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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 2000, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ________.
COMMISSION FILE NUMBER: 000-23193
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APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 450-9333
-----------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [_]
As of July 31, 2000, 125,469,938 shares of the Registrant's Common Stock
were issued and outstanding.
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APPLIED MICRO CIRCUITS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Part I. FINANCIAL INFORMATION:
Item 1. a) Condensed Consolidated Balance Sheets at June 30, 2000
(unaudited) and March 31, 2000....................................................... 3
b) Condensed Consolidated Statements of Income (unaudited) for the three months
ended June 30, 2000 and 1999......................................................... 4
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended June 30, 2000 and 1999.................................... 5
d) Notes to Condensed Consolidated Financial Statements (unaudited)..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 24
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 24
Item 2. Changes in Securities and Use of Proceeds................................................ 24
Item 6. Exhibits and Reports of Form 8-K......................................................... 26
Signatures............................................................................................ 26
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................................................... $ 189,812 $ 170,102
Short-term investments - available-for-sale......................................... 784,255 784,449
Accounts receivable, net of allowance for doubtful accounts of $689 and $314
at June 30, 2000 (unaudited) and March 31, 2000, respectively..................... 38,271 25,459
Inventories......................................................................... 11,092 10,925
Deferred income taxes............................................................... 4,462 4,148
Current portion of notes receivable from officer and employees...................... 82 81
Other current assets................................................................ 11,993 10,240
---------- ----------
Total current assets...................................................... 1,039,967 1,005,404
Property and equipment, net.............................................................. 44,913 37,842
Purchased intangibles, net of $2,284 of accumulated amortization at June 30, 2000........ 193,601 --
Other assets............................................................................. 3,626 3,636
---------- ----------
Total assets........................................................................ $1,282,107 $1,046,882
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 12,291 $ 8,818
Accrued payroll and related expenses................................................ 7,934 7,618
Other accrued liabilities........................................................... 15,848 6,448
Deferred revenue.................................................................... 3,552 2,776
Current portion of long-term debt................................................... 1,418 1,394
Current portion of capital lease obligations........................................ 704 729
---------- ----------
Total current liabilities...................................................... 41,747 27,783
Long-term debt, less current portion..................................................... 3,235 3,599
Long-term capital lease obligations, less current portion................................ 1,533 1,695
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000 shares authorized, none issued and outstanding.............................. -- --
Common Stock, $0.01 par value:
Authorized shares - 180,000
Issued and outstanding shares - 124,624 at June 30, 2000 (unaudited)
and 121,842 at March 31, 2000.................................................. 1,246 1,218
Additional paid-in capital.......................................................... 1,164,878 944,512
Deferred compensation, net.......................................................... (3,762) (1,443)
Accumulated other comprehensive loss................................................ (304) (166)
Retained earnings................................................................... 73,534 70,139
Notes receivable from stockholders.................................................. -- (455)
---------- ----------
Total stockholders' equity..................................................... 1,235,592 1,013,805
---------- ----------
Total liabilities and stockholders' equity.......................................... $1,282,107 $1,046,882
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
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APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Net revenues ............................................. $ 74,188 $ 31,643
Cost of revenues ......................................... 19,314 10,283
-------- --------
Gross profit ............................................. 54,874 21,360
Operating expenses:
Research and development ............................ 14,837 6,354
Selling, general and administrative ................. 10,611 5,569
Amortization of goodwill and purchased intangibles .. 2,284 --
Acquired in-process research and development ........ 21,800 --
-------- --------
Total operating expenses ......................... 49,532 11,923
-------- --------
Operating income ......................................... 5,342 9,437
Interest income, net ..................................... 12,277 884
-------- --------
Income before income taxes ............................... 17,619 10,321
Provision for income taxes ............................... 14,224 3,535
-------- --------
Net income ............................................... $ 3,395 $ 6,786
======== ========
Basic earnings per share:
Earnings per share .................................. $ 0.03 $ 0.07
-------- --------
Shares used in calculating basic earnings per share . 121,352 102,860
-------- --------
Diluted earnings per share:
Earnings per share .................................. $ 0.03 $ 0.06
======== ========
Shares used in calculating diluted earnings per share 132,581 114,112
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Operating Activities
Net income .......................................................... $ 3,395 $ 6,786
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ................................... 2,418 1,916
Amortization of purchased intangibles ........................... 2,284 --
Acquired in-process research and development .................... 21,800 --
Amortization of deferred compensation ........................... 169 154
Tax benefit of disqualifying dispositions ....................... 5,238 894
Changes in assets and liabilities:
Accounts receivable ......................................... (12,723) (1,975)
Inventories ................................................. (167) (596)
Other current assets ........................................ (910) 342
Accounts payable ............................................ 3,429 938
Accrued payroll and other accrued liabilities ............... 7,591 (1,575)
Deferred income taxes ....................................... -- 300
Deferred revenue ............................................ 776 (64)
--------- ---------
Net cash provided by operating activities ................ 33,300 7,120
Investing Activities
Proceeds from sales and maturities of short-term investments ......... 831,059 38,020
Purchase of short-term investments ................................... (830,993) (40,025)
Notes receivable from officers and employees ......................... 9 90
Payments for acquired businesses, less cash acquired ................. (8,433) --
Purchase of property and equipment ................................... (8,949) (5,059)
--------- ---------
Net cash used for investing activities .................... (17,307) (6,974)
Financing Activities
Proceeds from issuance of common stock, net .......................... 3,799 1,347
Proceeds on notes receivable from stockholders ....................... 455 --
Repurchase of restricted stock ....................................... -- (8)
Payments on capital lease obligations ................................ (188) (301)
Payments on long-term debt ........................................... (339) (880)
Other ................................................................ (10) --
--------- ---------
Net cash provided by financing activities ................ 3,717 158
--------- ---------
Net increase in cash and cash equivalents ................ 19,710 304
Cash and cash equivalents at beginning of period ............................ 170,102 13,530
--------- ---------
Cash and cash equivalents at end of period .................................. $ 189,812 $ 13,834
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest.... ......................................................... $ 128 $ 224
========= =========
Income taxes ......................................................... $ 138 $ 1,842
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION - INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited interim condensed financial statements of
Applied Micro Circuits Corporation ("AMCC" or the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. The Company has experienced significant quarterly
fluctuations in net revenues and operating results, and expects that these
fluctuations in sales, expenses and net income or losses will continue.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. These
estimates include assessing the collectability of accounts receivable, the use
and recoverability of inventory, estimates to complete engineering contracts,
costs of future product returns under warranty and provisions for contingencies
expected to be incurred. Actual results could differ from those estimates.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended March 31, 2000.
2. EARNINGS PER SHARE
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
THREE MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
Shares used in basic earnings per share
computations-weighted average common shares
outstanding ................................ 121,352 102,860
Net effect of dilutive common share equivalents 11,229 11,252
------- -------
Shares used in diluted earnings per share
computations .............................. 132,581 114,112
======= =======
6
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3. CERTAIN FINANCIAL STATEMENT INFORMATION
JUNE 30, MARCH 31,
2000 2000
-------- ---------
Inventories (in thousands):
Finished goods ................ $ 2,494 $ 2,666
Work in process ............... 7,301 6,966
Raw materials ................. 1,297 1,293
------- -------
$11,092 $10,925
======= =======
JUNE 30, MARCH 31,
2000 2000
-------- --------
Property and equipment (in thousands):
Machinery and equipment ................. $ 51,515 $ 46,375
Leasehold improvements .................. 8,440 8,352
Computers, office furniture and equipment 24,960 20,743
Land .................................... 4,808 4,808
-------- --------
89,723 80,278
Less accumulated depreciation and amortization .... (44,810) (42,436)
-------- --------
$ 44,913 $ 37,842
======== ========
4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
JUNE 30, JUNE 30,
2000 1999
-------- --------
Net income ............................ $ 3,395 $ 6,786
Change in net unrealized loss
on available-for-sale investments ... (128) (174)
Foreign currency translation adjustment (10) --
------- -------
Comprehensive income .......... $ 3,257 $ 6,612
======= =======
Accumulated other comprehensive loss presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
loss on available-for-sale investments and foreign currency translation
adjustments.
5. BUSINESS COMBINATIONS
On June 8, 2000, the Company completed the acquisition of YuniNetworks,
Inc., a developer of scalable switch fabric silicon solutions for communication
equipment. The transaction was accounted for as a purchase. Under the terms of
the merger agreement, in exchange for all YuniNetworks' shares of common and
preferred stock, AMCC issued 2,024,323 shares of its common stock; the Company
also assumed options to purchase 133,722 shares of its common stock. Pursuant to
a separate agreement, AMCC purchased 10% of the YuniNetworks' shares held by the
majority stockholder of YuniNetworks for $8.9 million cash. The accompanying
financial statements include the results of operations of YuniNetworks from the
date of acquisition.
7
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Based on the consideration issued in the transaction, transaction costs and
the liabilities assumed, the total purchase price was approximately $220
million. The Company conducted an independent valuation of the tangible and
intangible assets acquired in order to allocate the purchase price in accordance
with Accounting Principles Board Opinion No. 16. The purchase price was
allocated as follows based upon management's best estimate of the tangible and
intangible assets, including acquired technology and in-process research and
development (in thousands):
Current assets acquired ............ $ 2,177
Property and equipment ............. 482
Assembled workforce ................ 1,200
In-process research and development 21,800
Goodwill ........................... 191,165
Liabilities assumed ................ (542)
Liabilities for merger-related costs (850)
Deferred compensation .............. 2,488
---------
Total consideration ................ $ 217,920
=========
A portion of the purchase price has been allocated to acquired in-process
research and development ("IPR&D"). IPR&D was identified and valued through
extensive interviews, analysis of data provided by YuniNetworks concerning
products under development, their stage of development, the time and resources
needed to complete them, their expected income generating ability, target
markets and associated risks. The income approach, which includes an analysis of
the markets, cash flows, and risks associated with achieving such cash flows,
was the primary technique utilized in valuing the IPR&D.
At the date of acquisition, YuniNetworks had no developed products. The
product under development consists of a unique switching chipset that consists
of six individual integrated circuits, reference designs, and a simulation tool.
Because the development project had not reached technological feasibility and
had no future alternative use, it was classified as IPR&D and charged to expense
upon closing of the merger. The Company estimates that a total investment of
$3.1 million in research and development over the next seven months will be
required to complete the IPR&D. The nature of the efforts required to develop
the purchased IPR&D into commercially viable products principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities necessary to establish that the products can be produced to meet
their design specifications, including functions, features and technical
performance requirements.
In valuing the IPR&D, the Company considered, among other factors,
projected incremental cash flows from the projects when completed and any
associated risks with achieving these cash flows. The projected incremental cash
flows were discounted back to their present value using a 21% discount rate. The
discount rate was determined after consideration of the Company's weighted
average cost of capital and the weighted average return on assets. Associated
risks include the inherent difficulties and uncertainties in completing the
project and thereby achieving technological feasibility, anticipated levels of
market acceptance and penetration, market growth rates and risks related to the
impact of potential changes in future target markets.
The acquired assembled workforce is comprised of 22 skilled employees
across YuniNetworks' executive, research and development, and general and
administrative groups. The Company is amortizing the value assigned to the
assembled workforce of approximately $1.2 million on a straight-line basis over
an estimated remaining useful life of four years.
Goodwill, which represents the excess of the purchase price of an
investment in an acquired business over the fair value of the underlying net
identifiable assets, is being amortized on a straight-line basis over its
estimated remaining useful life of six years.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding the charge for acquired in-process
research and development, as if the acquisition of YuniNetworks had
8
<PAGE>
occurred at the beginning of the earliest period presented and does not purport
to be indicative of what would have occurred had the acquisition been made as of
that date or of the results which may occur in the future. The pro forma results
of operations combines the consolidated results of operations of the Company,
excluding the charge for acquired in-process research and development
attributable to YuniNetworks for the three months ended June 30, 2000 with the
historical results of operations of YuniNetworks for the three months ended June
30, 2000.
The pro forma combined results for the three months ended June 30, 1999 are
the same as the reported results for that period because YuniNetworks did not
commence its operations until October 8, 1999.
THREE MONTHS ENDED
JUNE 30,
-------------------
2000 1999
------- -------
Net sales .............................................. $74,188 $31,643
======= =======
Net income ............................................. 17,531 6,786
======= =======
Diluted earnings per share ............................. 0.13 0.06
======= =======
During the three months ended June 30, 2000, the Company also completed the
acquisitions of pBaud Logic, Inc. and Chameleon Technologies, which were also
accounted for as purchases.
6. NEW ACCOUNTING PRONOUNCEMENTS
In September 1999, the Financial Accounting Standards Board ("FASB") issued
Emerging Issues Task Force Topic No. D-83 ("EITF D-83"), "Accounting for Payroll
Taxes Associated with Stock Option Exercises." EITF D-83 requires that payroll
taxes paid on the difference between the exercise price and the fair value of
acquired stock in association with an employee's exercise of stock options be
treated as operating expenses. Payroll taxes on stock option exercises were
$388,000 for the quarter ended June 30, 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. Management does not believe
this will have a material effect on the Company's operations. Implementation of
this standard has recently been delayed by the FASB for a 12- month period. The
Company will now adopt SFAS 133 as required for its first quarterly filing of
fiscal year 2002.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The Company is
required to adopt SAB 101 in the quarter ending March 31, 2001. The Company is
in the process of assessing the impact of adopting SAB 101 on our financial
position and results of operations, however, we do not expect the effect, if
any, to be material.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are included in the Annual Report on Form 10-K for the year ended March 31, 2000
for the Company. This Quarterly Report on Form 10-Q, and in particular
Management's Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements regarding future events or the
future performance of the Company that involve certain risks and uncertainties
including those discussed in "Risk Factors" below. 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 optical networks. We utilize a
combination of high-frequency analog, mixed-signal and digital design expertise
coupled with system-level knowledge and multiple silicon process technologies to
offer integrated circuit, or IC, products that enable the transport of voice and
data over fiber optic networks. Our products target the SONET/SDH, ATM, Gigabit
Ethernet and Fibre Channel semiconductor markets. In addition, we recently
introduced silicon ICs targeted for DWDM systems. We provide our customers with
complete silicon IC solutions ranging from physical media dependent devices such
as laser drivers and physical layer products such as transceivers to overhead
processor products such as framers and mappers. Our products span data rates
from OC-3, or 155 megabits per second, to OC-192, or 10 gigabits per second. We
also supply silicon ICs for the automated test equipment, or ATE, high-speed
computing and military markets.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
THREE MONTHS
ENDED JUNE 30,
---------------------
2000 1999
----- -----
Net revenues................................... 100.0% 100.0%
Cost of revenues............................... 26.0% 32.5%
----- -----
Gross profit................................... 74.0% 67.5%
Operating expenses:
Research and development................. 20.0% 20.1%
Selling, general and administrative...... 14.3% 17.6%
Amortization of goodwill and purchased
intangibles ........................... 3.1% --
Acquired in-process R&D ................. 29.4% --
----- -----
Total operating expenses............. 66.8% 37.7%
----- -----
Operating income............................... 7.2% 29.8%
Net interest income............................ 16.5% 2.8%
----- -----
Income before provisions for income taxes...... 23.7% 32.6%
Provision for income taxes..................... 19.2% 11.2%
----- -----
Net income..................................... 4.5% 21.4%
===== =====
10
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Net Revenues. Net revenues for the three months ended June 30, 2000 were
$74.2 million, an increase of 134% over net revenues of $31.6 million for the
three months ended June 30, 1999. Revenues from sales of communications products
increased to 83% of net revenues for the three months ended June 30, 2000 from
70% of net revenues for the three months ended June 30, 1999, reflecting unit
growth in shipments of existing products, as well as the introduction of new
products. Sales to Nortel, and their contract manufacturers, accounted for 37%
of net revenues for the three months ended June 30, 2000 compared to 31% for the
three months ended June 30, 1999. Sales to Insight Electronics, Inc., our
domestic distributor, accounted for 19% of net revenues in the three months
ended June 30, 2000, compared to 14% for the three months ended June 30, 1999.
Sales outside of North America accounted for 19% of net revenues for the three
months ended June 30, 2000, compared to 25% for the three months ended June 30,
1999.
Gross Margin. Gross margin was 74% for the three months ended June 30,
2000, compared to 68% for the three months ended June 30, 1999. The increase in
gross margin resulted from increased utilization of our wafer fabrication
facility. Our gross margin is primarily impacted by factory utilization, wafer
yields, product mix and the timing of depreciation expense and other costs
associated with expanding manufacturing capacity. Our strategy is to maximize
factory utilization whenever possible, maintain or improve our manufacturing
yields, and focus on the development and sales of high-performance products that
allow for higher gross margins. There can be no assurance, however, that we will
be successful in achieving these objectives. In addition, these factors can vary
significantly from quarter to quarter, which would likely result in fluctuations
in quarterly gross margin and net income.
Research and Development. Research and development ("R&D") expenses
increased 134% to approximately $14.8 million, or 20% of net revenues, for the
three months ended June 30, 2000, from approximately $6.4 million, or 20% of net
revenues, for the three months ended June 30, 1999. The increase in R&D expenses
in absolute dollars is a reflection of our aggressive product development
efforts. Factors contributing to the increase in R&D expenses are a $1.9 million
increase in compensation related costs, as a result of both increased headcount
and increased average compensation costs, a $666,000 increase in the cost of
design tools and software and a $3.5 million increase in prototyping and outside
contractor costs. We believe that a continued commitment to R&D is vital to
maintain a leadership position with innovative communications products.
Accordingly, we expect R&D expenses to increase in absolute dollars and as a
percentage of net revenues in the future. Currently, R&D expenses are focused on
the development of products and processes for the communications markets, and we
expect to continue this focus.
Selling, General and Administrative. Selling, general and administrative
(SG&A) expenses were approximately $10.6 million, or 14% of net revenues, for
the three months ended June 30, 2000, as compared to approximately $5.6 million,
or 18% of net revenues, for the three months ended June 30, 1999. The increase
in SG&A expenses for the three months ended June 30, 2000 was primarily due to a
$2.3 million increase in personnel and travel costs, and a $1.0 million increase
in commissions earned by sales representatives, as well as increases in
professional fees for legal and accounting services.
Amortization of Purchased Intangibles. For the three months ended June 30,
2000, amortization of purchased intangibles ("API") expense was $2.3 million or
3% of net revenues. The API expense is due to the amortization of intangible
assets recorded in connection with our acquisitions, which were accounted for as
purchases. At June 30, 2000, we expect amortization expense to be $27.5 million,
$33.1 million, $33.0 million, $32.6 million and $31.9 million for the years
ended March 31, 2001, 2002, 2003, 2004 and 2005, respectively. See Note 5 of
Notes to Condensed Consolidated Financial Statements.
Acquired In-process Research and Development. For the three months ended
June 30, 2000, the Company recorded $21.8 million of acquired in-process
research and development resulting from the acquisition of YuniNetworks. See
Note 5 of Notes to Condensed Consolidated Financial Statements. This amount was
expensed on the acquisition date because the acquired technology had not yet
reached technological feasibility and had no future alternative uses. There can
be no assurance that acquisitions of businesses, products or technologies by us
in the future will not result in substantial charges for acquired in-process
research and development that may cause fluctuations in our quarterly or annual
operating results.
11
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Net Interest Income. Net interest income increased to $12.3 million for the
three months ended June 30, 2000 from $884,000 for the three months ended June
30, 1999. This increase was due principally to higher interest income from
larger cash and short-term investment balances as a result of our public stock
offering in January 2000.
Provision for Income Taxes. The effective tax rate for the three months
ended June 30, 2000 was 81%. This amount differed from statutory rates primarily
due to the nondeductibility of purchased in-process R&D and the amortization of
purchased intangibles.
Deferred Compensation. During the three months ended June 30, 2000,
deferred compensation of $2.5 million was recorded related to restricted stock
and options granted to founders and employees of acquired companies. We
currently expect to record amortization of deferred compensation with respect to
these option grants of approximately $1.1 million, $1.1 million, $1.0 million,
and $0.8 million during the fiscal years ended March 31, 2001, 2002, 2003, and
2004, respectively.
Backlog. Our sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of our products to be delivered and
delivery schedules are frequently revised to reflect changes in customer needs,
and in some cases customer orders can be canceled or rescheduled without
significant penalty to the customer. For these reasons, our backlog as of any
particular date is not representative of actual sales for any succeeding period,
and we therefore believe that backlog is not a good indicator of future revenue.
Our backlog for products requested to be shipped and nonrecurring engineering
services to be completed in the next six months was $100.0 million on June 30,
2000, compared to $42.0 million on June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity as of June 30, 2000 consists of $974.1
million in cash, cash equivalents and short-term investments. Working capital as
of June 30, 2000 was $998.2 million, compared to $977.6 million as of March 31,
2000. This increase in working capital was primarily due to net cash provided by
operating activities, offset by payments for acquired businesses and the
purchase of property and equipment.
For the three months ended June 30, 2000 and 1999, net cash provided by
operating activities was $33.3 million and $7.1 million, respectively. Net cash
provided by operating activities for the three months ended June 30, 2000 and
1999 primarily reflected net income before depreciation, amortization and other
non-cash charges plus increased accounts payable and accrued liabilities offset
by increases in accounts receivable.
Capital expenditures totaled $8.9 million for the three months ended June
30, 2000 which included approximately $3.7 million for engineering hardware and
design software and $4.7 million for test and manufacturing equipment, compared
to capital expenditures of $5.1 million for the three months ended June 30,
1999. We intend to increase capital expenditures for manufacturing equipment,
test equipment and computer hardware and software.
We are exploring alternatives for the expansion of our manufacturing
capacity, which would likely occur after fiscal year 2001, including further
expansion of our current wafer fabrication facility, building a new wafer
fabrication facility, purchasing a wafer fabrication facility, and/or entering
into strategic relationships to obtain additional capacity. Any of these
alternatives could require a significant investment by us, and there can be no
assurance that any of the alternatives for expansion of our manufacturing
capacity will be available on a timely basis.
In January 2000, we completed the public offering of approximately 12
million shares of common stock raising net proceeds of approximately $815
million. We intend to use the proceeds of the offering for working capital and
general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire businesses or technologies.
We believe that our available cash, cash equivalents and short-term
investments, and cash generated from operations will be sufficient to meet our
capital requirements for the next 12 months, although we could elect or
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could be required to raise additional capital during such period. There can be
no assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all.
RISK FACTORS
Our operating results may fluctuate because of a number of factors, many of
which are beyond our control.
If our operating results are below the expectations of public market
analysts or investors, then the market price of our common stock could decline.
Some of the factors that affect our quarterly and annual results, but which are
difficult to control or predict are:
. the reduction, rescheduling or cancellation of orders by customers,
whether as a result of stockpiling of our products or otherwise;
. fluctuations in the timing and amount of customer requests for product
shipments;
. fluctuations in manufacturing output, yields and inventory levels;
. changes in the mix of products that our customers buy;
. our ability to introduce new products and technologies on a timely
basis;
. the announcement or introduction of products and technologies by our
competitors;
. the availability of external foundry capacity, purchased parts and raw
materials;
. the ability of our customers to obtain components from their other
suppliers;
. competitive pressures on selling prices;
. market acceptance of our products and of our customers' products;
. the amounts and timing of costs associated with warranties and product
returns;
. the amounts and timing of investments in research and development;
. the amounts and timing of the costs associated with payroll taxes
related to stock option exercises;
. the timing of depreciation and other expenses that we expect to incur
in connection with any expansion of our manufacturing capacity;
. costs associated with acquisitions and the integration of acquired
operations;
. costs associated with compliance with applicable environmental
regulations or remediation;
. costs associated with litigation, including without limitation,
litigation or settlements relating to the use or ownership of
intellectual property;
. general communications systems industry and semiconductor industry
conditions; and
. general economic conditions.
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Our expense levels are relatively fixed and are based, in part, on our
expectations of future revenues. We are continuing to increase our operating
expenses for additional manufacturing capacity, personnel and new product
development. However, we have limited ability to reduce expenses quickly in
response to any revenue shortfalls.
Consequently, our business, financial condition and operating results would
be harmed if we do not achieve increased revenues. We can have revenue
shortfalls for a variety of reasons, including:
. significant pricing pressures that occur because of declines in
average selling prices over the life of a product;
. sudden shortages of raw materials or production capacity constraints
that lead our suppliers to allocate available supplies or capacity to
customers with resources greater than us and, in turn, interrupt our
ability to meet our production obligations;
. fabrication, test or assembly capacity constraints for internally
manufactured devices which interrupt our ability to meet our
production obligations; and
. the reduction, rescheduling or cancellation of customer orders.
In addition, our 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. Because we do not have substantial
noncancellable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand which are highly unpredictable
and can fluctuate substantially. In addition, from time to time, in response to
anticipated long lead times to obtain inventory and materials from our outside
suppliers and foundries, we may order materials in advance of anticipated
customer demand. This advance ordering might result in excess inventory levels
or unanticipated inventory write-downs if expected orders fail to materialize,
or other factors render the customers' products less marketable. Further, we
currently anticipate that an increasing portion of our revenues in future
periods will be derived from sales of application specific standard products, or
ASSPs, instead of application specific integrated circuits, or ASICs. Customer
orders for ASSPs typically have shorter lead times than orders for ASICs, which
may make it increasingly difficult for us to predict revenues and inventory
levels and adjust production appropriately. If we are unable to plan inventory
and production levels effectively, our business, financial condition and
operating results could be materially harmed.
If we do not successfully expand our manufacturing capacity on time, we may face
serious capacity constraints.
We currently manufacture a majority of our IC products at our wafer
fabrication facility located in San Diego, California, and we are currently
expanding this facility. We believe that when the expansion is completed we will
be able to satisfy our production needs from this fabrication facility through
the end of fiscal 2001, although this date may vary depending on, among other
things, our rate of growth. We will be required to hire, train and manage
additional production personnel in order to increase production capacity as
scheduled. In addition, to further expand our capacity to fabricate wafers using
a bipolar process, we entered into a foundry agreement with a third-party wafer
fabrication facility. We will have to install our fabrication processes at this
foundry, qualify our processes at this foundry and then ramp production volumes
at this foundry. If we cannot expand our capacity on a timely basis, we could
experience significant capacity constraints that could render us unable to meet
customer demand or force us to spend more to meet demand. In addition, the
depreciation and other expenses that we will incur in connection with the
expansion of our manufacturing capacity may harm our gross margin in any future
fiscal period.
We are exploring alternatives for the further expansion of our
manufacturing capacity which would likely occur after fiscal year 2001,
including:
. entering into strategic relationships to obtain additional capacity;
. building a new wafer fabrication facility; or
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. purchasing a wafer fabrication facility.
Any of these alternatives could require a significant investment by us.
There can be no assurance that any of the alternatives for expansion of our
manufacturing capacity will be available on a timely basis or that we will be
able to manage our growth and effectively integrate our expansion into our
current operations.
The cost of any investment we may have to make to expand our manufacturing
capacity 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. We may not be able to obtain the additional
financing necessary to fund the construction and completion of the new
manufacturing facility.
Expanding our current wafer fabrication facility, building a new wafer
fabrication facility or purchasing a wafer fabrication facility entails
significant risks, including:
. shortages of materials and skilled labor;
. unforeseen environmental or engineering problems;
. work stoppages;
. weather interference; and
. unanticipated cost increases.
Any one of these risks could have a material adverse effect on the
building, equipping and production start-up of a new facility or the expansion
of our existing 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
expansion or new facility and could reduce our anticipated revenues. Also, the
timing of commencement of operation of our expanded or new facility will depend
upon the availability, timely delivery, successful installation and testing of
the necessary process equipment. As a result of the foregoing and other factors,
our expanded or new facility may not be completed and in volume production
within budget or as scheduled. Furthermore, we may be unable to achieve adequate
manufacturing yields in our expanded or new facility in a timely manner, and our
revenues may not increase commensurate with the anticipated increase in
manufacturing capacity associated with the expanded or new facility. In
addition, in the future, we may be required for competitive reasons to make
additional capital investments in the existing wafer fabrication facility or to
accelerate the timing of the construction of a new wafer fabrication facility in
order to expedite the manufacture of products based on more advanced
manufacturing processes.
Our operating results substantially depend on manufacturing output and yields,
which may not meet expectations.
We manufacture most of our semiconductors at our San Diego fabrication
facility. Manufacturing semiconductors requires manufacturing tools which are
unique to each product being produced. If one of these unique manufacturing
tools was damaged or destroyed, then our ability to manufacture the related
product would be impaired and our business would suffer until the tool was
repaired or replaced.
Our yields decline whenever a substantial percentage of wafers must be
rejected or a significant number of die on each wafer are nonfunctional. Such
declines can be caused by many factors, including minute levels of contaminants
in the manufacturing environment, design issues, defects in masks used to print
circuits on a wafer and difficulties in the fabrication process. The ongoing
expansion of the manufacturing capacity of our existing wafer fabrication
facility could increase the risk of contaminants in the facility. In addition,
many of these problems are difficult to diagnose, and are time consuming and
expensive to remedy and can result in shipment delays.
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Difficulties associated with adapting our technology and product design to
the proprietary process technology and design rules of outside foundries also
can lead to reduced yields. The process technology of an outside foundry 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 may require
cooperation between ourselves and our manufacturer. In some cases this risk
could be compounded by the offshore location of certain of our manufacturers,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. In addition, manufacturing defects which we do not
discover during the manufacturing or testing process may lead to costly product
recalls.
We estimate 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. We have in the past, and may in the future from time to
time, take inventory write-downs as a result of decreases in manufacturing
yields. We may suffer periodic yield problems in connection with new or existing
products or in connection with the commencement of production in a new or
expanded manufacturing facility.
In addition our manufacturing output or yields may decline as a result of
power outages, accidents, natural disasters or other disruptions to the
manufacturing process.
Because the majority of our costs of manufacturing are relatively fixed,
yield decreases can result in substantially higher unit costs and may result in
reduced gross profit and net income. In addition, yield decreases could force us
to allocate available product supply among customers, which could potentially
harm customer relationships.
A disruption in the manufacturing capabilities of our outside foundries would
negatively impact the production of certain of our products.
We rely on outside foundries for the manufacture of certain products,
including all of our products designed on CMOS processes and silicon germanium
processes. The outside foundries manufacture our products on a purchase order
basis. We expect that, for the foreseeable future, a single foundry will
manufacture certain products. Because establishing relationships and ramping
production with new outside foundries takes several months to over a year, there
is no readily available alternative source of supply for these products. A
manufacturing disruption experienced by one or more of our outside foundries or
a disruption of the relationship between us and our outside foundry would impact
the production of certain of our products for a substantial period of time.
Furthermore, the transition to the next generation of manufacturing technologies
at one or more of our outside foundries could be unsuccessful or delayed.
Our dependence on third-party manufacturing and supply relationships increases
the risk that we will not have an adequate supply of products to meet demand or
that our cost of materials will be higher than expected.
The risks associated with our dependence upon third parties which
manufacture, assemble or package certain of our products, include:
. reduced control over delivery schedules and quality;
. risks of inadequate manufacturing yields and excessive costs;
. the potential lack of adequate capacity during periods of excess
demand;
. difficulties selecting and integrating new subcontractors;
. limited warranties on wafers or products supplied to us;
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. potential increases in prices; and
. potential misappropriation of our intellectual property.
These risks may lead to increased costs or delay product delivery, which
would harm our profitability and customer relationships. We may encounter
similar risks if we hire subcontractors to test our products in the future.
If the subcontractors we use to manufacture our wafers or products discontinue
the manufacturing processes needed to meet our demands or fail to upgrade their
technologies needed to manufacture our products, we may face production delays.
Our wafer and product requirements typically represent a very small portion
of the total production of the third-party foundries. As a result, we are
subject to the risk that a producer will cease production on an older or
lower-volume process that it uses to produce our parts. Additionally, we cannot
be certain our external foundries will continue to devote resources to the
production of our products or continue to advance the process design
technologies on which the manufacturing of our products are based. Each of these
events could increase our costs and harm our ability to deliver our products on
time.
Due to an industry transition to six-inch, eight-inch and twelve-inch wafer
fabrication facilities, there is a limited number of suppliers of the four-inch
wafers that we use to build products in our existing manufacturing facility, and
we rely on a single supplier for these wafers. Although we believe that we will
have sufficient access to four-inch wafers to support production in our existing
fabrication facility for the foreseeable future, we cannot be certain that our
current supplier will continue to supply us 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.
Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular, design engineers, and we may not be able to continue to
attract and train engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future. Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management personnel and the development of additional expertise by existing
management personnel. Loss of the services of, or failure to recruit, key design
engineers or other technical and management personnel could be significantly
detrimental to our product and process development programs.
Periods of rapid growth and expansion could continue to place a significant
strain on our limited personnel and other resources.
To manage expanded operations effectively, we will be required to continue
to improve our operational, financial and management systems and to successfully
hire, train, motivate and manage our employees. In addition, the integration of
past and future potential acquisitions and the expansion of our manufacturing
capacity will require significant additional management, technical and
administrative resources. We cannot be certain that we will be able to manage
our growth or effectively integrate a new or expanded wafer fabrication facility
into our current operations.
Our customers are concentrated, so the loss of one or more key customers could
significantly reduce our revenues and profits.
Historically, a relatively small number of customers has accounted for a
significant portion of our revenues in any particular period. For example, our
five largest customers accounted for approximately 69% of our revenues in the
three months ended June 30, 2000. Sales to Nortel and its contract manufacturers
accounted for approximately 37% of our revenues in the three months ended June
30, 2000. However, we have no long-term volume purchase
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commitments from any of our major customers. We anticipate that sales of
products to relatively few customers will continue to account for a significant
portion of our revenues. If Nortel or another significant customer overstocked
our products, additional orders for our products could be harmed. A reduction,
delay or cancellation of orders from one or more significant customers or the
loss of one or more key customers could significantly reduce our revenues and
profits. We cannot assure you that our current customers will continue to place
orders with us, that orders by existing customers will continue at current or
historical levels or that we will be able to obtain orders from new customers.
An important part of our strategy is to continue our focus on the markets for
high-speed communications ICs. If we are unable to penetrate these markets
further, our revenues could stop growing and may decline.
Our markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. If
our products are unable to support the new features or performance levels
required by OEMs in these markets, we 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. If we fail
to develop products with required features or performance standards, or if we
experience a delay as short as a few months in bringing a new product to market,
or if our customers fail to achieve market acceptance of their products, our
revenues could be significantly reduced for a substantial period.
A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of products based on SONET, SDH
and ATM transmission standards. If the communications market evolves to new
standards, we may not be able to successfully design and manufacture new
products that address the needs of our customers or gain substantial market
acceptance. Although we have developed products for the Gigabit Ethernet and
Fibre Channel communications standards, volume sales of these products are
modest, and we may not be successful in addressing the market opportunities for
products based on these standards.
Our markets are subject to rapid technological change, so our success depends
heavily on our ability to develop and introduce new products.
The markets for our 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.
To develop new products for the communications markets, we must develop,
gain access to and use leading technologies in a cost-effective and timely
manner and continue to develop technical and design expertise. In addition, we
must have our products designed into our customers' future products and maintain
close working relationships with key customers in order to develop new products,
particularly ASSPs, that meet customers' changing needs. We also must respond to
changing industry standards, trends towards increased integration and other
technological changes on a timely and cost-effective basis. Further, if we fail
to achieve design wins with key customers our business will significantly suffer
because once a customer has designed a supplier's product into its
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system, the customer typically is extremely reluctant to change its supply
source due to significant costs associated with qualifying a new supplier.
Products for communications applications, as well as for high-speed
computing applications, are based on industry standards that are continually
evolving. Our ability to compete in the future will depend on our ability to
identify and ensure compliance with these evolving industry standards. The
emergence of new industry standards could render our products incompatible with
products developed by major systems manufacturers. As a result, we could be
required to invest significant time and effort and to incur significant expense
to redesign our products to ensure compliance with relevant standards. If our
products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. In addition, we may not be successful in developing or using new
technologies or in developing new products or product enhancements that achieve
market acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.
The markets in which we compete are highly competitive.
The markets in which we operate are highly competitive and we expect that
competition will increase in these markets. In particular the communications IC
market is intensely competitive and our ability to compete successfully in these
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;
. customer support;
. time-to-market;
. product performance;
. price;
. the efficiency of production;
. design wins;
. expansion of production of our products for particular systems
manufacturers;
. end-user acceptance of the systems manufacturers' products;
. market acceptance of competitors' products; and
. general economic conditions.
In addition, our competitors or customers may offer enhancements to our
existing products or offer new products based on new technologies, industry
standards or customer requirements including, but not limited to, all optical
networking systems that are available to customers on a more timely basis than
comparable products from us or that have the potential to replace or provide
lower-cost or higher performance alternatives to our products. The introduction
of enhancements or new products by our competitors could render our existing and
future products obsolete or unmarketable. In addition, we expect that certain of
our competitors and other semiconductor companies
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may seek to develop and introduce products that integrate the functions
performed by our IC products on a single chip, thus eliminating the need for our
products.
In the communications markets, we compete primarily against Agilent,
Conexant, Giga (recently acquired by Intel), Lucent, Maxim, Philips, PMC-Sierra,
Infineon, TriQuint and Vitesse. Some of these companies have significantly
greater financial and other resources than us, and some of these companies use
other process technology, such as gallium arsenide, which may have certain
advantages over technology we currently use. In certain circumstances, most
notably with respect to ASICs supplied to Nortel, our customers or potential
customers have internal IC manufacturing capabilities with which we may compete.
We must develop or otherwise gain access to improved process technologies.
Our future success will depend, in large part, upon our ability to continue
to improve existing process technologies, to develop or acquire new process
technologies including silicon germanium processes, and to adapt our process
technologies to emerging industry standards. In the future, we may be required
to transition one or more of our products to process technologies with smaller
geometries, other materials or higher speeds in order to reduce costs and/or
improve product performance. We may not be able to improve our 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. In addition, products based on these technologies
may not achieve market acceptance.
We expect revenues that are currently derived from non-communications markets
will decline in future periods.
We historically have derived significant revenues from product sales to
customers in the ATE, high-speed computing and military markets and currently
anticipate that we will continue to derive revenues from sales to customers in
these markets in the near term. However, we are not currently funding product
development efforts in these markets and as a result we expect that revenues
from products in these markets will decline in future periods. In addition, the
market for ATE and high-speed computing IC products is subject to extreme price
competition, and we may not be able to reduce the costs of manufacturing high-
speed computing IC products in response to declining average selling prices.
Further, we expect that certain competitors will seek to develop and
introduce products that integrate the functions performed by our ATE and
high-speed computing IC products on single chips. In addition, one or more of
our customers may choose to utilize discrete components to perform the functions
served by our 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
ATE and high-speed computing customers to purchase our IC products could be
eliminated.
We have in the past and may in the future make acquisitions where advisable,
which will involve numerous risks. There is no assurance that we will be able to
address these risks successfully without substantial expense, delay or other
operational or financial problems.
The risks involved with acquisitions include:
. diversion of management's attention;
. failure to retain key personnel;
. amortization of acquired intangible assets;
. client dissatisfaction or performance problems with an acquired firm;
. the cost associated with acquisitions and the integration of acquired
operations; and
. assumption of unknown liabilities, or other unanticipated events or
circumstances.
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Our operating results suffer as a result of purchase accounting treatment,
primarily due to the impact of amortization of goodwill and other intangibles
originating from acquisitions.
Under U.S. generally accepted accounting principles that apply to us, we
accounted for a number of business combinations using the purchase method of
accounting, the most significant being the acquisition of YuniNetworks. Under
purchase accounting, we recorded the market value of our shares issued in these
acquisitions, the fair value of the stock options assumed and the amount of
direct transaction costs as the cost of acquiring these entities. That cost is
allocated to the individual assets acquired and liabilities assumed, including
various identifiable intangible assets such as in-process research and
development and acquired workforce, based on their respective fair values. We
allocated the excess of the purchase cost over the fair value of the net assets
to goodwill.
The impact of these acquisitions resulted in amortization expense of $2.1
million for the three months ended June 30, 2000. Additionally, we also incur
other purchase accounting related costs and expenses in the period a particular
transaction closes to reflect purchase accounting adjustments adversely
impacting gross profit and costs of integrating new businesses or curtailing
overlapping operations. Purchase accounting treatment of our acquisitions will
result in a net loss for us in the foreseeable future, which could have a
material and adverse effect on the market value of our common stock.
The goodwill and other intangible assets recorded as a result of these
acquisitions will be amortized over their expected period of benefit. At June
30, 2000, we expect amortization expense to be $27.5 million, $33.1 million,
$33.0 million, $32.6 million and $31.9 million for the years ended March 31,
2001, 2002, 2003, 2004 and 2005, respectively. A future acquisition accounted
for as a purchase could further adversely affect our operating results as a
result of such amortization.
Acquisitions accounted for using the pooling of interest methods of
accounting are subject to rules established by the Financial Accounting
Standards Board and the Securities and Exchange Commission. These rules are
complex and the interpretation of them is subject to change. The availability of
pooling of interests accounting treatment for a business combination depends in
part upon circumstances and events occurring after the effective time. The
failure of a past business combination or a future potential business
combination that has been accounted for under the pooling of interests
accounting method to qualify for this accounting treatment would materially harm
our reported and future earnings and likely, the price of our common stock.
Any of these risks could materially harm our business, financial condition
and results of operations. There can be no assurance that any business that we
acquire will achieve anticipated revenues or operating results.
We may not be able to protect our intellectual property adequately.
We rely in part on patents to protect our intellectual property. There can
be no assurance that our pending patent applications or any future applications
will be approved, or that any issued patents will provide us 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 our ability to do business. Furthermore, others may
independently develop similar products or processes, duplicate our products or
processes or design around any patents that may be issued to us.
To protect our intellectual property, we also rely 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, we
cannot be certain that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property, or disclose such intellectual property or trade
secrets, or that we can meaningfully protect our intellectual property.
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We could be harmed by litigation involving patents and proprietary rights.
Litigation may be necessary to enforce our intellectual property rights, to
determine the validity and scope of proprietary rights of others or to defend
against claims of others or to defend against claims of infringement or
misappropriation. As a general matter, the semiconductor industry is
characterized by substantial litigation regarding patent and other intellectual
property rights. Such litigation could result in substantial costs and diversion
of resources, including the attention of our management and technical personnel
and could have a material adverse effect on our business, financial condition
and results of operations. We may be accused of infringing the intellectual
property rights of third parties. We have certain indemnification obligations to
customers with respect to the infringement of third-party intellectual property
rights by our products. We cannot be certain that infringement claims by third
parties or claims for indemnification by customers or end users of our products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not harm our business.
Any litigation relating to the intellectual property rights of third
parties, whether or not determined in our favor or settled by us, would at a
minimum be costly and could divert the efforts and attention of our management
and technical personnel. In the event of any adverse ruling in any such
litigation, we could be required to pay substantial 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. A license might not be available on
reasonable terms, or at all.
Our operating results are subject to fluctuations because we rely substantially
on foreign customers.
International sales (including sales to Canada) accounted for approximately
37% of revenues for the quarter ended June 30, 2000. International sales may
increase in future periods and may account for an increasing portion of our
revenues. As a result, an increasing portion of our revenues may be subject to
certain risks, including:
. foreign currency exchange fluctuations;
. changes in regulatory requirements;
. tariffs and other barriers;
. timing and availability of export licenses;
. political and economic instability;
. difficulties in accounts receivable collections;
. difficulties in staffing and managing foreign subsidiary and branch
operations;
. difficulties in managing distributors;
. difficulties in obtaining governmental approvals for communications
and other products;
. the burden of complying with a wide variety of complex foreign laws
and treaties; and
. potentially adverse tax consequences.
We are subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our 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 our 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
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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 our results of
operations. Some of our customer purchase orders and agreements are governed by
foreign laws, which may differ significantly from United States laws. Therefore,
we may be limited in our ability to enforce our rights under such agreements and
to collect damages, if awarded.
We could incur substantial fines or litigation costs associated with our
storage, use and disposal of hazardous materials.
We are 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 our manufacturing process. Any
failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production or a cessation of operations.
In addition, these regulations could restrict our ability to expand our
facilities at the present location or construct or operate a new wafer
fabrication facility or could require us to acquire costly equipment or incur
other significant expenses to comply with environmental regulations or clean up
prior discharges. Since 1993, we have been named as a potentially responsible
party, along with a large number of other companies that used Omega Chemical
Corporation in Whittier, California to handle and dispose of certain hazardous
waste material. We are a member of a large group of potentially responsible
parties that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, our payment obligations with respect to
these funding efforts have not been material, and we believe that our future
obligations to fund these efforts will not have a material adverse effect on our
business, financial condition or operating results. Although we believe that we
are currently in material compliance with applicable environmental laws and
regulations, we cannot assure you that we are or will be in material compliance
with these laws or regulations or that our future obligations to fund any
remediation efforts, including those at the Omega site, will not have a material
adverse effect on our business.
Our ability to manufacture sufficient wafers to meet demand could be severely
hampered by a shortage of water or natural disasters.
We use significant amounts of water throughout our 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. We
cannot be certain that near term reductions in water allocations to
manufacturers will not occur. Our existing wafer fabrication facility is, and a
potential new wafer fabrication facility may be, located in Southern California
and these facilities may be subject to natural disasters such as earthquakes or
floods. We do not have earthquake insurance for these facilities, because
adequate coverage is not offered at economically justifiable rates. A
significant natural disaster, such as an earthquake or flood, could have a
material adverse impact on our business, financial condition or operating
results.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date.
In the future, the market price of our common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to- quarter variations in:
. our anticipated or actual operating results;
. announcements or introductions of new products by us or our
competitors;
. technological innovations or setbacks by us or our competitors;
. conditions in the semiconductor, telecommunications, data
communications, ATE, high-speed computing or military markets;
. the commencement of litigation;
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. changes in estimates of our performance by securities analysts;
. announcements of merger or acquisition transactions;
. general economic conditions; and
. governmental regulatory action.
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, including semiconductor companies, and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations may harm the market price of our common stock.
The anti-takeover provisions of our certificate of incorporation and of the
Delaware general corporation law may delay, defer or prevent a change of
control.
Our 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 our stockholders. The rights of the holders of common stock
will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future. The issuance of
preferred stock may delay, defer or prevent a change in control, as the terms of
the preferred stock that might be issued could potentially prohibit our
consummation of any merger, reorganization, sale of substantially all of our
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 our
stockholders.
ITEM 3. QUANTITATIVE AND QUALTITATIVE DISCLOSURE ABOUT MARKET RISK
At June 30, 2000, our investment portfolio included fixed-income securities
of $784.3 million. These securities are subject to interest rate risk and will
decline in value if interest rates increase. Because the average maturity date
of the investment portfolio is relatively short, an immediate 100 basis point
increase in interest rates would have no material impact on our financial
condition or results of operations.
We generally conduct business, including sales to foreign customers, in
U.S. dollars and as a result, have limited foreign currency exchange rate risk.
The effect of an immediate 10 percent change in foreign exchange rates would not
have a material impact on our financial condition or results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this Quarterly Report on Form 10-Q, we are not engaged in any legal
proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on our business, financial condition or operating
results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(b) Recent Sales of Unregistered Securities
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On April 4, 2000, we acquired all the outstanding stock of pBaud Logic,
Inc. Under the terms of the related agreement, all of the outstanding stock of
pBaud was exchanged for approximately 18,000 shares of our Common Stock and
approximately $309,000 in cash. At the time of the transaction, the shares of
Common Stock issued to the former pBaud stockholders were not registered under
the Securities Act because the transaction involved a non-public offering exempt
from registration under Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. On April 21, 2000, we filed a registration
statement on Form S-3 to cover the potential resale of 9,000 of the shares of
Common Stock issued pursuant to the agreement.
(c) Use of Proceeds
(1) Initial Public Offering
We filed a Registration Statement on Form S-1 (the "IPO Registration
Statement"), File No. 333-37609, which was declared effective by the Securities
and Exchange Commission on November 24, 1997, relating to the initial public
offering of our Common Stock. The managing underwriters of the offering were
BankAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, and Cowen
& Company. The IPO Registration Statement registered an aggregate of 22,212,000
shares of Common Stock and the price to the public was $2.00 per share. Of such
shares, 14,153,792 were sold by us (which includes the underwriter over-
allotment of 3,331,800 shares) and 11,390,008 were sold by certain of our
shareholders.
We incurred $3,196,718 of total expenses in connection with the offering
covered by the IPO Registration Statement consisting of $1,981,531 in
underwriting discounts and commissions and $1,215,187 in other expenses. All
such expenses were direct or indirect payments to others. The net offering
proceeds to the Company after deducting the $3,196,718 of total expenses were
approximately $25,111,000.
As of June 30, 2000, we have expended all of the proceeds as follows:
approximately $4.8 million for the purchase of land for future capacity
expansion, approximately $11 million for the purchase of additional
manufacturing and test equipment and engineering design hardware and software,
and approximately $9.3 million for purchase business combinations. The use of
proceeds described herein does not represent a material change in the use of
proceeds described in the prospectus of the IPO Registration Statement.
(2) 1998 Public Offering
We filed a Registration Statement on Form S-1, File No. 333-46071 (the
"1998 Registration Statement"), which was declared effective by the Securities
and Exchange Commission on March 12, 1998, relating to a public offering of our
Common Stock. The managing underwriters offering were BancAmerica Robertson
Stephens, NationsBanc Montgomery Securities LLC, and Cowen & Company. The 1998
Registration Statement registered an aggregate of 14,120,000 shares of Common
Stock and the price to the public was $4.84375 per share. Of such shares,
6,000,000 shares were sold by us, and 10,238,000 shares were sold by certain of
our stockholders (which includes the underwriter overallotment of 2,118,000
shares).
We incurred expenses of approximately $2,181,000 in connection with the
Offering, of which $1,515,000 constituted underwriting discounts and commissions
and approximately $666,000 constituted other expenses including registration and
filing fees, printing, accounting and legal expenses. No direct or indirect
payments were made to any directors, officers, owners of ten percent or more of
any class of the Company's equity securities, or other affiliates of the Company
other than for reimbursement of expense incurred on the road show. Net offering
proceeds to the Company after deducting these expenses were approximately,
$26,882,000.
As of June 30, 2000, we have expended approximately $8.4 million for the
purchase of additional manufacturing and test equipment and engineering design
hardware and software and $165,000 for purchase business combinations. We have
invested the remaining net offering proceeds of $18.3 million in short-term
investments consisting of United States Treasury Notes, obligations of United
States government agencies and corporate bonds with maturities ranging from July
1, 1999 to March 31, 2001. The use of proceeds described herein
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does not represent a material change in the use of proceeds described in the
prospectus of the Secondary Registration Statement.
(3) 2000 Public Offering
We filed a Registration Statement on Form S-3, (the "2000 Registration
Statement") File No. 333-92431, which was declared effective by the Securities
and Exchange Commission on January 13, 2000 relating to a follow-on public
offering of our Common Stock. The managing underwriters for the offering were
Credit Suisse First Boston, Salomon Smith Barney, and SG Cowen. The 2000
Registration Statement registered an aggregate of 12,004,542 shares (including
1,504,542 shares upon exercise of the underwriters over-allotment option) of
Common Stock and the price to the public was $71.00 per share. All of the shares
registered were sold by us.
The expenses incurred by us in connection with the offering were
approximately $37.3 million of which $36.2 constituted underwriting discounts
and commissions and approximately $1.1 million constituted other expenses
including registration and filing fees, printing, accounting and legal expenses.
No direct or indirect payments were made to any directors, officers, owners of
ten percent or more of any class of our equity securities, or other affiliates.
Net offering proceeds to the Company after deducting these expenses were
approximately, $815.0 million.
We have invested the net proceeds of the offering in short-term investments
consisting of US Treasury Notes, obligations of US government agencies and
corporate bonds with maturities ranging from July 1, 2000 to April 15, 2032. The
use of proceeds described herein does not represent a material change from the
use of proceeds described in the prospectus of the 2000 Registration Statement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) The Registrant filed the following current reports on Form 8-K
with the Commission during the during the three months ended June
30, 2000:
1) On June 23, 2000 the Company filed a Current Report on Form
8-K to announce the acquisition on June 8, 2000 of
YuniNetworks, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 1, 2000 Applied Micro Circuits Corporation
By: /s/ William Bendush
------------------------------------------
William Bendush
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
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