<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1999, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-23193
___________
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (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 January 7, 2000, 54,177,787 shares of the Registrant's Common Stock
were issued and outstanding.
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I. FINANCIAL INFORMATION:
Item 1. a) Condensed Consolidated Balance Sheets at December 31, 1999
(unaudited) and March 31, 1999............................................................ 3
b) Condensed Consolidated Statements of Income (unaudited) for the three months
ended and nine months ended December 31, 1999 and 1998.................................... 4
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the nine months ended December 31, 1999 and 1998...................................... 5
d) Notes to Condensed Consolidated Financial Statements (unaudited).......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
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 3 Defaults upon Senior Securities............................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders........................................... 25
Item 5. Other Information............................................................................. 25
Item 6. Exhibits and Reports on Form 8-K.............................................................. 25
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>
DECEMBER 31, MARCH 31,
1999 1999
--------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................................................... $ 22,774 $ 13,530
Short-term investments - available-for-sale......................................... 92,494 73,010
Accounts receivable, net of allowance for doubtful accounts of $318 and $177
at December 31, 1999 (unaudited) and March 31, 1999, respectively................. 20,854 19,275
Inventories......................................................................... 10,522 9,813
Deferred income taxes............................................................... 4,273 4,573
Notes receivable from officers and employees........................................ 100 815
Other current assets................................................................ 4,010 4,004
-------- --------
Total current assets...................................................... 155,027 125,020
Property and equipment, net.............................................................. 33,999 23,128
Other assets............................................................................. 3,357 2,507
-------- --------
Total assets........................................................................... $192,383 $150,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 8,239 $ 5,131
Accrued payroll and related expenses................................................ 6,589 4,689
Other accrued liabilities........................................................... 6,789 7,207
Deferred revenue.................................................................... 2,316 1,439
Current portion of long-term debt................................................... 1,370 1,862
Current portion of capital lease obligations........................................ 776 1,075
-------- --------
Total current liabilities................................................. 26,079 21,403
Long-term debt, less current portion..................................................... 3,957 4,995
Long-term capital lease obligations, less current portion................................ 1,873 2,563
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 - 54,118 at December 31, 1999 (unaudited)
and 53,224 at March 31, 1999............................................ 541 532
Additional paid-in capital........................................................... 112,814 102,259
Deferred compensation, net........................................................... (1,661) (2,123)
Accumulated other comprehensive loss................................................. (274) (33)
Retained earnings.................................................................... 49,509 21,514
Notes receivable from stockholders................................................... (455) (455)
-------- --------
Total stockholders' equity.............................................. 160,474 121,694
-------- --------
Total liabilities and stockholders' equity........................................... $192,383 $150,655
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------
1999 1998 1999 1998
---------------------------------------
<S> <C> <C> <C> <C>
Net revenues.................................................... $45,762 $26,972 $115,303 $76,258
Cost of revenues................................................ 13,209 9,669 34,818 28,415
------- ------- -------- -------
Gross profit.................................................... 32,553 17,303 80,485 47,843
Operating expenses:
Research and development..................................... 8,281 5,847 21,829 16,194
Selling, general and administrative.......................... 7,061 4,573 19,178 13,033
------- ------- -------- -------
Total operating expenses................................... 15,342 10,420 41,007 29,227
------- ------- -------- -------
Operating income................................................ 17,211 6,883 39,478 18,616
Interest income, net............................................ 1,225 883 3,114 2,613
------- ------- -------- -------
Income before income taxes...................................... 18,436 7,766 42,592 21,229
Provision for income taxes...................................... 6,324 2,646 14,597 7,457
------- ------- -------- -------
Net income...................................................... $12,112 $ 5,120 $ 27,995 $13,772
======= ======= ======== =======
Basic earnings per share:
Earnings per share........................................... $ 0.23 $ 0.10 $ 0.53 $ 0.28
======= ======= ======== =======
Shares used in calculating basic earnings per share.......... 53,119 49,602 52,364 48,568
======= ======= ======== =======
Diluted earnings per share:
Earnings per share........................................... $ 0.21 $ 0.09 $ 0.48 $ 0.25
======= ======= ======== =======
Shares used in calculating diluted earnings per share........ 58,804 55,238 57,930 54,396
======= ======= ======== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
Operating Activities
Net income....................................................................... $ 27,995 $ 13,772
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 5,802 5,060
Amortization of deferred compensation........................................ 462 193
Changes in assets and liabilities:
Accounts receivable...................................................... (1,579) (5,023)
Inventories.............................................................. (709) (1,507)
Other assets............................................................. (956) 258
Accounts payable......................................................... 3,108 (1,473)
Accrued payroll and other accrued liabilities............................ 6,320 5,163
Deferred income taxes.................................................... 300 295
Deferred revenue......................................................... 877 (298)
--------- ---------
Net cash provided by operating activities............................ 41,620 16,440
Investing Activities
Proceeds from sales and maturities of short-term investments................. 92,870 136,245
Purchase of short-term investments........................................... (112,595) (143,102)
Notes receivable from officers and employees................................. 815 262
Purchase of property and equipment........................................... (16,673) (11,988)
--------- ---------
Net cash used for investing activities............................... (35,583) (18,583)
Financing Activities
Proceeds from issuance of common stock, net.................................. 5,737 6,572
Repurchase of restricted stock............................................... (11) -
Payments on capital lease obligations........................................ (989) (1,759)
Proceeds from long-term debt................................................. -- 3,784
Payments on stockholders notes............................................... -- 46
Payments on long-term debt................................................... (1,530) (483)
--------- ---------
Net cash provided by financing activities............................ 3,207 8,160
--------- ---------
Net increase in cash and cash equivalents............................ 9,244 6,017
Cash and cash equivalents at beginning of period.................................... 13,530 6,460
--------- ---------
Cash and cash equivalents at end of period.......................................... $ 22,774 $ 12,477
========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest................................................................. $ 495 $ 373
========= =========
Income taxes............................................................. $ 9,620 $ 2,505
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
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 (the "Company" or "AMCC") 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 operating results and it 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 inventories, 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.
On September 1, 1999, the Company's stockholders approved an increase in the
authorized number of shares of common stock authorized to 180,000,000. On
September 9, 1999, the Company effected a two-for-one stock split (in the form
of a stock 100% dividend); accordingly, all prior share and per share amounts in
this Quarterly Report on Form 10-Q have been restated to reflect the stock
split.
On December 9, 1999, the Company filed, and subsequently amended on January
3, 2000, a registration statement on Form S-3 with the Securities and Exchange
Commission relating to the proposed under-written public offering of 4,500,000
shares of common stock (or 5,175,000 shares if the underwriters over-allotment
option is exercised in full). As of the date of the filing of Quarterly report
on Form 10-Q this registration statement has not yet become effective and no
shares have been issued pursuant to such filling.
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, 1999.
6
<PAGE>
2. EARNINGS PER SHARE
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares used in basic earnings per share
computations-weighted average common shares
outstanding 53,119 49,602 52,364 48,567
Net effect of dilutive common share
equivalents based on the treasury stock method 5,685 5,636 5,566 5,824
------ ------ ------ ------
Shares used in diluted earnings per share
computations 58,804 55,238 57,930 54,391
====== ====== ====== ======
</TABLE>
3. CERTAIN FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
-------------------------------------------
<S> <C> <C>
Inventories (in thousands):
Finished goods $ 2,890 $ 975
Work in process 6,486 7,688
Raw materials 1,146 1,150
------- ------
$10,522 $9,813
======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
---------------------------------------------
<S> <C> <C>
Property and equipment (in thousands):
Machinery and equipment $ 42,015 $ 33,280
Leasehold improvements 7,802 7,641
Computers, office furniture and equipment 19,573 16,654
Land 4,808 1,133
-------- --------
74,198 58,708
Less accumulated depreciation and amortization (40,199) (35,580)
-------- --------
$ 33,999 $ 23,128
======== ========
</TABLE>
7
<PAGE>
4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1999 1998
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $12,112 $5,120 $27,995 $13,772
Change in net unrealized loss
on available-for-sale investments (67) - (241) -
------- ------ ------- -------
Comprehensive income $12,045 $5,120 $27,754 $13,772
======= ====== ======= =======
</TABLE>
Accumulated other comprehensive loss presented in the accompanying consolidated
condensed balance sheets consists of the accumulated net unrealized loss on
available-for-sale investments.
5. CONTINGENCIES
The Company is party to various claims and legal actions arising in the ordinary
course of business, including notification of possible infringement on the
intellectual property rights of third parties. In addition, the Company has been
named as a potentially responsible party ("PRP") along with a large number of
other companies that used Omega Chemical Corporation ("Omega") in Whittier,
California to handle and dispose of certain hazardous waste material. The
Company is a member of a group of PRPs that has agreed to fund certain
remediation efforts at the Omega site. The Company has accrued approximately
$50,000 for its contributions to such efforts. Although the ultimate outcome of
these matters is not presently determinable, management believes that the
resolution of all such pending matters, net of amounts accrued, will not have a
material adverse effect on the Company's financial position or liquidity;
however, there can be no assurance that the ultimate resolution of these matters
will not have a material averse effect on the Company's results of operations in
any period.
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 a number of companies, including AMCC,
engaged in the manufacture and/or sale of IC products. On November 25, 1998, the
Company was served a summons pursuant to this lawsuit. 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. 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. 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, net of amounts accrued, 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 in any period.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations that are included in
the Annual Report on Form 10-K for the year ended March 31, 1999 for Applied
Micro Circuits Corporation. This Quarterly Report on Form 10-Q, and in
particular this Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements regarding future
events or the future financial performance of the Company that involve certain
risks and uncertainties including, but not limited to, those set forth in the
"Risk Factors" discussed 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 customers include leading communications
equipment manufacturers such as Alcatel, Ciena, Cisco, Lucent, Marconi
Communications and Nortel as well as emerging communications systems providers
such as Cerent (recently acquired by Cisco), Juniper Networks, Monterey Networks
(recently acquired by Cisco), Nexabit (recently acquired by Lucent) and Sycamore
Networks.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 28.9% 35.8% 30.2% 37.3%
----- ----- ----- -----
Gross profit.............................. 71.1% 64.2% 69.8% 62.7%
Operating expenses:
Research and development................ 18.1% 21.7% 18.9% 21.2%
Selling, general and administrative..... 15.4% 17.0% 16.6% 17.1%
----- ----- ----- -----
Total operating expenses............. 33.5% 38.6% 35.6% 38.3%
----- ----- ----- -----
Operating income.......................... 37.6% 25.5% 34.2% 24.4%
Interest income, net...................... 2.7% 3.3% 2.7% 3.4%
----- ----- ----- -----
Income before income taxes................ 40.3% 28.8% 36.9% 27.8%
Provision for income taxes................ 13.8% 9.8% 12.7% 9.8%
----- ----- ----- -----
Net income................................ 26.5% 19.0% 24.3% 18.1%
===== ===== ===== =====
</TABLE>
Net Revenues. Net revenues for the three months and nine months ended
December 31, 1999 were $45.8 million and $115.3 million representing increases
of 70% and 51%, respectively, over net revenues of $27.0 million and $76.3
million for the three months and nine months ended December 31, 1998,
respectively. Revenues from sales of communications products increased to 83%
and 79% of net revenues for the three months and nine months ended December 31,
1999, respectively, from 55% and 53% of net revenues for the three months and
nine months ended December 31, 1998, respectively. This increase reflects both
unit growth in shipments of existing products, as well as the introduction of
new products for these markets. Revenues from sales of non-communications
products, consisting of the ATE, high-speed computing and military products,
decreased to 17% and 21% of net revenues during the three months and nine months
ended December 31, 1999, respectively, from 45% and 47% of net revenues for the
three months and nine months ended December 31, 1998, respectively. Sales to
Nortel, including
9
<PAGE>
their contract manufactures, accounted for 40% and 36% of net revenues for the
three months and nine months ended December 31, 1999, respectively, as compared
to 20% and 18% for the three months and nine months ended December 31, 1998,
respectively. Sales to Insight Electronics, Inc., the Company's domestic
distributor, accounted for 16% and 15% of net revenues for the three months and
nine months ended December 31, 1999, respectively compared to 17% and 13% in the
three months and nine months ended December 31, 1998, respectively. Sales to
Raytheon Systems Co. (including shipments of $1.0 million and $4.8 million for
the three months and nine months ended December 31, 1999 relating to the partial
fulfillment of an end-of-life order) accounted for 2% and 4% of net revenues for
the three months and nine months ended December 31, 1999, respectively, compared
to 14% and 13% for the three months and nine months ended December 31, 1998.
Sales outside of North America accounted for 27% and 25% of net revenues for the
three months and nine months ended December 31, 1999 respectively, as compared
to 21% and 25% for the three months and nine months ended December 31, 1998,
respectively.
Gross Margin. Gross margin was 71.1% and 69.8% for the three months and nine
months ended December 31, 1999, respectively, as compared to 64.2% and 62.7% for
the three months and nine months ended December 31, 1998, respectively. 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 our manufacturing capacity. Although
we do not expect our gross margin to continue to increase at the rates reflected
above, our strategy is to maximize factory utilization whenever possible,
maintain or improve our manufacturing yields, and focus on the development and
sale of high-performance products that can have higher gross margins. There can
be no assurance, however, that we will be successful in achieving these
objectives or that the trend of increasing gross margins will continue. In
addition, these factors can vary significantly from quarter to quarter, which
would likely result in fluctuations in quarterly gross margin and net income.
Research and Development. Research and development ("R&D") expenses increased
to $8.3 million, or 18.1% of net revenues, and increased to $21.8 million, or
18.9% of net revenues for the three months and nine months ended December 31,
1999, respectively from $5.8 million, or 21.7% of net revenues, and from $16.2
million, or 21.2% of net revenues for the three months and nine months ended
December 31, 1998, respectively. The increase in R&D expenses was due to
accelerated new product and process development efforts, an increase in
personnel costs as a result of additional R&D personnel and an increase in
engineering hardware and software expenses. 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 in the future. Currently, R&D expenses are primarily focused on
the development of products and processes for the communications market, and we
expect to continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $7.1 million or 15.4% of net revenues and $19.2 million
or 16.6% of net revenues, for the three months and nine months ended December
31, 1999, respectively compared to $4.6 million or 17.0% of net revenues and
$13.0 million or 17.1% of net revenues, for the three months and nine months
ended December 31, 1998, respectively. The increase in SG&A expenses in absolute
dollars for the three months and nine months ended December 31, 1999, primarily
reflected increased compensation and travel costs related to additional sales
and administrative personnel, increases in legal and accounting costs and
increases in product promotion expenses.
Operating Margin. Our operating margin increased to 37.6% and 34.2% of net
revenues for the three months and nine months ended December 31, 1999,
respectively, compared to 25.5% and 24.4% for the three months and nine months
ended December 31, 1998, respectively, principally as a result of the increase
in gross margin and the decrease in the R&D and SG&A expenses as a percentage of
revenue.
Interest Income, net. Interest income, net increased to $1.2 million for the
three months ended December 31, 1999 from $883,000 for the three months ended
December 31, 1998 and increased to $3.1 million for the nine months ended
December 31, 1999 from $2.6 million for the nine months ended December 31, 1998.
This increase was due principally to higher interest income from larger cash and
short-term investment balances.
10
<PAGE>
Income Taxes. The Company's estimated annual effective tax rate used for
the nine months ended December 31, 1999 was 34.3%, compared to an effective tax
rate of 35.1% for the nine months ended December 31, 1998. This decrease in the
Company's estimated effective tax rate is a result of a decrease in the
Company's estimated effective state tax rate and the utilization of certain tax
credits.
Deferred Compensation. In connection with the grant of certain stock
options to employees during the six months ended September 30, 1997, we recorded
aggregate deferred compensation of $599,000, representing the difference between
the deemed fair value of the Common Stock at the date of grant for accounting
purposes and the option exercise price of such options. Additionally, during the
year ended March 31, 1999, we recorded deferred compensation of $2.5 million
related to restricted stock and options granted to founders and employees of
Cimaron. Such amounts are 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 three months and nine
months ended December 31, 1999 was $154,000 and $462,000; respectively compared
to $72,000 and $193,000 for the three months and nine months ended December 31,
1998. We currently expect to record amortization of deferred compensation with
respect to these restricted stock and option grants of approximately $658,000,
$543,000, $414,000, $330,000 and $178,000 during the fiscal years ending March
31, 2000, 2001, 2002, 2003 and 2004, respectively.
Backlog. Our sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of the our 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 backlog as of any particular date is not
representative of actual sales for any succeeding period, and therefore we
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 $62.1 million on December 31, 1999,
compared to $38.3 million on December 31, 1998. Included in backlog at December
31, 1999 is $4.4 million remaining on the Raytheon Systems Co. end-of-life buy
for integrated circuits used in its high-speed radar systems.
Year 2000 Compliance. As a semiconductor manufacturer with our own wafer
fabrication facility, we are dependent on computer systems and manufacturing
equipment with embedded hardware or software to conduct our business. We have
executed a plan designed to make our computer systems, applications and
manufacturing equipment and facilities Year 2000 ready. The plan covered five
stages including (i) inventory, (ii) assessment, (iii) remediation, (iv)
testing, and (v) contingency planning. We have completed the Plan and to date,
none of our systems, applications, equipment or facilities have experienced any
material difficulties from the transition to Year 2000, nor have we been
notified that any of our suppliers have had any such difficulties. Due the
breadth of potential issues related to the Year 2000, we cannot guarantee that
our Year 2000 plan has been successfully implemented or that we will not
experience any problems in the future and the final determination may take
several months. Actual results could still differ materially from our plan.
We have incurred approximately $750,000 related to the Year 2000 project
and we expect any further expenditures to be minor. Approximately one-half of
the costs associated with the Year 2000 project were related 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 were 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 our policy on
property and equipment.
Liquidity and Capital Resources
Our principal source of liquidity as of December 31, 1999 consisted of
$115.3 million in cash, cash equivalents and short-term investments. Working
capital as of December 31, 1999 was $128.9 million, compared to $103.6 million
as of March 31, 1999. This increase in working capital was primarily due to net
cash provided by operating activities, partially offset by the purchase of
property and equipment.
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For the nine months ended December 31, 1999 and 1998, net cash provided by
operating activities was $41.6 million and $16.4 million, respectively. Net cash
provided by operating activities for the nine months ended December 31, 1999
primarily reflected net income before depreciation and amortization expense and
increases in accounts payable, other accrued liabilities and deferred revenue.
Net cash provided by operating activities for the nine months ended December 31,
1998 primarily reflected net income before depreciation and amortization expense
and increases in accounts payable, offset by increases in accounts receivable
and inventory.
Capital expenditures totaled $16.7 million for the nine months ended
December 31, 1999 and included the payment of $3.7 million to complete the
purchase of land under a contract entered into in June 1998, compared to capital
expenditures of $12.0 million for the nine months ended December 31, 1998. We
intend to increase our capital expenditures for manufacturing equipment, test
equipment and engineering and operational 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 or at all.
On December 9, 1999, the Company filed, and subsequently amended on January
3, 2000, a registration statement on Form S-3 with the Securities and Exchange
Commission relating to the proposed under-written public offering of 4,500,000
shares of common stock (or 5,175,000 shares if the underwriters over-allotment
option is exercised in full). We intend to use the proceeds of the offering to
fund the capacity expansion, for working capital and for general corporate
purposes including, but not limited to, acquiring businesses and technologies.
Although we believe that we will be able complete the offering as planned, there
can be no assurance that we will be successful in these efforts.
We believe that our available cash, cash equivalents and short-term
investments, and cash generated from operations, will be sufficient to meet the
our capital requirements for normal operations for at least the next 12 months
should we be unsuccessful in our current effort to raise additional capital.
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;
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. 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 our products and of our customers' products;
. 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;
. the ability of our customers to obtain components from their other
suppliers;
. general communications systems industry and semiconductor industry
conditions; and
. general economic conditions.
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, as compared to 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
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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. We believe that we will be able to
satisfy our production needs from this fabrication facility through the end of
the first quarter 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. To 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:
. expanding our current wafer fabrication facility;
. entering into strategic relationships to obtain additional capacity;
. building a new wafer fabrication facility; or
. 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 interferences; 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
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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
its current budget or within the period currently 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 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 were 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.
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.
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.
We generally do not have long-term wafer supply agreements with our outside
foundries that guarantee wafer or product quantities, prices or delivery lead
times. 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
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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 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;
. 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 and eight-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
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development of our business or to replace engineers or other qualified personnel
who may leave our employment 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 44%, 46% and 59% of our
revenues in fiscal 1997, 1998 and 1999, respectively, accounted for 62% and 73%
for the three months ended December 31, 1998 and 1999, respectively and
accounted for 56% and 69% for the nine months ended December 31, 1998 and 1999,
respectively. Sales to Nortel accounted for approximately 20%, 21% and 20% of
our revenues in fiscal 1997, 1998 and 1999, respectively, accounted for 20% and
40% for the three months ended December 31, 1998 and 1999, respectively and
accounted for 18% and 36% for the nine months ended December 31, 1998 and 1999,
respectively. However, we have no long-term volume purchase 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 MARKET 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.
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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 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 AND SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, PRICE EROSION AND HEIGHTENED INTERNATIONAL COMPETITION.
The communications IC market is intensely competitive. Our ability to compete
successfully in our 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;
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. 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 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 Conexant, Giga,
Hewlett-Packard, Lucent, Maxim, Philips, PMC-Sierra, Sony, Texas Instruments,
TriQuint and Vitesse. Some of these companies use gallium arsenide process
technologies for certain products. In certain circumstances, most notably with
respect to ASICs supplied to Nortel, our customers or potential customers have
internal IC manufacturing capabilities.
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 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 automated test equipment, or 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
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manufacturing high-speed computing IC products in response to declining average
selling prices. Even if we successfully utilize new processes or technologies to
reduce the manufacturing costs of our high-speed computing products in a timely
manner, our customers in the ATE and high-speed computing markets may not
purchase these products.
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.
In addition, 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. Additionally, 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 anticipate revenues and 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
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intellectual property, or disclose such intellectual property or trade secrets,
or that we can meaningfully protect our intellectual property.
WE COULD BE HARMED BY LITIGATION INVOLVING PATENTS AND PROPRIETARY RIGHTS.
As a general matter, the semiconductor industry is characterized by substantial
litigation regarding patent and other intellectual property rights. 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. On July 31, 1998, the Lemelson
Medical, Education & Research Foundation Limited Partnership filed a lawsuit in
the U.S. District Court for the District of Arizona against a number of
companies, including us, engaged in the manufacture and/or sale of IC products.
The complaint alleges infringement by the defendants of certain U.S. patents
held by the Lemelson Partnership relating to certain semiconductor manufacturing
processes. On November 25, 1998, we were 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 us
a license under the Lemelson patents. Although the ultimate outcome of this
matter is not currently determinable, we believe, 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 our 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 our results of operations
for any quarter. Furthermore, there can be no assurance that we would prevail in
any such litigation.
Any litigation relating to the intellectual property rights of third parties,
including the Lemelson Patents, 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 40%, 42% and 41%
of revenues for the years ended March 31, 1997, 1998 and 1999, respectively and
39% and 50% for the three months ended December 31, 1998 and 1999, respectively.
For the nine months ended December 31, 1998 and 1999, international sales
(including sales to Canada) accounted for 40% and 52% of revenues, respectively.
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:
. 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;
21
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. difficulties in obtaining governmental approvals for communications 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.
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 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. A significant natural disaster, such as an earthquake or flood, could
have a material adverse impact on our business, financial condition and
operating results.
22
<PAGE>
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;
. 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;
. changes in estimates of our performance by securities analysts;
. announcements of merger or acquisition transactions;
. other events or factors; and
. general economic and market conditions.
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 harm the
market price of our common stock.
IF WE HAVE NOT ADEQUATELY PREPARED FOR THE TRANSITION TO YEAR 2000, OUR
BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD SUFFER.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities Year 2000 ready. To date,
none of our systems, applications, equipment or facilities have experienced
material difficulties from the transition to Year 2000, nor have we been
notified that any of our suppliers have had any such difficulties. However, due
to the breadth of potential issues related to the Year 2000, we cannot guarantee
that we will not experience any problems in the future and the final
determination may take several months. Where practicable, we have attempted to
mitigate our risks with respect to any failures of our critical external
suppliers related to the Year 2000. The effect on our results of operations from
any failure of our systems, applications, equipment or facilities, or our
critical external suppliers, related to the Year 2000 issue cannot yet be
determined.
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 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.
23
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At December 31, 1999, the Company's investment portfolio includes fixed-
income securities of $92.5 million. These securities are subject to interest
rate risk and will decline in value if interest rates increase. Due to the short
duration of the Company's investment portfolio, an immediate 100 basis point
increase in interest rates would have no material impact on the Company's
financial condition or results of operations.
The Company generally conducts business, including sales to foreign
customers, in U.S. dollars and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10% change in foreign exchange
rates would not have a material impact on the Company's financial condition or
results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations on the normal course of business. As of the
date of this Quarterly Report on Form 10-Q, the Company is not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition or
operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Use of Proceeds
(1) Initial Public Offering
The Company filed a Registration Statement on Form S-1 (the "Registration
Statement"), File No. 333-37609, which was declared effective by the Securities
and Exchange Commission on November 24, 1997, relating to the initial public
offering of the Company's Common Stock. The managing underwriters of the
offering were BankAmerica Robertson Stephens, NationsBanc Montgomery Securities
LLC, and Cowen & Company. The Registration Statement registered an aggregate
11,106,000 shares of Common Stock and the price to the public was $4.00 per
share. Of such shares, 7,076,896 were sold by the Company (which includes the
underwriter's over-allotment of 1,665,900 shares) and 5,695,004 were sold by
certain shareholders of the Company.
The Company incurred $3,196,718 of total expenses in connection with the
IPO 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 December 31, 1999, the Company has expended approximately $4,808,000
for the purchase of land for future capacity expansion, $5,232,000 for the
purchase of additional manufacturing and test equipment within our facilities
and invested the remaining proceeds of $15,071,000 in short-term investments
consisting of United States Treasury Notes, obligations of United States
government agencies and corporate bonds with maturities ranging from January 1,
2000 to April 15, 2032. The use of proceeds described herein does not represent
a material change in the use of proceeds described in the prospectus of the
Registration Statement.
(2) Secondary Public Offering
The Company filed a Registration Statement on Form S-1, File No. 333-46071
(the "Secondary Registration Statement"), which was declared effective by the
Securities and Exchange Commission on March 12, 1998, relating to the secondary
public offering of the Company's Common Stock. The managing underwriters for the
Offering were BancAmerica Robertson Stephens, NationsBanc Montgomery Securities
LLC, and Cowen & Company. The Registration Statement registered an aggregate of
7,060,000 shares of the Common Stock and the
24
<PAGE>
price to the public was $9.6875 per share. Of such shares, 3,000,000 shares were
sold by the Company, and 5,119,000 shares were sold by certain stockholders of
the Company (which includes the underwriter's overallotment of 1,059,000
shares).
The expenses incurred by the Company in connection with the Offering were
approximately $2,181,000, 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.
The Company has invested the net offering proceeds in short-term
investments consisting of United States Treasury Notes, obligations of United
States government agencies and corporate bonds with maturities ranging from
January 1, 2000 to April 15, 2032. The use of proceeds described herein does not
represent a material change in the use of proceeds described in the prospectus
of the Secondary Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: January 12, 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)
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10Q FOR THE FISCAL QUARTER ENDED DECEMBER 31, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 22,774
<SECURITIES> 92,494
<RECEIVABLES> 21,172
<ALLOWANCES> 318
<INVENTORY> 10,522
<CURRENT-ASSETS> 155,027
<PP&E> 74,198
<DEPRECIATION> 40,199
<TOTAL-ASSETS> 192,383
<CURRENT-LIABILITIES> 26,079
<BONDS> 5,830
0
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<COMMON> 541
<OTHER-SE> 159,933
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<SALES> 45,762
<TOTAL-REVENUES> 45,762
<CGS> 13,209
<TOTAL-COSTS> 13,209
<OTHER-EXPENSES> 15,342
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 150
<INCOME-PRETAX> 18,436
<INCOME-TAX> 6,324
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