<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: April 8, 1999
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
000-23193
(Commission File Number)
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
N/A
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS.
Pursuant to the Agreement and Plan of Merger, dated as of March 3, 1999
(the "Merger Agreement"), by and among Applied Micro Circuits Corporation, a
Delaware corporation ("AMCC"), Wiley Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of AMCC ("Merger Sub"), and Cimaron
Communications Corporation, a Delaware corporation ("Cimaron"), and the related
Certificate of Merger filed with the Delaware Secretary of State on March 17,
1998, Merger Sub was merged with and into Cimaron (the "Merger"). As a result
of the Merger, Cimaron has become a wholly-owned subsidiary of AMCC. The
details of the announcement of the Merger Agreement are contained in AMCC's
press release dated March 3, 1999 attached as an exhibit hereto and incorporated
by reference herein. The acquisition is being accounted for as a pooling of
interests transaction.
At the time the Merger became effective on March 17, 1998 (the "Effective
Time"), each issued and outstanding share of Cimaron Common Stock and Preferred
Stock was converted into and exchanged for 0.3976 shares of AMCC Common Stock.
Each issued and outstanding option to purchase shares of Cimaron Common Stock
(the "Cimaron Options") was converted into an option to purchase that number of
shares of AMCC Common Stock determined by multiplying the number of Cimaron
shares subject to such Cimaron Option by the applicable exchange ratio set forth
above. The aggregate number of shares of Common Stock of AMCC issued in
accordance with the terms of the Merger Agreement upon such conversion and
exchange was 2,908,587 shares. An additional 92,795 shares of AMCC Common Stock
are issuable under outstanding options assumed by AMCC in the Merger. No
fractional shares of AMCC Common Stock were issued or are issuable in connection
with such conversion and exchange. In lieu thereof, AMCC has paid or will pay
to the holders of fractional shares of AMCC Common Stock an amount in cash
(rounded to nearest whole cent) equal to such fractional share interest
multiplied by $39.06.
Under the terms of the Merger Agreement, a total of at least 290,858, but
not more than 300,000 shares of AMCC Common Stock issued as described in the
preceding paragraph will be held in escrow for the purpose of indemnifying AMCC
against certain liabilities of Cimaron. The escrow period shall terminate with
respect to the escrowed shares upon the earlier of six months after the
Effective Time or the date of issuance of the first independent audit report on
AMCC's financial statements after the Effective Time, which include the
financial results of Cimaron.
AMCC has granted the holders of the shares of AMCC Common Stock issued in
the Merger certain registration rights for a period of one year following the
Effective Time.
The amount of consideration paid in connection with the Merger was
determined in arms-length negotiations between officers of AMCC and Cimaron.
The terms of the
<PAGE>
transaction were approved by the Boards of Directors of AMCC, Merger Sub and
Cimaron and by the shareholders of Merger Sub and Cimaron.
The accompanying supplemental interim condensed consolidated financial
statements contain certain restated financial information which has not yet been
otherwise filed under the Securities Exchange Act of 1934 and have been
retroactively restated to reflect the combined supplemental financial position
and combined supplemental results of operations and cash flows of AMCC and
Cimaron for all periods presented, giving effect to the acquisition which closed
on March 17, 1999, as if it had occurred at the beginning of the earliest period
presented.
Cimaron was incorporated in the state of Delaware on January 2, 1998.
Prior to the combination, Cimaron's fiscal year end was December 31st. In
presenting the supplemental interim consolidated financial statements of the
combined Company, the operations of Cimaron for the period from January 2, 1998
(inception) through September 30, 1998 for Cimaron have been combined with the
nine months ended December 31, 1998 for AMCC. Based on the manner in which the
interim periods have been combined and the date of formation of Cimaron, the
financial statements of AMCC as of March 31, 1998 and for the three years then
ended which are included in AMCC's annual report on Form 10-K filed with the
Securities Exchange Commission on June 15, 1998, as amended on October 15, 1998
remain the historical consolidated financial statements of the combined Company.
Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation of
the business combination. The accompanying supplemental consolidated financial
statements do not extend through the date of consummation of the business
combination; however, they will become the historical consolidated financial
statements of the combined Company after financial statements covering the date
of consummation of the business combination are issued.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------- ---------
(UNAUDITED)
ASSETS
------
Current assets:
<S> <C> <C>
Cash and cash equivalents........................................................... $ 12,477 $ 6,460
Short-term investments available-for-sale.......................................... 68,293 61,436
Accounts receivable, net of allowance for doubtful accounts of $180 and $350
at December 31, 1998 (unaudited) and March 31, 1998, respectively................. 17,202 12,179
Inventories......................................................................... 9,692 8,185
Deferred income taxes............................................................... 3,587 3,882
Notes receivable from officers and employees........................................ 815 87
Other current assets................................................................ 2,039 2,297
-------- --------
Total current assets............................................................ 114,105 94,526
Property and equipment, net.............................................................. 22,683 17,218
Other assets............................................................................. 2,105 1,090
-------- --------
Total assets.................................................................... $138,893 $112,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 3,742 $ 5,215
Accrued payroll and related expenses................................................ 5,150 5,057
Other accrued liabilities........................................................... 3,737 2,344
Deferred revenue.................................................................... 1,575 1,873
Current portion of long-term debt................................................... 1,417 567
Current portion of capital lease obligations........................................ 884 2,053
-------- --------
Total current liabilities....................................................... 16,505 17,109
Long-term debt, less current portion..................................................... 5,605 2,736
Long-term capital lease obligations, less current portion................................ 765 1,355
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000,000 shares authorized, none issued and outstanding........................... - -
Common Stock, $0.01 par value:
Authorized shares - 60,000,000
Issued and outstanding shares - 26,240,273 at December 31, 1998 (unaudited)
and 22,536,013 at March 31, 1998................................................. 262 225
Additional paid-in capital........................................................... 98,236 86,660
Deferred compensation, net........................................................... (1,176) (472)
Retained earnings.................................................................... 19,151 5,722
Notes receivable from stockholders................................................... (455) (501)
-------- --------
Total stockholders' equity...................................................... 116,018 91,634
-------- --------
Total liabilities and stockholders' equity........................................... $138,893 $112,834
======== ========
</TABLE>
See accompanying Notes to Supplemental Condensed Consolidated Financial
Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED
DECEMBER 31,
-------------------
1998 1997
------- -------
Net revenues.............................................. $76,258 $54,874
Cost of revenues.......................................... 28,415 25,370
------- -------
Gross profit.............................................. 47,843 29,504
Operating expenses:
Research and development............................... 16,194 9,339
Selling, general and administrative.................... 13,033 10,260
------- -------
Total operating expenses............................. 29,227 19,599
------- -------
Operating income.......................................... 18,616 9,905
Interest income, net...................................... 2,613 294
------- -------
Income before income taxes................................ 21,229 10,199
Provision for income taxes................................ 7,457 262
------- -------
Net income................................................ $13,772 $ 9,937
======= =======
Basic earnings per share:
Earnings per share..................................... $ 0.57 $ 1.37
======= =======
Shares used in calculating basic earnings per share.... 24,284 7,243
======= =======
Diluted earnings per share:
Earnings per share..................................... $ 0.51 $ 0.51
======= =======
Shares used in calculating diluted earnings per share.. 27,198 19,306
======= =======
See accompanying Notes to Supplemental Condensed Consolidated Financial
Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
---------- --------
<S> <C> <C>
Operating Activities
Net income............................................................................ $ 13,772 $ 9,937
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization..................................................... 5,060 4,053
Write-offs of inventories......................................................... - 598
Amortization of deferred compensation............................................. 193 87
Changes in assets and liabilities:
Accounts receivable......................................................... (5,023) (2,111)
Inventories................................................................. (1,507) (1,070)
Other current assets........................................................ 258 (237)
Accounts payable............................................................ (1,473) 2,582
Accrued payroll and other accrued liabilities............................... 5,163 (642)
Deferred income taxes....................................................... 295 (1,813)
Deferred revenue............................................................ (298) 455
--------- --------
Net cash provided by operating activities....................................... 16,440 11,839
Investing Activities
Proceeds from sales and maturities of short-term investments.......................... 136,245 23,268
Purchase of short-term investments.................................................... (143,102) (41,466)
Payments on notes receivable from officer and employees............................... 262 -
Notes receivable from officer and employees........................................... - (118)
Purchase of property and equipment and other assets................................... (11,988) (8,431)
--------- --------
Net cash used for investing activities.......................................... (18,583) (26,747)
Financing Activities
Proceeds from issuance of common stock, net........................................... 2,262 25,454
Issuance (repurchase) of preferred stock.............................................. 4,310 (3,877)
Payments on notes receivable from stockholders........................................ 46 12
Payments on capital lease obligations................................................. (1,759) (2,209)
Proceeds from long-term debt.......................................................... 3,784 -
Payments on long-term debt............................................................ (483) (37)
--------- --------
Net cash provided by financing activities....................................... 8,160 19,343
--------- --------
Net increase in cash and cash equivalents....................................... 6,017 4,435
Cash and cash equivalents at beginning of period.......................................... 6,460 5,488
--------- --------
Cash and cash equivalents at end of period................................................ $ 12,477 $ 9,923
========= ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest........................................................................... $ 373 $ 358
Income taxes....................................................................... $ 2,505 $ 2,559
</TABLE>
See accompanying Notes to Supplemental Condensed Consolidated Financial
Statements.
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<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited supplemental interim condensed consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information 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 supplemental interim condensed
consolidated 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. Applied Micro Circuits Corporation ("AMCC" or "the Company") has
experienced significant quarterly fluctuations in operating results and it
expects that these fluctuations in revenues, expenses and net income will
continue.
The supplemental interim condensed consolidated financial statements and
related disclosures have been prepared with the presumption that users of the
supplemental interim condensed consolidated financial information have read or
have access to the audited consolidated financial statements for the preceding
fiscal year. Accordingly, these supplemental interim condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes thereto contained in AMCC's Annual
Report on Form 10-K filed with the Securities and Exchange Commission for the
year ended March 31, 1998 as amended on October 15, 1998.
As more fully described in note 2, in March 1999, AMCC acquired all of the
issued and outstanding shares Cimaron Communications Corporation ("Cimaron").
The acquisition was accounted for using the pooling-of-interests method of
accounting and, accordingly, the supplemental interim consolidated financial
statements reflect the combined financial position and operating results for
AMCC and Cimaron for all periods presented giving retroactive effect to the
pooling transaction. All significant intercompany accounts have been
eliminated. These supplemental condensed consolidated financial statements will
become the historical consolidated financial statements of the combined Company
upon the issuance of financial statements for a period that includes the date of
the merger.
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<PAGE>
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 AMCC's initial public offering (the
"IPO") price prior to the effectiveness of the IPO.
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
NINE MONTHS
ENDED
DECEMBER 31,
--------------------
1998 1997
------ ------
Shares used in Basic Earnings Per Share
Computations - Weighted average
common shares outstanding 24,284 7,243
Effect of conversion of preferred stock from
date of issuance - 9,911
Net effect of dilutive common share
equivalents based on the treasury stock
method 2,914 2,152
------ ------
Shares used in Diluted Earnings Per Share
Computations 27,198 19,306
====== ======
NEW ACCOUNTING STANDARDS
On April 1, 1998 the Company adopted, the Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Segment Information. 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. Comprehensive income for the nine months
ended December 31, 1998 and 1997 did not differ from net income for the same
periods. SFAS No. 131 amends the
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<PAGE>
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 Company
believes it operates in one business and operating segment. The adoption of SFAS
No. 131 did not have a material impact on the Company's operations or financial
position.
2. ACQUISITION
On March 17, 1999, the Company acquired Cimaron, a privately-held Delaware
corporation formed on January 2, 1998, specializing in the design, development,
and marketing of high performance semiconductor products in the communication
equipment supplier market. At the Effective Time of the merger, each issued and
outstanding share of Cimaron Preferred and Common Stock was converted into and
exchanged for 0.3976 shares of AMCC stock. Stockholders of Cimaron received
approximately 3,000,000 shares of the Company's common stock in exchange for all
of the outstanding common stock and common stock equivalents of Cimaron. The
acquisition has been accounted for using the pooling-of-interests method of
accounting, and accordingly, the historical financial statements of periods
prior to the consummation of the combination have been restated as though the
companies had been combined for all periods presented. In presenting the
supplemental interim consolidated financial statements, the operations of
Cimaron for the period from January 2, 1998 (inception of Cimaron) through
September 30, 1998 been combined with the nine months ended December 31, 1998
for AMCC. The combined Company will record a charge in the fourth quarter of
fiscal 1999 of approximately $3.1 million related to the estimated costs of the
merger. Approximately $700,000 of these total merger costs were incurred by
Cimaron and will not be reflected in the Company's results of operations for the
fourth quarter of fiscal 1999 because Cimaron's results of operations for this
period will be reflected as a charge to retained earnings.
Separate results for both AMCC and Cimaron for the nine months ended December
31, 1998 and 1997 were as follows:
AMCC Cimaron Combined
Nine months ended December 31, 1998:
Total revenue $ 75,436 $ 822 $ 76,258
Net income (loss) $ 14,576 $ (804) $ 13,772
Nine months ended December 31, 1997:
Total revenue $ 54,874 $ 0 $ 54,874
Net income $ 9,937 $ 0 $ 9,937
-8-
<PAGE>
3. CERTAIN FINANCIAL STATEMENT INFORMATION
DECEMBER 31, MARCH 31,
1998 1998
----------- ---------
(unaudited)
Inventories (in thousands):
Raw materials $ 1,435 $ 1,207
Work in process 6,842 5,161
Finished goods 1,415 1,817
-------- -------
$ 9,692 $ 8,185
======== =======
4. RIGHT TO PURCHASE LAND
In July 1998, the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for its new wafer fabrication facility.
This parcel of land is located approximately one quarter mile from the Company's
headquarters in San Diego, California. The Company has made payments of $1.0
million related to this transaction through December 31, 1998. In December 1998,
the Company exercised this right to acquire the land and will be required to
make additional payments of approximately $3.7 million by May 31, 1999.
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<PAGE>
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
the Annual Report on Form 10-K for the year ended March 31, 1998 for Applied
Micro Circuits Corporation (the "Company" or "AMCC"). This current report on
Form 8-K 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. Actual events or the actual future results of
the Company may differ materially from any forward-looking statements due to
such risks and uncertainties. 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 assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking assumptions.
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 analog, digital and mixed-signal design expertise
coupled with system-level knowledge and multiple silicon process technologies.
AMCC believes that its internal bipolar and BiCMOS processes, complemented by
advanced CMOS and planned silicon germanium BiCMOS processes from external
foundries, enable the Company to offer high-performance, highly integrated
solutions optimized for specific applications and customer requirements. The
Company further believes that its products provide significant cost, power,
performance and feature advantages for systems OEMs in addition to accelerating
time to market. The Company also provides products for the automated test
equipment ("ATE"), high-speed computing and military markets.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
NINE MONTHS ENDED
------------------
DECEMBER 31,
------------
1998 1997
------ ------
Net revenues................................. 100.0% 100.0%
Cost of revenues............................. 37.3% 46.2%
----- -----
Gross profit................................. 62.7% 53.8%
Operating expenses:
Research and development................... 21.2% 17.0%
Selling, general and administrative........ 17.1% 18.7%
----- -----
Total operating expenses................ 38.3% 35.7%
----- -----
Operating income............................. 24.4% 18.1%
Net interest income.......................... 3.4% 0.5%
----- -----
Income before provisions for income taxes.... 27.8% 18.6%
Provision for income taxes................... 9.8% 0.5%
----- -----
Net income................................... 18.0% 18.1%
===== =====
NET REVENUES
Net revenues for the nine months ended December 31, 1998 were approximately
$76.3 million representing an increase of 39% over net revenues of $54.9 million
for the nine months ended December 31, 1997. Revenues from sales of
communications products increased from 47% of net revenues for the nine months
ended December 31, 1997 to 53% of net revenues for the nine months ended
December 31, 1998, 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 53% of net revenues during the nine months
ended December 31, 1997 to 47% of net revenues for the nine months ended
December 31, 1998, although aggregate revenues from sales to these other markets
increased in absolute dollars. The increase in revenues in absolute dollars
attributable to these other markets was primarily due to $6.1 million of
shipments in the nine months ended December 31, 1998 relating to the partial
fulfillment of an end-of-life order from Raytheon Systems Co. Sales to Nortel
accounted for 18% of net revenues for nine months ended December 31, 1998 as
compared to 20% for the nine months ended December 31, 1997. Sales to Raytheon
Systems Co., a military customer, accounted for 13% of net revenues for the nine
months ended December 31, 1998 and were less than 10% of revenues in the
comparable period in the prior fiscal year. Sales to Insight Electronics, Inc.,
the Company's domestic distributor, accounted for 13% of net revenues in the
nine months ended December 31, 1998 compared to less than 10% for the nine
months ended December 31, 1997. Sales outside of North America accounted for 25%
of net revenues for the nine months ended December 31, 1998 as compared to 24%
for the nine months ended December 31, 1997. Although less than eight percent of
the Company's revenues were attributable to sales in Asia during the nine months
ended December 31, 1998, the recent economic instability in certain Asian
countries could adversely affect the Company's business, financial condition and
operating results,
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<PAGE>
particularly to the extent that this instability impacts the sales of products
manufactured by the Company's customers.
GROSS MARGIN
Gross margin (gross profit as a percentage of net revenues) was 62.7% for
the nine months ended December 31, 1998 as compared to 53.8% for the nine months
ended December 31, 1997. The increase in gross margin resulted from increased
utilization of the Company's wafer fabrication facility, as well as cost
reductions of approximately $1.7 million for the nine months ended December 31,
1998 on purchased parts, direct materials and services. The Company's gross
margin is primarily impacted by factory utilization, wafer yields, product mix
and the Company's timing of depreciation expense and other costs associated with
expanding its manufacturing capacity. AMCC does not expect its gross margin to
continue to increase at the rates reflected above, and there can be no assurance
that the trend of increasing gross margins will continue. In addition, the
factors that affect gross margin can vary significantly from quarter to quarter,
which would likely result in fluctuations in quarterly gross margin and net
income.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses increased to approximately $16.2
million, or 21.2% of net revenues, for the nine months ended December 31, 1998
from approximately $9.3 million, or 17.0% of net revenues, for the nine months
ended December 31, 1997. The increases in R&D expenses for the nine months ended
December 31, 1998 were due to accelerated new product and process development
efforts, including increases in personnel costs of $2.5 million, increases in
prototyping and outside contractor costs of $3.2 million and increases in
certain other expenses. The increases in the costs described above include the
impact of AMCC's acquisition of Cimaron which increased R&D by $1.5 million for
the nine months ended December 31, 1998 but did not affect R&D for the nine
months ended December 31, 1997 due to Cimaron's inception on January 2, 1998.
The Company believes that a continued commitment to R&D is vital to maintain a
leadership position with innovative communications products. Accordingly, the
Company expects R&D expenses to increase in absolute dollars in the future.
Currently, R&D expenses are primarily focused on the development of products and
manufacturing processes 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 were approximately $13
million, or 17.1% of net revenues, for the nine months ended December 31, 1998,
as compared to approximately $10.3 million, or 18.7% of net revenues, for the
nine months ended December 31, 1997. The increase in SG&A expenses in absolute
dollars for the nine months ended December 31, 1998, primarily reflected an
increase of $1.4 million in personnel costs, an increase of $400,000 in product
promotion expenses, an increase of $400,000 in commissions earned by third-party
sales representatives, an increase of $200,000 in legal costs and increases in
certain other costs. The decrease in SG&A expenses as a percentage of net
revenues in the nine months ended December 31, 1998
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<PAGE>
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 the Company's sales and marketing departments, due to increased
spending on information technology, and due to increased product promotion
expenses.
OPERATING MARGIN
The Company's operating margin increased to 24.4% of net revenues for the
nine months ended December 31, 1998 compared to 18.1% for the nine months ended
December 31, 1997 principally as a result of the increase in gross margin and
the decrease in SG&A expenses as a percentage of net revenues, offset partially
by increases in R&D expense as a percentage of net revenues.
NET INTEREST INCOME
Net interest income increased to $2.6 million for the nine months ended
December 31, 1998 from $294,000 for the nine months ended December 31, 1997.
This increase was due principally to higher interest income from larger cash and
short-term investment balances generated by the proceeds from the Company's
public offerings completed in the second half of the fiscal year ended March 31,
1998.
INCOME TAXES
The Company's estimated annual effective tax rate used for the nine months
ended December 31, 1998 was 35.1%, compared to an effective tax rate of 2.6% for
the nine months ended December 31, 1997. This increase in the tax rate was due
to the Company's expectation that its effective tax rate will approximate
statutory rates in fiscal 1999. Fiscal 1998's effective tax rate was decreased
from statutory rates due to the reduction of a valuation allowance recorded
against deferred tax assets for net operating loss carryforwards and credits.
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 fair value of
the Common Stock at the date of grant for accounting purposes and the option
exercise price of such options. Additionally, during the nine months ended
December 31, 1998 the Company recorded deferred compensation of approximately
$900,000 related to restricted stock and options granted to founders and
employees of Cimaron. 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, 1998 was $193,000. The Company currently expects to record
amortization of deferred compensation with respect to these option grants of
approximately $277,000, $295,000,
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<PAGE>
$214,000, $99,000 and $15,000 during the fiscal years ended March 31, 1999,
2000, 2001, 2002, and 2003, 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 requested to be shipped and
nonrecurring engineering services to be completed in the next six months was
$38.3 million on December 31, 1998, compared to $28.2 million on December 31,
1997. Included in backlog at December 31, 1998 is the $13.2 million balance of
an order received from Raytheon Systems Co. related to an end-of-life buy for
integrated circuits used in its high speed radar systems.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In April 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
adoption of these standards did not effect the operations or financial position
of the Company at December 31, 1998 or for the three months and nine months then
ended.
YEAR 2000
As a semiconductor manufacturer with its own wafer fabrication facility,
the Company is dependent on computer systems and manufacturing equipment with
embedded hardware or software to conduct its business. The Company has
developed and is currently executing a plan designed to make its computer
systems, applications, computer and manufacturing equipment and facilities Year
2000 ready. The plan covers five stages including (i) inventory, (ii)
assessment, (iii) remediation, (iv) testing, and (v) contingency planning. As
of December 31, 1998, the Company is in the process of performing the inventory
and assessment stages and expects to complete these stages in March 1999. The
Company will primarily utilize internal resources to reprogram, or replace where
necessary, and test the software for Year 2000 modifications. The remediation,
testing and contingency planning stages are targeted to be completed in November
1999.
The Company is in process of communicating with its critical external
suppliers to determine the extent to which the Company may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. Where practicable, the
Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000
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ready. The effect, if any, on the Company's results of operations from the
failure of such parties to be Year 2000 ready, is not reasonably estimable.
As of December 31, 1998, the Company had incurred and expensed
approximately $200,000 related to the Year 2000 project and expects to incur an
additional $700,000 on completing the Year 2000 project. Approximately one-
half of the costs associated with the Year 2000 project are expected to relate
to internal resources that have been reallocated from other projects, with the
balance of costs reflecting incremental spending for equipment and software
upgrades. The costs of the Year 2000 project are expected to be funded through
operating cash flows, with the cost of internal resources expensed as incurred
and the cost of equipment and software upgrades capitalized or expensed in
accordance with the Company's policy on property and equipment.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and the ability to identify and
correct equipment with embedded hardware or software and similar uncertainties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity as of December 31, 1998
consisted of $80.8 million in cash, cash equivalents and short-term investments.
Working capital as of December 31, 1998 was $97.6 million, compared to $77.4
million as of March 31, 1998.
For the nine months ended December 31, 1998 and 1997, net cash provided by
operating activities was $16.4 million and $11.8 million, respectively. Net
cash provided by operating activities for the nine months ended December 31,
1998 primarily reflected net income before depreciation and amortization expense
plus increased accrued liabilities less increased accounts receivable and
inventories. Net cash provided by operating activities for the nine months ended
December 31, 1997 primarily reflected net income before depreciation and
amortization expense plus increased accounts payables less increased accounts
receivables, deferred income taxes, and inventories and less decreased accrued
liabilities.
Capital expenditures and the purchase of other assets totaled $12.0 million
and $8.4 million for the nine months ended December 31, 1998 and 1997,
respectively, of which $4.2 million was financed using debt for the nine months
ended December 31, 1998. The Company has tentative plans to initiate
construction of a new six-inch wafer fabrication facility during 2000 and to
complete the physical plant during 2001. The Company believes the new facility
will not begin commercial production prior to late
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2001. The Company currently expects to spend approximately $4.0 million and
$12.0 million on capital expenditures and the purchase of other assets in the
last quarter of fiscal 1999 and in fiscal year 2000, respectively, of which
approximately $4.0 million is currently planned to relate to the initial site
acquisition and planning of the Company's new wafer fabrication facility. In
July 1998 the Company acquired the right to purchase, in the form of a ground
lease, a parcel of land as a site for its new wafer fabrication facility. This
parcel of land is located approximately one-quarter mile from the Company's
headquarters in San Diego, California. The Company has made payments of $1.0
million related to this transaction through December 31, 1998. In December 1998,
the Company exercised this right to acquire the land and will be required to
make additional payments of approximately $3.7 million by May 31, 1999. In the
course of acquiring land and securing financing for the proposed new facility,
the Company may be required to expend additional funds and to provide marketable
securities as collateral. The Company estimates that the total cost of the new
wafer fabrication facility will be at least $80.0 million, of which at least
$35.0 million relates to the purchase of land and construction of the facility
and at least $45.0 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 and debt and lease financing. The Company is also exploring other
alternatives for the expansion of its manufacturing capacity and process
development capabilities, including purchasing a wafer fabrication facility or
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.
The Company believes that 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 to finance its internal growth and to potentially
finance acquisitions of other businesses. There can be no assurance that such
additional debt or equity financing will be available on commercially reasonable
terms or at all.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
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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 output, 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 amounts and timing
of costs associated with warranties and product returns; the amounts and 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 its proposed new wafer fabrication
facility; costs associated with compliance with applicable environmental
regulations or remediation; costs associated with future litigation, if any,
including without limitation, litigation or settlements 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
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substantially. In addition, from time to time, in response to anticipated long
lead times to obtain inventory and materials from its outside foundries, the
Company may order materials in advance of anticipated customer demand, which
might result in excess inventory levels or unanticipated inventory write-downs
if expected orders fail to materialize or other factors render the customer's
products less marketable. Furthermore, the Company currently anticipates that an
increasing portion of its revenues in future periods will be derived from sales
of application-specific standard products ("ASSPs"), as compared to application-
specific integrated circuits ("ASICs"). Customer orders for ASSPs typically have
shorter lead times than orders for ASICs, which may make it increasingly
difficult for the Company to predict its revenues and inventory levels and
adjust production appropriately in future periods. A failure by the Company to
plan inventory and production levels effectively could have a material adverse
effect on the Company's business, financial condition and operating results.
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.
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
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operations between fabrication facilities. Because the majority of the Company's
costs of manufacturing are relatively fixed, maintenance of the number of
shippable die per wafer is critical to the Company's results of operations.
Yield decreases can result in substantially higher unit costs and may result in
reduced gross profit and net income. The Company has in the past experienced
yield problems in connection with the manufacture of its products. For example,
in the second quarter of fiscal 1997 the Company experienced a decrease in
internal yields primarily due to the Company's increasing volume production of a
single product at less than normal production yields in support of a customer's
delivery requirements. This decrease in internal yields adversely impacted the
Company's gross margin for the quarter by approximately $600,000. The Company
estimates yields per wafer in order to estimate the value of inventory. If
yields are materially different than projected, work-in-process inventory may
need to be revalued. The Company has in the past and may in the future from time
to time take inventory write-downs as a result of decreases in manufacturing
yields. There can be no assurance that the Company will not suffer periodic
yield problems in connection with new or existing products or in connection with
the commencement of production in the Company's proposed new manufacturing
facility or the transfer of the Company's manufacturing operations to such
facility, any of which problems could cause the Company's business, financial
condition and operating results to be materially and adversely affected. See
"--Manufacturing Capacity Limitations; New Production Facility."
Semiconductor manufacturing yields are a function both of product design and
process technology. In cases where products are manufactured for the Company by
an outside foundry, the process technology is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As a
result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the Company and the manufacturer. In some cases this risk
could be compounded by the offshore location of certain of the Company's
manufacturers, increasing the effort and time required to identify, communicate
and resolve manufacturing yield problems. 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
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process. Any of the foregoing factors could have a material adverse effect on
the Company's business, financial condition and operating results.
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.
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
products for the 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
derive an
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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 Related to the Cimaron Merger.
On March 17, 1999, the Company completed the acquisition of Cimaron
Communications Corporation. Acquisition transactions, in general, are
accompanied by a number of risks, including: the difficulty of assimilating the
operations and personnel of the acquired company; the potential disruption of
AMCC's and Cimaron's ongoing business and distraction of management;
unanticipated expenses related to technology integration; the maintenance of
uniform standards, controls, procedures and policies; the impairment of
relationships with employees and customers as a result of any integration of new
management personnel; and the potential unknown liabilities associated with
acquired businesses. AMCC may not be successful in addressing these risks or any
other problems encountered in connection with such acquisition.
In addition, the market price of AMCC common stock could decline as a
result of the merger if: the integration of AMCC and Cimaron is unsuccessful;
the combined company does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by financial analysts; or the effect of
the merger on the combined company financial results is not consistent with the
expectations of financial analysts.
AMCC intends to account for the merger under the pooling of interest
accounting and financial reporting rules. To qualify the merger as a pooling of
interests for accounting purposes, AMCC and Cimaron and their respective
affiliates must meet the criteria for pooling of interests accounting
established in opinions published by the Accounting Principals Board and
interpreted by the Financial Accounting Standards Board and the Commission.
These opinions are complex and the interpretation of them is subject to change.
Consummation of the merger was conditioned, among other things, upon the
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receipt by AMCC of a letter from its independent accountants and Cimaron's
independent accountants that, subject to customary qualifications, they concur
with management's conclusion that no conditions exist that would preclude AMCC
and Cimaron from being parties to a business combination that would be accounted
for as a pooling of interests. However, the availability of pooling of interests
accounting treatment for the merger depends in part, upon circumstances and
events occurring after the effective time. For example, there must be no
significant changes in the business of the combined company, including
significant dispositions of assets for a period of two years following the
effective time. Further, affiliates of AMCC and Cimaron must not sell, or
otherwise reduce their risk with respect to, any shares of either AMCC and
Cimaron capital stock, except for a deminimus number as defined by certain
Commission rules and regulations, during the period beginning 30 days before the
effective time and continuing until the day that AMCC publicly announces
financial results covering at least 30 days of combined operations of AMCC and
Cimaron after the merger. AMCC expects that such combined financial results
would be published in late April 1999. If affiliates of AMCC or Cimaron sell
their shares of AMCC common stock prior to that time despite a contractual
obligation not to do so, the merger may not qualify for accounting as a pooling
of interests for financial reporting purposes. The failure of the merger to
qualify for pooling of interests accounting treatment for financial reporting
purposes for any reason would materially and adversely affect AMCC's reported
earnings and likely, the price of AMCC's common stock.
Dependence on the Automated Test Equipment Market
The Company historically has derived significant revenues from product sales
to customers in the Automated Test Equipment ("ATE") market and currently
anticipates that it will continue to derive significant revenues from sales to
customers in this market in the near term. During the past year, customers in
the ATE market have experienced decreased demand due primarily to slower growth
in the semiconductor industry and economic turmoil in Asia. Accordingly, the
Company's net revenues in the ATE markets have declined for three consecutive
quarters, and the Company believes that its revenue from the ATE market will
decline further.
There can be no assurance that conditions in the semiconductor industry
will improve or that the economic situation in Asia will improve. Because the
Company's revenues in the ATE market depend on the demand for its customers' ATE
products, any further reduction in such demand due to further downturns in the
semiconductor industry or continued economic turmoil in Asia could adversely
affect the Company's business, operating results and financial condition .
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
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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 may
also 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, increased integration with other functions, 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, trends towards increased integration 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
well as for high-speed computing applications are based on industry standards
that are continually
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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
"--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
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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
"--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 silicon based products
from companies such as Giga, Hewlett-Packard, Lucent, Maxim, Philips, Sony and
Texas Instruments. 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 companies and potential new competitors have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
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 "-- 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 further potential expansion of
capacity at its existing fabrication facility, it will be able to satisfy its
production needs of products produced in its fabrication facility through 2001,
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 has tentative plans for the construction of
a new six-inch wafer
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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 or entering into strategic relationships to obtain
additional capacity. In July 1998 the Company acquired the right to purchase, in
the form of a ground lease, a parcel of land as a site for its new wafer
fabrication facility. This parcel of land is located approximately one quarter
mile from the Company's headquarters in San Diego, California. The Company has
made payments of $1.0 million related to this transaction through December 31,
1998. In December 1998, the Company exercised this right to acquire the land and
will be required to make additional payments of approximately $3.7 million by
May 31, 1999. The Company currently plans to acquire the site to which it has
rights by mid-1999, to initiate construction of the new facility during 2000 and
to complete the physical plant during 2001. 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
2001. This new fabrication facility will have room for additional equipment and
manufacturing capacity. The Company estimates that the cost of the new wafer
fabrication facility will be at least $80.0 million, of which at least $35.0
million relates to the purchase of land and construction of the building and at
least $45.0 million relates to capital equipment purchases necessary to
establish the initial manufacturing capacity of the facility. The Company
intends to fund approximately $24.0 million of the total cost of the new
facility with a portion of the proceeds from the Company's initial and secondary
public offering which are now invested in short-term investments. 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 such financing on a timely basis
could delay the completion of the facility and have a material adverse effect on
the Company's business, financial condition and results of operations. As the
rights to acquire the site for the Company's proposed new manufacturing facility
are subject to certain conditions, there can be no assurance that the Company
will be able to acquire the site in a timely manner, if at all. Any significant
delay by the Company in acquiring the site or, if such site becomes unavailable,
finding a new site for the potential wafer fabrication facility, 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 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
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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
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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 or otherwise gain access to improved
process technologies. The Company's future success will depend, in large part,
upon its ability to continue to improve its existing process technologies,
develop new process technologies including silicon germanium (SiGe) processes,
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 or otherwise gain access to 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 or otherwise gain access to 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, and all
of its products that it anticipates will be designed on silicon germanium
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
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effect on the Company's business, financial condition and operating results.
Furthermore, in the event that the transition to the next generation of
manufacturing technologies at one or more of the Company's outside foundries is
unsuccessful or delayed, the Company's business, financial condition and
operating results could be materially and adversely affected.
There are additional risks associated with the Company's dependence upon
third-party manufacturers for certain of its products, including, but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on wafers or products supplied to
the Company, increases in prices and potential misappropriation of the Company's
intellectual property. With respect to certain of its products, the Company
depends upon external foundries to produce wafers and, in some cases, finished
products of acceptable quality, to deliver those wafers and products to the
Company on a timely basis and to allocate to the Company a portion of their
manufacturing capacity sufficient to meet the Company's needs. On occasion, the
Company has experienced difficulties in causing these events to occur
satisfactorily. The Company's wafer and product requirements typically represent
a very small portion of the total production of these external foundries. The
Company is subject to the risk that a producer will cease production on an older
or lower-volume process that is used to produce the Company's parts.
Additionally, there can be no assurance that such external foundries will
continue to devote resources to the production of the Company's products or
continue to advance the process design technologies on which the manufacturing
of the Company's products are based. Any such difficulties could have a material
adverse effect on the Company's business, financial condition and operating
results. See "--Manufacturing Yields."
Certain of the Company's products are assembled and packaged by third-party
subcontractors. The Company does not have long-term agreements with any of these
subcontractors. Such assembly and packaging is conducted on a purchase order
basis. As a result of its reliance on third-party subcontractors to assemble and
package its products, the Company cannot directly control product delivery
schedules, which could lead to product shortages or quality assurance problems
that could increase the costs of manufacturing, assembly or packaging of the
Company's products. In addition, the Company may, from time to time, be required
to accept price increases for such assembly or packaging services that could
have a material adverse effect on the Company's business, financial condition
and operating results. Due to the amount of time normally required to qualify
assembly and packaging subcontractors, product shipments could be delayed
significantly if the Company is required to find alternative subcontractors. In
the future, the Company may contract with third parties for the testing of its
products. Any problems associated with the delivery, quality or cost of the
assembly, testing or packaging of the Company's products could have a material
adverse effect on the Company's business, financial condition and operating
results.
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<PAGE>
Due to an industry transition to six-inch and eight-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
be 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 1997, fiscal 1998, the first nine months of fiscal 1999 and
the quarter ended December 31, 1998, the Company's five largest customers
accounted for approximately 44%, 46%, 56% and 62% of the Company's revenues in
each of such periods and sales to Nortel accounted for approximately 20%, 21%,
18% and 20% of the Company's revenues in each of such periods. Raytheon Systems
Co. accounted for 14% of the net revenues for both the three months and nine
months ended December 31, 1998, respectively, including $3.0 million and $6.1
million of shipments in the three months and nine months ending December 31,
1998, respectively, relating to the partial fulfillment of an end-of-life order
for integrated circuits used in its high speed radar systems. The Company
believes that the $13.2 million balance of this end-of-life order, which is
included in the Company's backlog of $38.3 million at December 31, 1998, is
expected to be shipped over the next 3 to 4 quarters. 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".
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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. The Company's
ability to manage growth successfully will require such personnel to work
together effectively. In addition, the expansion of the Company's current wafer
fabrication facility, the construction and operation of the Company's planned
wafer fabrication facility, the initial integration of the proposed new wafer
fabrication facility with the Company's current facility and the subsequent
potential transfer of the Company's manufacturing operations to the proposed new
wafer fabrication facility will require significant management, technical and
administrative resources. There can be no assurance that the Company will be
able to manage its growth or effectively integrate its planned wafer fabrication
facility into its current operations, and a failure to do so could have a
material adverse effect on the Company's business, financial condition and
operating results.
Dependence on Qualified Personnel
The Company's future success depends in part on the continued service of
its key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel. There is intense
competition for qualified personnel in the semiconductor industry, in particular
design engineers, 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 who 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, except for one year employment agreements with
Ram Sudireddy, Vice President, Cimaron and Gary Martin, Vice President and Chief
Technical Officer, Cimaron. 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.
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<PAGE>
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 its available cash, cash equivalents and
short-term investments and cash generated from operations, will be sufficient to
meet the Company's capital requirements through the next 12 months, although the
Company could be required, or could elect, to seek to raise additional financing
during such period. The Company's future capital requirements will depend on
many factors, including the costs associated with the expansion of its
manufacturing operations, the rate of revenue growth, the timing and extent of
spending to support research and development programs and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products.
Additionally, the Company may elect to acquire other businesses, which would
entail the issuance of the Company's stock and the payment of cash. The Company
may elect to raise additional cash to finance such transactions. The Company
expects that it will need to raise additional debt or equity financing in the
future, primarily for purposes of financing the acquisition of property for its
proposed new wafer fabrication facility, the construction of the proposed new
wafer fabrication facility and the purchase of equipment for the proposed new
wafer fabrication facility. There can be no assurance that such additional debt
or equity financing will be available on commercially reasonable terms or at
all.
Uncertainty Regarding Patents and Protection of Proprietary Rights
The Company relies in part on patents to protect its intellectual property.
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 if challenged, will be found to be valid or enforceable, 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 the
Company.
To protect its intellectual property, the Company also relies on the
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. Despite these
efforts, there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such intellectual
property or trade secrets, or that the Company can meaningfully protect its
intellectual property. A failure by the Company to meaningfully protect its
intellectual property could have a material adverse effect on the Company's
business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company in the past
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<PAGE>
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. On July 31, 1998,
the Lemelson Medical, Education & Research Foundation Limited Partnership (the
"Lemelson Partnership") filed a lawsuit in the U.S. District Court for the
District of Arizona against 26 companies, including the Company, engaged in the
manufacture and/or sale of IC products. The complaint alleges infringement by
the defendants of certain U.S. patents (the "Lemelson Patents") held by the
Lemelson Partnership relating to certain semiconductor manufacturing processes.
On November 25, 1998, the Company was served a summons pursuant to this lawsuit.
The complaint seeks, among other things, injunctive relief and unspecified
treble damages. Previously, the Lemelson Partnership has offered the Company a
license under the Lemelson 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 previously 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 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 40%, 42% and
40% of revenues in fiscal 1997, fiscal 1998 and the first nine months of fiscal
1999,
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respectively. 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 eight percent of
the Company's revenues were attributable to sales in Asia during the nine months
ended December 31, 1998, 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. 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.
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
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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 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; announcements of
merger or acquisition transactions; and other events or factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that have affected the market prices of many high technology
companies, particularly semiconductor companies, and that have often been
unrelated or disproportionate to the operating performance of companies. These
fluctuations, as well as general economic and market conditions, may affect
adversely the market price of the Common Stock.
Year 2000
As a semiconductor manufacturer with its own wafer fabrication facility,
the Company is dependent on computer systems and manufacturing equipment with
embedded hardware or software to conduct its business. The Company has
developed and is
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currently executing a plan designed to make its computer systems, applications,
computer and manufacturing equipment and facilities Year 2000 ready. The plan
covers five stages including (i) inventory, (ii) assessment, (iii) remediation,
(iv) testing, and (v) contingency planning. As of December 31, 1998, the Company
is in the process of performing the inventory and assessment stages and expects
to complete these stages in March 1999. The Company will primarily utilize
internal resources to reprogram, or replace where necessary, and test the
software for Year 2000 modifications. The remediation, testing and contingency
planning stages are targeted to be completed in November 1999.
The Company is initiating communications with its critical external
suppliers to determine the extent to which the Company may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. Where practicable, the
Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The effect, if any, on the
Company's results of operations from the failure of such parties to be Year 2000
ready, is not reasonably estimable.
To date, the Company has incurred and expensed approximately $200,000
related to the Year 2000 project and expects to incur an additional $700,000 on
completing the Year 2000 project. Approximately one-half the costs associated
with the Year 2000 project will be internal resources that have been reallocated
from other projects with the balance of costs reflecting incremental spending
for equipment and software upgrades. The costs of the Year 2000 Project will be
funded through operating cash flows with the cost of internal resources expensed
as incurred and the cost of equipment and software upgrades capitalized or
expensed in accordance with the Company's policy on property and equipment.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, the ability to identify and
correct equipment with embedded hardware or software and similar uncertainties.
See "--Factors That May Affect Future Results--Year 2000".
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
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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.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(c) Exhibits.
--------
99.1 Press Release dated March 3, 1999 announcing the execution of
the Agreement and Plan of Merger.
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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 hereunto duly authorized.
APPLIED MICRO CIRCUITS CORPORATION
Date: April 8, 1999 By: /s/ JOEL O. HOLLIDAY
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Joel O. Holliday
Chief Financial Officer
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INDEX TO EXHIBITS
Page Number Under
Sequential Numbering
Exhibit No. Exhibit System
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99.1 Press Release dated March 3, 1999 announcing 40
the execution of the Agreement and Plan of
Merger.
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EXHIBIT 99.1
COMPANY CONTACTS: AT THE FINANCIAL RELATIONS
BOARD:
Joel Holliday Debra Hart George Christy
Chief Financial Officer Investor Relations Financial Relations Board
(619) 450-9333 (619) 535-6566 (310) 442-0599
e-mail: [email protected] e-mail: [email protected] e-mail: [email protected]
AMCC TO ACQUIRE CIMARON COMMUNICATIONS
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Cimaron's expertise in framer/OHP termination devices to expand
AMCC's already broad product offering for SONET systems
SAN DIEGO, CA, March 3, 1999 - Applied Micro Circuits Corporation (AMCC)
[NASDAQ: AMCC], a leader in high-bandwidth silicon connectivity solutions, today
announced the signing of a definitive agreement to acquire Cimaron
Communications Corporation, a leader in the design and development of silicon
solutions and ASIC cores for high-speed SONET systems.
Under the terms of the agreement, AMCC will issue 3,000,000 shares of its common
stock in exchange for all outstanding shares of Cimaron preferred and common
stock, including shares issuable upon exercise of employee stock options and
other rights. Based on AMCC's closing price yesterday of $38.50 per share, the
transaction is valued at approximately $115 million. The merger transaction is
expected to close in March and is expected to be accounted for as a pooling of
interests. The agreement has been approved by the boards of directors of both
companies. The transaction is subject to certain customary closing conditions
and regulatory approvals.
Cimaron is a privately held company located in Andover, Massachusetts, and is a
premier provider of high-speed SONET framing technology. The pending
acquisition is a highly strategic, logical next step for AMCC, and will
substantially expand AMCC's available markets for high-speed communications
products. Cimaron's framer expertise and will enable AMCC to migrate beyond the
Company's analog physical media devices (PMDs) and mixed-signal physical-layer
devices up into the next layer of the network protocol, the
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digital layer. The addition of Cimaron's framer and mapper expertise to AMCC's
proven expertise in silicon-based process technologies and mixed signal
capabilities illustrates AMCC's commitment to providing a broad range of
solutions for high-bandwidth communications markets.
"This acquisition is consistent with our strategy of providing leading-edge
solutions by adding higher-layer digital content to our product portfolio," said
Dave Rickey, President and CEO of AMCC. "With the acquisition of Cimaron, we
anticipate that AMCC will be able to offer to its customers an extensive,
compatible set of IC solutions for the high-bandwidth marketplace. Furthermore,
we believe that our combined expertise in high-speed CMOS mixed-signal design
and digital systems knowledge will provide an unparalleled platform for optimum
integration in the network."
"We're excited at the prospect of being a part of a company that has such
complementary objectives and goals," said Ram Sudireddy, president of Cimaron
Communications. "As a premier provider of high-speed silicon framer/OHP
termination devices for SONET systems, this relationship with AMCC is a natural
fit; we're looking forward to passing on unparalleled value to our customers in
the high-speed SONET marketplace."
Cimaron will retain its corporate identity for the near term, and will be
referred to as an AMCC company. Cimaron has thirty five employees, and the
company's operations will remain in the Andover office. President Ram Sudireddy
will report directly to AMCC's CEO, Dave Rickey.
AMCC designs, develops, manufacturers and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency, mixed-signal design expertise
and multiple silicon process technologies to offer IC products for the
telecommunications market that address the SONET/SDH and ATM transmission
standards and for the data communications markets that address the Gigabit
Ethernet, ATM and Fibre Channel transmission standards.
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AMCC's core technologies also address ATE and high-speed computing needs. AMCC's
corporate headquarters and wafer fabrication facilities are located in San
Diego, California. Sales and consulting engineering offices are located
throughout the world.
Cimaron designs, develops and markets highly complex digital integrated circuits
for mapping, framing and pointer process functions in SONET and ATM
applications.
To learn more about the proposed transaction, you are invited to participate in
a teleconference briefing that will take place today, March 3, 1999, at 2:00 PM
PST. The call-in number is (888) 836-6072. If you are located outside the
U.S., you may call in on (703) 736-7363. To hear a playback of the
teleconference briefing at your convenience, please call (888) 266-2086. The
reservation code for playback is 1365156.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters set forth in
this news release are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in the forward-looking statements, including, but not
limited to, such factors as the rescheduling or cancellation of orders by
customers; fluctuations in the timing and amount of customer requests for
product shipments; fluctuations in manufacturing yields and inventory levels;
changes in product mix; the Company's ability to introduce new products and
technologies on a timely basis; the introduction of products and technologies by
the Company's competitors; the availability of external foundry capacity,
purchased parts, and raw material; competitive pressures on selling prices; the
timing of investments in research and development; market acceptance of the
Company's and its customer's products; the financial condition and performance
of the Company's customers; 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 facility; the
timing and amount of recruiting and relocation expenses, prototyping costs and
promotional expenses; costs associated with future litigation, if any, including
without
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limitation, litigation relating to the use or ownership of intellectual
property; costs associated with compliance with applicable environmental
regulations; general semiconductor industry conditions; and general economic
conditions, including, but not limited to, economic conditions in Asia and the
risk factors that are detailed in the Company's Annual Report on Form 10-K for
the year ended March 31, 1998, the Company's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1998, and the Company's other filings with the
Securities and Exchange Commission.
For more information about AMCC, please visit our website on the Internet at
http://www.amcc.com
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AMCC is a registered trademark of Applied Micro Circuits Corporation
