capacity, including
purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. 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 commence commercial production prior to late 2000. 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 $80.0 million, of which approximately $30.0 million
relates to the purchase of land and construction of the building and at least
$50.0 million relates to capital equipment purchases necessary to establish
the initial manufacturing capacity of the facility. The Company currently
anticipates that a significant portion of these capital equipment purchases
will occur prior to the end of 1999. The Company intends to fund approximately
$24.0 million of the total cost of the new facility with a portion of the
proceeds from an offering currently being undertaken by the Company (the
"Secondary Offering") and the Company's initial public offering (the
"IPO"). The balance of the cost of this facility is expected to be funded
through a combination of available cash, cash equivalents and short term
investments, cash from operations and additional debt, lease 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 is expected to 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
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facility may adversely effect the Company's gross margin in any future fiscal
period. Furthermore, there can be no assurance that other alternatives to
constructing a new wafer fabrication facility will be available on a timely
basis or at all. See "--Dependence on Third-Party Manufacturing and Supply
Relationships" and "-- Need For Additional Capital."
The construction of the new wafer fabrication facility entails significant
risks, including shortages of materials and skilled labor, 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. Also, the timing of commencement of
operation of the new facility will depend upon the availability, timely
delivery and successful installation and testing of the necessary process
equipment. As a result of the foregoing and other factors, there can be no
assurance that the new facility will be completed and in volume production
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.
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
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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 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," and
"-- Manufacturing Capacity Limitations; New Production Facility."
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
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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.
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.
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 nine months of fiscal
1998, the Company's five largest customers accounted for approximately 44% of
the Company's revenues in each of such periods and sales to Nortel accounted
for approximately 20% of the Company's revenues in each of such periods. 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,"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations."
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
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particular design engineers, 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.
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 the Secondary
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 month period following the
effective date of the Secondary Offering, 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 the Secondary Offering will
be consummated or that such additional debt or equity financing will be
available on commercially reasonable terms or at all. See "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.
The Company has been issued 13 patents in the United States and one patent in
Canada, which patents 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 six 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
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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. On January 6, 1998, in a lawsuit between a
third party and Dr. Li filed in Federal District Court for the Eastern
District of Virginia, the court ruled that the Li Patent was invalid for
inequitable conduct. In January 1998, the Company received a written notice
from legal counsel for the Lemelson Medical, Education & Research Foundation
Limited Partnership (the "Lemelson Partnership") asserting that the Company
infringes certain United States Patents (the "Lemelson Patents") and offering
the Company a license under the patents. The Company is monitoring this matter
and, although the ultimate outcome of this matter is not currently
determinable, the Company believes, based in part on the licensing terms
offered by the Lemelson Partnership, that the resolution of this matter will
not have a material adverse effect on the Company's financial position or
liquidity; however, there can be no assurance that the ultimate resolution of
this matter will not have a material adverse effect on the Company's results
of operations for any quarter. Furthermore, there can be no assurance that the
Lemelson Partnership 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 Lemelson Patents, 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 nine 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. Although less than seven
percent of the Company's revenues were attributable to sales in Asia during
the nine months ended December 31, 1997, the recent economic instability in
certain Asian countries could adversely affect the Company's business,
financial condition and operating results, particularly to the extent that
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this instability impacts the sales of products manufactured by the Company's
customers. 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 -- Results of Operations."
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.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated significantly to
date. In addition, the market price of the Common Stock could be subject to
significant fluctuations due to general market conditions and 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
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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, a substantial portion of the shares of the Company's Common Stock
are held by a large number of individual stockholders. Substantially all of the
Company's outstanding Common Stock will be eligible for sale in the public
market upon the expiration of certain lock-up agreements, 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"). These lock-up agreements were
entered into between the Underwriters and certain stockholders in connection
with the Company's initial public offering (the "IPO"), which agreements expire
at midnight on May 23, 1998, and are being entered into between the Underwriters
and the selling stockholders in an offering currently being undertaken by the
Company, which agreements are expected to expire 90 days after the effective
date of the registration statement filed pursuant to this offering. 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."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Certain of the Company's internal computer systems are not Year
2000 compliant, and the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. The Company has commenced taking actions
to correct such internal systems and is in the early stages of conducting an
audit of its third-party suppliers as to the Year 2000 compliance of their
systems. Failure of the Company's internal computer systems or of such third-
party equipment or software, or of systems maintained by the Company's
suppliers, to operate properly with regard to the Year 2000 and thereafter
could require the Company to incur unanticipated expenses to remedy any
problems, which could have a material adverse effect on the Company's business,
operating results and financial condition. Furthermore, the purchasing patterns
of customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 compliance. These expenditures may result in reduced funds available to
purchase the Company's products, which could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Industry Background."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock (including shares
issued upon the exercise of outstanding options) in the public market 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 the offering currently being undertaken by the Company, the
Company will have 21,870,368 shares of Common Stock outstanding (based on the
number of shares of Common Stock outstanding at December 31, 1997). The up to
6,000,000 shares being offered will be immediately tradable without restriction.
The 6,385,950 shares sold in the IPO are also freely tradeable without
restriction. The 9,484,418 remaining shares of Common Stock outstanding upon
completion of the offering are "restricted securities" as that term is defined
in Rule 144 under the Securities Act ("Restricted Shares"). Of the Restricted
Shares, approximately 579,000 shares have been eligible for immediate sale in
the public market since the completion of the IPO without restriction pursuant
to Rule 144(k) under the Securities Act, some or all of which may have been sold
in the public market since the completion of the IPO, and approximately 607,000
shares will be eligible for sale on February 22, 1998 subject, in some cases to
volume and other restrictions under Rule 144 and Rule 701 under the Securities
Act. As a result of lock-up agreements between certain stockholders and the
Company or the representatives of the Underwriters (the "Representatives"),
which agreements were entered into in connection with the IPO, approximately
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8,905,418 Restricted Shares will not be available for immediate sale in the
public market until at least May 24, 1998 subject in some cases to the
volume and other restrictions of Rule 144 and Rule 701 under the Securities Act.
In addition, certain stockholders, who entered into lock-up agreements in
connection with the IPO and who offer shares of Common Stock in the current
offering being undertaken by the Company, are expected to enter into an
additional lock-up agreement with the Representatives of the Underwriters
pursuant to which a portion of the Restricted Shares held by such stockholders
will not be available for sale in the public market until the expiration of the
90 day period following the effective date of the offering, 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 has registered the Common Stock to be issued pursuant to the
Company's 1997 Employee Stock Purchase Plan and intends to register all of the
shares of Common Stock to be issued pursuant to the Company's other employee
benefit plans on or about the date approximately 90 days after the IPO Effective
Date.
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has 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.
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APPLIED MICRO CIRCUITS CORPORATION
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds
(1) The Company filed a Registration Statement on Form S-1 (the
"Registration Statement"), File No. 333-37609, which was declared
effective by the Securities and Exchange Commission on November
24, 1997.
(2) The offering pursuant to the Registration Statement commenced on
November 25, 1997.
(3) (i) The offering has terminated but did not do so before the
sale of all securities registered pursuant to the
Registration Statement.
(ii) The managing underwriters of the offering were BancAmerica
Robertson Stephens, NationsBanc Montgomery Securities
LLC, and Cowen & Company.
(iii) Pursuant to the Registration Statement, the Company
registered its Common Stock.
(iv) Pursuant to the Registration Statement, the Company
registered 6,385,950 shares of Common Stock. Of such
shares of Common Stock, 3,538,448 shares were sold by the
Company and 2,847,502 shares were sold by certain
stockholders of the Company.
(v) From November 24, 1997 to December 31, 1997, the Company
incurred $4,791,319 of total expenses in connection with
the offering as follows:
(1) $3,576,132 in underwriting discounts and commissions;
and
(2) $1,215,187 in other expenses (not including finders'
fees or expenses paid to or for the underwriters).
All of such expenses were direct or indirect payments to
others.
(vi) The net offering proceeds to the Company after deducting
total expenses in clause (v) above were $25,110,866.
(vii) The Company used the net offering proceeds, in direct or
indirect payments to others, as follows:
(1) approximately $1,326,053 for working capital.
(viii) The use of proceeds in clause (vii) does not represent a
material change in the use of proceeds described in the
prospectus of the Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
-25-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 1997, the Company's stockholders acted by written
consent to approve: (i) the amendment and restatement of the Company's then
current Restated Certificate of Incorporation; (ii) the amendment and
restatement of the Company's then current Bylaws; (iii) the amendment and
restatement of the Company's 1992 Stock Option Plan; (iv) adoption of the
Company's 1997 Employee Stock Purchase Plan; (v) adoption of the Company's 1997
Directors' Stock Option Plan and (vi) the form of indemnification agreement
thereafter entered into by the Company with each of its officers and directors.
The votes cast for and against such matters and the number of abstentions as to
each such matter are set below by each matter:
<TABLE>
<CAPTION>
Votes Votes
For Against Abstentions
---------- ------- -----------
<S> <C> <C> <C>
Amendment and restatement of the Company's
then current Restated Certificate of Incorporation.. 12,485,933 1,613 4,614,204
Amendment and restatement of the Company's
then current Bylaws................................. 12,485,933 1,613 4,614,204
Amendment and restatement of the Company's
1992 Stock Option Plan.............................. 12,485,933 1,613 4,614,204
Adoption of the Company's
1997 Employee Stock Purchase Plan................... 12,485,933 1,613 4,614,204
Adoption of the Company's
1997 Directors' Stock Option Plan................... 12,485,933 1,613 4,614,204
Approval form of indemnification agreement thereafter
entered into by the Company with each of
its officers and directors.......................... 12,485,933 1,613 4,614,204
</TABLE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended
December 31, 1997
-26-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 13, 1998 Applied Micro Circuits Corporation
By: /s/ Joel O. Holliday
-----------------------------------
Joel O. Holliday
Vice President, Finance and Administration
And Chief Financial Officer
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
-27-
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
11.1 Computation of Earnings per Share.
27.1 Financial Data Schedule.
-28-
<PAGE>
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE DATA, UNDER SFAS NO. 128
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31, Nine Months Ended
---------------------------------------------------------------------
1997 1996 1997 Dec. 96
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 4,003 $ 1,898 $ 9,937 $ 4,541
=====================================================================
Average common shares outstanding 12,049 5,018 7,588 4,995
Effect of assumed conversion of preferred
stock from date of issuance 6,413 12,829 9,911 12,829
---------------------------------------------------------------------
Shares used in Basic computations 18,463 17,847 17,499 17,824
=====================================================================
Earnings (loss) per share - Basic $ 0.22 $ 0.11 $ 0.57 $ 0.25
=====================================================================
Net effect of dilutive common share
equivalents based on the treasury stock
method (using average market price as
the buyback price) 1,920 73 1,807 73
---------------------------------------------------------------------
Shares used in Diluted computations 20,383 17,920 19,306 17,897
=====================================================================
Earnings (loss) per share - Diluted $ 0.20 $ 0.11 $ 0.51 $ 0.25
=====================================================================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE
QUARTER ENDED DECEMBER 31, 1997
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,923
<SECURITIES> 26,307
<RECEIVABLES> 10,879
<ALLOWANCES> (350)
<INVENTORY> 8,002
<CURRENT-ASSETS> 57,522
<PP&E> 45,623
<DEPRECIATION> (30,196)
<TOTAL-ASSETS> 73,857
<CURRENT-LIABILITIES> 12,827
<BONDS> 0
0
0
<COMMON> 208
<OTHER-SE> 59,147
<TOTAL-LIABILITY-AND-EQUITY> 73,857
<SALES> 19,666
<TOTAL-REVENUES> 19,666
<CGS> 8,836
<TOTAL-COSTS> 8,836
<OTHER-EXPENSES> 6,864
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 143
<INCOME-PRETAX> 4,106
<INCOME-TAX> 103
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,003
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.20
</TABLE>
