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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-23193
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2586591
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
</TABLE>
6290 Sequence Drive
San Diego, California 92121
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (858) 450-9333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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 during the preceding 12 months (or for such shorter period than 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $16,675,629,734 as of March 31, 2000, based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% of more of the outstanding Common Stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 122,441,822 shares of the registrant's Common Stock issued and
outstanding as of May 26, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on August 29,
2000.
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PART I
Item 1. Business.
Applied Micro Circuits Corporation ("AMCC") was incorporated and commenced
operations in California in 1979. AMCC was reincorporated in Delaware in 1987.
Certain statements in this Annual Report on Form 10-K, including statements
contained in the "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. See "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In this Annual Report on Form 10-K, "Applied Micro Circuits Corporation",
"AMCC", the "Company", "we", "us" and "our" refers to Applied Micro Circuits
Corporation and all of our consolidated subsidiaries.
During fiscal 2000, we effected two two-for-one stock splits in the form of
100% stock dividends. Those dividends were issued on September 9, 1999 and
March 23, 2000. Accordingly, all share, per share, common stock options and
prices presented in this Annual Report on Form 10-K have been adjusted to
reflect these events.
Overview
We design, develop, manufacture and market high-performance, high-bandwidth
silicon solutions for the world's optical networks. We offer integrated
circuit ("IC") products that enable the transport of voice and data over fiber
optic networks by utilizing a combination of high-frequency analog, mixed-
signal and digital design expertise coupled with system-level knowledge and
multiple silicon process technologies. Our customers include leading
communications equipment manufacturers such as Alcatel, Ciena, Cisco, JDS
Uniphase, Lucent, Marconi Communications and Nortel as well as emerging
communications systems providers such as Cerent (acquired by Cisco), Juniper
Networks, Monterey Networks (acquired by Cisco), Nexabit (acquired by Lucent)
and Sycamore Networks.
Our objective is to be the premier supplier of high-bandwidth silicon ICs
for the world's optical networks. Our strategies for achieving this objective
include:
. Focusing on high-growth, fiber optic-based network markets;
. Providing complete IC solutions to our customers and aggressively
integrating product functionality; and
. Leveraging our expertise in multiple silicon-process technologies to
provide cost-effective, optimized solutions.
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 ("ATE") high-speed
computing and military markets.
We manufacture a majority of our products at our silicon wafer fabrication
facility in San Diego, California. We also use outside semiconductor wafer
fabrication facilities for the production of products designed on CMOS and
silicon germanium ("SiGe") BiCMOS processes.
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Industry Background
The Communications Industry
Communications technology has evolved from simple analog voice signals
transmitted over networks of copper telephone lines to complex analog and
digital voice and data transmitted over hybrid networks of media such as
copper, coaxial and fiber optic cables, as well as wireless. This evolution
has been driven by enormous increases in the number of users and the
complexity of the data types transmitted over networks. In addition, the
substantial growth in the Internet, the World Wide Web, cellular and facsimile
communications; the emergence of new applications such as video conferencing;
and the increase in demand for remote network access and higher speed, higher
bandwidth communication between local area networks and local and wide area
networks have increased network bandwidth requirements. This increase has made
many systems architectures inadequate.
In the wide area network ("WAN") market, service providers and equipment
suppliers in particular were impacted by the inadequacy of systems
architectures caused by the legacy public network infrastructure. This
infrastructure was designed to optimize voice communications and is not well
suited for the high-throughput requirements of data transmission that is
transmitted in "packet bursts." The volume and complexity of this data led to
the increasing deployment of fiber optic technology for use in WANs. This
technology provides substantially greater transmission capacity and is less
error prone and easier to maintain than copper networks. The Synchronous
Optical Network ("SONET") standard in North America and Japan, and the
Synchronous Digital Hierarchy ("SDH") standard in the rest of the world,
became the standards for the transmission of signals over optical fiber. The
SONET/SDH standards facilitate high data integrity and improved network
reliability, while reducing maintenance and other operation costs by
standardizing interoperability among equipment from different vendors. With
data and video traffic being added in abundance to voice traffic, a
transmission protocol complementary to SONET/SDH, Asynchronous Transfer Mode
("ATM"), emerged to optimize bandwidth utilization. Today's carriers and
service providers are seeing exponential increases in data traffic and only
very modest increases in voice traffic making data the dominant traffic over
fiber optic networks today. The explosive bandwidth growth in today's data
centric networks has demanded the adoption of more advanced optical networking
technologies such as Dense Wave Division Multiplexing ("DWDM"). DWDM is the
optical multiplexing of different wavelengths of light down a single fiber.
Each wavelength is the equivalent of an independent optical channel. DWDM
greatly increases the capacity of installed fiber. Complementing DWDM
transmission capabilities are emerging optical add drop multiplexers and cross
connects which can more efficiently switch large optical datapaths through the
network. In addition, new protocols such as multi-protocol level switching
("MPLS") have emerged which are better suited for data centric traffic while
providing for the low latency and quality of service needs of voice and video
traffic. SONET/SDH has also evolved to handle these new protocols with packet
over SONET ("POS") capabilities.
In the local area network ("LAN") market, similar bandwidth issues have
arisen as the greater computational power of PCs have enabled powerful network
applications such as video conferencing and Web communications. However, these
new applications and the increasing number of computers on networks have
significantly increased the volume of data traffic and, as a result, the
network has now become the bottleneck in the delivery of integrated video,
audio and data. Ethernet is currently the most widespread LAN standard,
operating at 10 to 100 megabits per second. However, LAN backbones are rapidly
being upgraded to Gigabit Ethernet and ATM standards in order to increase
available bandwidth. These network protocols, which enable expanded bandwidth
in excess of one gigabit per second, are emerging as the new standards for LAN
backbones. Future LAN backbones will have yet more bandwidth capability as 10
Gigabit Ethernet is deployed. In addition, the Fibre Channel standard, which
also facilitates data transmission at rates exceeding one gigabit per second,
has emerged as a practical, cost-effective and highly reliable method for
achieving high-speed, high-volume data transfer among workstations,
mainframes, data storage devices and other peripherals. Fibre Channel and
Gigabit Ethernet are complementary and compatible transmission standards, and
the emergence of Gigabit Ethernet has accelerated the growth of the Fibre
Channel standard.
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The Communications IC Opportunity
In order to address the growing requirements of communications networks,
equipment suppliers are developing and introducing increasingly sophisticated
systems at a rapid rate. To achieve the performance and functionality required
by such systems, these OEMs must utilize increasingly complex ICs, which now
account for a larger portion of the value-added proprietary content of such
systems. As a result of the rapid pace of new product introductions, the
proliferation of standards to be accommodated and the difficulty of designing
and producing requisite ICs, equipment suppliers increasingly outsource these
ICs to semiconductor firms with specialized expertise. These trends have
created a significant opportunity for IC suppliers that can design cost-
effective solutions for the transmission of high-frequency data. IC suppliers
must utilize a variety of skills and technologies to satisfy the requirements
of communications equipment OEMs. These OEMs require IC suppliers that possess
system-level expertise and can quickly bring to market high-performance,
highly reliable, power-efficient ICs. Additionally, these OEMs seek suppliers
with both analog and digital expertise to provide a more complete solution
that enables faster integration into the system design and higher performance.
In particular, WAN OEMs require IC suppliers to provide solutions that
minimize jitter (a measure of the stability and noisiness of a signal), which
degrades transmission quality over distance. LAN products typically have
substantially shorter life cycles than WAN products, increased cost pressures,
and higher volumes.
In the high-performance communication IC market, a number of process
technologies are used to produce ICs. Traditionally, designers have relied on
silicon-based manufacturing process technologies for the development of high-
speed, mixed-signal analog and digital circuits with precision timing. In some
cases, OEMs utilize discrete components or IC solutions based on non-silicon
processes such as gallium arsenide ("GaAs") to meet the high-frequency
requirements of certain communications products. However, non-silicon
processes tend to be more expensive and less predictable with respect to
yields and are less able to ramp to high-volume production than silicon
processes.
AMCC Strategy
Our objective is to be the leading supplier of high-performance, high-
bandwidth silicon IC solutions for the world's optical communications
infrastructure. To achieve this objective, we employ the following strategies:
Focus on High-Growth Wide Area Network Markets
We target key high-growth WAN markets, including those for SONET/SDH, ATM,
POS, DWDM and optical modules. We have built substantial competencies focused
on the specific requirements of these markets in the areas of process
technology and mixed-signal design and substantial expertise in systems
architecture and applications support. We believe that the integration of
these capabilities enables us to optimize solutions addressing the high-
bandwidth connectivity requirements of WAN systems OEMs.
Provide Complete System Level IC Solutions to the Customer and Aggressively
Integrate Products Functionality
Our strategy in the WAN market is two-fold; 1) provide fiber-through-switch
silicon solutions; and 2) continue to optimize these solutions through
integration. To this end, in June 2000, we acquired YuniNetworks, Inc.
providing us with expertise in the development of terabit switching solutions.
We believe this acquisition, together with our established competence in the
high-speed mixed-signal and high-integration digital development, will allow
us to offer comprehensive solutions for communications equipment OEMs from the
fiber through the switch. These integrated solutions provide our customers
with guaranteed interoperability, pre-designed subsystems, better-cost
economics, and system-level expertise. The result is faster time-to-market,
better performance and lower cost. To continue these customer benefits in
future generations of products, we are pursuing an aggressive integration
strategy to provide greater functionality in fewer ICs.
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Leverage our Expertise in Multiple Silicon Process Technologies to Provide
Cost Effective Optimized Solutions
We are dedicated to utilizing the best silicon process technology available
to offer solutions optimized for specific applications and customer
requirements. We believe our current bipolar and BiCMOS processes,
complemented by advanced CMOS and SiGe BiCMOS processes from external
foundries, provide us with the flexibility to design and manufacture products
that are tailored to an application's individual needs. Through this flexible
approach, we are better able to transition products over time to new
manufacturing processes as product performance requirements and process
technologies evolve.
Products and Customers
Our current IC products primarily address the needs of the fiber optic
based WAN and LAN markets. Our products for these markets are designed to
respond to the growing demand for high-speed networking applications for
established and emerging WAN standards such as SONET/SDH, POS, ATM, and MPLS,
and LAN standards, such as Gigabit Ethernet, ATM and Fibre Channel. We also
market and sell IC products that address the needs of the ATE, broadcast HDTV,
high-speed computing and military markets. We utilize our high-performance,
high-density design expertise and systems knowledge, together with our
internal bipolar and BiCMOS processes and CMOS and SiGe processes from outside
foundries, to design and manufacture products that are tailored to our
customers' needs.
Transition from ASICs to ASSPs
Application specific integrated circuits ("ASICs") are custom products that
are designed by or for only one customer, and can be sold only to that one
customer. Application specific standard products ("ASSPs"), on the other hand,
are standardized products, that are designed for, and can be used by, several
customers. ASSPs generally can be designed and brought to market in less time.
Accordingly, companies that manufacture networking systems have been using
fewer ASICs and more ASSPs. Most of our products are ASSPs, and we believe
that the trend towards greater usage of ASSPs in communication network systems
will continue.
We have several types of communications IC products categorized by the type of
signals they utilize. These categories are:
Analog Layer: Our analog layer ICs typically work in conjunction with the
lasers or photo diodes that provide the electrical-to-optical and optical-to-
electrical signal conversions. These ICs include various amplifiers that take
very weak electrical signals (e.g. a few millivolts) and increase them for use
at the higher digital signal level (e.g. hundreds of millivolts). Our analog
layer products transmit signals at rates ranging from 1 to 10 Gbps.
Mixed Signal Layer: Our mixed signal ICs transmit and receive data to and
from the analog layer in a very high-speed serial format (up to 10 Gbps) and
reduce overall system "noise." This low noise capability permits the
transmission of data over greater distances with fewer errors. Our mixed
signal ICs also convert data from the analog layer to the digital layer and
vice versa.
Digital Layer: Our digital layer ICs transmit and receive data to and from
the mixed signal layer in a parallel format and are used predominately in
systems such as very high-speed transmission equipment, add-drop multiplexers,
digital and optical cross-connects, edge and core routers and DWDM. After
transmitting and receiving the data, these ICs then perform a number of
additional functions, including framing, terminating the overhead, performance
monitoring, forward error correction and mapping the data payload to/from the
transmission format. These ICs then send the data either directly to a switch
fabric product which routes the data to its destination, or to a network
processor, which further processes the data prior to forwarding it to a switch
fabric product.
We use our design methodologies to develop a platform product and leverage
that product into multiple derivative products that are highly optimized for
specific applications. For example, we recently developed the
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S3057, a SONET/SDH OC-48 transceiver, as a platform for three products in its
S3000 family. By reusing significant portions of the platform design, we can
reduce development time, risk and costs. This is especially important in
analog intensive circuitry such as very low jitter phase locked loops
("PLLs").
The following table summarizes the product catagories that we offer in the
communication markets:
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PRODUCT CATEGORY
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MARKET Digital Mixed Signal Analog
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WAN-SONET/SDH/ATM:
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OC-3 (155 megabits per second) X X
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OC-12 (622 megabits per second) X X
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OC-48 (2.5 gigabits per second) X X X
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OC-192 (10 gigabits per second) X X X
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LAN:
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Fibre Channel X X
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Gigabit Ethernet X X
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X = We currently produce or have sampled products in this market.
WAN Products
WAN Analog Products: Over the past fiscal year, we introduced our first
generation of analog PMD products for the OC-192 market. The S3090
transimpedence amplifier and S3096 post amplifier were developed in a SiGe
process.
WAN Mixed Signal Products: We introduced our first generation of SONET OC-
12 products in 1993. We have since developed four additional generations of
these products, each integrating greater functionality on each chip while
improving jitter performance. Over the past fiscal year, we have introduced
several OC-48 integrated physical layer transceiver devices and OC-192
transmitter and receiver chipsets. The S3067 operating off a single +3.3V
supply offered the industry's first multi-rate forward error correction
capable device with Clock Synthesis Unit, mux and demux functions.
Additionally we introduced the Yukon device, the first OC-48 framer/mapper
chip with a fully integrated physical layer including clock and data recovery.
WAN Digital Layer Products: In the past fiscal year we introduced many
digital layer products for the OC-12, OC-48, and OC-192 markets. The Missouri
device is the first commercially available OC-48 pointer processor. The Rhine
device supports 16 physical OC-3 channels, 4 OC-12 channels or a single OC-48
channel. The Indus device performs SONET framing and muxing at OC-192. All of
these devices can be utilized with our mixed signal and analog layer products
to provide a comprehensive solution set.
Current customers for our WAN products include Alcatel, Cisco, Ciena, ECI,
Hitachi, JDS Uniphase, Juniper, Lucent, Marconi, Nortel, Sycamore and Tellabs.
LAN Products
LAN Analog Products: Over the past fiscal year, we have focused on
producing 2.5Gbps laser drivers and amplifiers for Verticle Cavity Surface
Emitting Lasar based modules. These modules will be deployed in very short
reach applications (less than 300 meters) which include optical backplanes for
next-generation core switches, routers and DWDM systems.
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LAN Mixed Signal Products: We introduced our first physical layer products
in the gigabit ethernet and fibre channel markets in 1995. Today the S2060 is
AMCC's most popular low-cost, low-power, gigabit ethernet transceiver.
Current customers for our products in the LAN market include 3Com, Agilent,
Bay Networks (acquired by Nortel), Cabletron Systems, Cisco, Compaq, FORE
Systems (acquired by Marconi), Lucent, Newbridge Networks (acquired by
Alcatel) and Sun Microsystems.
ATE
We are not currently developing new products for the ATE market. We
continue to manufacture and sell ASIC products to customers such as Hewlett-
Packard, LTX, Schlumberger, Teradyne and Texas Instruments.
High-Speed Computing Products
We offer a PCI product line that addresses the high-speed computing market.
However, we are not currently developing new products for this market. The
S5933 is a standard master/slave PCI controller chip. The S5920 is a standard
target-only PCI controller chip. These devices are supported with
comprehensive development kits and third-party driver software. We sell these
products to a very large and diverse customer base. Current customers of our
PCI products include Cisco Systems, Ericsson, IBM, Nortel, Sagem.
Military
We are not currently developing new products for military applications. We
continue to manufacture and sell ASIC products for military applications to
customers such as Northrop Grumman and Raytheon Systems.
Technology
We utilize our technological and design expertise to solve the problems of
high-speed analog, digital and mixed-signal circuit designs for the world's
optical networks. Our competencies include the design and manufacture of high-
performance analog, digital and mixed signal ICs, in-depth knowledge of the
architecture and functioning of high-bandwidth fiber optic communications
systems, proven ASIC design methodologies and libraries, and high-performance
semiconductor manufacturing and packaging expertise.
Design of High-Performance Analog, Digital and Mixed-Signal ICs
We have developed multiple generations of products that integrate both
analog and digital elements on the same chip, while balancing the difficult
trade-offs of speed, power and timing inherent in high-speed applications. We
were one of the first companies to embed analog PLLs in bipolar chips with
digital logic for high-speed data transmission and receiver applications.
Since the introduction of our first on-chip clock recovery and clock synthesis
products in 1993 (the S3005/S3006 chip set), we have refined these key
circuits and have successfully integrated multiple analog functions and
multiple channels on the same chip. The mixing of digital and analog signals
poses difficult challenges for IC designers, particularly at high frequencies.
We have acquired significant expertise in mixed-signal IC designs through the
development of multiple generations of products. Through the acquisition of
Cimaron Communications, we added VLSI digital design and systems expertise. We
will continue to apply these competencies in the development of increasingly
complex digital layer products.
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Systems and Architecture Expertise
We believe that our systems architects, design engineers and technical
marketing and applications engineers have a thorough understanding of the
fiber optic communications systems for which we design and build ASSPs. We
substantially expanded this expertise into higher layers of the communication
system with the acquisition of Cimaron. Using this systems expertise, we
develop semiconductor devices to meet OEMs' high-bandwidth systems
requirements. By understanding the systems into which our products are
designed, we believe that we are better able to anticipate and develop optimal
solutions for the various cost, power and performance trade-offs faced by our
customers. We believe that our systems knowledge also enables us to develop
more comprehensive, interoperable solutions. This allows us to develop boards
with multiple products that are a more substantial part of the customers'
system, enabling faster integration into their products.
Process Technology
We utilize our own internal wafer fabrication facility and have developed
and produced multiple generations of cost-effective, high-performance bipolar
and BiCMOS processes. The proven internal silicon-based process technologies
we employ have not required the highly capital-intensive facilities needed by
certain advanced microprocessor, memory or CMOS ASIC suppliers. In addition,
we have obtained access to advanced CMOS and SiGe BiCMOS processes through
foundry relationships. We believe that through the use of our internal and
external process technologies we are able to provide an optimal mix of cost
and performance for the targeted application.
Packaging
We have substantial experience in the development and use of plastic and
ceramic packages for high-performance applications. The selection of the
optimal package solution is a vital element of the delivery of high-
performance products and involves balancing cost, size, thermal management and
technical performance. Our products are designed to reduce power dissipation
and die size to enable the use of industry standard packages. We employ a wide
variety of package types and are currently designing products using ball grid
arrays, tape ball grid arrays and multi-chip modules. Our experience with a
variety of packages is one of the factors that enables us to provide optimal
high-performance IC solutions to our customers.
Research and Development
Our research and development expertise and efforts are focused on the
development of high-performance analog, digital and mixed-signal ASSPs for
fiber optic communications applications. We also develop high-performance
libraries and design methodologies that are optimized for these applications.
Product Development
Our product development is focused on building high-performance high-gate-
count digital design expertise and analog-intensive design expertise that is
incorporated into well-documented blocks that can be reused for multiple
products. We have made, and will continue to make significant investments in
advanced CAD tools to leverage our design engineering staff, reduce design
cycle time and increase first-time design correctness. Our product development
is driven by the imperatives of reducing design cycle time, increasing first-
time design correctness, adhering to disciplined, well documented design
processes and continuing to be responsive to customer needs. We are also
developing high-performance packages for our products in collaboration with
our packaging suppliers and our customers.
Process Development
Our process development is focused on enhancing our current bipolar
processes and acquiring or developing new processes optimized for high-
performance digital and mixed-signal communications applications. Our
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process engineers are also involved with the selection and management of our
relationships with outside foundries to provide the advanced CMOS and SiGe
BiCMOS processes required for certain of our products. If we fail to improve
our existing process technologies or to obtain access to new process
technologies from external foundries in a timely or affordable manner our
business, financial condition and operating results could be adversely
affected.
Our research and development expenses in fiscal years 1998, 1999 and 2000
were $13.3 million, $22.5 million and $32.8 million, respectively, which were
17.3%, 21.4% and 19.0%, respectively, of revenues for such periods. We have
156 employees engaged in engineering and product development related
activities.
Manufacturing
Wafer Fabrication
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. We are currently running several different
bipolar and BiCMOS processes in this facility and we believe that the wafer
fabrication facility has competitive yields, cycle times and costs, produces
large die at acceptable yields and operates on a flexible basis of multiple
products and variable lot sizes. 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 are exploring alternatives for the further expansion of our
manufacturing capacity that would likely occur after fiscal year 2001,
including:
. entering into strategic relationships to obtain additional capacity;
. building a new wafer fabrication facility; or
. purchasing a wafer fabrication facility.
In addition, we currently utilize four outside foundries, AMI
Semiconductor, IBM, Kawasaki CSI Japan and Taiwan Semiconductor Manufacturing
Corporation for the production of products designed on CMOS processes, and we
are utilizing IBM for SiGe BiCMOS processes. We do not plan to fabricate our
own CMOS wafers. There are certain risks associated with our dependence on
external foundries for certain of our products, including reduced control over
delivery schedules, quality assurance, manufacturing yields and costs, the
potential lack of adequate capacity during periods of excess demand, limited
warranties on wafers or products supplied to us, increases in prices and
potential misappropriation of our intellectual property. See "Risk Factors."
Components and Raw Materials
We purchase all of our "raw" silicon wafers from Wacker Siltronic
Corporation. While most silicon wafers now being supplied to the semiconductor
industry are larger than four inches, we believe that Wacker Siltronic will
continue to supply our needs for the foreseeable future. We also carry a
significant inventory of raw wafers to cushion any interruption in supply. We
purchase our ceramic packages from Kyocera America and NTK Ceramics and our
plastic packaging from Amkor and ASAT. See "Risk Factors."
Assembly and Test
We assemble prototypes and modest production volumes of specific products
in our internal assembly facility in San Diego, California. Most of our
production assembly, however, is performed by multiple assembly subcontractors
located in the Far East, Europe and the United States. Following assembly, the
packaged units are returned to us for burn-in (in some cases), final testing
and marking prior to shipment to customers. From time to time, some testing is
performed by subcontractors.
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Sales and Marketing
We sell our products principally through a network of independent
manufacturers' representatives and distributors in specified territories,
under the direction of our direct sales force.
The direct sales force is technically trained and is supported by
applications engineers in the field as well as applications and design
engineers at our design centers. We believe that this "engineering-intensive"
relationship with our customers results in strong, long-term customer
relationships beneficial to both us and our customers. We augment this
strategic account sales approach with domestic and foreign distributors that
service primarily smaller accounts purchasing ASSPs.
In North America, our direct sales effort is supported by 18 independent
manufacturers' representatives and one distributor. Internationally, we sell
our products through 11 distributors in Europe and 8 distributors throughout
the rest of the world. During fiscal years 1998, 1999 and 2000, 21%, 20% and
38%, respectively, of net revenues were from Nortel and its contract
manufacturers. In fiscal years 1998, 1999 and 2000, purchases through Insight
Electronics, our domestic distributor, accounted for 11%, 13% and 17% of net
revenues, respectively. Additionally, in fiscal year 1999, Raytheon Systems
accounted for 16% of net revenues. No other customer accounted for more than
10% of revenues in any period. In fiscal years 1998, 1999 and 2000,
approximately 23%, 24% and 23% of our revenues were derived from sales to
customers located outside of North America.
Our sales headquarters is located in San Diego, California. We maintain
sales offices in Andover, Massachusetts; Raleigh, North Carolina; Plano,
Texas; San Jose, California; Signal Hill, California; Naperville, Illinois;
Manchester, United Kingdom; Munich, Germany; Milan, Italy; Paris, France; and
Tokyo, Japan.
Backlog
Our sales are made primarily pursuant to standard purchase orders for the
delivery of products. Quantities of our products to be delivered and delivery
schedules are frequently revised to reflect changes in customers' needs, and
customer orders generally 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 non-recurring engineering
services to be completed in the next six months was $86.1 million on March 31,
2000, compared to $38.2 million on March 31, 1999. See "Risk Factors."
Competition
The semiconductor market, particularly the high-performance semiconductor
market, is highly competitive and subject to rapid technological change, price
erosion and heightened international competition. The communications industry
is becoming intensely competitive due in part to deregulation and heightened
international competition. Our ability to successfully compete in these
markets depends on a number of factors, including: product performance,
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the
efficiency of production, design wins for our IC products, ramp up of
production of our products for particular system manufacturers, end-user
acceptance of the system manufacturers' products, market acceptance of
competitors' products and general economic conditions. In addition, our
competitors may offer enhancements to existing products, or offer new products
based on new technologies, industry standards or customer requirements, that
are available to customers on a more timely basis than comparable products
from us or that have the potential to replace or provide lower cost
alternatives to our products. The introduction of such enhancements or new
products by our competitors could render our existing and future products
obsolete or unmarketable. Furthermore, once a customer has designed a
supplier's product into its system, the customer is extremely reluctant to
change its supply source due to the significant costs associated with
qualifying a new supplier. Finally, we expect that certain of our competitors
and other semiconductor companies may seek to develop and introduce products
that integrate the functions
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performed by our IC products on a single chip, thus eliminating the need for
our products. Each of these factors could have a material adverse effect on
our business, financial condition and results of operations. See "Risk
Factors."
In the communications markets, we compete primarily against companies such
as Agilent, Conexant, Giga (recently acquired by Intel), Infineon, Lucent,
Maxim, Philips, PMC-Sierra, TriQuint and Vitesse. In certain circumstances,
most notably with respect to ASICs supplied to Nortel, our customers or
potential customers have internal IC manufacturing capability, and this
internal source is an alternative available to the customer. In the ATE
market, we compete primarily against Vitesse and Silicon ECL and BiCMOS
products offered principally by semiconductor manufacturers such as Analog
Devices, Lucent and Maxim. Many of these companies and potential new
competitors have greater financial, technical, manufacturing and marketing
resources than us. In addition, in lower-frequency applications, we face
increasing competition from other CMOS-based products, particularly as the
performance of such products continues to improve. There can be no assurance
that we will be able to develop new products to compete with new technologies
on a timely basis or in a cost-effective manner. Any failure by us to compete
successfully in these target markets, particularly in the communications
markets, would have a material adverse effect on our business, financial
condition and results of operations. See "Risk Factors."
Proprietary Rights
We rely in part on patents to protect our intellectual property. We have
been issued 23 patents in the United States and one patent in Canada, which
patents principally cover certain aspects of the design and architecture of
our IC products. In addition, we have 35 patent applications pending in the
U.S. Patent and Trademark Office. 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. There can be no assurance that others will not
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 a combination of mask
work protection under the Federal Semiconductor Chip Protection Act of 1984,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements. A mask work refers to the
intangible information content of the set of masks or mask databases used to
make a semiconductor product. Despite these efforts, there can be no assurance
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. A
failure by us to meaningfully protect our intellectual property could have a
material adverse effect on our business, financial condition and operating
results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. In the past we have been, and in the future may be, notified that we
may be 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.
There can be no assurance 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 materially adversely affect our
business, financial condition or operating results. In the event of any
adverse ruling in any such matter, we could be required to pay substantial
damages, which could include treble damages, cease the manufacturing, use and
sale of infringing products, discontinue the use of certain processes or
obtain a license under the intellectual property rights of the third-party
claiming infringement. There can be no assurance that a license would be
available on reasonable terms or at all. Any limitations on our ability to
market our products, any delays and costs associated with redesigning our
products or payments of license fees to third parties or any failure by us to
develop or license a substitute technology on
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commercially reasonable terms could have a material adverse effect on our
business, financial condition and operating results. See "Risk Factors."
Environmental Matters
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, such regulations could restrict our ability to expand
our facility at its present location or construct or operate our planned 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. In this regard, since 1993, we have 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. We are a
member of a large group of PRPs that has agreed to fund certain remediation
efforts at the Omega site, which efforts are ongoing. To date, our payment
obligations with respect to such funding efforts have not been material, and
we believe that our future obligations to fund such 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, there can be no assurance that
we are or will be in material compliance with such 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, financial
condition or operating results. See "Risk Factors."
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EMPLOYEES
As of March 31, 2000, we had 477 full-time employees: 45 in administration,
156 in engineering and product development, 195 in operations and 81 in
marketing and sales. Our ability to attract and retain qualified personnel is
essential to our continued success. None of our employees is covered by a
collective bargaining agreement, nor have we ever experienced any work
stoppage. We believe our employee relations are good. Loss of the services of,
or failure to recruit, key design engineers or other technical and management
personnel could be significantly detrimental to our product and process
development programs or otherwise have a material adverse effect on our
business, financial condition and results of operations. See "Risk Factors."
Executive Officers of the Registrant
Our executive officers and their ages as of May 31, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
David M. Rickey............. 44 President and Chief Executive Officer
William E. Bendush.......... 51 Vice President, Finance and Administration,
Chief Financial Officer and Secretary
Kenneth L. Clark............ 51 Vice President, Operations
Candace Kilburn............. 46 Vice President, Human Resources
Brent E. Little............. 36 Vice President, Marketing
Gary Martin................. 49 Chief Technical Officer, Digital Products
Stephen M. Smith............ 41 Vice President, Business Development
Ram Sudireddy............... 33 Vice President, Digital Products
Thomas L. Tullie............ 35 Vice President, Sales
Greg Winner................. 44 Vice President, Engineering
</TABLE>
David M. Rickey has served as President and Chief Executive Officer since
February 1996. From August 1993 to May 1995, Mr. Rickey served as the
Company's Vice President of Operations. From May 1995 to February 1996, Mr.
Rickey served as Vice President of Operations at NexGen, a semiconductor
company. Previously, Mr. Rickey spent more than eight years with Nortel, a
telecommunications manufacturer, where he led the wafer fab engineering and
manufacturing operations in both Ottawa, Canada and San Diego, California. Mr.
Rickey also worked in various engineering positions with IBM from 1981 to
1985. Mr. Rickey has earned B.S. degrees from both Marietta College (summa cum
laude) and Columbia University. In addition, Mr. Rickey received an M.S. in
Materials Science and Engineering from Stanford University.
William E. Bendush joined the company in April 1999 as Vice President,
Finance and Administration, Chief Financial Officer and Secretary. Prior to
joining AMCC, Mr. Bendush served for 14 years as Senior Vice President and
Chief Financial Officer of Silicon Systems, Inc. Mr. Bendush is a Certified
Public Accountant and holds a bachelor's degree from Northern Illinois
University.
Kenneth L. Clark has served as Vice President, Operations since November
1997. Prior to joining the Company, Mr. Clark worked at Integrated Device
Technology, Inc., a semiconductor company, from February 1995 to October 1997,
where he served as Director, Fab Operations. From 1990 to 1995, Mr. Clark
served in various senior management positions including Director, Fab
Operations at Silicon Systems. Mr. Clark holds a B.S. in Physics from the
University of Washington.
Candace Kilburn joined AMCC in 1996. Prior to joining AMCC, Ms. Kilburn
served as Director of Human Resources with Buck Knives Inc. from 1990 to 1996
where she was responsible for international human resources. She has also held
positions at Handyman Corporation and Rohr Industries. Ms. Kilburn earned a
Bachelor of Science in Business Administration from the United States
International University, and an MBA
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from Chapman University. She is designated as a Senior Professional in Human
Resources, a Certified Employee Benefits Specialist, and has two certificates
in Human Resources Management.
Brent E. Little joined the Company in 1991. Prior to his current position
as Vice President of Marketing, he held several marketing management positions
with AMCC as the Director of Strategic Marketing, and Director of Marketing
for ASIC products. Mr. Little earned his B.S in Electrical Engineering from
University of California, Santa Barbara.
Gary Martin, Chief Technical Officer, Digital Products, joined the Company
on March 17, 1999 with the acquisition of Cimaron. Prior to joining the
Company, Dr. Martin co-founded Cimaron, and served as its Chief Technical
Officer since its inception in January 1998. From 1995 to 1997, he served as
Vice President of Engineering and Chief Technical Officer at ATI. From 1978 to
1995, Dr. Martin held various management and technical positions at AT&T Bell
Laboratories. Dr. Martin holds a master's degree and doctorate in Electrical
Engineering from Stanford University and a B.S. and M.S. in Mechanical
Engineering from Oklahoma State University.
Stephen M. Smith joined AMCC in October of 1999 as Vice President, Business
Development. From May 1998 to October 1999 Mr. Smith worked at ST
Microelectronics as the Director of the Micro-fluidics Business Unit. Mr.
Smith also worked for ST microelectronics from January 1993 until May 1997 as
the Director of Finance, Region Americas. From May 1997 to May 1998 Mr. Smith
served as Vice President of Finance for Vixel Corporation. Previously, Mr.
Smith spent eight years with Nortel. Mr. Smith holds a B.S. degree from
Arizona State University.
Ram Sudireddy, Vice President, Digital Products joined the Company on March
17, 1999, with the acquisition of Cimaron. Prior to joining the Company, Mr.
Sudireddy co-founded Cimaron and served as its President and CEO from its
inception in January 1998. From 1996 to 1997, he served as Vice President of
Research and Development at Siltek Corporation, an ATM and SONET design
company that he founded. From 1991 to 1996, Mr. Sudireddy was a member of the
technical staff at AT&T Bell Laboratories, where he held positions as chief
architect and lead designer for a number of highly complex ASICs. Mr.
Sudireddy has a master's degree in Computer Engineering from the University of
Massachusetts at Lowell, and a bachelor's degree in Electrical Engineering
from Nagarjuna University in Guntur, India.
Gregory A. Winner joined AMCC in November 1999. Mr. Winner came to AMCC
from Silicon Systems, Inc., where he was responsible for the advanced
development of integrated circuit products as Vice President of Product
Development from September 1982 to November 1999. Mr. Winner holds an M.S.E.E.
from Stanford University and a B.S.E.E degree from the University of
California, Los Angeles.
Thomas L. Tullie has served as Vice President, Sales since August 1996.
From 1989 to 1996 Mr. Tullie held several strategic sales management
positions, most recently as Director of East Coast Sales, at S-MOS Systems, a
semiconductor company. Mr. Tullie earned a B.S. from the University of
Massachusetts and an M.B.A. from Clark University.
13
<PAGE>
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;
. 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 amount 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;
. 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;
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<PAGE>
. 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 ASSPs, instead
of 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
. 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:
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. 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.
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
16
<PAGE>
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;
. 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
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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 71% of our revenues in
fiscal 2000. Sales to Nortel and its contract manufacturers accounted for
approximately 38% of our revenues in fiscal 2000. 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.
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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 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
19
<PAGE>
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 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
20
<PAGE>
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.
A future acquisition could adversely affect operating results. In
particular, if we were to acquire a company or assets and record the
acquisition as a purchase, we may capitalize a significant goodwill asset.
This asset would be amortized over its expected period of benefit. The
resulting amortization expense could seriously impact operating results for
many years.
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.
21
<PAGE>
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.
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
49% of revenues for the fiscal year 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:
. changes in regulatory requirements;
. tariffs and other barriers;
. timing and availability of export licenses;
. political and economic instability;
22
<PAGE>
. 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;
. 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
23
<PAGE>
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;
. 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; and
. general economic 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, 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.
24
<PAGE>
Item 2. Properties.
Our executive offices, marketing, engineering and test manufacturing
functions are located in San Diego, California in a 90,000 square foot
building that is leased under a lease that expires in 2007. In addition we
have secured a long-term lease for a 60,000 square foot building beginning in
October 2000, which when occupied, will serve as our principal engineering
headquarters. Our wafer fabrication facility is located in a 21,000 square
foot building in San Diego. We lease the facility under a lease that expires
in 2003, but provides us with an option to extend the lease for one additional
five year period. In May 1999, we acquired a parcel of land as a site for a
potential new wafer fabrication facility. This parcel of land is located
approximately one-quarter mile from our headquarters in San Diego, California.
The land currently does not have any improvements and there are no current
plans to commence building on the land.
We lease additional space for sales offices and design centers in Andover,
Massachusetts; Raleigh, North Carolina; Plano, Texas; San Jose, California;
Signal Hill, California; Naperville, Illinois; Edina, Minnesota; Manchester,
United Kingdom; Munich, Germany; Milan, Italy; Paris France and Tokyo, Japan.
Through acquisitions completed subsequent to March 31, 2000 we also have
office space in Kanata, Canada, and Irvine and Del Mar, California.
Item 3. 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 Annual Report on Form 10-K, the Company is 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 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year ended March 31, 2000.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The following table sets forth the high and low sales prices of our
Common Stock as reported by the Nasdaq National Market for the periods
indicated.
On September 9, 1999 and again on March 23, 2000, we effected a two-for-one
stock split (in the form of a 100% stock dividend); accordingly, the prices
presented below have been restated to reflect these stock splits.
<TABLE>
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal year ended March 31, 1999
First Quarter................................................. $ 7.50 $ 4.41
Second Quarter................................................ $ 7.50 $ 3.22
Third Quarter................................................. $ 10.16 $ 3.06
Fourth Quarter................................................ $ 11.69 $ 8.22
<CAPTION>
High Low
------- ------
<S> <C> <C>
Fiscal year ended March 31, 2000
First Quarter................................................. $ 21.25 $10.28
Second Quarter................................................ $ 33.50 $19.06
Third Quarter................................................. $ 64.19 $27.19
Fourth Quarter................................................ $158.87 $50.53
</TABLE>
25
<PAGE>
At March 31, 2000, there were approximately 663 holders of record of our
Common Stock.
We have not paid cash dividends on our Common Stock and presently intend to
continue this policy.
Recent Sales of Unregistered Securities
There were no sales of equity securities by the Company that were not
registered under the Securities Act during fiscal 2000.
(b) 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's 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 March 31,2000, we have expended approximately $4.8 million of the net
proceeds 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. The remaining proceeds of
approximately $9.3 million were invested in short-term investments consisting
of United States Treasury Notes, obligations of United States government
agencies and corporate bonds with maturities ranging from April 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 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 the 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's
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 under-writing 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.
We have invested the net proceeds of the offering in short-term investments
consisting of United States Treasury Notes, obligations of United States
government agencies and corporate bonds with maturities ranging
26
<PAGE>
from April 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.
(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 of
(including 1,504,542 shares upon exercise of the underwriters over-allotment
option) 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 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 United States Treasury Notes, obligations of United States
government agencies and corporate bonds with maturities ranging from April 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.
27
<PAGE>
Item 6. Selected Financial Data.
We effected two-for-one stock splits in the form of a 100% stock dividend
on September 9, 1999 and again on March 23, 2000. All share and per share
information has been restated to reflect these events.
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues.................... $50,264 $57,468 $76,618 $105,000 $ 172,352
Cost of revenues................ 34,169 30,057 34,321 37,937 50,218
------- ------- ------- -------- ----------
Gross profit.................... 16,095 27,411 42,297 67,063 122,134
Operating expenses:
Research and development...... 8,283 7,870 13,268 22,472 32,815
Selling, general and
administrative............... 11,232 12,537 14,278 18,325 28,199
Merger-related costs.......... -- -- -- 2,350 --
------- ------- ------- -------- ----------
Total operating expenses.... 19,515 20,407 27,546 43,147 61,014
------- ------- ------- -------- ----------
Operating income (loss)......... (3,420) 7,004 14,751 23,916 61,120
Interest income (expense), net.. (242) (29) 871 3,450 12,872
------- ------- ------- -------- ----------
Income (loss) before income
taxes.......................... (3,662) 6,975 15,622 27,366 73,992
Provision for income taxes...... 32 659 406 10,233 25,367
------- ------- ------- -------- ----------
Net income (loss)............... $(3,694) $ 6,316 $15,216 $ 17,133 $ 48,625
======= ======= ======= ======== ==========
Basic earnings (loss) per share:
Earnings (loss) per share..... $ (0.20) $ 0.32 $ 0.36 $ 0.17 $ 0.45
======= ======= ======= ======== ==========
Shares used in calculating
basic earnings (loss) per
share........................ 18,264 20,024 42,376 98,056 107,820
======= ======= ======= ======== ==========
Diluted earnings (loss) per
share:
Earnings (loss) per share..... $ (0.05) $ 0.09 $ 0.19 $ 0.16 $ 0.41
======= ======= ======= ======== ==========
Shares used in calculating
diluted earnings (loss) per
share........................ 69,576 71,628 81,176 109,720 119,152
======= ======= ======= ======== ==========
Consolidated Balance Sheet Data:
Working capital................. $13,977 $19,364 $77,417 $103,617 $ 977,621
Total assets.................... 37,836 41,814 112,834 150,655 1,046,882
Long-term debt and capital lease
obligations including current
portion........................ 8,091 5,854 6,711 10,495 7,417
Total stockholders' equity...... 21,512 27,743 91,634 121,694 1,013,805
</TABLE>
28
<PAGE>
Quarterly Comparisons
The following tables set forth consolidated statements of operations for
each of our last eight quarters. This quarterly information is unaudited and
has been prepared on the same basis as the annual consolidated financial
statements. In our opinion, this quarterly information reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
QUARTERLY FINANCIAL INFORMATION FOR FISCAL 1999 AND FISCAL 2000
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 2000
------------------------------- -------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $23,814 $25,472 $26,972 $28,742 $31,643 $37,898 $45,762 $57.049
Cost of revenues........ 9,399 9,347 9,669 9,522 10,283 11,326 13,209 15,400
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 14,415 16,125 17,303 19,220 21,360 26,572 32,553 41,649
Operating expenses:
Research and
development............ 4,893 5,454 5,847 6,278 6,354 7,194 8,281 10,986
Selling, general and
administrative......... 4,164 4,296 4,573 5,292 5,569 6,548 7,061 9,021
Merger-related costs.... -- -- -- 2,350 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............... 9,057 9,750 10,420 13,920 11,923 13,742 15,342 20,007
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 5,358 6,375 6,883 5,300 9,437 12,830 17,211 21,642
Interest income, net.... 853 877 883 837 884 1,005 1,225 9,758
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 6,211 7,252 7,766 6,137 10,321 13,835 18,436 31,400
Provision for income
taxes.................. 2,227 2,584 2,646 2,776 3,535 4,738 6,324 10,770
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,984 $ 4,668 $ 5,120 $ 3,361 $ 6,786 $ 9,097 $12,112 $20,630
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per
share.................. $ 0.04 $ 0.04 $ 0.05 $ 0.03 $ 0.06 $ 0.08 $ 0.10 $ 0.16
======= ======= ======= ======= ======= ======= ======= =======
Shares used in
calculating
diluted earnings per
share.................. 106,660 109,184 110,476 112,560 114,112 115,864 117,608 129,024
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of the financial condition and results of our
operations should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in our Annual Report on Form
10-K. This discussion contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those described in the "Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect our analysis only as of the date hereof. We assume
no obligation to update these forward-looking statements to reflect actual
results or changes in factors or assumptions affecting such forward-looking
statements.
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.
29
<PAGE>
Results of Operations
The following table sets forth certain selected consolidated statement of
operations data in dollars and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------
1998 1999 2000
------------- -------------- --------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $76,618 100.0% $105,000 100.0% $172,352 100.0%
Cost of revenues................ 34,321 44.8 37,937 36.1 50,218 29.1
------- ----- -------- ----- -------- -----
Gross profit.................... 42,297 55.2 67,063 63.9 122,134 70.9
Operating expenses:
Research and development...... 13,268 17.3 22,472 21.4 32,815 19.0
Selling, general and
administrative............... 14,278 18.6 18,325 17.5 28,199 16.4
Merger-related costs.......... -- -- 2,350 2.2 -- --
------- ----- -------- ----- -------- -----
Total operating expenses.... 27,546 35.9 43,147 41.1 61,014 35.4
------- ----- -------- ----- -------- -----
Operating income................ 14,751 19.3 23,916 22.8 61,120 35.5
Net interest income............. 871 1.1 3,450 3.3 12,872 7.5
------- ----- -------- ----- -------- -----
Income before provision for
income taxes................... 15,622 20.4 27,366 26.1 73,992 42.9
Provision for income taxes...... 406 0.5 10,233 9.8 25,367 14.7
------- ----- -------- ----- -------- -----
Net income...................... $15,216 19.9% $ 17,133 16.3% $ 48,625 28.2%
------- ----- -------- ----- -------- -----
Diluted earnings per share:
Earnings per share............ $ 0.19 $ 0.16 $ 0.41
======= ======== ========
Shares used in calculating
diluted earnings per share... 81,176 109,720 119,152
======= ======== ========
</TABLE>
Comparison of the Year Ended March 31, 2000 to the Year Ended March 31, 1999
On September 9, 1999 and again on March 23, 2000, we effected a two-for-one
stock split (in the form of a 100% stock dividend); accordingly, all share and
per share amounts in this discussion of the results of operations have been
restated to reflect the stock splits.
Net Revenues. Net revenues for the year ended March 31, 2000 were
approximately $172.4 million, representing an increase of 64% over net
revenues of approximately $105.0 million for the year ended March 31, 1999.
Revenues from sales of communications products increased 141% to $138.1
million or 80% of net revenues for the year ended March 31, 2000 from $57.3
million or 55% of net revenues for the year ended March 31, 1999. 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 markets, decreased from 45% of net revenues for the year ended March
31, 1999, to 20% of net revenues for the year ended March 31, 2000. Sales to
Nortel, including their contract manufacturers, accounted for 38% and 20% of
net revenues for the years ended March 31, 2000 and 1999, respectively. In the
years ended March 31, 2000 and 1999, Insight Electronics, Inc., our domestic
distributor, accounted for 17% and 13% of net revenues, respectively. Sales
outside of North America accounted for 23% and 24% of net revenues for the
years ended March 31, 2000 and 1999, respectively.
Gross Margin. Gross margin was 70.9% for the year ended March 31, 2000, as
compared to 63.9% for the year ended March 31, 1999. The increase in gross
margin resulted primarily from increased utilization of our wafer fabrication
facility. Our gross margin is primarily impacted by factory utilization,
manufacturing yields, product mix and the timing of depreciation expense and
other costs associated with expanding our manufacturing capacity. Our strategy
is to maximize factory utilization whenever possible, maintain or improve our
30
<PAGE>
manufacturing yields, and focus on the development and sales of high-
performance products that can have higher gross margins. There can be no
assurance, however, that 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 46% to approximately $32.8 million, or 19% of revenues, for the year
ended March 31, 2000, from approximately $22.5 million, or 21.4% of net
revenues, for the year ended March 31, 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 $4.2
million increase in compensation related costs, as a result of both increased
headcount and increased average compensation costs, a $2.8 million increase in
the cost of design tools and software, and a $3.0 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 possibly 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 $28.2 million, or 16.4% of revenues, for
the year ended March 31, 2000, as compared to approximately $18.3 million, or
17.5% of net revenues, for the year ended March 31, 1999. The increase in SG&A
expenses for the year ended March 31, 2000 was primarily due to a $4.4 million
increase in personnel and travel costs, a $1.0 million increase in commissions
earned by sales representatives, a $500,000 increase in product promotion
expenses, and a $1.1 million increase in professional fees related to legal,
accounting and strategic developments. The decrease in SG&A expenses as a
percentage of net revenues for the year ended March 31, 2000 was a result of
net revenues increasing more rapidly than SG&A expenses. We expect SG&A
expenses to increase in the future due principally to additional staffing in
our sales and marketing departments, as well as increased spending on
information technology and product promotion.
Operating Margin. Our operating margin increased to 35.5% of net revenues
for the year ended March 31, 2000, compared to 22.8% for the year ended March
31, 1999, principally as a result of the increase in gross margin and the
decrease in R&D and SG&A expenses as a percentage of net revenues.
Net Interest Income. Net interest income increased to $12.9 million for the
year ended March 31, 2000 compared to $3.5 million for the year ended March
31, 1999. This increase was due principally to higher interest income from
larger cash and short-term investment balances generated from operations and
the net proceeds of approximately $815 million from our public offering
completed in January 2000.
Income Taxes. Our annual effective tax rate for the year ended March 31,
2000 was 34.3%, compared to an effective tax rate of 37.4% for the year ended
March 31, 1999. The effective tax rate for the year ended March 31, 2000 was
decreased from statutory rates due to the utilization of certain federal and
state tax credits. The rate for fiscal 2000 was lower than the prior year due
to the non-deductibility of certain merger-related costs incurred in fiscal
1999.
Diluted Earnings per share. Diluted earnings per share increased 156% to
$0.41 in the year ended March 31, 2000, compared to $0.16 for the year ended
March 31, 1999.
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 Communications Corporation ("Cimaron").
Such amounts are presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable options.
Amortization of
31
<PAGE>
deferred compensation recorded for the years ended March 31, 2000 and 1999 was
$611,000 and $860,000, respectively. We currently expect to record
amortization of deferred compensation with respect to the restricted stock and
option grants of approximately $521,000, $412,000, $330,000 and $180,000
during the fiscal years ending 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 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
therefore we believe that backlog is not a good indicator of future revenue.
Our backlog for products requested to be shipped in the next six months was
$86.1 million on March 31, 2000 compared to $38.2 million on March 31, 1999.
Comparison of the Year Ended March 31, 1999 to the Year Ended March 31, 1998
Net Revenues. Net revenues for the year ended March 31, 1999 were
approximately $105.0 million, representing an increase of 37% over net
revenues of approximately $76.6 million for the year ended March 31, 1998.
Revenues from sales of communications products increased 56% to $57.3 million
or 55% of net revenues for the year ended March 31, 1999 from $36.6 million or
48% of net revenues for the year ended March 31,1998. 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
products to other markets, consisting of the ATE, high-speed computing and
military markets, decreased from 52% of net revenues for the year ended March
31, 1998, to 45% of net revenues for the year ended March 31, 1999, although
revenues from sales to these other markets increased in absolute dollars. The
increase in absolute dollars in revenues attributed to these other markets was
primarily due to $10.0 million of shipments in the year ended March 31, 1999,
relating to the partial fulfillment of an end-of-life order from Raytheon
Systems Co. Total sales to Raytheon Systems Co. accounted for 16% of net
revenues in the year ended March 31, 1999 and were less than 10% of net
revenues in the year ended March 31, 1998. Sales to Nortel accounted for 20%
and 21% of net revenues for the years ended March 31, 1999 and 1998,
respectively. In the years ended March 31, 1999 and 1998, Insight Electronics,
Inc. accounted for 13% and 11% of net revenues, respectively. Sales outside of
North America accounted for 24% and 23% of net revenues for the years ended
March 31, 1999 and 1998, respectively.
Gross Margin. Gross margin was 63.9% for the year ended March 31, 1999, as
compared to 55.2% for the year ended March 31, 1998. The increase in gross
margin resulted from increased utilization of our wafer fabrication facility.
Research and Development. R&D expenses increased 69% to approximately $22.5
million, or 21.4% of revenues, for the year ended March 31, 1999, from
approximately $13.3 million, or 17.3% of net revenues, for the year ended
March 31, 1998. The substantial increase in R&D expenses was due to our
acquisition of Cimaron, which incurred approximately $2.5 million of R&D
expenses during its fiscal year, and accelerated new product and process
development efforts, including a $3.2 million increase in compensation costs,
and a $3.9 million increase in prototyping and outside contractor costs.
Selling, General and Administrative. SG&A expenses were approximately $18.3
million, or 17.5% of revenues, for the year ended March 31, 1999, as compared
to approximately $14.3 million, or 18.6% of net revenues, for the year ended
March 31, 1998. The increase in SG&A expenses for the year ended March 31,
1999 was primarily due to a $2.1 million increase in personnel costs, a
$500,000 increase in commissions earned by third-party sales representatives,
a $500,000 increase in product promotion expenses and a $400,000 increase in
legal and accounting costs. A portion of such increases was also due to our
acquisition of Cimaron. The decrease in SG&A expenses as a percentage of net
revenues for the year ended March 31, 1999 was a result of net revenues
increasing more rapidly than SG&A expenses.
32
<PAGE>
Merger-related costs. In March 1999, we acquired all of the outstanding
common stock and common stock equivalents of Cimaron in exchange for
approximately 12 million shares of our common stock. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Costs
associated with this merger of $2.3 million, or $0.02 per diluted share, were
expensed in the quarter ended March 31, 1999.
Operating Margin. Our operating margin increased to 22.8% of net revenues
for the year ended March 31, 1999, compared to 19.3% for the year ended March
31, 1998, principally as a result of the increase in gross margin and decrease
in SG&A expenses as a percentage of net revenues, partially offset by the
increase in R&D expenses as a percentage of net revenues.
Net Interest Income. Net interest income increased to $3.5 million for the
year ended March 31, 1999 compared to $871,000 for the year ended March 31,
1998. This increase was due principally to higher interest income from larger
cash and short-term investment balances generated from operations and the
proceeds from our public offerings completed during the second half of the
year ended March 31, 1998.
Income Taxes. Our annual effective tax rate for the year ended March 31,
1999, which approximated statutory rates, was 37.4%, compared to an effective
tax rate of 2.6% for the year ended March 31, 1998. The effective tax rate for
the year ended March 31, 1998 was decreased from statutory rates due to the
reduction of a valuation allowance recorded against deferred tax assets for
net operating loss carryforwards and credits.
Diluted Earnings per share. Diluted earnings per share decreased 16% to
$0.16 in the year ended March 31, 1999, compared to $0.19 for the year ended
March 31, 1998. The decrease reflects the merger related costs of $2.3
million, the increase in the effective tax rate, and the greater number of
shares outstanding due in part to the Cimaron acquisition, offset in part by
the increase in operating income in fiscal 1999.
Deferred Compensation. Amortization of deferred compensation recorded for
the years ended March 31, 1998 and 1999 was $127,000 and $860,000,
respectively.
Backlog. Our backlog for products requested to be shipped and nonrecurring
engineering services to be completed in the next six months at March 31, 1999
was $38.2 million, compared to $30.1 million on March 31, 1998. Included in
backlog at March 31, 1999 was the $9.3 million balance of an order received
from Raytheon Systems Co. related to an end-of-life buy for integrated
circuits used in its high speed radar systems.
Liquidity and Capital Resources
Our principal source of liquidity as of March 31, 2000 consisted of $954.6
million in cash, cash equivalents and short-term investments. Working capital
as of March 31, 2000 was $977.6 million, compared to $103.6 million as of
March 31, 1999. This increase in working capital was primarily due to the
proceeds of our public stock offering of approximately $815 million and
approximately $65 million of cash provided by our operating activities, offset
by the purchase of property, equipment and other assets.
For the years ended March 31, 2000, 1999 and 1998, net cash provided by
operating activities was $65.3 million, $22.0 million, and $16.9 million,
respectively. Net cash provided by operating activities in fiscal 2000 and
1999 primarily reflected net income before depreciation and amortization
expense and the tax benefit of disqualified dispositions, offset by increases
in accounts receivable, inventories, and other assets.
Capital expenditures totaled $22.8 million, $16.5 million, and $11.6 for
the years ended March 31, 2000, 1999 and 1998, respectively, of which $0, $6.7
million, and $3.6 million for the years ended March 31, 2000, 1999, and 1998,
respectively, were financed using debt or capital leases. In fiscal year 2001,
we expect to incur approximately $36 million in capital expenditures for
manufacturing and test equipment, computer hardware and software and leasehold
improvements for our new engineering facility.
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
33
<PAGE>
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.
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
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 2000, our investment portfolio includes fixed-income
securities of $784.4 million. These securities are subject to interest rate
risk and will decline in value if interest rates increase. Because the
maturity dates of our investment portfolio are 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, we 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.
Item 8. Financial Statements and Supplementary Data.
Refer to the Index to the Financial Statements on Page F-l of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
34
<PAGE>
PART III
Certain information required by Part III is omitted from this report
because we will file a definitive proxy statement within 120 days after the
end of our fiscal year pursuant to Regulation 14A (the "Proxy Statement") for
our Annual Meeting of Stockholders to be held August 29, 2000, and the
information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant.
(a) Executive Officers--See the section entitled "Executive Officers of the
Registrant" in Part I, Item 1 hereof.
(b) Directors--the information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Proxy
Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
section entitled "Common Stock Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
section entitled "Transactions with Management" in the Proxy Statement.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements of the Company are included herein as required
under Item 8 of this Annual Report on Form 10-K. See Index on page F-l.
(2) Financial Statement Schedules:
The financial statement schedules of the Company are included in Part IV
of this report:
For the three fiscal years ended March 31, 2000 -- II Valuation and
Qualifying Accounts
Schedules not listed above have been omitted because information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
The following exhibits are filed or incorporated by reference into this
report.
(a) Exhibits
<TABLE>
<C> <S>
2.1(4) Agreement and Plan of Merger and Reorganization dated as of April 18,
2000 among Applied Micro Circuits Corporation, OLI Acquisition
Corporation and YuniNetworks, Inc.
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated Bylaws of the Company.
4.1(1) Specimen Stock Certificate.
10.1(1) Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2(1) 1982 Employee Incentive Stock Option Plan, as amended, and form of
Option Agreement.
10.3(1) 1992 Stock Option Plan as amended, and form of Option Agreement.
10.4(1) 1997 Employee Stock Purchase Plan and form of Subscription Agreement.
10.5(1) 1997 Directors' Stock Option Plan and form of Option Agreement.
10.6(1) 401(k) Plan, effective April 1, 1985 and form of Enrollment
Agreement.
10.9(1) Industrial Real Estate Lease, dated October 29, 1996 between the
Company and ADI Mesa Partners AMCC, L.P. (the Sequence Drive Lease).
10.10(1) Industrial Real Estate Lease, dated April 8, 1992 between the Company
and Mira Mesa Business Park (the Oberlin Drive Lease).
10.15(1) Patent License Agreement, dated January 1, 1998, as amended by and
between the Company and Motorola, Inc.
10.17(1) Patent License Agreement, dated June 1, 1997 by and between the
Company and International Business Machines Corporation.
10.18(1) Letter Agreement, dated January 30, 1996 by and between the Company
and David Rickey.
10.19(1) Patent License Agreement, dated October 19, 1992, as amended by and
between Registrant and Alcatel Network Systems, Inc.
10.24(2) 1998 Employee Stock Purchase Plan and form of Subscription Agreement.
10.26(3) 1998 Stock Incentive Plan of Cimaron Communications Corporation
adopted by Registrant in merger transaction, effective March 17,
1999.
10.27(3) Employment Agreement by and between Registrant and Gary Martin.
10.28(3) Employment Agreement by and between Registrant and Ramakrishna
Sudireddy.
10.29(3) Agreement to Sell and Purchase and Escrow Instructions to Acquire
Land by and between Kilroy Realty, L.P. and Registrant dated January
8, 1999.
10.30(3) Lease of Engineering Building by and between Kilroy Realty, L.P. and
Registrant dated February 17, 1999.
10.31(3) *Custom Sales Agreement dated July 14, 1998 by and between Registrant
and International Business Machines.
10.32 Amendment No. 1 to the engineering Building Lease dated November,
1999.
10.33(6) 2000 Equity Incentive Plan and form of Option Agreement.
10.34(7) Form of Underwriting Agreement.
11.1(5) Computation of Per Share Data under SFAS No. 128.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
24.1 Power of Attorney (see page 38).
27.1 Financial Data Schedules.
</TABLE>
(b) The Company filed the following current reports on Form 8-K with the
Commission during the during the quarter ended March 31, 2000:
(1) On March 22, 2000, the Company filed a current report on form 8-K
to announce the Board of Directors approval of a two-for-one stock
split to be implemented as a 100% stock dividend.
*Confidential treatment has been granted with respect to certain portions of
this exhibit.
--------
(1) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-37609) filed October 10, 1997,
or with any Amendments thereto, which registration statement became
effective November 24, 1997.
(2) Incorporated by reference to Appendix I filed with the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders filed on June 15,
1998.
(3) Incorporated by reference to identically numbered exhibits filed with the
Company's Annual Report, Form 10-K for the year ended March 31, 2000.
(4) Incorporated by reference to Appendix A filed with the Company's
Registration Statement on Form S-4 (No. 333-37372) filed May 19, 2000.
(5) The Computation of Per Share Data under SFAS No. 128 is included in the F-
pages of this report.
(6) Incorporated by reference to Exhibits 99.1 and 99.2 filed with the
Company's Registration Statement on Form S-8 (No. 333-35-408) filed April
21, 2000 which became effective April 21, 2000.
(7) Incorporated by Reference to Exhibit 1.1 filed with the Company's
Registration Statement on Form S-3 (No. 333-92431) filed on January 13,
2000.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
APPLIED MICRO CIRCUITS CORPORATION
/s/ David M. Rickey
----------------------------------
By:
David M. Rickey
President and Chief Executive
Officer
Date: June 26, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David M. Rickey and William E. Bendush,
jointly and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ David M. Rickey President and Chief June 26, 2000
____________________________________ Executive Officer
David M. Rickey
/s/ William E. Bendush Chief Financial Officer June 26, 2000
____________________________________
William E. Bendush
/s/ Roger A. Smullen, Sr. Director and Chairman of the June 26, 2000
____________________________________ Board of Directors
Roger A. Smullen, Sr.
/s/ William K. Bowes, Jr. Director June 26, 2000
____________________________________
William K. Bowes, Jr.
/s/ R. Clive Ghest Director June 26, 2000
____________________________________
R. Clive Ghest
/s/ Franklin P. Johnson, Jr. Director June 26, 2000
____________________________________
Franklin P. Johnson, Jr.
/s/ S. Atiq Raza Director June 26, 2000
____________________________________
S. Atiq Raza
/s/ Arthur B. Stabenow Director June 26, 2000
____________________________________
Arthur B. Stabenow
/s/ Harvey P. White Director June 26, 2000
____________________________________
Harvey P. White
</TABLE>
38
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets as of March 31, 1999 and 2000............ F-3
Consolidated Statements of Income for the fiscal years ended March
31, 1998, 1999 and 2000............................................. F-4
Consolidated Statements of Stockholder' Equity for the fiscal years
ended March 31, 1998, 1999 and 2000................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended
March 31, 1998, 1999 and 2000....................................... F-6
Notes to Consolidated Financial Statements........................... F-7 - 19
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Applied Micro Circuits Corporation
We have audited the accompanying consolidated balance sheets of Applied
Micro Circuits Corporation as of March 31, 1999 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 2000. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Micro Circuits Corporation at March 31, 1999 and 2000, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
San Diego, California
April 19, 2000
F-2
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
March 31,
--------------------
1999 2000
Assets -------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 13,530 $ 170,102
Short-term investments--available-for-sale.............. 73,010 784,449
Accounts receivable, net of allowance for doubtful
accounts of $177 and $314 at March 31, 1999 and 2000,
respectively........................................... 19,275 25,459
Inventories............................................. 9,813 10,925
Deferred income taxes................................... 4,573 4,148
Current portion of notes receivable from officer and
employees.............................................. 815 81
Other current assets.................................... 4,004 10,240
-------- ----------
Total current assets................................. 125,020 1,005,404
Property and equipment, net.............................. 23,128 37,842
Notes receivable from officers and employees, less
current portion......................................... 100 48
Other assets............................................. 2,407 3,588
-------- ----------
Total assets......................................... $150,655 $1,046,882
======== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable........................................ $ 5,131 $ 8,818
Accrued payroll and related expenses.................... 4,689 7,618
Other accrued liabilities............................... 7,207 6,448
Deferred revenue........................................ 1,439 2,776
Current portion of long-term debt....................... 1,862 1,394
Current portion of capital lease obligations............ 1,075 729
-------- ----------
Total current liabilities............................ 21,403 27,783
Long-term debt, less current portion..................... 4,995 3,599
Long-term capital lease obligations, less current
portion................................................. 2,563 1,695
Commitments and contingencies (Notes 7 and 10)
Stockholders' equity:
Preferred Stock, $0.01 par value:
Authorized shares--2,000, none issued and outstanding.. -- --
Common Stock, $0.01 par value:
Authorized shares--180,000 at March 31, 2000
Issued and outstanding shares--106,448 and 121,842 at
March 31, 1999 and 2000, respectively................. 1,064 1,218
Additional paid-in capital.............................. 101,727 944,512
Deferred compensation, net.............................. (2,123) (1,443)
Accumulated other comprehensive income (loss)........... (33) (166)
Retained earnings....................................... 21,514 70,139
Notes receivable from stockholders...................... (455) (455)
-------- ----------
Total stockholders' equity........................... 121,694 1,013,805
-------- ----------
Total liabilities and stockholders' equity.............. $150,655 $1,046,882
======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------
1998 1999 2000
------------------ ---------
<S> <C> <C> <C>
Net revenues...................................... $ 76,618 $ 105,000 $ 172,352
Cost of revenues.................................. 34,321 37,937 50,218
-------- --------- ---------
Gross profit...................................... 42,297 67,063 122,134
Operating expenses:
Research and development......................... 13,268 22,472 32,815
Selling, general and administrative.............. 14,278 18,325 28,199
Merger-related costs............................. -- 2,350 --
-------- --------- ---------
Total operating expenses...................... 27,546 43,147 61,014
-------- --------- ---------
Operating income.................................. 14,751 23,916 61,120
Interest income, net.............................. 871 3,450 12,872
-------- --------- ---------
Income before income taxes........................ 15,622 27,366 73,992
Provision for income taxes........................ 406 10,233 25,367
-------- --------- ---------
Net income........................................ $ 15,216 $ 17,133 $ 48,625
======== ========= =========
Basic earnings per share:
Earnings per share............................... $ 0.36 $ 0.17 $ 0.45
======== ========= =========
Share used in calculating basic earnings per
share........................................... 42,376 98,056 107,820
======== ========= =========
Diluted earnings per share:
Earnings per share............................... $ 0.19 $ 0.16 $ 0.41
======== ========= =========
Shares used in calculating diluted earnings per
share........................................... 81,176 109,720 119,152
======== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated Notes
Stock Common Stock Additional Other Retained Receivable Total
-------------- --------------- Paid-In Deferred Comprehensive Earnings From Stockholders'
Shares Amount Shares Amount Capital Compensation (Loss) (Deficit) Stockholders Equity
------ ------ ------- ------ ---------- ------------ ------------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
31, 1997......... 1,223 $ 12 20,100 $ 201 $ 36,823 $ -- $ -- $(9,235) $ (58) $ 27,743
Issuance of
common stock,
net of issuance
costs........... -- -- 20,156 202 51,791 -- -- -- -- 51,993
Conversion of
convertible
preferred stock
to common
stock........... (1,051) (11) 42,868 429 (418) -- -- -- -- --
Issuance of
stock pursuant
to exercise of
stock options... -- -- 6,808 69 806 -- -- -- (455) 420
Net exercise of
warrants........ -- -- 212 -- -- -- -- -- -- --
Payments on
notes........... -- -- -- -- -- -- -- -- 12 12
Repurchase of
convertible
preferred
stock........... (172) (1) -- -- (3,617) -- -- (259) -- (3,877)
Deferred
compensation
related to stock
options......... -- -- -- -- 599 (599) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 127 -- -- -- 127
Net income...... -- -- -- -- -- -- -- 15,216 -- 15,216
------ ---- ------- ------ -------- ------- ----- ------- ----- ----------
Balance, March
31, 1998......... -- -- 90,144 901 85,984 (472) -- 5,722 (501) 91,634
Issuance of
stock upon
formation of
Cimaron......... -- -- 9,376 93 4,571 (230) -- -- -- 4,434
Issuance of
common stock
under employee
stock purchase
plans........... -- -- 1,668 17 3,162 -- -- -- -- 3,179
Issuance of
stock pursuant
to exercise of
stock options... -- -- 5,260 53 2,484 (964) -- -- -- 1,573
Tax benefit of
disqualifying
dispositions.... -- -- -- -- 4,209 -- -- -- -- 4,209
Payment on
notes........... -- -- -- -- -- -- -- -- 46 46
Deferred
compensation
related to stock
options and
restricted
stock........... -- -- -- -- 1,317 (1,317) -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 860 -- -- -- 860
Adjustment for
change in
Cimaron's year
end............. -- -- -- -- -- -- -- (1,341) -- (1,341)
Comprehensive
income:
Net income...... -- -- -- -- -- -- -- 17,133 -- 17,133
Unrealized loss
on short-term
investments, net
of tax benefit.. -- -- -- -- -- -- (33) -- -- (33)
----------
Total
comprehensive
income.......... -- -- -- -- -- -- -- -- -- 17,100
------ ---- ------- ------ -------- ------- ----- ------- ----- ----------
Balance, March
31, 1999......... -- -- 106,448 1,064 101,727 (2,123) (33) 21,514 (455) 121,694
Issuance of
stock, net of
issuance costs.. -- -- 12,005 120 814,860 -- -- -- -- 814,980
Issuance of
common stock
under employee
stock purchase
plans........... -- -- 262 3 2,501 -- -- -- -- 2,504
Issuance of
stock pursuant
to exercise of
stock options... -- -- 3,183 31 10,345 -- -- -- -- 10,376
Repurchase of
restricted
stock........... -- -- (56) -- (11) -- -- -- -- (11)
Amortization of
deferred
compensation.... -- -- -- -- -- 611 -- -- -- 611
Elimination of
deferred
compensation
related to stock
options
forfeited....... -- -- -- -- (69) 69 -- -- -- --
Tax benefit of
disqualifying
dispositions.... -- -- -- -- 15,159 -- -- -- -- 15,159
Comprehensive
income: --
Net income...... -- -- -- -- -- -- -- 48,625 -- 48,625
Unrealized loss
on short-term
investments, net
of tax benefit.. -- -- -- -- -- -- (133) -- -- (133)
----------
Total
comprehensive
income.......... -- -- -- -- -- -- -- -- -- 48,492
------ ---- ------- ------ -------- ------- ----- ------- ----- ----------
Balance, March
31, 2000......... -- $-- 121,842 $1,218 $944,512 $(1,443) $(166) $70,139 $(455) $1,013,805
====== ==== ======= ====== ======== ======= ===== ======= ===== ==========
</TABLE>
F-5
<PAGE>
APPLIED MICO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
------------------------------
1998 1999 2000
-------- -------- ----------
<S> <C> <C> <C>
Operating Activities
Net income................................... $ 15,216 $ 17,133 $ 48,625
Adjustment to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 5,174 7,045 8,039
Write-offs of inventories.................... 600 180 701
Amortization of deferred compensation........ 127 860 611
Tax benefit of disqualifying dispositions.... -- 4,209 15,159
Loss on disposals of property................ -- 221 --
Adjustment for change in Cimaron year end.... -- (1,341) --
Changes in operating assets and liabilities:
Accounts receivables........................ (3,761) (7,096) (6,184)
Inventories................................. (1,255) (1,808) (1,813)
Other assets................................ (1,607) (678) (7,417)
Accounts payable............................ 2,787 (84) 3,687
Accrued payroll and other accrued
liabilities................................ 2,418 4,495 2,170
Deferred income taxes....................... (3,882) (691) 425
Deferred revenue............................ 1,067 (434) 1,337
-------- -------- ----------
Net cash provided by operating
activities............................... 16,884 22,011 65,340
Investing Activities
Proceeds from sales and maturities of short-
term investments............................ 66,547 187,787 1,847,446
Purchase of short-term investments........... (119,874) (199,394) (2,559,018)
Repayments and (advances) on notes receivable
from officers and employees................. (366) 262 786
Purchase of property, equipment and other
assets...................................... (11,342) (16,490) (22,753)
-------- -------- ----------
Net cash used for investing activities.... (65,035) (27,835) (733,539)
Financing Activities
Proceeds from issuance of common stock, net.. 52,413 9,062 827,860
Repurchase of common stock................... -- -- (11)
Repurchase of convertible preferred stock.... (3,877) -- --
Payments on notes receivable from
stockholders................................ 12 46 --
Payments on capital lease obligations........ (2,691) (2,110) (1,214)
Payments on long-term debt................... (37) (792) (1,864)
Proceeds from equipment financed under
capital leases.............................. -- 2,342 --
Issuance of long-term debt................... 3,303 4,346 --
-------- -------- ----------
Net cash provided by financing
activities............................... 49,123 12,894 824,771
-------- -------- ----------
Net increase in cash and cash
equivalents.............................. 972 7,070 156,572
Cash and cash equivalents at beginning of
year.......................................... 5,488 6,460 13,530
-------- -------- ----------
Cash and cash equivalents at end of year....... $ 6,460 $ 13,530 $ 170,102
-------- -------- ----------
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest.................................... $ 380 $ 542 $ 634
======== ======== ==========
Income taxes................................ $ 3,251 $ 4,274 $ 12,273
======== ======== ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities. Capital
lease obligations of approximately $282,000 were incurred and notes were
received for the exercise of stock options totaling $455,000 during fiscal year
1998.
See accompanying notes.
F-6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
The Company designs, develops, manufactures and markets high-performance,
high-bandwidth silicon solutions for the world's optical networks.
Basis of Presentation
On September 9, 1999 and again on March 23, 2000, the Company effected a
two-for-one stock split (in the form of a 100% stock dividend); accordingly,
all prior share, per share, common stock, and stock option amounts in these
financial statements have been restated to reflect the stock splits.
The consolidated financial statements include all the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of money market type funds and highly
liquid debt instruments with original maturities of three months or less at
the date of acquisition. Short-term investments consist of United States
Treasury notes, obligations of U.S. government agencies, state, municipal and
county governments notes and bonds and corporate bonds. The Company maintains
its excess cash in financial institutions with strong credit ratings and has
not experienced any significant losses on its investments.
The Company classifies its short-term investments as "Available-for-Sale"
and records such assets at the estimated fair value with unrealized gains and
losses excluded from earnings and reported, net of tax, in comprehensive
income (loss). The basis for computing realized gains or losses is by specific
identification.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
----------------
Estimated
Amortized Fair
Cost Gains Losses Value
--------- ----- ------ ---------
<S> <C> <C> <C> <C>
At March 31, 2000:
U.S. treasury securities and obligations
of U.S. government agencies............. $ 25,942 $ -- $118 $ 25,824
State, Municipal and County government
notes and bonds......................... 397,645 30 14 397,661
U.S. corporate debt securities........... 361,132 26 194 360,964
-------- ----- ---- --------
$784,719 $ 56 $326 $784,449
======== ===== ==== ========
At March 31, 1999:
U.S. treasury securities and obligations
of U.S. government agencies............. $ 21,740 $ 22 $ 72 $ 21,690
U.S. corporate debt securities........... 51,321 16 17 51,320
-------- ----- ---- --------
$ 73,061 $ 38 $ 89 $ 73,010
======== ===== ==== ========
</TABLE>
F-7
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
2000
---------
<S> <C>
Due in one year or less............................................ $700,939
Due after one year through two years............................... 35,582
Greater than two years............................................. 47,928
--------
$784,449
========
</TABLE>
Fair Value of Financial Instruments
The carrying value of cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities and long-term debt
approximates fair value.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of available-for-sale
securities and trade receivables. The Company believes that the credit risk in
its trade receivables is mitigated by the Company's credit evaluation process,
relatively short collection terms and dispersion of its customer base. The
Company generally does not require collateral and has not experienced
significant losses on trade receivables from any particular customer or
geographic region for any period presented.
The Company invests its excess cash in debt instruments of the U.S.
Treasury, governmental agencies and corporations with strong credit ratings.
The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant losses on its
cash equivalents or short-term investments.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. These
estimates include assessing the collectability of accounts receivable, the use
and recoverability of inventory, estimates to complete engineering contracts,
costs of future product returns under warranty and provisions for
contingencies expected to be incurred. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. The Company's inventory valuation process is done
on a part-by-part basis. Lower of cost or market adjustments, specifically
identified on a part-by-part basis, reduce the carrying value of the related
inventory and take into consideration reductions in sales prices, excess
inventory levels and obsolete inventory. Once established, these adjustments
are considered permanent and are not reversed until the related inventory is
sold or disposed.
Property and Equipment
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets (3 to 7 years) using the straight line
method. Leasehold improvements are stated at cost and amortized over the
useful life of the asset. Property and equipment under capital leases are
recorded at the net present value of the minimum lease payments and are
amortized over the useful life of the assets.
F-8
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of", the Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Through March 31,
2000, the Company has not experienced any such impairments.
Advertising Cost
Advertising costs are expensed as incurred.
Revenues
Revenues related to product sales are generally recognized when the
products are shipped to the customer. Recognition of revenues and the related
cost of revenues on shipments to distributors that are subject to terms of
sale allowing for price protection and right of return on products unsold by
the distributor are deferred until the distributor's ability to return the
products or its rights to price protection lapse or have been limited.
Revenues on engineering design contracts are recognized using the percentage-
of-completion method based on actual cost incurred to date compared to total
estimated costs of the project. Deferred revenue represents both the margin on
shipments of products to distributors that will be recognized when the
distributors ship the products to their customers or the right of return has
lapsed and billings in excess and estimated earnings on uncompleted
engineering design contracts.
Warranty Reserves
Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual
experience.
Research and Development
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to new product development,
designing significant improvements to existing products and new process
development.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee and director stock options
because the alternative fair value accounting provided for under SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), requires the use of
option valuation models that were not developed for use in valuing employee
and director stock options. Under SFAS 123 compensation cost is determined
using the fair value of stock-based compensation determined as of the grant
date, and is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to continue using the
current implicit value accounting method specified in APB 25 to account for
stock-based compensation and disclose in the footnotes to the financial
statements the pro forma effect of using the fair value method for its stock
based compensation.
F-9
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board (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.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Earnings Per Share
Shares used in basic earnings per share are computed using the weighted
average number of common shares outstanding during each period. Shares used in
diluted earnings per share include the dilutive effect of common shares
potentially issuable upon the exercise of stock options. The reconciliation of
shares used to calculate basic and diluted earnings per share consists of the
following (in thousands):
<TABLE>
<CAPTION>
Fiscal years ended
March 31,
----------------------
1998 1999 2000
------ ------- -------
<S> <C> <C> <C>
Shares used in basic earnings per share
computations-weighted average common shares
outstanding....................................... 42,376 98,056 107,820
Effect of assumed conversion of preferred stock
from date of issuance............................. 29,736 -- --
Net effect of dilutive common share equivalents
based on treasury stock method.................... 9,064 11,664 11,332
------ ------- -------
Shares used in diluted earnings per share
computations...................................... 81,176 109,720 119,152
====== ======= =======
</TABLE>
2. Acquisitions
In March 1999, the Company acquired all of the outstanding common stock and
common stock equivalents of Cimaron Communications Corporation ("Cimaron") in
exchange for approximately 12 million shares of the Company's common stock.
Cimaron also designs and develops high-bandwidth silicon solutions for the
world's communications equipment manufacturers. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Prior to
the combination, Cimaron had a fiscal year end of December 31. In recording
the business combination, Cimaron's results of operations for the fiscal year
ended December 31, 1998 were combined with AMCC's for the fiscal year ended
March 31, 1999. Cimaron's net sales and net loss for the three month period
ended March 31, 1999 were $110,000 and $(1,341,000), respectively. Cimaron's
results of operations and cash flows for the three month period ended March
31, 1999 have been added directly to the retained earnings and cash flows of
AMCC and excluded from reported fiscal 1999 results of operations.
In April 1998, the Company acquired Ten Mountains Design which designs and
develops high bandwidth analog devices for communications equipment suppliers
and optical module manufacturers. The purchase price was approximately
$330,000 and resulted in recording intangible assets of approximately $280,000
which will be amortized over three years. The financial statements include the
results of operation for Ten Mountains Design from the date of acquisition.
F-10
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Certain Financial Statement Information
<TABLE>
<CAPTION>
March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Inventories (in thousands):
Finished goods.......................................... $ 975 $ 2,666
Work in process......................................... 7,688 6,966
Raw materials........................................... 1,150 1,293
-------- --------
$ 9,813 $ 10,925
======== ========
Property and equipment (in thousands):
Machinery and equipment................................. $ 33,280 $ 46,375
Leasehold improvements.................................. 7,641 8,352
Computers, office furniture and equipment............... 16,654 20,743
Land.................................................... 1,133 4,808
-------- --------
58,708 80,278
Less accumulated depreciation and amortization........... (35,580) (42,436)
-------- --------
$ 23,128 $ 37,842
======== ========
Other accrued liabilities (in thousands):
Income taxes payable.................................... $ 3,329 $ 839
Accrued merger-related costs............................ 1,893 --
Other................................................... 1,985 5,609
-------- --------
$ 7,207 $ 6,448
======== ========
</TABLE>
The cost and accumulated amortization of machinery and equipment under
capital leases at March 31, 2000 were approximately $10.5 million and $8.7
million, respectively ($10.5 million and $8.5 million, at March 31, 1999,
respectively). Amortization of assets held under capital leases is included
with depreciation expense.
During the years ended March 31, 1998, 1999 and 2000, the Company earned
interest income of $1,252,000, $3,992,000 and $13,506,000, respectively, and
incurred interest expense of $381,000, $542,000 and $634,000, respectively.
4. Long-Term Debt
During Fiscal 1999, the Company had an equipment line of credit with a bank
which expired on March 31, 1999. Borrowings of $7.1 million under the line of
credit were converted into term notes, with monthly payments totaling $141,000
including interest, payable over 53 to 60 months, at interest rates between
6.44% and 7.42%. At March 31, 2000, approximately $5.0 million was outstanding
on the notes.
Principal maturities of the notes payable at March 31, 2000 are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending March 31,
2001................................................................. $1,394
2002................................................................. 1,495
2003................................................................. 1,603
2004................................................................. 501
------
$4,993
======
</TABLE>
F-11
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Stockholders' Equity
Authorized shares
On September 1, 1999, the Company's stockholders approved an increase in
the number of authorized shares of common stock to 180 million.
Stock Offerings
In December 1997, the Company completed its initial public offering of its
common stock. The offering raised net proceeds to the Company of approximately
$25.1 million. In March 1998, the Company completed a secondary public
offering of common stock in which the Company raised net proceeds of
approximately $26.9 million. In January 2000, the Company raised an additional
$815 million of net proceeds from the issuance of approximately 12 million
shares of its common stock.
Convertible Preferred Stock
On April 24, 1997 the Board authorized the Company to repurchase up to $4.0
million of convertible preferred stock, with priority given to the holders of
convertible preferred stock that submitted bids for the sale of their shares
of convertible preferred stock at the lowest price per share. On June 20,
1997, the Company repurchased an aggregate of 172,300 shares of convertible
preferred stock for approximately $3.9 million at prices between $1.20 and
$2.61 per share on an as converted to common stock basis. In connection with
the initial public offering, all then outstanding shares of convertible
preferred stock immediately converted into 42.9 million shares of common
stock.
Preferred Stock
In November 1997, the Certificate of Incorporation was amended to allow the
issuance of up to 2.0 million shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restriction thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series of the designation of such series, without
further vote or action by the stockholders.
Stock Options and Other Stock Awards
In March 2000, the Company adopted the 2000 Equity Incentive Plan (" the
2000 Plan") under which 4.0 million shares were reserved for future granting
of nonqualified stock options to employees, directors and consultants of the
Company and its affiliates. At March 31, 2000, 2.6 million non-qualified stock
options were outstanding and 1.4 million shares were available for future
grant.
The Company's 1992 Stock Option Plan ("1992 Plan") provides for the
granting of incentive and nonqualified stock options to employees. During
Fiscal 2000, the Board of Directors adopted, and the stockholders subsequently
approved, an amendment to the 1992 Plan to increase the number of shares
available for future grant by 15.2 million. At March 31, 2000, 17.3 million
stock options were outstanding and 9.8 million shares were available for
future grant. The Company's 1982 Employee Incentive Stock Option Plan expired
in 1992.
In connection with the Company's acquisition of Cimaron, the Company
assumed options and other stock awards granted under Cimaron's 1998 Stock
Incentive Plan ("The Incentive Plan") covering approximately 2.6 million
shares of Common Stock at a weighted average exercise price of $.06 per share.
The terms of the plan provides for the granting of options, restricted stock,
or other stock based awards ("stock awards") to employees,
F-12
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
officers, directors, consultants and advisors. Generally, the stock awards are
granted at prices at least equal to the fair value of the Company's Common
Stock on the date of grant. At March 31, 2000, approximately 250,000 stock
options were outstanding and 1.6 million shares were available for future
grant under the Incentive Plan.
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 800,000 shares of Common Stock are
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of non-statutory options to nonemployee directors of the
Company. At March 31, 2000, 100,000 stock options had been issued under the
Directors' Plan and 700,000 were available for future grant.
Options and other stock awards under the plans expire not more than ten
years from the date of grant and are either, exercisable immediately after the
date of grant and subject to certain repurchase rights by the Company until
such ownership rights have vested, or exercisable upon vesting. Vesting
generally occurs over four to five years. At March 31, 1999 and 2000, 3.5
million and 1.1 million shares of common stock were subject to repurchase,
respectively. Options are granted at prices at least equal to fair value of
the Company's common stock on the date of grant.
Pursuant to an employment agreement entered into during January 1996,
between the Company and an executive, the Company granted an option to
purchase 3.2 million shares of the Company's common stock at $0.13 per share
under the 1992 Stock Option Plan. The option vests ratably over four years. In
the event the Company is acquired, the agreement stipulates that under certain
circumstances the executive is eligible for certain additional compensation.
These options as well as 266,668 additional options issued in April 1997 were
exercised in July 1997. The exercise was paid for with various full-recourse
notes, which aggregated $455,000 and bear interest at rates between 5.98% and
6.54%, and were due at the earlier of February 12, 2000 ($420,000) and April
9, 2001 ($35,000) or the termination of employment. In January 2000, the notes
due on February 2000 were extended by the Board of Directors to become due in
February 2002.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value of the options was estimated at the date of grant
using the minimum value method for grants prior to the initial public offering
and the Black Scholes method for grants after the initial public offering.
The fair value of options granted in 1998, 1999 and 2000 reported below has
been estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions.
<TABLE>
<CAPTION>
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Expected life (in years)................................... 4.0 4.5 4.0
Risk-free interest rate.................................... 6.0% 6.0% 6.0%
Volatility................................................. .92 .89 .82
Dividend yield............................................. 0% 0% 0%
</TABLE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options. The weighted
F-13
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
average estimated fair value of employee stock options granted during 1998,
1999 and 2000, including options assumed through acquired companies, was
$1.71, $5.27 and $40.28 per share, respectively. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized to expense
over the options' vesting periods. The Company's pro forma information is as
follows:
<TABLE>
<CAPTION>
1998 1999 2000
(In thousands, except per share amounts) ------- ------- -------
<S> <C> <C> <C>
Pro forma net income................................ $14,856 $13,202 $19,385
Pro forma basic earnings per share.................. $ 0.35 $ 0.13 $ 0.18
Pro forma diluted earnings per share................ $ 0.18 $ 0.12 $ 0.16
</TABLE>
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information are as follows: (shares in
thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------
1998 1999 2000
----------------- ----------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 11,369 $0.13 10,730 $1.72 10,694 $ 4.03
Granted................ 7,196 2.50 6,081 4.62 13,798 63.51
Exercised.............. (6,806) 0.13 (5,258) 0.30 (3,183) 3.26
Forfeited.............. (1,029) 0.16 (859) 2.08 (1,026) 9.65
------ ------ ------
Outstanding at end of
year................... 10,730 $1.72 10,694 $4.03 20,283 $44.31
====== ===== ====== ===== ====== ======
Vested at end of year... 2,540 $0.15 2,714 $1.81 3,899 $ 8.39
====== ===== ====== ===== ====== ======
</TABLE>
The following is a further breakdown of the options outstanding at March
31, 2000 (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.09 - $ 2.00 2,304 6.86 $ 0.38 1,288 $ 0.24
$ 2.00 - $ 6.75 3,024 8.02 $ 5.64 1,125 $ 5.60
$ 6.75 - $ 23.00 7,014 9.05 $ 12.96 1,329 $12.05
$ 23.00 - $ 42.25 1,451 9.55 $ 35.07 31 $27.93
$ 42.25 - $ 71.97 2,086 9.80 $ 71.00 126 $71.83
$ 71.97 - $140.53 691 9.87 $ 97.62 -- $ --
$140.53 - $154.81 3,713 9.94 $140.95 -- $ --
----------------- ------ ---- ------- ----- ------
$ 0.09 - $154.81 20,283 8.95 $ 44.31 3,899 $ 8.39
================= ====== ==== ======= ===== ======
</TABLE>
From April 1, 1997 through September 30, 1997, the Company recorded
deferred compensation expense for the difference between the exercise price
and the fair value for financial statement presentation purposes of the
Company's common stock, as determined by the Board of Directors, for all
options granted in the period. This deferred compensation aggregates to
$599,000, which is being amortized ratably over the four year vesting period
of the related options. Additionally, during the year ended March 31, 1999,
the Company recorded deferred compensation related to restricted stock and
stock options granted to founders and employees of Cimaron of $2.5 million.
Such amount is being amortized over the related vesting period, generally five
years. Amortization of deferred compensation during fiscal years 1998, 1999
and 2000 was $127,000, $860,000 and $611,000, respectively.
F-14
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Stock Purchase Plans
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 1.6 million shares of common stock
are reserved for issuance under the 1997 Purchase Plan. At March 31, 2000,
approximately 1.58 million shares had been issued under the 1997 Purchase Plan
and approximately 20,000 shares were available for future grant.
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was approved by the stockholders on August 4, 1998. A total of 1.6 million
shares are authorized for issuance under the 1998 Purchase Plan. At March 31,
2000, 355,144 shares had been issued under the 1998 Purchase Plan and
approximately 1.2 million shares were available for future grant.
Under the terms of the plans, purchases are made semiannually on January 31
and July 31 and the purchase price of the Common Stock is equal to 85% of the
fair market value of the common stock on the first or last day of the offering
period, whichever is lower.
Common Shares Reserved for Future Issuance
At March 31, 2000, the Company has the following shares of common stock
reserved for issuance upon the exercise of equity instruments: (in thousands)
<TABLE>
<S> <C>
Stock Options:
Issued and outstanding.............................................. 20,283
Authorized for future grants........................................ 13,500
Stock purchase plans.................................................. 1,269
------
35,052
======
</TABLE>
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-------------------------------
1998 1999 2000
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................... $ 3,606 $ 9,860 $ 21,966
State...................................... 682 1,064 2,976
--------- --------- ---------
Total current............................ 4,288 10,924 24,942
Deferred:
Federal.................................... (3,558) (362) 65
State...................................... (324) (329) 360
--------- --------- ---------
Total deferred........................... (3,882) (691) 425
--------- --------- ---------
$ 406 $ 10,233 $ 25,367
========= ========= =========
</TABLE>
F-15
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes reconciles to the amount computed by
applying the federal statutory rate (35%) to income before income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
$ % $ % $ %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory rate.... $ 5,468 35% $ 9,578 35% $25,897 35%
Increase (decrease) in valuation
allowance of deferred tax
assets.......................... (5,094) (32) -- -- -- --
Foreign sales corporation........ (309) (2) (387) (1) (873) (1)
Tax exempt interest.............. -- -- -- -- (312) --
State taxes, net of federal
benefit......................... 233 1 478 1 2,294 3
Federal tax credits.............. (281) (2) (1,216) (5) (2,122) (3)
State tax credits................ -- -- -- -- (1,097) (2)
Merger costs and deferred
compensation.................... -- -- 763 3 213 --
Other............................ 389 3 1,017 4 1,367 2
------- --- ------- --- ------- ---
$ 406 3% $10,233 37% $25,367 34%
======= === ======= === ======= ===
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 1999 and 2000 are as shown
below. At March 31, 1998, the effective tax rate is computed based on a full
reduction of the valuation allowance and realization of the deferred tax
asset.
<TABLE>
<CAPTION>
March 31,
-------------
1999 2000
------ ------
<S> <C> <C>
Deferred tax assets (in thousands):
Inventory write-downs and other reserves................... $1,850 $2,433
Net operating loss carryforwards........................... 1,719 --
Capitalization of inventory and research and development
costs..................................................... 313 405
Research and development credit carryforwards.............. 298 1,364
State income taxes......................................... 47 140
Other credit carryforwards................................. 447 --
------ ------
Total deferred tax assets.................................. 4,674 4,342
Deferred tax liabilities:
Depreciation and amortization.............................. 101 194
------ ------
Net deferred tax assets $4,573 $4,148
====== ======
</TABLE>
At March 31, 2000, the Company has federal research and development tax
credit carryforwards of approximately $1.4 million, which will begin to expire
in 2020 unless previously utilized.
7. Commitments
The Company leases certain of its facilities under long-term operating
leases, which expire at various dates through 2011. In addition, the Company
has committed to a long-term lease for a building beginning in October 2000,
which also expires in 2011. The lease agreements frequently include renewal
provisions, which require the Company to pay taxes, insurance and maintenance
costs and contain escalation clauses based upon increases in the Consumer
Price Index or defined rent increases. The Company also leases certain
software under non-cancellable operating leases expiring through 2002.
F-16
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Annual future minimum lease payments, including machinery and equipment
under capital leases as of March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Fiscal Year Ending March 31, Lease Leases
---------------------------- --------- -------
<S> <C> <C>
2001........................................................ $ 4,591 $ 879
2002........................................................ 5,076 736
2003........................................................ 4,485 449
2004........................................................ 2,379 678
2005........................................................ 2,261 --
Thereafter.................................................. 8,292 --
------- ------
Total minimum lease payments.............................. $27,084 2,742
=======
Less amount representing interest............................. 318
------
Present value of remaining minimum capital lease payments
(including
current portion of $729)..................................... $2,424
======
</TABLE>
Rent expense (including short-term leases and net of sublease income) for
the years ended March 31, 1998, 1999, and 2000 was $1.2 million, $1.4 million
and $1.6 million, respectively.
8. Employee Retirement Plan
Effective January 1, 1986, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all full-time
employees with greater than three months of service. The Retirement Plan
provides for voluntary employee contributions from 1% to 20% of annual
compensation, subject to a maximum limit allowed by Internal Revenue Service
guidelines. The Company may contribute such amounts as determined by the Board
of Directors. Employer contributions vest to participants at a rate of 20% per
year of service, provided that after five years of service all past and
subsequent employer contributions are 100% vested. The contributions charged
to operations totaled $412,000, $573,000 and $677,000 for the years ended
March 31, 1998, 1999 and 2000, respectively.
9. Significant Customer and Geographic Information
During the years ended March 31, 1998, 1999, and 2000, 21%, 20% and 38%,
respectively, of net revenues were from Nortel and their subcontract
manufacturers. In 1998, 1999 and 2000, Insight Electronics, the Company's
domestic distributor, accounted for 11%, 13% and 17% of net revenues,
respectively. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of
net revenues. No other customer accounted for more than 10% of revenues in any
period.
Net revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
----------------------------
1998 1999 2000
------------------ ---------
<S> <C> <C> <C>
Net revenues:
United States................................. $ 44,448 $ 61,760 $ 88,349
Canada........................................ 14,204 18,011 43,770
Europe and Israel............................. 13,773 18,136 28,980
Asia.......................................... 4,193 7,093 11,253
-------- --------- ---------
$76,618 $ 105,000 $ 172,352
======== ========= =========
</TABLE>
F-17
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Contingencies
The Company is party to various claims and legal actions arising in the
normal course of business, including notification of possible infringement on
the intellectual property rights of third parties. In addition, since 1993 the
Company has been named as a potentially responsible party ("PRP") along with a
large number of other companies that used Omega Chemical Corporation ("Omega")
in Whittier, California to handle and dispose of certain hazardous waste
material. The Company is a member of a large group of PRPs that has agreed to
fund certain remediation efforts at the Omega site for which the Company has
accrued approximately $50,000. Although the ultimate outcome of these matters
is not presently determinable, management believes that the resolution of all
such pending matters, net of amounts accrued, will not have a material adverse
affect on the Company's financial position or liquidity; however, there can be
no assurance that the ultimate resolution of these matters will not have a
material impact on the Company's results of operations in any period.
11. Subsequent Event
On April 19, 2000, the Company signed a definitive agreement to acquire
YuniNetworks, Inc., a developer of scalable switch fabric silicon solutions
for communication equipment. Under the terms of the agreement, AMCC will issue
up to 2,250,000 shares of its common stock and options in exchange for all
outstanding shares of YuniNetworks' preferred and common stock, including
shares issuable upon exercise of employee stock options and other rights. The
transaction will be accounted for as a purchase and is expected to close in
June 2000.
F-18
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
----------------------------------------------------------------------------------------------
Additions
----------------------------------------------------------------------------------------------
(2)
(1) Charged to
Balance at Charged to Other Balance
Beginning of Costs and Accounts Deductions- At End Of
Description Period Expenses Describe Describe Period
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 2000:
Allowance for doubtful
accounts..................... $177 $150 $ -- $ 13 $314
----------------------------------------------------------------------------------------------
Year ended March 31, 1999:
Allowance for doubtful
accounts..................... $350 $ 50 $ -- $223 $177
----------------------------------------------------------------------------------------------
Year ended March 31, 1998:
Allowance for doubtful
accounts..................... $200 $157 $ -- $ 7 $350
</TABLE>
F-19
