Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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, 1998
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)
DELAWARE 94-2586591
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6290 SEQUENCE DRIVE
SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 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. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $431,600,000 as of March 31, 1998, 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 22,536,013 shares of the registrant's Common Stock issued and
outstanding as of March 31, 1998.
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 4, 1998.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS.
Applied Micro Circuits Corporation ("AMCC" or the "Company") was originally
incorporated in California on April 9, 1979 and reincorporated in Delaware in
April, 1987. The Company commenced operating in April, 1979. Certain
statements in this Annual Report on Form 10-K, including certain 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 "Factors That May
Affect Future Results" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency mixed-signal design
expertise, system-level knowledge and multiple silicon process technologies to
offer IC products for the telecommunications markets that address the
SONET/SDH and ATM transmission standards and for the data communications
markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission
standards. The Company also leverages its technology to provide solutions for
the ATE, high-speed computing and military markets. Customers of the Company
include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun
Microsystems and Teradyne.
The Company has developed multiple generations of many of its products. In
the telecommunications market, the Company provides ATM and SONET/SDH physical
layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC-
12 standards, and is currently developing an OC-48 chip set. In the data
communications market, the Company provides physical layer transceivers for
Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches
for serial backplanes. In the high-speed computing market, the Company
provides PCI controllers and high-frequency clock drivers and clock
generators. In addition, the Company also provides high-performance, low-power
application-specific integrated circuit ("ASIC") products for the ATE and
military markets.
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. 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 and 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 current
systems architectures inadequate.
In the telecommunications market, service providers and equipment suppliers
in particular have been impacted by the inadequacy of systems architectures
caused by the current 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 "bursts."
The volume and complexity of this data has led to the increasing deployment of
fiber optic technology for use in wide area networks ("WANs"). This
2
technology has 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 the Synchronous Digital
Hierarchy ("SDH") standard in the rest of the world, have emerged as 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. A transmission
standard complementary to SONET/SDH, Asynchronous Transfer Mode ("ATM"), has
emerged to optimize bandwidth utilization. ATM is a network transmission
standard that packages data and reduces network delays, enabling the support
of not only data traffic, but delay-sensitive voice, video and imaging
applications.
In the data communications market, similar bandwidth issues have arisen as
the convergence of the LAN and WAN as well 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
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. 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 expandable 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.
The Communications IC Opportunity
In order to address the growing requirements of communications networks,
equipment suppliers are having to develop and introduce increasingly
sophisticated systems at a rapid rate. To achieve the performance and
functionality required by such systems, these OEMs must utilize increasingly
complex integrated circuits ("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. Dataquest estimates that the worldwide
SONET/SDH markets for ICs were approximately $240 million in 1996 and will
increase to approximately $700 million in 2000, and that the ATM markets for
ICs were approximately $130 million in 1996 and will increase to approximately
$700 million in 2000. The Fibre Channel and Gigabit Ethernet markets were
relatively small in 1996 and Dataquest estimates that such combined markets
will be approximately $300 million in 2000.
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 high-
frequency, mixed-signal solutions to bridge the analog physical world and the
digital computing environment. In particular, telecommunications OEMs require
IC suppliers to provide solutions that minimize jitter (a measure of the
stability and crispness of a signal), which degrades transmission quality over
distance. Data communications products typically have substantially shorter
life cycles than telecommunications products, and the rate of new product
introductions is very high. Therefore, data communications OEMs specifically
require IC suppliers that can provide IC solutions that accommodate these
increased time-to-market demands. Furthermore, the data communications market
is highly cost driven and generally involves large volumes. Therefore, OEMs in
this market require IC suppliers that can provide increasingly lower cost IC
solutions that can quickly be ramped into high-volume production.
3
In the high-performance 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, less predictable with respect to yields and less able to ramp
to high-volume production than silicon processes.
The Automated Test Equipment Industry
Automated test equipment ("ATE") is used for the comprehensive testing of
ICs, printed circuit boards and electronic systems. Increasing worldwide
demand for ICs has led to a corresponding increase in the demand for IC test
equipment. IC manufacturers continue to increase the pace of introduction of
increasingly complex and higher speed ICs. Thus, ATE OEMs must provide new
systems that are capable of testing ICs and electronic systems with
increasingly higher frequencies and that are introduced rapidly enough to
support the increased pace at which new ICs and electronic systems are being
introduced. In addition, very accurate timing, utilizing precision analog
verniers, is critical for the testing of today's advanced microprocessors and
other ICs. Furthermore, ATE OEMs differentiate their systems and optimize
speed and timing performance through the use of customized ICs. Accordingly,
ATE OEMs require IC suppliers that possess the combination of ASIC
methodologies, high-performance process technologies and high-speed, mixed-
signal design expertise that can deliver ICs with the requisite speeds and
precision timing. Generally, ATE equipment requires ICs that operate at faster
speeds and have more precise timing than the ICs being tested. This need for
speed and precision timing requires that IC suppliers use high-performance
processors that are similar to the high-performance processes required to
service the advanced telecommunications market. Finally, ATE OEMs require IC
suppliers that deliver timely solutions, enabling the OEMs to satisfy their
increasingly rapid time-to-market requirements. In today's environment, there
are declining numbers of IC suppliers that satisfy these requirements.
The High-Speed Computing Industry
Increasing worldwide demand for high-performance computing equipment has led
to a corresponding increase in the demand for ICs for the high-speed computing
industry. High-speed computing equipment manufacturers must deliver increased
computational performance that is compatible with, and driven by, rapidly
increasing microprocessor speeds. The peripheral devices that communicate with
the computer processor must keep pace with the processor to enable the system
to deliver optimal performance. The pace of new product introductions in this
industry continues to accelerate, and product life cycles continue to shorten.
As a result, a premium is placed on time-to-market. High-performance computing
equipment manufacturers must rely on suppliers of cost-effective, increasingly
complex, standard ICs that can be designed, produced and delivered in time to
meet rapidly changing market demands.
AMCC STRATEGY
AMCC's objective is to be the leading supplier of high-performance, high-
bandwidth connectivity IC solutions for the world's communications
infrastructure. To achieve this objective, the Company employs the following
strategies:
Focus on High-Growth Telecommunications Markets
AMCC targets key high-growth telecommunications markets, including those for
SONET/SDH and ATM products. The Company has 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. The Company believes that the
integration of these capabilities enables it to optimize solutions addressing
the high-bandwidth connectivity requirements of telecommunications systems
OEMs.
4
Leverage Telecommunication Capabilities in High-Bandwidth Data Communications
Markets
AMCC leverages its mixed-signal design expertise, process technologies and
systems capabilities in telecommunications to address specific customer
requirements in high-bandwidth data communications markets. The Company
believes that this strategy enables it to provide data communications OEMs
with cost-effective IC solutions that can be introduced and produced rapidly.
The Company has targeted, in particular, Gigabit Ethernet, ATM and Fibre
Channel applications. Consistent with this strategy, the Company has
introduced serial backplane ICs to address the growing demand for high-
bandwidth switching.
Exploit Established Markets
The Company believes it has developed a strong presence in specific segments
of the ATE, high-speed computing and military markets, where it maintains
established customer relationships and many competitive products. AMCC
believes that its high-performance design expertise is directly applicable to
the product requirements of these markets. Furthermore, the Company believes
that its process technologies are well-suited for the ATE and military
applications that are being served by a decreasing number of suppliers. AMCC
believes that continued participation in these markets provides it with an
opportunity for revenue diversification and stability.
Capitalize on Multiple Silicon-Process Technologies to Provide Optimized
Solutions
The Company is dedicated to utilizing the best silicon process technology
available to offer solutions optimized for specific applications and customer
requirements. The Company has successfully developed multiple generations of
its processes and believes that it will be able to continue the evolution of
its processes to deliver the performance required of future communications
ICs. AMCC believes its current and future bipolar and BiCMOS processes,
complemented by advanced CMOS processes from external foundries, together with
its mixed-signal design expertise, provide the Company with the flexibility to
design and manufacture products that are tailored to its customers' individual
needs. Through this flexible approach, AMCC is better able to transition
products over time to new manufacturing processes as product performance
requirements and process technologies evolve.
Capitalize on Established Silicon-Process Technologies to Provide Cost-
Effective Solutions
The Company applies its systems expertise and its mixed-signal analog and
digital design techniques to architect high-performance products based on
established silicon process technologies. The Company believes that these
silicon-based processes are proven, stable and predictable relative to non-
silicon processes and benefit from the extensive semiconductor industry
infrastructure devoted to the support of silicon processes. The process
technologies employed by AMCC are designed to deliver high-performance
products while being substantially less capital intensive than other advanced
semiconductor processes. In addition, the Company's ASIC methodology enables
the use of cells that have been successfully characterized and manufactured
previously. As a result, the Company believes it is well-positioned to deliver
products on time and to meet the rapidly increasing production requirements of
its customers.
Continue to Develop Internal Wafer Fabrication Capability
The Company believes that the continued development of its internal bipolar
and BiCMOS wafer fabrication capability provides an important competitive
advantage. AMCC believes that this capability improves the Company's ability
to design and manufacture new products with short development cycles. It also
gives AMCC greater control over its manufacturing process characteristics and
costs, and enhances its ability to leverage existing design libraries and
methodologies for future products.
PRODUCTS AND CUSTOMERS
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company's current IC products address the needs of two
5
primary segments of the communications market: the telecommunications market
and the data communications market. The Company's products for the
telecommunications and the data communications markets are designed to respond
to the growing demand for high-speed networking applications for established
WAN standards such as SONET/SDH and ATM and emerging LAN standards such as
Gigabit Ethernet, ATM and Fibre Channel. The Company also markets and sells IC
products that address the needs of the ATE, high-speed computing and military
markets. The Company utilizes its high-performance digital and mixed-signal
design expertise and systems knowledge, together with its internal bipolar and
BiCMOS processes and CMOS processes from outside foundries, to design and
manufacture products that are tailored to its customers' individual needs.
The Company has used its design methodologies to successfully develop
products ranging from ASSPs designed for industry-wide applications, to ASICs
that are custom solutions for specific customer applications. These
complementary products enable the Company to provide optimal solutions for its
customers' applications. For example, the earlier generation of the Company's
standard SONET products used ASIC platforms for quick time-to-market.
Recently, the Company used the S2052, its ASSP designed for the Gigabit
Ethernet market, as a platform to develop its S2053 and S2054 products, two
customer-specific devices that are expected to eventually become standard
products. As the Company develops special macros such as Phase Locked Loops
("PLLs") to support a customers' application needs, they become part of the
Company's ASIC library, which in turn can be used for other ASICs or ASSPs.
The Company believes that it has a particularly strong competence in the
design of high-speed, low-jitter PLLs, which are key elements in its mixed-
signal transceivers and precision timing products.
AMCC's products for SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel
applications are primarily focused on very high-speed digital and mixed-signal
circuits called physical layer circuits. These circuits consist of a
transmitter and receiver that, when integrated, is called a transceiver chip.
Most of these circuits are very high-speed, mixed-signal circuits that convert
parallel digital inputs into a single analog bit stream that is up to 20 times
faster than the original signal.
Telecommunications Products
The following describes the Company's telecommunications products:
- -------------------------------------------------------------------------------------------------------------
DATE OF
PRODUCTION
PRODUCTS RELEASE(1) APPLICATION
- -------------------------------------------------------------------------------------------------------------
S3005/6................. June 1993 ATM physical layer transceiver products for OC-3
S3020/21................ December 1994 (155 Mbps) and/or OC-12 (622 Mbps).
- -------------------------------------------------------------------------------------------------------------
S3015/16................ March 1995 ATM/E-4 & STM-1 physical layer transmitter/receiver pair (155 Mbps).
- -------------------------------------------------------------------------------------------------------------
S3017/18................ June 1995 SONET/SDH physical layer transceiver products for OC-3
S3028................... January 1997 (155 Mbps) and/or OC-12 (622 Mbps).
S3029................... October 1997
- -------------------------------------------------------------------------------------------------------------
S3014................... December 1993 Clock Recovery and Synthesis Units for SONET/ATM
S3025/26/27............. March 1997 Modules for OC-3 (155 Mbps) and/or OC-12 (622 Mbps).
- -------------------------------------------------------------------------------------------------------------
S3019................... March 1998 Fully integrated single chip +3.3V Transceiver for OC-12 (622 Mbps).
- -------------------------------------------------------------------------------------------------------------
- --------
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
AMCC introduced its first generation OC-3 (155 Mbps) physical layer products
in 1993. The Company has since developed two additional generations of these
products, each integrating greater functionality on each chip while improving
jitter performance. "Jitter" is a measure of the degradation in the quality of
the signal being transmitted or received. Jitter can be caused by the presence
of noise in the system and increases with the distance over which the signal
is transmitted. Jitter is usually controlled by special analog circuit
techniques that separate the noise in the system from the valid data. Low
jitter devices enable the system designer to transmit
6
the signal over longer distances or use less expensive optical devices, thus
reducing the overall system cost. The Company's first generation of these
products consisted of transmitter/receiver pairs with dual voltage. The second
generation consisted of products that are compatible with single +5V optical
modules. The Company's third generation physical layer product, the S3028, is
a single chip transceiver designed to be compatible with the system needs of
optical links. This product offers systems OEMs selectable reference
frequencies, a 4 or 8-bit data path, a PECL or TTL level interface, a
diagnostic mode and special failure indicators. The Company's S3029 is a
multiple-channel OC-3 (155 Mbps) transceiver that incorporates five separate
high-frequency PLLs on a single chip and includes an internal loop filter for
clock recovery. The Company has under development additional ATM physical
layer transceiver products compatible with the OC-3 and OC-12 standard, as
well as additional SONET/SDH physical layer transceiver products for OC-12 and
OC-48 applications.
AMCC's products for the OC-12 (622 Mbps) standard are highly integrated
products that consist of parallel-to-serial converters ("Mux"), serial-to-
parallel converters ("DeMux"), transmit and receive Phase Locked Loops
("PLLs"), Clock Synthesis Units ("CSU") and Clock Recovery Units ("CRU") with
low power dissipation and low output jitter. The superior jitter performance
of these products enables customers to use less expensive optical components.
The Company has also successfully integrated five PLLs on a single product at
155 Mbps. The power dissipation of this multichannel device is less than 1
watt (less than 200 milliwatt per PLL). All of the Company's
telecommunications devices are supported with evaluation boards and design
aids for easy implementation by engineers with limited knowledge of high
performance circuit layout techniques.
The Company's Micropower bipolar standard cell ASIC products are well-suited
for high performance telecommunications applications that require up to 20,000
equivalent gates, a high-speed digital interface, low jitter, and PLL macros
operating at speeds of up to 2.5 GHz. The Company also uses its Micropower
technology for its ASSPs for the SONET/SDH market.
Current customers for the Company's telecommunications products include
Alcatel, ECI, Fujitsu, GPT, Lucent, Nortel and SAT. The Company has achieved
design wins for its ASIC and ASSP products with certain other customers in the
telecommunications market, including Ciena, DSC Communications, IBM, NEC,
Nokia, Tellabs and Tellium. The design wins with Ciena and Tellium are for
wavelength division multiplexing ("WDM") applications. There can be no
assurance that these design wins will result in volume shipments to any of
such customers. Sales to Nortel accounted for approximately 20%, 20%, and 21%,
of the Company's net revenues in fiscal 1996, 1997, and 1998, respectively.
Additionally, in fiscal 1998, another customer accounted for 11% of net
revenues. No other customer accounted for more than 10% of revenues in any
period.
Data Communications Products
The following describes the Company's data communications products:
- ---------------------------------------------------------------------------------------------------------
DATE OF
PRODUCTION
PRODUCTS RELEASE(1) APPLICATION
- ---------------------------------------------------------------------------------------------------------
S2046/47................ October 1997 Transceivers/physical layer ICs for Gigabit Ethernet
S2052................... June 1997 backbone and Fibre Channel.
- ---------------------------------------------------------------------------------------------------------
S2036................... February 1995 Serial chip sets, GLM Transceivers and port bypass circuits for
S2042/43................ August 1996 Fibre Channel (1.0625 Gbps, 533 and 265 Mbps) and
S2044/45................ August 1996 Redundant Array of Independent Disks ("RAID") drives.
S2057................... February 1998
- ---------------------------------------------------------------------------------------------------------
S2016................... October 1995 High density switches, physical layer ICs, multi-port
S2024................... September 1995 crosspoint switches and transceivers for backplanes in ISP
S2025................... May 1996 networks.
S2042/43................ August 1996
S2052................... June 1997
S2053................... January 1998
S2054................... January 1998
- ---------------------------------------------------------------------------------------------------------
- --------
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
7
LAN Products. AMCC introduced its first generation of data communications
physical layer devices in 1995. The Company has since developed two additional
generations of products that support both +5V and +3.3V applications. The
Company's first two generations of physical layer devices consisted of
transmitter/receiver pairs with 10-bit interfaces or industry-standard 20-bit
interfaces for Giga-Link Modules ("GLM") and open fiber control for the Fibre
Channel standard. The Company's S2052 product is a single chip transceiver
that supports both the Fibre Channel and Gigabit Ethernet transmission
standards. This product is compatible with the Fibre Channel pin-out
configuration and is capable of directly driving fiber optic or twinaxial
cables. Some of the Company's customers also use derivatives of the S2052 for
their specific application needs. The S2053, one of the Company's most recent
data communications IC products, is a ten-bit transceiver that supports
Gigabit Ethernet and Fibre Channel transmission standards. This device
supports differential PECL-compatible I/Os for fiber optic component
interfaces in order to minimize crosstalk and maximize data integrity. All of
the Company's data communications IC products are supported with evaluation
boards and design aids for easy implementation by engineers with limited
knowledge of high performance circuit layout techniques. The Company has under
development additional physical layer ICs for Gigabit Ethernet and Fibre
Channel applications.
Serial Backplane Products. In addition to the WAN and LAN network equipment
and standards developed to address the issue of network bandwidth, network
equipment OEMs must also ensure that once high-frequency signals exit the
transmission network, they can be switched efficiently, while taking full
advantage of the available bandwidth. Backplanes (the boards that distribute
signals to various ports of a switching system) are currently emerging as a
serious constraint for systems OEMs because redesigning the traditional
architecture of parallel channels to accommodate higher frequency signals is
prohibitively expensive. Therefore, serial channels, which can accommodate
much higher frequencies, are being increasingly employed. The Company believes
that this transition has created a significant opportunity for suppliers that
can design IC solutions enabling the transmission of high-frequency data
through a serial backplane. The Company's S2054, a transceiver similar to the
S2053, has dual serial I/Os for serial backplane applications, enabling the
facilitation of broadcasting functions. This product also supports TTL-
compatible reference inputs.
Data communications system designers use three different backplane
architectures. All of these architectures use serializer and deserializer
chips such as the Company's S2052 and S2042/43 chip sets, and one of these
architectures uses crosspoint switches. Based upon the system design, 16-bit
or 32-bit crosspoint switches are currently required and, in the future, 64-
bit crosspoint switches may be required. AMCC introduced its first generation
of crosspoint-based serial backplane products in 1995. These products included
16-bit and 32-bit crosspoint switches with fast reconfiguration time and the
S2042/43 serializer/deserializer pair with fast acquisition time. The Company
currently offers its second generation 32-bit crosspoint switch and the S2052
single chip serializer/deserializer, as a serial backplane solution. The
Company has under development additional multi-port products for backplane
applications.
Current customers of the Company's IC products in the data communications
market include 3Com, Cabletron Systems, Compaq, Digital Equipment Corporation,
Fujikura and Vixel. The Company has achieved design wins with certain other
customers in this market, including Adaptec, Ascend Communications, Bay
Networks, Cisco Systems, FORE Systems, Fujitsu Nexion, Hewlett-Packard,
Newbridge Networks and Sun Microsystems. There can be no assurance that these
design wins will result in volume shipments to any of such customers.
ATE
AMCC introduced its current generation gate array Q20000 family of products
in 1991 and its Micropower-based standard cell products in 1993. Micropower,
one of the first products to offer +3.3V operation for high performance ASICs,
uses AMCC's proprietary bipolar process. The high-performance and low-power
characteristics of this family of products make it particularly suitable for
high performance semiconductor ATE applications that require approximately
4,000 equivalent gates, low jitter and precision circuits. Current customers
for the Company's products for the ATE market include Hewlett-Packard, LTX,
Schlumberger,
8
Teradyne and Texas Instruments. The Company has achieved design wins with
Teradyne for circuits using these products. There can be no assurance that
these design wins will result in volume shipments to any of such customers.
High-Speed Computing Products
The following describes the Company's high-speed computing products:
- ------------------------------------------------------------------------------------------
DATE OF
PRODUCTION
PRODUCT FAMILY RELEASE(1) APPLICATION
- ------------------------------------------------------------------------------------------
S5920................... February 1998 PCI controller (target only).
S5933................... March 1997 PCI controllers.
SC3000 Series........... 1992-96 Clock drivers for servers.
SC4400 Series........... 1992-96 Clock generators for servers.
S4506................... January 1997 250 Mhz Clock generator for Rambus-based systems.
S4507................... June 1997 300 MHz Clock generator for Rambus-based systems.
- ------------------------------------------------------------------------------------------
- --------
(1) The date of production release is the date that the particular product is
available for volume shipment to customers. Engineering samples of these
products are available prior to volume shipment to customers.
AMCC offers two product lines that address the high-speed computing 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. The Company
sells these products to a very large and diverse customer base. Current
customers of the Company's products include Cisco Systems, Ericsson, IBM and
SAT. The Company's S5933 PCI controller chip is also used in reference designs
with C-Cube Microsystems for digital video disk products.
AMCC's second line of high-speed computing products consists of clocking
devices that use the Company's PLL technology for precision clock generation
for applications in the workstation, telecommunications and data
communications markets. AMCC's 250 MHz and 300 MHz clock generators are being
used in Rambus-based systems. The Company's customers with Rambus-based
systems also include Chromatic Research, Gateway 2000, Hewlett-Packard, LG
Semiconductor, Micron Electronics, NEC and STB. The Company has under
development additional PCI controller chips.
Military
The Company introduced its Q20000 gate array family of ASIC products in
1991. These devices are well suited for military applications and as
replacements for ECLinPS(TM) logic from Motorola. The Company sells ASICs to
military customers such as Hughes Electronics, Northrop Grumman, Raytheon,
Rockwell International and Texas Instruments.
TECHNOLOGY
The Company utilizes its technological and design expertise to solve the
unique problems of high-speed digital and mixed-signal circuit designs for the
world's communications infrastructure. The Company's competencies include the
design and manufacture of high-performance digital and mixed-signal ICs, in-
depth knowledge of the architecture and functioning of high-bandwidth
telecommunications and data communications systems, proven ASIC design
methodologies and libraries, and high-performance semiconductor manufacturing
and packaging expertise.
Design of High-Performance Digital and Mixed-Signal ICs
AMCC has 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.
AMCC was one of the first companies to embed analog PLLs in bipolar chips with
digital logic for
9
high-speed data transmission and receiver applications. Since the introduction
of AMCC's first on-chip clock recovery and clock synthesis products in 1993
(the S3005/S3006 chip set), the Company has refined these key circuits and has
successfully integrated multiple analog functions and multiple channels on the
same chip. For example, the Company has under development a quad transceiver
with a PLL clock recovery and PLL clock multiplier. The mixing of digital and
analog signals poses difficult challenges for IC designers, particularly at
high frequencies. The Company has built significant expertise in mixed-signal
IC designs through the development of multiple generations of products. The
Company believes that one of its primary skills is its ability to integrate
increasingly complex analog functions with high-speed digital logic on a
single chip. The Company also applies this expertise, developed using bipolar
process technology, to IC designs on CMOS processes.
Systems and Architecture Expertise
AMCC believes that its systems architects, design engineers and technical
marketing and applications engineers have a thorough understanding of the
telecommunications and data communications systems for which the Company
designs and builds ASSPs. Using this systems expertise, AMCC develops
semiconductor devices to meet OEMs' high-bandwidth systems requirements. By
understanding the systems into which its products are designed, the Company
believes that it is better able to anticipate and develop optimal solutions
for the various cost, power and performance trade-offs faced by its customers.
AMCC believes that its systems knowledge also enables the Company to design
its IC products to provide the most cost-effective and performance-optimized
solution available using proven process technologies. For example, in its IC
design for OC-48 applications, AMCC applied its systems knowledge and mixed-
signal design expertise to partition the solution into bipolar and high-speed
CMOS chips, which enabled AMCC to offer a substantially lower power
alternative and provide the customer with added flexibility in its future
design plans.
Design Methodology
The Company believes that its extensive experience in the use of ASIC design
methodologies (gate arrays and standard cells), enables its designers to
accelerate the design of new standard products. The Company also has extensive
experience in using ASIC methodologies in collaborative product development
efforts with its customers. The Company uses extensive libraries of analog and
digital blocks that have been well characterized and previously used, which
the Company believes decreases design costs and cycle time and minimizes any
final redesign that may be required once the circuit is implemented in
silicon. The Company's design methodology utilizes advanced computer aided
design ("CAD") tools for each of the following phases of the implementation
process: design capture, logic synthesis, simulation, physical layout and chip
composition and verification. AMCC uses industry-standard CAD tool sets
whenever possible, but augments these tool sets with certain proprietary tools
that enable its designers to optimize mixed-signal performance at very high
frequencies. Industry standard Verilog/VHDL models, developed at the
behavioral and the gate level, are given to key customers for system level
simulation and verification, and feedback from these customers is used to
finalize the Company's device designs to ensure that AMCC's devices will
interface appropriately with the OEM's system. The Company believes that this
process results in shortened design cycle time and greater first-time
correctness of production-worthy devices.
Process Technology
AMCC utilizes its own internal wafer fabrication facility and has developed
and produced multiple generations of cost-effective, high-performance bipolar
and BiCMOS processes. Bipolar processes are widely recognized as the
technology of choice for circuits that require high-speed, analog-intensive
circuitry with low to moderate levels of density (number of gates or functions
per chip). Nevertheless, the Company believes that the number of companies
possessing this advanced bipolar process capability and applying it to the
markets targeted by AMCC is limited. The proven internal silicon-based process
technologies employed by the Company have not required the highly capital-
intensive facilities needed by certain advanced microprocessor, memory or CMOS
10
ASIC suppliers. The Company believes that its bipolar-based processes are the
optimal choice for the performance (speed, timing and stability), power and
cost trade-offs that must be made in providing the mixed-signal ICs required
by its targeted markets.
Packaging
AMCC has 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. AMCC's products are designed to reduce power
dissipation and die size to enable the use of industry standard packages. AMCC
employs a wide variety of package types, and is currently designing products
using ball grid arrays, tape ball grid arrays and multi-chip modules with pin
counts in excess of 200 pins. The Company's experience with a variety of
packages is one of the factors that enables it to provide optimal high-
performance IC solutions to its customers.
RESEARCH AND DEVELOPMENT
AMCC's research and development expertise and efforts are focused on the
development of high-performance, mixed-signal ASSPs for advanced
communications applications, as well as ASIC products and methodologies for
communications and ATE applications. The Company also focuses on the
development of silicon wafer fabrication processes that are optimized for
these applications.
Product Development
The Company's product development is focused on building high-performance,
analog-intensive design expertise that is incorporated into well-documented
blocks that can be reused by AMCC's design group for multiple products. The
Company has, and continues to make, significant investments in advanced CAD
tools to leverage its design engineering staff, reduce design cycle time and
increase first-time design correctness. AMCC is consistently seeking to add
engineers with high-performance, mixed-signal experience in both its bipolar
and CMOS design groups. The Company's 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.
Process Development
The Company's process development is focused on enhancing its current
bipolar processes and developing new processes optimized for high-performance
digital and mixed-signal communications applications. These new processes are
being designed to provide higher transistor speeds and improved parasitics to
address higher frequency communications requirements, as well as the need to
constantly improve jitter performance in the circuits, while maintaining low
power dissipation and enabling high yields in volume production. AMCC's
process engineers are also involved with the selection and management of the
Company's relationships with outside foundries to provide the advanced CMOS
processes required by certain of AMCC's products. The Company is also
developing high-performance packages for its products in collaboration with
its packaging suppliers and its customers.
The Company's research and development expenses in fiscal years 1996, 1997,
1998 were $8.3, $7.9 and $13.3 million, respectively, which were 16.5%, 13.7%
and 17.3%, respectively, of net revenues for such periods. The Company has 95
employees engaged in engineering and product development related activities.
A failure by the Company to improve its existing process technologies in a
timely or affordable manner could adversely affect the Company's business,
financial condition and operating results. See "Factors That May Affect Future
Results--Rapid Technological Change; Necessity to Develop and Introduce New
Products," and "--Manufacturing Capacity Limitations; New Production Facility"
and "--Transition to New Process Technologies."
11
MANUFACTURING
Wafer Fabrication
AMCC manufactures products at its four-inch wafer fabrication facility in
San Diego, California in an 8,200 square foot clean room if required. The
Company has tentative plans to expand the clean room by approximately 2,300
additional square feet to accommodate new equipment that would expand capacity
and would be used for process development, however, the Company is also
evaluating other alternatives to provide for additional capacity and process
development. The Company believes that its 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. However, there can be no assurance that the Company will achieve or
obtain acceptable manufacturing yield levels in the future. The Company is
currently running several different bipolar and BiCMOS processes in this
facility. See "Factors That May Affect Future Results--Manufacturing Yields"
and "Business--Technology."
The Company is currently planning for the construction of a new six-inch
wafer fabrication facility that it believes will be located in San Diego,
California. AMCC believes that it will need such a facility to be operational
in approximately three years in order to support the Company's growth and to
build certain new products, although the timing of this need may vary based
on, among other things, the Company's rate of growth. The Company currently
plans to acquire or acquire rights to a site for this new facility by mid- to
late-1998. The Company is also exploring other alternatives for the expansion
of its manufacturing capacity, including purchasing a wafer fabrication
facility and entering into strategic relationships to obtain additional
capacity. There can be no assurance that the Company will be able to manage
its growth, or effectively integrate its proposed expansion into its current
operations, or successfully obtain additional capacity through strategic
relationships. See "Factors That May Affect Future Results--Manufacturing
Yields," "--Manufacturing Capacity Limitations; New Production Facility" and
"--Management of Growth."
AMCC currently utilizes four outside foundries, AMI Semiconductor ("AMI"),
IBM, Kawasaki CSI Japan ("Kawasaki") and Taiwan Semiconductor Manufacturing
Corporation ("TSMC") for the production of products designed on CMOS
processes. The Company does not plan to fabricate its own CMOS wafers.
The Company's PCI Bus products are currently produced by AMI in Idaho on a
five-inch CMOS process and by Kawasaki in Japan on a six-inch CMOS process.
Additionally, certain of AMCC's products are being produced by TSMC on six-
inch CMOS and BiCMOS processes. Some of the Company's products are being
designed to be produced by IBM on eight-inch CMOS processes. Although the
Company has a long term agreement with IBM that provides that AMCC will be
able to purchase certain minimum quantities of wafers through March 2000, the
Company does not have long-term wafer supply agreements with its other outside
foundries that guarantee wafer or product quantities, prices or delivery lead
times. There are certain risks associated with the Company's dependence upon
external foundries for certain of its 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 the Company, increases in prices
and potential misappropriation of the Company's intellectual property. See
"Factors That May Affect Future Results -- Dependence on Third-Party
Manufacturing and Supply Relationships."
Components and Raw Materials
AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic
Corporation ("WSC"). While most silicon wafers now being supplied to the
semiconductor industry are larger than four inches, AMCC believes that WSC
will continue to supply AMCC's needs for the foreseeable future. AMCC also
carries a significant inventory of raw wafers to cushion any interruption in
supply. AMCC purchases its ceramic packages from Kyocera America and NTK
Ceramics and its plastic packaging from ASAT. See "Factors That May Affect
Future Results -- Dependence on Third-Party Manufacturing and Supply
Relationships."
12
Assembly and Test
The Company assembles prototypes and modest production volumes of specific
products in its internal assembly facility in San Diego, California. Most of
the Company's 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 the Company 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. See "Factors
That May Affect Future Results--Dependence on Third-Party Manufacturing and
Supply Relationships."
SALES AND MARKETING
The Company sells its products principally through a direct sales
organization consisting of a network of independent manufacturers'
representatives in specified territories that work under the direction of the
Company's direct sales force and distributors.
The Company has a total of 14 direct sales personnel and field applications
engineers. The direct sales force is technically trained and is supported by
applications engineers in the field as well as applications and design
engineers at the Company's headquarters. The Company believes that this
"engineering-intensive" relationship with its customers results in strong,
long-term customer relationships beneficial to both the Company and its
customers. The Company augments this strategic account sales approach with
domestic and foreign distributors, which service primarily smaller accounts
purchasing ASSPs.
In North America, the Company's direct sales effort is supported by 19
independent manufacturers' representatives and one distributor. The Company
sells its products through 11 distributors and 2 independent manufacturers'
representatives in Europe and 7 distributors throughout the rest of the world.
In fiscal 1996, 1997 and 1998, approximately 24%, 21% and 23% of the Company's
revenues were derived from sales to customers located outside of North
America.
The Company's sales headquarters is located in San Diego, California. The
Company maintains sales offices in Burlington, Massachusetts; Raleigh, North
Carolina; San Clemente, California; Plano, Texas; Hollis, New Hampshire; San
Jose, California; Munich, Germany; and Milan, Italy.
BACKLOG
The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of the Company's products to be delivered
and delivery schedules are frequently revised to reflect changes in customer
needs, and customer orders can be canceled or rescheduled without significant
penalty to the customer. For these reasons, the Company's backlog as of any
particular date is not representative of actual sales for any succeeding
period, and the Company therefore believes that backlog is not a good
indicator of future revenue. The Company's backlog for products requested to
be shipped and non-recurring engineering services to be completed in the next
six months was $30.1 million on March 31, 1998, compared to $20.4 million on
March 31, 1997.
PROPRIETARY RIGHTS
The Company relies in part on patents to protect its intellectual property.
The Company has been issued 13 patents in the United States and one patent in
Canada, which patents principally cover certain aspects of the design and
architecture of the Company's IC products and have expiration dates ranging
from 2004 to 2009. In addition, the Company has six patent applications
pending in the United States Patent and Trademark Office (the "PTO"). There
can be no assurance that the Company's pending patent applications or any
future applications will be approved, or that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties or that if challenged, will be found to be valid or enforceable, or
that the patents of others will not have an adverse effect on the Company's
ability to do business. Furthermore, there can be no
13
assurance that others will not independently develop similar products or
processes, duplicate the Company's products or processes or design around any
patents that may be issued to the Company.
To protect its intellectual property, the Company also relies on a
combination of mask work protection under the Federal Semiconductor Chip
Protection Act of 1984, trademarks, copyrights, trade secret laws, employee
and third-party nondisclosure agreements and licensing arrangements. A mask
work refers to the intangible information content of the set of masks or mask
databases used to make a semiconductor chip product. Despite these efforts,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been and in the future may be notified
that it may be infringing the intellectual property rights of third parties.
The Company has certain indemnification obligations to customers with respect
to the infringement of third party intellectual property rights by its
products. There can be no assurance that infringement claims by third parties
or claims for indemnification by customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition or operating results. In
March 1997, the Company received a written notice from legal counsel for Dr.
Chou Li asserting that the Company manufactures certain of its products in
ways that appear to such counsel to infringe a United States patent held by
Dr. Li (the "Li Patent"). After a review of its technology in light of such
assertion, the Company believes that the Company's processes do not infringe
any of the claims of this patent. On January 6, 1998, in a lawsuit between a
third party and Dr. Li filed in Federal District Court for the Eastern
District of Virginia, the court ruled that the Li Patent was invalid for
inequitable conduct. In January 1998, the Company received a written notice
from legal counsel for the Lemelson Medical, Education & Research Foundation
Limited Partnership (the "Lemelson Partnership") asserting that the Company
infringes certain United States patents (the "Lemelson Patents") and offering
the Company a license under the patents. The Company is monitoring this matter
and, although the ultimate outcome of this matter is not currently
determinable, the Company believes, based in part on the licensing terms
offered by the Lemelson Partnership, that the resolution of this matter will
not have a material adverse effect on the Company's financial position or
liquidity; however, there can be no assurance that the ultimate resolution of
this matter will not have a material adverse effect on the Company's results
of operations for any quarter. Furthermore, there can be no assurance that the
Lemelson Partnership will not file a lawsuit against the Company or that the
Company would prevail in any such litigation. Any litigation relating to the
intellectual property rights of third parties, including, but not limited to
the Lemelson Patents or the Li Patent, whether or not determined in the
Company's favor or settled by the Company, would at a minimum be costly and
could divert the efforts and attention of the Company's management and
technical personnel, which could have a material adverse effect on the
Company's business, financial condition or operating results. In the event of
any adverse ruling in any such matter, the Company could be required to pay
substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or obtain a license under the intellectual property rights
of the third-party claiming infringement. There can be no assurance, however,
that a license would be available on reasonable terms or at all. Any
limitations on the Company's ability to market its products, any delays and
costs associated with redesigning its products or payments of license fees to
third parties or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse
effect on the Company's business, financial condition and operating results.
See "Factors That May Affect Future Results--Uncertainty Regarding Patents and
Protection of Proprietary Rights."
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
14
telecommunications, data communications, ATE and high-speed computing
industries are also becoming intensely competitive due in part to deregulation
and heightened international competition. The ability of the Company to
compete successfully in its 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 its IC products, ramp up
of production of the Company's products for particular system manufacturers,
end-user acceptance of the system manufacturers' products, market acceptance
of competitors' products and general economic conditions. In addition, the
Company's competitors may offer enhancements to existing products, or offer
new products based on new technologies, industry standards or customer
requirements, that are available to customers on a more timely basis than
comparable products from the Company or that have the potential to replace or
provide lower cost alternatives to the Company's products. The introduction of
such enhancements or new products by the Company's competitors could render
the Company's existing and future products obsolete or unmarketable.
Furthermore, once a customer has designed a supplier's product into its
system, the customer is extremely reluctant to change its supply source due to
the significant costs associated with qualifying a new supplier. Finally, the
Company expects that certain of its competitors and other semiconductor
companies may seek to develop and introduce products that integrate the
functions performed by the Company's IC products on a single chip, thus
eliminating the need for the Company's products. Each of these factors could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Factors That May Affect Future Results--
Dependence on High-Speed Computing Market."
In the telecommunications and data communications markets, the Company
competes primarily against GaAs-based companies such as Giga, Rockwell
International, TriQuint and Vitesse, and bipolar silicon-based products from
companies such as Giga, Hewlett-Packard, Maxim, Philips and Sony. In certain
circumstances, most notably with respect to ASICs supplied to Nortel, AMCC's
customers or potential customers have internal IC manufacturing capability,
and this internal source is an alternative available to the customer. In the
ATE market, the Company competes primarily against Vitesse and silicon ECL and
BiCMOS products offered principally by semiconductor manufacturers such as
Analog Devices, Lucent Technologies and Maxim. In the high-speed computing
market, the Company competes primarily against companies such as Chrontel,
Cypress, ICS, PLX and Tundra. Many of these companies and potential new
competitors have significantly greater financial, technical, manufacturing and
marketing resources than the Company. In addition, in lower-frequency
applications, the Company faces increasing competition from other CMOS-based
products, particularly as the performance of such products continues to
improve. There can be no assurance that the Company will be able to develop
new products to compete with new technologies on a timely basis or in a cost-
effective manner. Any failure by the Company to compete successfully in its
target markets, particularly in the telecommunications and data communications
markets, would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Factors That May Affect
Future Results--Intense Competition" and "--Increasing Dependence on
Telecommunications and Data Communications Markets and Increasing Dependence
on Application-Specific Standard Products."
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations
15
with respect to such funding efforts have not been material, and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results. See "Factors That May Affect Future Results--Environmental
Regulations."
EMPLOYEES
As of March 31, 1998, the Company had 320 full-time employees: 29 in
administration, 95 in engineering and product development, 156 in operations
and 40 in marketing and sales. The Company's ability to attract and retain
qualified personnel is essential to its continued success. None of the
Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. The Company believes its
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 the Company's product and process development
programs or otherwise have a material adverse effect on the Company's
business, financial condition, and operating results. See "Factors That May
Affect Future Results--Dependence on Qualified Personnel."
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, and their ages as of March 31, 1998,
are as follows:
NAME AGE POSITION
---- --- --------
David M. Rickey............. 42 President, Chief Executive Officer and Director
Joel O. Holliday............ 58 Vice President, Finance and Administration,
Treasurer, Chief Financial Officer and
Secretary
Roger A. Smullen, Sr........ 62 Chairman of the Board of Directors
Thomas L. Tullie............ 33 Vice President, Sales
Anil K. Bedi................ 47 Vice President, Marketing
Laszlo V. Gal............... 50 Vice President, Engineering
Kenneth L. Clark............ 49 Vice President, Operations
David M. Rickey has served as President, Chief Executive Officer and
Director 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.
Joel O. Holliday has served as the Vice President, Finance and
Administration, Treasurer, Chief Financial Officer and Secretary of the
Company since November 1981. He has previously served as the Director of
Finance during the reorganization of Westgate-California Corporation and as
Vice President, Finance of Spin Physics, Inc., an electronics company. Mr.
Holliday received a B.A. from Claremont McKenna College and an M.B.A. from
Harvard Business School.
Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of
Directors since October 1982. Mr. Smullen has served as Acting Vice President,
Operations of the Company from August 1997 through October 1997. From April
1983 until April 1987, Mr. Smullen served as the Company's Chief Executive
Officer.
16
Previously, he was senior vice president of operations of Intersil, Inc.'s
semiconductor division. In 1967, Mr. Smullen co-founded National
Semiconductor. Prior to that, he was director of integrated circuits at
Fairchild Semiconductor. Mr. Smullen is currently a director of Micro Linear
Corporation, a manufacturer of integrated circuits. He holds a B.S. in
Mechanical Engineering from the University of Minnesota.
Thomas L. Tullie joined the Company as Vice President, Sales in August 1996.
Prior to joining the Company, 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. Prior to joining S-MOS
Systems, Mr. Tullie was a designer in the workstations group of Digital
Equipment Corporation. Mr. Tullie earned a B.S. from the University of
Massachusetts and an M.B.A. from Clark University.
Anil K. Bedi joined the Company in August 1996 as Vice President, Marketing.
Prior to joining the Company, Mr. Bedi worked at Philips Semiconductor from
October 1993 to July 1996, where he served as Director of Strategic Marketing
and General Manager of the Mass Storage Product Group. Prior to joining
Philips Semiconductor, from 1984 to 1993 Mr. Bedi served in senior marketing
and management positions at Oki Semiconductor and Gazelle and TriQuint
Semiconductor (two GaAs-based semiconductor companies). Mr. Bedi has also held
marketing and sales positions at Xerox Corporation and National Semiconductor.
Mr. Bedi earned his B.S.E.E. and M.S.E.E. degrees from the University of
Wisconsin and his M.B.A. from the University of Utah.
Laszlo V. Gal joined the Company in January 1997 as Vice President,
Engineering. From September 1994 to December 1996, he served in various senior
management positions, including Director of Product Development at Motorola,
Inc. Mr. Gal served as the manager of IC Designs at Burroughs/Unisys from 1983
to 1994 and worked as a staff scientist at the IBM Research Center from 1981
to 1982. From 1979 to 1981 Mr. Gal was a member of the technical staff at
Rockwell Corporation, where he worked on GaAs development. Mr. Gal was
educated at the Budapest Technical University in Hungary, where he received a
B.S. and M.S. and Ph.D in Electrical Engineering. He holds 12 U.S. patents in
VLSI design and applications.
Kenneth L. Clark joined the Company in November 1997 as Vice President,
Operations. Prior to joining the Company, Mr. Clark worked at Integrated
Device Technologies, 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, Inc., a semiconductor company. From 1987 to
1990, Mr. Clark served as Director, Fab Operations at National Semiconductor
Corp. Mr. Clark has also held manufacturing and engineering management
positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and
American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the
University of Washington.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Fluctuations in Operating Results
AMCC has experienced and may in the future experience fluctuations in its
operating results. The Company had fluctuating revenues and incurred net
losses in fiscal 1995 and 1996. The Company's quarterly and annual operating
results are affected by a wide variety of factors that could materially and
adversely affect revenues, gross profit and operating income, including, but
not limited to: the rescheduling or cancellation of orders by customers;
fluctuations in the timing and amount of customer requests for product
shipments; fluctuations in manufacturing yields and inventory levels; changes
in product mix; the Company's ability to introduce new products and
technologies on a timely basis; the announcement or introduction of products
and technologies by the Company's competitors; the availability of external
foundry capacity, purchased parts and raw materials; competitive pressures on
selling prices; the timing of investments in research and development; market
acceptance of the Company's and its customers' products; the timing of
depreciation and other expenses to be incurred by the Company in connection
with the expansion of its existing manufacturing facility and in connection
with its proposed new wafer fabrication facility; costs associated with
compliance with applicable environmental regulations; costs associated with
future litigation, if any, including without limitation, litigation
17
relating to the use or ownership of intellectual property; general
semiconductor industry conditions; and general economic conditions, including,
but not limited to, economic conditions in Asia.
The Company's expense levels are relatively fixed and are based, in part, on
its expectations of future revenues. Because the Company is continuing to
increase its operating expenses for personnel and new product development and
is limited in its ability to reduce expenses quickly in response to any
revenue shortfalls, the Company's business, financial condition and operating
results would be adversely affected if increased revenues are not achieved.
Furthermore, sudden shortages of raw materials or production capacity
constraints can lead producers to allocate available supplies or capacity to
customers with resources greater than those of the Company, which could
interrupt the Company's ability to meet its production obligations. Finally,
average selling prices in the semiconductor industry historically have
decreased over the life of a product, and as a result, the average selling
prices of the Company's products may be subject to significant pricing
pressures in the future. In response to such pressures, the Company may take
pricing or other actions that could have a material adverse effect on the
Company's business, financial condition and operating results.
The Company's business is characterized by short-term orders and shipment
schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, the Company typically plans its production and
inventory levels based on internal forecasts of customer demand, which is
highly unpredictable and can fluctuate substantially. In addition, from time
to time, in response to anticipated long lead times to obtain inventory and
materials from its outside foundries, the Company may order materials in
advance of anticipated customer demand, which might result in excess inventory
levels or unanticipated inventory write-downs if expected orders fail to
materialize or other factors render the customer's products less marketable.
Furthermore, the Company currently anticipates that an increasing portion of
its revenues in future periods will be derived from sales of application-
specific standard products ("ASSPs"), as compared to application-specific
integrated circuits ("ASICs"). Customer orders for ASSPs typically have
shorter lead times than orders for ASICs, which may make it increasingly
difficult for the Company to predict its revenues and inventory levels and
adjust production appropriately in future periods. A failure by the Company to
plan inventory and production levels effectively could have a material adverse
effect on the Company's business, financial condition and operating results.
As a result of the foregoing or other factors, the Company may experience
fluctuations in future operating results on a quarterly or annual basis that
could materially and adversely affect its business, financial condition and
operating results. For example, as a result of the termination of a
relationship with a strategic foundry partner, decreased orders from two major
customers, charges associated with a reduction in the Company's workforce and
charges for excess inventory, the Company experienced revenue fluctuations and
incurred net losses in fiscal 1995 and 1996. Accordingly, the Company believes
that period-to-period comparisons of its operating results should not be
relied upon as an indication of future performance. In addition, the results
of any quarterly period are not indicative of results to be expected for a
full fiscal year. There can be no assurance that the Company will be able to
achieve increased sales or maintain its profitability in any future period. In
certain future quarters, the Company's operating results may be below the
expectations of public market analysts or investors. In such event, the market
price of the Company's Common Stock could be materially and adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Manufacturing Yields
The fabrication of semiconductors is a complex and precise process. Minute
levels of contaminants in the manufacturing environment, defects in masks used
to print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. In addition, the
Company's ongoing expansion of the manufacturing capacity of its existing
wafer fabrication facility could increase the risk to the Company of
contaminants in such facility. Many of these problems are difficult to
diagnose, time consuming and expensive to remedy and can result in shipment
delays. As a result, semiconductor companies often experience problems in
achieving acceptable wafer
18
manufacturing yields, which are represented by the number of good die as a
proportion of the total number of die on any particular wafer, particularly in
connection with the commencement of production in a new fabrication facility
or the transfer of manufacturing operations between fabrication facilities.
Because the majority of the Company's costs of manufacturing are relatively
fixed, maintenance of the number of shippable die per wafer is critical to the
Company's results of operations. Yield decreases can result in substantially
higher unit costs and may result in reduced gross profit and net income. The
Company has in the past experienced yield problems in connection with the
manufacture of its products. For example, in the second quarter of fiscal 1997
the Company experienced a decrease in internal yields primarily due to the
Company's increasing volume production of a single product at less than normal
production yields in support of a customer's delivery requirements. This
decrease in internal yields adversely impacted the Company's gross margin for
the quarter by approximately $600,000. The Company estimates yields per wafer
in order to estimate the value of inventory. If yields are materially
different than projected, work-in-process inventory may need to be revalued.
The Company has in the past and may in the future from time to time take
inventory write-downs as a result of decreases in manufacturing yields. There
can be no assurance that the Company will not suffer periodic yield problems
in connection with new or existing products or in connection with the
commencement of production in the Company's proposed new manufacturing
facility or the transfer of the Company's manufacturing operations to such
facility, any of which problems could cause the Company's business, financial
condition and operating results to be materially and adversely affected. See
"--Manufacturing Capacity Limitations; New Production Facility."
Semiconductor manufacturing yields are a function both of product design and
process technology. In cases where products are manufactured for the Company
by an outside foundry, the process technology is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As
a result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the Company and the manufacturer. In some cases this
risk could be compounded by the offshore location of certain of the Company's
manufacturers, increasing the effort and time required to identify,
communicate and resolve manufacturing yield problems. If the Company develops
relationships with additional outside foundries, yields could be adversely
affected due to difficulties associated with adapting the Company's technology
and product design to the proprietary process technology and design rules of
such new foundries. Because of the Company's limited access to wafer
fabrication capacity from its outside foundries for certain of its products,
any decrease in manufacturing yields of such products could result in an
increase in the Company's per unit costs for such products and force the
Company to allocate its available product supply among its customers, thus
potentially adversely impacting customer relationships as well as revenues and
gross margin. There can be no assurance that the Company's outside foundries
will achieve or maintain acceptable manufacturing yields in the future.
Furthermore, the Company also faces the risk of product recalls resulting from
design or manufacturing defects which are not discovered during the
manufacturing and testing process. Any of the foregoing factors could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Manufacturing."
Increasing Dependence on Telecommunications and Data Communications Markets
and Increasing Dependence on Application-Specific Standard Products
An important part of the Company's strategy is to continue its focus on the
telecommunications market and to leverage its technology and expertise to
penetrate further the data communications market for high-speed ICs. The
Company anticipates that sales to its other traditional markets will grow more
slowly or not at all and, in some instances, as in the case of military
markets, may decrease over time. The telecommunications and data
communications markets are characterized by extreme price competition, rapid
technological change, industry standards that are continually evolving and, in
many cases, short product life cycles. These markets frequently undergo
transitions in which products rapidly incorporate new features and performance
standards on an industry-wide basis. If, at the beginning of each such
transition, the Company's products are unable to support the new features or
performance levels being required by OEMs in these markets, the Company would
be likely
19
to lose business from an existing or potential customer and, moreover, would
not have the opportunity to compete for new design wins until the next product
transition occurs. There can be no assurance that the Company will be able to
penetrate the telecommunications or data communications market successfully. A
failure by the Company to develop products with required features or
performance standards for the telecommunications or data communications
markets, a delay as short as a few months in bringing a new product to market
or a failure by the Company's telecommunications or data communications
customers to achieve market acceptance of their products by end-users could
significantly reduce the Company's revenues for a substantial period, which
would have a material adverse effect on the Company's business, financial
condition and operating results.
A significant portion of the Company's revenues in recent periods has been,
and is expected to continue to be, derived from sales of products based on the
Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH")
transmission standards and the Asynchronous Transfer Mode ("ATM") transmission
standard. If the communications market evolves to new standards, there is no
assurance the Company will be able to successfully design and manufacture new
products that address the needs of its customers or that such new products
will meet with substantial market acceptance. Although the Company has
developed some initial products for the emerging Gigabit Ethernet and Fibre
Channel communications standards, volume sales of these products have only
recently commenced, and there is no assurance AMCC will be successful in
addressing the market opportunities for products based on these standards. See
"--Rapid Technological Change; Necessity to Develop and Introduce New
Products."
The Company has under development a number of ASSPs for the
telecommunications and data communications markets, from which it expects to
derive an increasing portion of its future revenues. The Company has a limited
operating history in selling ASSPs, particularly to customers in the
telecommunications and data communications markets, upon which an evaluation
of the Company's prospects in such markets can be based. In addition, the
Company's relationships with certain customers in these markets have been
established recently. The Company's future success in selling ASSPs, and in
particular, selling ASSPs to customers in the telecommunications and data
communications markets, will depend in large part on whether the Company's
ASSPs are developed on a timely basis and whether such products achieve market
acceptance among new and existing customers, and on the timing of the
commencement of volume production of the OEMs' products, if at all. The
Company has in the past encountered difficulties in introducing new products
in accordance with customers' delivery schedules and the Company's initial
expectations. There can be no assurance the Company will not encounter such
difficulties in the future or that the Company will be able to develop and
introduce ASSPs in a timely manner so as to meet customer demands. Any such
difficulties or a failure by the Company to develop and timely introduce such
ASSPs could have a material adverse effect on the Company's business,
financial condition and operating results. See "--Rapid Technological Change;
Necessity to Develop and Introduce New Products."
Dependence on High-Speed Computing Market
The Company historically has derived significant revenues from product sales
to customers in the high-speed computing market and currently anticipates that
it will continue to derive significant revenues from sales to customers in
this market in the near term. The market for high-speed computing IC products
is subject to extreme price competition. The Company believes that the average
selling prices of the Company's IC products for the high-speed computing
market will decline in future periods and that the Company's gross margin on
sales of such products also will decline in future periods. There can be no
assurance that the Company will be able to reduce the costs of manufacturing
its high-speed computing IC products in response to declining average selling
prices. Even if the Company successfully utilizes new processes or
technologies to reduce the manufacturing costs of its high-speed computing
products in a timely manner, there can be no assurance that the Company's
customers in the high-speed computing market will purchase such new products.
A failure by the Company to reduce its manufacturing costs sufficiently or a
failure by the Company's customers to purchase such products could have a
material adverse effect on the Company's business, financial condition and
operating results. Furthermore, the Company expects that certain of its
competitors may seek to develop and introduce products
20
that integrate the functions performed by the Company's high-speed computing
IC products on a single chip. In addition, one or more of the Company's
customers may choose to utilize discrete components to perform the functions
served by the Company's high-speed computing IC products or may use their own
design and fabrication facilities to create a similar product. In either case,
the need for high-speed computing customers to purchase the Company's IC
products could be eliminated, which could adversely affect the Company's
business, financial condition and operating results. See "--Intense
Competition."
Rapid Technological Change; Necessity to Develop and Introduce New Products
The markets for the Company's products are characterized by rapidly changing
technologies, evolving and competing industry standards, short product life
cycles, changing customer needs, emerging competition, frequent new product
introductions and enhancements and rapid product obsolescence. The Company's
future success will depend, in large part, on its ability to develop, gain
access to and use leading technologies in a cost-effective and timely manner
and on its ability to continue to develop its technical and design expertise.
The Company's ability to have its products designed into its customers' future
products, to maintain close working relationships with key customers in order
to develop new products, particularly ASSPs, that meet customers' changing
needs and to respond to changing industry standards and other technological
changes on a timely and cost-effective basis will also be a critical factor in
the Company's future success. Furthermore, once a customer has designed a
supplier's product into its system, the customer typically is extremely
reluctant to change its supply source due to significant costs associated with
qualifying a new supplier. Accordingly, the failure by the Company to achieve
design wins with its key customers could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Research and Development."
Products for telecommunications and data communications applications, as
well as for high-speed computing applications are based on industry standards
that are continually evolving. The Company's ability to compete in the future
will depend on its ability to identify and ensure compliance with evolving
industry standards. The emergence of new industry standards could render the
Company's products incompatible with products developed by major systems
manufacturers. As a result, the Company could be required to invest
significant time and effort and to incur significant expense to redesign the
Company's products to ensure compliance with relevant standards. If the
Company's products are not in compliance with prevailing industry standards
for a significant period of time, the Company could miss opportunities to
achieve crucial design wins. There can be no assurance that the Company will
be successful in developing or using new technologies or in developing new
products or product enhancements on a timely basis, or that such new
technologies, products or product enhancements will achieve market acceptance.
In the past, the Company has encountered difficulties in introducing new
products and product enhancements in accordance with customers' delivery
schedules and the Company's initial expectations. The Company could encounter
such difficulties in the future. The Company's pursuit of necessary
technological advances may require substantial time and expense. A failure by
the Company, for technological or other reasons, to develop and introduce new
or enhanced products on a timely basis that are compatible with industry
standards and satisfy customer price and performance requirements could have a
material adverse effect on the Company's business, financial condition and
operating results. See "--Fluctuations in Operating Results," and "--
Increasing Dependence on Telecommunications and Data Communications Markets
and Increasing Dependence on Application-Specific Standard Products."
Intense Competition
The semiconductor market is highly competitive and subject to rapid
technological change, price erosion and heightened international competition.
The telecommunications, data communications, ATE and high-speed computing
industries in particular are intensely competitive. The Company believes that
the principal factors of competition in its markets are price, product
performance, product quality and time-to-market. The ability of the Company to
compete successfully in its markets depends on a number of factors, including
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the
efficiency of production, design wins for its IC products, ramp up of
production of the
21
Company's products for particular systems manufacturers, end-user acceptance
of the systems manufacturers' products, market acceptance of competitors'
products and general economic conditions. In addition, the Company's
competitors may offer enhancements to existing products or offer new products
based on new technologies, industry standards or customer requirements that
are available to customers on a more timely basis than comparable products
from the Company or that have the potential to replace or provide lower-cost
alternatives to the Company's products. The introduction of such enhancements
or new products by the Company's competitors could render the Company's
existing and future products obsolete or unmarketable. Furthermore, once a
customer has designed a supplier's product into its system, the customer is
extremely reluctant to change its supply source due to the significant costs
associated with qualifying a new supplier. Finally, the Company expects that
certain of its competitors and other semiconductor companies may seek to
develop and introduce products that integrate the functions performed by the
Company's IC products on a single chip, thus eliminating the need for the
Company's products. Each of these factors could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"--Dependence on High-Speed Computing Market."
In the telecommunications and data communications markets, the Company
competes primarily against gallium arsenide ("GaAs") based companies such as
Giga, Rockwell International, TriQuint and Vitesse, and bipolar silicon based
products from companies such as Giga, Hewlett-Packard, Maxim, Philips and
Sony. In certain circumstances, most notably with respect to ASICs supplied to
Nortel, AMCC's customers or potential customers have internal IC manufacturing
capabilities, and this internal source is an alternative available to the
customer. In the ATE market, the Company's products compete primarily against
GaAs based products offered by Vitesse and silicon ECL and BiCMOS products
offered principally by semiconductor manufacturers such as Analog Devices,
Lucent Technologies and Maxim. In the high-speed computing market, the Company
competes primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many of
these companies and potential new competitors have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
In addition, in lower-frequency applications, the Company faces increasing
competition from CMOS-based products, particularly as the performance of such
products continues to improve. There can be no assurance that the Company will
be able to develop new products to compete with new technologies on a timely
basis or in a cost-effective manner. Any failure by the Company to compete
successfully in its target markets, particularly in the telecommunications and
data communications markets, could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Increasing Dependence on Telecommunications and Data Communications Markets
and Increasing Dependence on Application-Specific Standard Products."
Manufacturing Capacity Limitations; New Production Facility
The Company currently manufactures a majority of its IC products at its
four-inch wafer fabrication facility located in San Diego, California. The
Company believes that, upon the completion of the capacity expansion of its
existing fabrication facility, it will be able to satisfy its production needs
of products produced in its fabrication facility through 2000, although this
date may vary depending on, among other things, the Company's rate of growth.
The Company will be required to hire, train and manage additional production
personnel in order to increase its production capacity as scheduled. In the
event the Company's expansion of the manufacturing capacity of its fabrication
facility is not completed on a timely basis, the Company could face production
capacity constraints, which could have a material adverse effect on the
Company's business, financial condition and operating results.
Based on the Company's current forecasts of its future need for
manufacturing capacity, the Company is planning for the construction of a new
six-inch wafer fabrication facility, initially to complement, and potentially
to replace, its existing facility in San Diego. The Company is also exploring
other alternatives for the expansion of its manufacturing capacity, including
purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. The Company currently plans to
acquire, or acquire rights to, a site by mid-, to late-1998, to initiate
construction of the new facility during 1999 and to complete the physical
plant
22
during 2000. Following the completion of the physical plant, the Company must
install equipment and perform necessary testing prior to commencing commercial
production at the facility, a process which the Company anticipates will take
at least nine months. Accordingly, the Company believes the new facility will
not commence commercial production prior to late 2000. This new fabrication
facility will have room for additional equipment and manufacturing capacity.
The Company estimates that the cost of the new wafer fabrication facility will
be at least $80.0 million, of which approximately $30.0 million relates to the
purchase of land and construction of the building and at least $50.0 million
relates to capital equipment purchases necessary to establish the initial
manufacturing capacity of the facility. The Company currently anticipates that
a significant portion of these capital equipment purchases will occur prior to
the end of 1999. The Company intends to fund approximately $24.0 million of
the total cost of the new facility with a portion of the proceeds from the
Company's initial public offering (the "IPO") which was completed in December
1997 and secondary public offering, which was completed in March 1998. The
balance of the cost of this facility is expected to be funded through a
combination of available cash, cash equivalents and short term investments,
cash from operations and additional debt, lease or equity financing. There can
be no assurance that the Company will be able to obtain the additional
financing necessary to fund the construction and completion of the new
manufacturing facility. Any failure by the Company to obtain on a timely basis
such financing could delay the completion of the facility and have a material
adverse effect on the Company's business, financial condition and results of
operations. To date, the Company has not acquired, or acquired rights to, a
suitable site for its proposed new manufacturing facility. There can be no
assurance that the Company will be able to acquire rights to such a site in a
timely manner, if at all. Any significant delay by the Company in finding such
a site could have a material adverse effect on the Company's business,
financial condition and operating results. In addition, the Company's existing
wafer fabrication facility is, and its proposed new wafer fabrication facility
is expected to be, located in California. There can be no assurance that these
facilities will not be subject to natural disasters such as earthquakes or
floods. In addition, the depreciation and other expenses to be incurred by the
Company in connection with the expansion of its existing manufacturing
facility and in connection with its proposed new wafer fabrication facility
may adversely effect the Company's gross margin in any future fiscal period.
Furthermore, there can be no assurance that other alternatives to constructing
a new wafer fabrication facility will be available on a timely basis or at
all. See "--Dependence on Third-Party Manufacturing and Supply Relationships"
and "--Need For Additional Capital."
The construction of the new wafer fabrication facility entails significant
risks, including shortages of materials and skilled labor, unforeseen
environmental or engineering problems, work stoppages, weather interferences
and unanticipated cost increases, any of which could have a material adverse
effect on the building, equipping and production start-up of the new facility.
In addition, unexpected changes or concessions required by local, state or
federal regulatory agencies with respect to necessary licenses, land use
permits, site approvals and building permits could involve significant
additional costs and delay the scheduled opening of the facility and could
reduce the Company's anticipated revenues. Also, the timing of commencement of
operation of the new facility will depend upon the availability, timely
delivery and successful installation and testing of the necessary process
equipment. As a result of the foregoing and other factors, there can be no
assurance that the new facility will be completed and in volume production
within its current budget or within the period currently scheduled by the
Company, which could have a material adverse effect on its business, financial
condition and operating results.
Furthermore, if the Company is unable to achieve adequate manufacturing
yields in its proposed new fabrication facility in a timely manner or if the
Company's revenues do not increase commensurate with the anticipated increase
in manufacturing capacity associated with the new facility, the Company's
business, financial condition and operating results could also be materially
adversely affected. In addition, in the future, the Company may be required
for competitive reasons to make capital investments in its existing wafer
fabrication facility or to accelerate the timing of the construction of its
new wafer fabrication facility in order to expedite the manufacture of
products based on more advanced manufacturing processes. To the extent such
capital investments are required, the Company's gross profit and, as a result,
its business, financial condition and operating results, could be materially
and adversely affected. See "--Manufacturing Yields."
23
The successful operation of the Company's proposed new wafer fabrication
facility, if completed, as well as the Company's overall production
operations, will also be subject to numerous risks. The Company has no prior
experience with the operation of the equipment or the processes involved in
producing finished six-inch wafers, which differ significantly from those
involved in the production of four-inch wafers. The Company will be required
to hire, train and manage production personnel in order to effectively operate
the new facility. The Company does not have sufficient excess production
capacity at its existing San Diego facility to fully offset any failure of the
proposed new wafer fabrication facility to meet planned production goals. The
Company may transfer its current San Diego manufacturing operations into the
proposed new wafer fabrication facility subsequent to its completion. Should
this transfer occur, there can be no assurance that the Company will not
experience delays in completing product testing and documentation required by
customers to qualify or requalify the Company's products from this facility as
being from an approved source as a result of this transfer, which could
materially adversely affect the Company's business, financial condition and
operating results. The Company will also have to effectively coordinate and
manage two manufacturing facilities to successfully meet its overall
production goals. The Company has no experience in coordinating and managing
production facilities that are located at different sites or in the transfer
of manufacturing operations from one facility to another. As a result of these
and other factors, the failure of the Company to successfully operate the
proposed new wafer fabrication facility, to successfully coordinate and manage
the two sites or to transfer the Company's manufacturing operations could
adversely affect the Company's overall production and could have a material
adverse effect on its business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Manufacturing."
Transition to New Process Technologies
The markets for the Company's products are characterized by rapid changes in
manufacturing process technologies. To provide competitive products to its
target markets, the Company must develop improved process technologies. The
Company's future success will depend, in large part, upon its ability to
continue to improve its existing process technologies, develop new process
technologies, and adapt its process technologies to emerging industry
standards. The Company may in the future be required to transition one or more
of its products to process technologies with smaller geometries, other
materials or higher speeds in order to reduce costs and/or improve product
performance. There can be no assurance that the Company will be able to
improve its process technologies and develop new process technologies,
including, but not limited to silicon germanium process technologies, in a
timely or affordable manner or that such improvements or developments will
result in products that achieve market acceptance. A failure by the Company to
improve its existing process technologies or processes or develop new process
technologies in a timely or affordable manner could adversely affect the
Company's business, financial condition and operating results. See "--Rapid
Technological Change; Necessity to Develop and Introduce New Products," "--
Manufacturing Capacity Limitations; New Production Facility" and "Business--
Research and Development."
Dependence on Third-Party Manufacturing and Supply Relationships
The Company relies on outside foundries for the manufacture of certain of
its products, including all of its products designed on CMOS processes. The
Company generally does not have long-term wafer supply agreements with its
outside foundries that guarantee wafer or product quantities, prices or
delivery lead times. Instead, the Company's products that are manufactured by
outside foundries are manufactured on a purchase order basis. The Company
expects that, for the foreseeable future, certain of its products will be
manufactured by a single outside foundry. Because establishing relationships
with new outside foundries takes several months, there is no readily available
alternative source of supply for these products. A manufacturing disruption
experienced by one or more of the Company's outside foundries would impact the
production of the Company's products for a substantial period of time, which
could have a material adverse effect on the Company's business, financial
condition and operating results. Furthermore, in the event that the transition
to the next generation of manufacturing technologies at one or more of the
Company's outside foundries is unsuccessful or delayed, the Company's
business, financial condition and operating results could be materially and
adversely affected.
24
There are additional risks associated with the Company's dependence upon
third-party manufacturers for certain of its products, including, but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on wafers or products supplied to
the Company, increases in prices and potential misappropriation of the
Company's intellectual property. With respect to certain of its products, the
Company depends upon external foundries to produce wafers and, in some cases,
finished products of acceptable quality, to deliver those wafers and products
to the Company on a timely basis and to allocate to the Company a portion of
their manufacturing capacity sufficient to meet the Company's needs. On
occasion, the Company has experienced difficulties in causing these events to
occur satisfactorily. The Company's wafer and product requirements typically
represent a very small portion of the total production of these external
foundries. The Company is subject to the risk that a producer will cease
production on an older or lower-volume process that is used to produce the
Company's parts. Additionally, there can be no assurance that such external
foundries will continue to devote resources to the production of the Company's
products or continue to advance the process design technologies on which the
manufacturing of the Company's products are based. Any such difficulties could
have a material adverse effect on the Company's business, financial condition
and operating results. See "--Manufacturing Yields."
Certain of the Company's products are assembled and packaged by third-party
subcontractors. The Company does not have long-term agreements with any of
these subcontractors. Such assembly and packaging is conducted on a purchase
order basis. As a result of its reliance on third-party subcontractors to
assemble and package its products, the Company cannot directly control product
delivery schedules, which could lead to product shortages or quality assurance
problems that could increase the costs of manufacturing, assembly or packaging
of the Company's products. In addition, the Company may, from time to time, be
required to accept price increases for such assembly or packaging services
that could have a material adverse effect on the Company's business, financial
condition and operating results. Due to the amount of time normally required
to qualify assembly and packaging subcontractors, product shipments could be
delayed significantly if the Company is required to find alternative
subcontractors. In the future, the Company may contract with third parties for
the testing of its products. Any problems associated with the delivery,
quality or cost of the assembly, testing or packaging of the Company's
products could have a material adverse effect on the Company's business,
financial condition and operating results.
Due to an industry transition to six-inch wafer fabrication facilities,
there is a limited number of suppliers of the four-inch wafers used by the
Company to build products in its existing manufacturing facility, and the
Company relies on a single supplier for such wafers. Although the Company
believes that it will have sufficient access to four-inch wafers to support
production in its existing fabrication facility for the foreseeable future,
there can be no assurance that the Company's current supplier will continue to
supply the Company with four-inch wafers on a long-term basis. Additionally,
the availability of manufacturing equipment needed for a four-inch process is
limited and certain new equipment required for more advanced processes may not
be available for a four-inch process. If the Company is not able to obtain a
sufficient supply of four-inch wafers or to obtain the requisite equipment for
a four-inch process, the Company's business, financial condition and operating
results would be materially adversely affected. See "Business--Manufacturing."
Customer Concentration
Historically, a relatively small number of customers has accounted for a
significant portion of the Company's revenues in any particular period. The
Company has no long-term volume purchase commitments from any of its major
customers. In fiscal 1996, 1997 and 1998, the Company's five largest customers
accounted for approximately 44%, 44% and 46% of the Company's revenues in each
of such periods and sales to Nortel accounted for approximately 20% of the
Company's revenues in each of such periods. The Company anticipates that sales
of its products to relatively few customers will continue to account for a
significant portion of its revenues. In the event of a reduction, delay or
cancellation of orders from one or more significant customers or if one or
more of its significant customers select products manufactured by one of the
Company's competitors for inclusion in future product generations, the
Company's business, financial condition and operating results
25
could be materially and adversely affected. There can be no assurance that the
Company's current customers will continue to place orders with the Company,
that orders by existing customers will continue at current or historical
levels or that the Company will be able to obtain orders from new customers.
The loss of one or more of the Company's current significant customers could
materially and adversely affect the Company's business, financial condition
and operating results. See "--Intense Competition," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and
"Business--Products and Customers."
Management of Growth
The Company has experienced, and may continue to experience, periods of
rapid growth and expansion, which have placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources. To
manage these expanded operations effectively, the Company will be required to
continue to improve its operational, financial and management systems and to
successfully hire, train, motivate and manage its employees. In particular,
certain of the Company's senior management personnel recently joined the
Company. The Company's ability to manage growth successfully will require such
personnel to work together effectively. In addition, the expansion of the
Company's current wafer fabrication facility, the construction and operation
of the Company's planned wafer fabrication facility, the initial integration
of the proposed new wafer fabrication facility with the Company's current
facility and the subsequent potential transfer of the Company's manufacturing
operations to the proposed new wafer fabrication facility will require
significant management, technical and administrative resources. There can be
no assurance that the Company will be able to manage its growth or effectively
integrate its planned wafer fabrication facility into its current operations,
and a failure to do so could have a material adverse effect on the Company's
business, financial condition and operating results.
Dependence on Qualified Personnel
The Company's future success depends in part on the continued service of its
key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel. There is intense
competition for qualified personnel in the semiconductor industry, in
particular design engineers, and there can be no assurance that the Company
will be able to continue to attract and train such engineers or other
qualified personnel necessary for the development of its business or to
replace engineers or other qualified personnel that may leave the Company's
employ in the future. The Company's anticipated growth is expected to place
increased demands on the Company's resources and will likely require the
addition of new management personnel and the development of additional
expertise by existing management personnel. Although the Company has entered
into an "at-will" employment agreement with David M. Rickey, the Company's
President and Chief Executive Officer, the Company has not entered into fixed
term employment agreements with any of its executive officers. In addition,
the Company has not obtained key-man life insurance on any of its executive
officers or key employees. Loss of the services of, or failure to recruit, key
design engineers or other technical and management personnel could be
significantly detrimental to the Company's product and process development
programs or otherwise have a material adverse effect on the Company's
business, financial condition and operating results.
Need for Additional Capital
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes its available cash, cash equivalents and
short-term investments and cash generated from operations, will be sufficient
to meet the Company's capital requirements through the next 12 months,
although the Company could be required, or could elect, to seek to raise
additional financing during such period. The Company's future capital
requirements will depend on many factors, including the costs associated with
the expansion of its manufacturing operations, the rate of revenue growth, the
timing and extent of spending to support research and development programs and
expansion of sales and marketing, the timing of introductions of new products
and enhancements to existing products, and market acceptance of the Company's
products. The Company expects that it will need to raise additional debt or
equity financing in the future, primarily for purposes of financing the
acquisition of property for its proposed new wafer
26
fabrication facility, the construction of the proposed new wafer fabrication
facility and the purchase of equipment for the proposed new wafer fabrication
facility. There can be no assurance that such additional debt or equity
financing will be available on commercially reasonable terms or at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Uncertainty Regarding Patents and Protection of Proprietary Rights
The Company relies on a combination of patents, mask work protection under
the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights,
trade secret laws and confidentiality procedures to protect its intellectual
property. There can be no assurance that such a combination will fully protect
the Company's intellectual property or that such protection will provide the
Company with competitive advantages.
In addition, as is typical in the semiconductor industry, the Company has
from time to time received, and in the future may receive communications from
third parties asserting patent rights, mask work rights, copyrights, trademark
rights or other intellectual property rights that such other parties allege
cover certain of the Company's products, processes, technologies or
information. Several such assertions relating to patents are in various stages
of evaluations. There can be no assurance that such claims or other
infringement claims by third parties or claims for indemnification by
customers or end users of the Company's products resulting from infringement
claims, if proven to be true, will not materially adversely affect the
Company's business, financial condition or operating results. See "Business--
Proprietary Rights."
International Sales
International sales (including sales to Canada) accounted for 44%, 40% and
42% of revenues in fiscal 1996, fiscal 1997 and fiscal 1998, respectively. The
Company anticipates that international sales may increase in future periods
and may account for an increasing portion of the Company's revenues. As a
result, an increasing portion of the Company's revenues may be subject to
certain risks, including changes in regulatory requirements, tariffs and other
barriers, timing and availability of export licenses, political and economic
instability, difficulties in accounts receivable collections, natural
disasters, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, difficulties in obtaining
governmental approvals for telecommunications and other products, foreign
currency exchange fluctuations, the burden of complying with a wide variety of
complex foreign laws and treaties and potentially adverse tax consequences.
Although less than six percent of the Company's revenues were attributable to
sales in Asia during the fiscal year ended March 31, 1998, the recent economic
instability in certain Asian countries could adversely affect the Company's
business, financial condition and operating results, particularly to the
extent that this instability impacts the sales of products manufactured by the
Company's customers. The Company is also subject to the risks associated with
the imposition of legislation and regulations relating to the import or export
of high technology products. The Company cannot predict whether quotas,
duties, taxes or other charges or restrictions upon the importation or
exportation of the Company's products will be implemented by the United States
or other countries. Because sales of the Company's products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of the Company's products
so that they become relatively more expensive to customers in the local
currency of a particular country, leading to a reduction in sales and
profitability in that country. Future international activity may result in
increased foreign currency denominated sales. Gains and losses on the
conversion to United States dollars of accounts receivable, accounts payable
and other monetary assets and liabilities arising from international
operations may contribute to fluctuations in the Company's results of
operations. Some of the Company's customer purchase orders and agreements are
governed by foreign laws, which may differ significantly from United States
laws. Therefore, the Company may be limited in its ability to enforce its
rights under such agreements and to collect damages, if awarded. Any of the
foregoing factors could have a material adverse effect on the Company's
business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
27
Environmental Regulations
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations with
respect to such funding efforts have not been material and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results. See "Business--Environmental Matters."
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California have resulted in restrictions being
placed on water use by manufacturers and residents in California. In the event
of future drought, reductions in water use may be mandated generally, and it
is unclear how such reductions will be allocated among California's different
users. There can be no assurance that near term reductions in water
allocations to manufacturers will not occur, which could have a material
adverse affect on the Company's business, financial condition or operating
results.
Volatility of Stock Price
The market price of the Common Stock has fluctuated significantly to date.
In addition, the market price of the Common Stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in the Company's anticipated or actual operating
results; announcements or introductions of new products; technological
innovations or setbacks by the Company or its competitors; conditions in the
semiconductor, telecommunications, data communications, ATE, high-speed
computing or military markets; the commencement of litigation; changes in
estimates of the Company's performance by securities analysts; and other
events or factors. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that have affected the
market prices of many high technology companies, particularly semiconductor
companies, and that have often been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as general
economic and market conditions, may affect adversely the market price of the
Common Stock.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Certain of the Company's internal computer systems are not Year
2000 compliant, and the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. The Company has commenced taking actions
to correct such internal systems and is in the early stages of conducting an
audit of its third-party suppliers as to the Year 2000 compliance of their
systems. Failure of the Company's internal computer systems or of such third-
party equipment or software, or of systems maintained by the Company's
suppliers, to operate properly with regard to
28
the Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, operating results and financial condition.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase the Company's products, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Business-- Industry Background."
Effect of Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of Preferred Stock that may be issued
in the future. The issuance of Preferred Stock may delay, defer or prevent a
change in control of the Company, as the terms of the Preferred Stock that
might be issued could potentially prohibit the Company's consummation of any
merger, reorganization, sale of substantially all of its assets, liquidation
or other extraordinary corporate transaction without the approval of the
holders of the outstanding shares of Preferred Stock. In addition, the
issuance of Preferred Stock could have a dilutive effect on stockholders of
the Company. Section 203 of the Delaware General Corporation Law, to which the
Company is subject, restricts certain business combinations with any
"interested stockholder" as defined by such statute. The statute may delay,
defer or prevent a change of control of the Company.
ITEM 2. PROPERTIES.
The Company's executive offices, research and development and engineering
functions are located in San Diego, California in a 90,000 square foot
building that is leased by the Company under a lease that expires in 2007. In
addition, the Company occupies a 21,000 square foot building in San Diego,
which houses the Company's manufacturing facilities under a lease that expires
in 2003, but provides the Company with an option to extend the lease for one
additional five year period. The Company leases additional space for sales
offices in Burlington, Massachusetts; Raleigh, North Carolina; San Clemente,
California; Plano, Texas; Hollis, New Hampshire; San Jose, California; Munich,
Germany and Milan, Italy.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations on the normal course of business. As of
the date of this 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 the Company's 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, 1998.
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "AMCC" since the Company's initial public offering on
November 25, 1997. The following table sets forth the high and low sales
prices of the Company's Common Stock as reported by the Nasdaq National Market
for the periods indicated.
FISCAL YEAR ENDED MARCH 31, 1998 HIGH LOW
-------------------------------- ------ ------
Third Quarter............................................ $13.50 $ 8.00
Fourth Quarter........................................... $24.38 $12.25
At March 31, 1998, there were approximately 983 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock and presently
intends to continue this policy.
(b) Recent Sales of Unregistered Securities
(1) From December 31, 1997 until March 2, 1998, 26,997 shares of Common
Stock were issued upon exercise of options with an average exercise price of
$.45 per share, all of which were paid in cash, and 56,312 shares of Common
Stock were issuable upon exercise of outstanding options with an average
exercise price of $.46 per share pursuant to grants to certain employees and
Directors of the Company under the Company's 1982 Incentive Stock Option Plan
(the "1982 Plan"). On March 2, 1998, the Company filed a Registration
Statement on Form S-8 to cover the shares of Common Stock issuable upon
exercise of options under the 1982 Plan.
(2) From December 31, 1997 until March 2, 1998, 120,719 shares of Common
Stock were issued upon exercise of options with an average exercise price of
$.53 per share, all of which were paid in cash, and 1,978,922 shares of Common
Stock were issuable upon exercise of outstanding options with an average
exercise price of $1.87 per share pursuant to grants to certain employees and
Directors of the Company under the Company's 1992 Incentive Stock Option Plan
(the "1992 Plan"). On March 2, 1998, the Company filed a Registration
Statement on Form S-8 to cover the shares of Common Stock issuable upon
exercise of options under the 1992 Plan.
There were no underwritten offerings in connection with any of the
transactions set forth in Items 5(b)(1) and 5(b)(2) above. The issuances
described in Items 5(b)(1) and 5(b)(2) above were deemed to be exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
thereunder in that they were offered and sold pursuant to a written
compensation plan. In addition, such issuances were deemed to be exempt from
registration under the Securities Act under Section 4(2) of the Securities Act
as transactions not involving any public offering. The recipients of
securities in each of the transactions described in Items 5(b)(1) and 5(b)(2)
above represented their intentions to acquire the securities for investment
only and not with a view to or for sale in connection with any distribution
thereof, and appropriate legends were affixed to the securities issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Company.
(c) Use of Proceeds
(1) Initial Public Offering
The Company filed a Registration Statement on Form S-1 (the "Registration
Statement"), File No. 333-37609, which was declared effective by the
Securities and Exchange Commission on November 24, 1997, relating to the
initial public offering (IPO) of the Company's Common Stock. The managing
underwriters of the offering were BancAmerican Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate 6,385,950 shares of Common Stock and the price
30
to the public was $8.00 per share. Of such shares, 3,538,448 were sold by The
Company (which includes the underwriter's over-allotment of 832,950 shares)
and 2,847,502 were sold by certain shareholders of the Company.
The Company incurred $3,197,000 of total expenses in connection with the IPO
consisting of $1,982,000 in underwriting discounts and commissions and
$1,215,000 including registration and filing fees, printing, accounting and
legal expenses. All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after deducting the total expenses
were $25,111,000.
The Company has invested the net offering proceeds of $25,111,000 in short-
term investments consisting of United States Treasury Notes, obligations of
United States government agencies and corporate bonds with maturities ranging
from April 2, 1998 to March 23, 2001. The use of proceeds described herein
does not represent a material change in the use of proceeds described in the
prospectus of the Registration Statement.
(2) Secondary Public Offering
The Company filed a Registration Statement on Form S-1, File No. 333-46071
(the "Secondary Registration Statement"), which was declared effective by the
Securities and Exchange Commission on March 12, 1998, relating to the
secondary public offering of the Company's Common Stock. The managing
underwriters for the Offering were BancAmerica Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate of 4,059,500 shares of the Common Stock and the price
to the public was $19.375 per share. Of such shares, 1,500,000 shares were
sold by the Company, and 2,559,500 shares were sold by certain stockholders of
the Company (which includes the underwriter's overallotment of 529,500
shares).
The expenses incurred by the Company in connection with the Offering were
approximately $2,181,000, of which $1,515,000 constituted underwriting
discounts and commissions and approximately $666,000 constituted other
expenses including registration and filing fees, printing, accounting and
legal expenses. No direct or indirect payments were made to any directors,
officers, owners of ten percent or more of any class of the Company's equity
securities, or other affiliates of the Company other than for reimbursement of
expense incurred on the road show. Net offering proceeds to the Company after
deducting these expenses were approximately, $26,882,000.
The Company has invested the net offering proceeds in short-term investments
consisting of United States Treasury Notes, obligations of United States
government agencies and corporate bonds with maturities ranging from April 2,
1998 to March 23, 2001. 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.
31
ITEM 6. SELECTED FINANCIAL DATA.
(in thousands, except per share data)
MARCH 31,
--------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net revenues...................... $49,686 $46,950 $50,264 $57,468 $ 76,618
Cost of revenues.................. 29,187 27,513 34,169 30,057 34,321
------- ------- ------- ------- --------
Gross profit...................... 20,499 19,437 16,095 27,411 42,297
Research and development........ 9,273 10,108 8,283 7,870 13,268
Selling, general and
administrative................. 9,513 10,112 11,232 12,537 14,278
------- ------- ------- ------- --------
Total operating expenses...... 18,786 20,220 19,515 20,407 27,546
Operating income (loss)........... 1,713 (783) (3,420) 7,004 14,751
Gain on contract settlement, net.. 9,530 -- -- -- --
Interest income (expense), net.... (464) (358) (242) (29) 871
------- ------- ------- ------- --------
Income (loss) before income taxes. 10,779 (1,141) (3,662) 6,975 15,622
Provision (benefit) for income
taxes............................ 575 (70) 32 659 406
------- ------- ------- ------- --------
Net income (loss)................. 10,204 (1,071) $(3,694) $ 6,316 $ 15,216
======= ======= ======= ======= ========
Basic earnings (loss) per share:
Earnings (loss) per share....... $ 0.60 $ (0.06) $ (0.21) $ 0.35 $ 0.84
======= ======= ======= ======= ========
Shares used in calculating basic
earnings (loss) per share...... 16,973 17,194 17,394 17,834 18,028
======= ======= ======= ======= ========
Diluted earnings (loss) per share:
Earnings (loss) per share....... $ 0.60 $ (0.06) $ (0.21) $ 0.35 $ 0.75
======= ======= ======= ======= ========
Shares used in calculating
diluted earnings (loss) per
share.......................... 17,099 17,194 17,394 17,907 20,294
======= ======= ======= ======= ========
CONSOLIDATED BALANCE SHEET DATA:
Working Capital................... $19,867 $16,753 $13,977 $19,364 $ 77,417
Total Assets...................... 45,124 40,180 37,836 41,814 112,834
Long-term debt and capital lease
obligations, less current
portion.......................... 7,493 6,515 4,447 3,192 4,091
Total stockholders' equity........ 25,829 24,805 21,512 27,743 91,634
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Annual
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. The Company's 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 set forth
under "Item 1. Business--Factors That May Affect Future Results". Readers are
cautioned not to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof. The Company
assumes no obligation to update these forward-looking statements to reflect
actual results or changes in factors or assumptions affecting such forward-
looking statements.
32
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by using a
combination of high-frequency; mixed-signal design expertise; system-level
knowledge and multiple silicon process technologies. AMCC believes that its
internal bipolar and BiCMOS processes, complemented by advanced CMOS processes
from external foundries, enable the Company to offer high-performance, high-
speed solutions optimized for specific applications and customer requirements.
The Company further believes that its products provide significant cost,
power, performance and reliability advantages for systems OEMs in addition to
accelerating time-to-market. The Company also leverages its technology to
provide products for the automated test equipment (ATE), high-speed computing
and military markets.
In fiscal 1997, the Company substantially reorganized its management team
and increased its focus on becoming the leading supplier of high-performance,
high-bandwidth connectivity ICs for the world's communications infrastructure.
Accordingly, the Company accelerated the pace of development of new products
for high-performance telecommunications and data communications markets.
Following the reorganization of the Company's management team in fiscal 1997
and its renewed focus on ASSP's for the telecommunications and data
communications markets, the Company returned to profitability after two years
of incurring net losses. The Company's revenues have increased in each of the
last eight fiscal quarters. In addition, as a result primarily of the
$21.5 million of net income generated in fiscal 1997 and 1998, the Company
transitioned from accumulated deficit of $15.4 million at March 31, 1996 to
retained earnings of $5.7 million at March 31, 1998.
In December 1997, the Company completed the initial public offering (IPO) of
its common stock, which raised net proceeds to the Company of approximately
$25.1 million. In March 1998, the Company completed a secondary public
offering, which raised net proceeds to the Company of approximately $26.9
million.
RESULTS OF OPERATIONS
The following table sets forth certain selected consolidated statements of
operations data in dollars and as a percentage of revenues for the periods
indicated:
FISCAL YEAR ENDED MARCH 31,
-----------------------------------------------
1996 1997 1998
-------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
$ % $ % $ %
------- ----- ------- ----- ------- -----
Net revenues.................. $50,264 100.0 % $57,468 100.0 % $76,618 100.0%
Cost of revenues.............. 34,169 68.0 30,057 52.3 34,321 44.8
------- ----- ------- ----- ------- -----
Gross profit.................. 16,095 32.0 27,411 47.7 42,297 55.2
Operating expenses:
Research and development.... 8,283 16.5 7,870 13.7 13,268 17.3
Selling, general and
administrative............. 11,232 22.3 12,537 21.8 14,278 18.6
------- ----- ------- ----- ------- -----
Total operating expenses.. 19,515 38.8 20,407 35.5 27,546 35.9
------- ----- ------- ----- ------- -----
Operating income (loss)....... (3,420) (6.8) 7,004 12.2 14,751 19.3
Interest income (expense),
net.......................... (242) (0.5) (29) (0.1) 871 1.1
------- ----- ------- ----- ------- -----
Income (loss) before provision
for income taxes............. (3,662) (7.3) 6,975 12.1 15,622 20.4
Provision for income taxes.... 32 0.0 659 1.1 406 0.5
------- ----- ------- ----- ------- -----
Net income (loss)............. $(3,694) (7.3)% $ 6,316 11.0 % $15,216 19.9%
======= ===== ======= ===== ======= =====
Diluted earnings (loss) per
share:
Earnings (loss) per share... $ (0.21) $ 0.35 $ 0.75
Shares used in calculating
earnings (loss) per share.. 17,394 17,907 20,294
33
COMPARISON OF THE YEAR ENDED MARCH 31, 1998 TO THE YEAR ENDED MARCH 31, 1997
Net Revenues. Net revenues for the year ended March 31, 1998 were
approximately $76.6 million, representing an increase of 33% over net revenues
of approximately $57.5 million for the year ended March 31, 1997. Revenues
from sales of communications products increased from 44% of net revenues for
the year ended March 31, 1997 to 48% of net revenues for the year ended March
31, 1998, reflecting unit growth in shipments of existing products, as well as
the introduction of new products for these markets. Revenues from sales of
products to other markets, consisting of the ATE, high-speed computing and
military markets, decreased from 56% of net revenues for the year ended March
31, 1997, to 52% of net revenues for the year ended March 31, 1998, 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 an increase in shipments of PCI bus products for high-speed
computing applications and to increased shipments of products to the ATE
market. Sales to Nortel accounted for 21% and 20% of net revenues for the
years ended March 31, 1998 and 1997, respectively. In the year ended March 31,
1998, one other customer, Insight Electronics, Inc., the Company's domestic
distributor, accounted for 11% of net revenues. Sales outside of North America
accounted for 23% and 21% of net revenues for the years ended March 31, 1998
and 1997, respectively. Although less than six percent of the Company's
revenues were attributable to sales in Asia for the year ended March 31, 1998,
the recent economic instability in certain Asian countries could adversely
affect the Company's business, financial condition and operating results,
particularly to the extent that this instability impacts the sales of products
manufactured by the Company's customers. See "Item 1. Business--Factors That
May Affect Future Results--International Sales."
Gross Margin. Gross margin was 55.2% for the year ended March 31, 1998, as
compared to 47.7% for the year ended March 31, 1997. The significant increase
in gross margin resulted from increased utilization of the Company's wafer
fabrication facility, as well as improved manufacturing yields. The Company's
gross margin is primarily impacted by factory utilization, wafer yields,
product mix and the Company's timing of depreciation expense and other costs
associated with expanding its manufacturing capacity. Although AMCC does not
expect its gross margin to continue to increase at the rate reflected above,
its strategy is to maximize factory utilization whenever possible, maintain or
improve its manufacturing yields, and focus on the development and sales of
high-performance products that can have higher gross margins. There can be no
assurance, however, that the Company will be successful in achieving these
objectives. In addition, these factors can vary significantly from quarter to
quarter, which would likely result in fluctuations in quarterly gross margin
and net income. See "Item 1. Business--Factors That May Affect Future
Operating Results--Fluctuations in Operating Results."
Research and Development. Research and development (R&D) expenses increased
69% to approximately $13.3 million, or 17.3% of net revenues, for the year
ended March 31, 1998, from approximately $7.9 million, or 13.7% of net
revenues, for the year ended March 31, 1997. The substantial increase in R&D
expenses was due to accelerated new product and process development efforts.
The Company believes that a continued commitment to R&D is vital to maintain a
leadership position with innovative communications products. Accordingly, the
Company expects R&D expenses to increase in absolute dollars and possibly as a
percentage of net revenues in the future. Currently, R&D expenses are
primarily focused on the development of products and processes for the
telecommunications and data communications markets, and the Company expects to
continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $14.3 million, or 18.6% of net revenues,
for the year ended March 31, 1998, as compared to approximately $12.5 million,
or 21.8% of net revenues, for the year ended March 31, 1997. The increase in
SG&A expenses for the year ended March 31, 1998 was primarily due to increased
compensation costs and increased commissions earned by third-party sales
representatives. The decrease in SG&A expenses as a percentage of net revenues
for the year ended March 31, 1998 was a result of net revenues increasing more
rapidly than SG&A expenses. The Company expects SG&A expenses to increase in
the future due principally to additional staffing in its sales and marketing
departments and additional expenses related to being a public company.
34
Operating Margin. The Company's operating margin increased to 19.3% of net
revenues for the year ended March 31, 1998, compared to 12.2% for the year
ended March 31, 1997, 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 $871,000 for the year
ended March 31, 1998 from a net interest expense of $29,000 for the year ended
March 31, 1997. This increase was due principally to higher interest income
from larger cash and short-term investment balances generated by the proceeds
from the Company's public offerings completed the year ended March 31, 1998,
as well as a decrease in interest expense associated with outstanding capital
lease and debt obligations.
Income Taxes. The Company's annual effective tax rate for the year ended
March 31, 1998 was 2.6%. This was due primarily to the reduction of a
valuation allowance recorded against deferred tax assets for net operating
loss carryforwards and credits in the prior two years. This reduction results
from sufficient levels of income for fiscal 1998, which makes the realization
of these deferred tax assets more likely than not. The effective tax rate of
9.5% for the year ended March 31, 1997 was attributable primarily to
alternative minimum taxes ("AMT"). The Company expects its effective tax rate
to approximate statutory rates in fiscal 1999.
Diluted Earnings per share. Diluted earnings per share increased 114% to
$0.75 in the year ended March 31, 1998, compared to $0.35 for the year ended
March 31, 1997.
Deferred Compensation. In connection with the grant of certain stock options
to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the fair value of the Common Stock at the date of grant for
accounting purposes and the option exercise price of such options. Such amount
is presented as a reduction of stockholders' equity and amortized ratably over
the vesting period of the applicable options. Amortization of deferred
compensation recorded for the year ended March 31, 1998 was $127,000. The
Company currently expects to record amortization of deferred compensation with
respect to these option grants of approximately $159,000, $159,000, $129,000
and $25,000 during the fiscal years ended March 31, 1999, 2000, 2001 and 2002,
respectively.
Backlog. The Company's sales are made primarily pursuant to standard
purchase orders for delivery of products. Quantities of the Company's products
to be delivered and delivery schedules are frequently revised to reflect
changes in customer needs, and customer orders can be canceled or rescheduled
without significant penalty to the customer. For these reasons, the Company's
backlog as of any particular date is not representative of actual sales for
any succeeding period, and the Company therefore believes that backlog is not
a good indicator of future revenue. The Company's backlog for products
requested to be shipped and nonrecurring engineering services to be completed
in the next six months was $30.1 million on March 31, 1998, compared to $20.4
million on March 31, 1997. See "Item 1. Business--Factors That May Affect
Future Results--Fluctuations in Operating Results."
Recently Issued Accounting Standards. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The Company does not
believe that comprehensive income or loss under SFAS No. 130 has been
materially different than net income or loss. The Company believes it operates
in one business and operating segment and does not believe adoption of SFAS
No. 131 will have a material impact on the Company's financial statements.
Year 2000 Compliance. Certain of the Company's internal computer systems are
not Year 2000 compliant and the Company utilizes third-party equipment and
software that may not be Year 2000 compliant. The Company has commenced taking
actions to correct such internal systems and is in the early stages of
conducting an audit of its third-party suppliers as to the Year 2000
compliance of their systems. The Company does not believe that the cost of
these actions will have a material adverse affect on the Company's business,
financial
35
condition or operating results. However, there can be no assurance that a
failure of the Company's internal computer systems or of third-party equipment
or software used by the Company, or of systems maintained by the Company's
suppliers, to be Year 2000 compliant will not have a material adverse effect
on the Company's business, financial condition or operating results. In
addition, there can be no assurance that adverse changes in the purchasing
patterns of the Company's customers or potential customers as a result of Year
2000 issues affecting such customers will not have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Item 1. Business--Factors That May Affect Future Results--Year 2000
Compliance."
COMPARISON OF THE YEAR ENDED MARCH 31, 1997 TO THE YEAR ENDED MARCH 31, 1996
Net Revenues. Net revenues for the year ended March 31, 1997 increased to
approximately $57.5 million from approximately $50.3 million for the year
ended March 31, 1996. Revenues from sales of communications products increased
from 41% of net revenues for the year ended March 31, 1996 to 44% of net
revenues for the year ended March 31, 1997, reflecting unit growth in
shipments of existing products, as well as the introduction of new products
for the communications market. Revenues from sales of products to other
markets decreased from 59% of net revenues for the year ended March 31, 1996
to 56% of net revenues for the year ended March 31, 1997. In the years ended
March 31, 1997 and 1996, sales to Nortel accounted for 20% of net revenues in
each year. Sales to customers outside of North America accounted for 21% and
24% of net revenues in the years ended March 31, 1997 and 1996, respectively,
reflecting an increase in revenues from sales to such customers, but a
decreased percentage of net revenues.
Gross Margin. Gross margin was 47.7% for the year ended March 31, 1997,
compared to 32.0% for the year ended March 31, 1996. The substantial increase
in gross margin in fiscal 1997 resulted primarily from a significant reduction
in charges related to excess inventory, as well as from increased utilization
of the Company's wafer fabrication facility. See "Item 1. Business--Factors
That May Affect Future Results--Fluctuations in Operating Results."
Research and Development. R&D expenses were approximately $7.9 million, or
13.7% of net revenues, for the year ended March 31, 1997, as compared to
approximately $8.3 million, or 16.5% of net revenues, for the year ended March
31, 1996. The decrease in R&D expense for the year ended March 31, 1997 was
primarily due to a decrease in prototyping costs.
Selling, General and Administrative. SG&A expenses were approximately $12.5
million, or 21.8% of net revenues, for the year ended March 31, 1997, as
compared to approximately $11.2 million, or 22.3% of net revenues, for the
year ended March 31, 1996. SG&A expenses increased in the year ended March 31,
1997 due primarily to increased compensation expense and an increase in
product promotion expenses.
Net Interest Expense. Net interest expense was $29,000 in the year ended
March 31, 1997, as compared to $242,000 in the year ended March 31, 1996. The
decrease in net interest expense was attributable primarily to decreasing
levels of capital lease and debt obligations and to increases in interest
income as a result of increasing levels of cash, cash equivalents and short-
term investments.
Income Taxes. The Company's effective tax rate for the year ended March 31,
1997 was 9.5%, which was comprised primarily of alternative minimum tax and
reflected tax at the statutory rate, reduced by net operating loss and
research and development tax credits. The tax benefit for the year ended March
31, 1996 was not material due to loss incurred during that fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal source of liquidity as of March 31, 1998 consisted
of $67.9 million in cash, cash equivalents and short-term investments. Working
capital as of March 31, 1998 was $77.4 million, compared to $19.4 million as
of March 31, 1997. This increase in working capital was primarily due to $52.0
million in net proceeds from the Company's initial and secondary public
offerings, and cash provided by operating activities,
36
offset by the purchase of property and equipment and by the repurchase of
certain shares of the Company's Preferred Stock. During the fiscal years ended
March 31, 1997 and 1996 the Company financed its operations primarily through
cash provided by operations and equipment lease financing.
For the years ended March 31, 1998, 1997 and 1996, net cash provided by
operating activities was $16.9 million, $11.7 million and $6.7 million,
respectively. Net cash provided by operating activities in fiscal 1998
primarily reflected net income before depreciation and amortization expense
plus increases in accounts payable and accrued liabilities less increases in
accounts receivable and deferred income taxes. Net cash provided by operating
activities in fiscal 1997 primarily reflected net income before depreciation
and amortization expense. Net cash provided by operating activities in fiscal
1996 differed from the net loss primarily due to adjustments for depreciation
and amortization expense, a reduction in inventory levels and an increase in
accounts payable and accrued liabilities.
Capital expenditures totaled $11.6 million, $4.1 million and $2.6 million
for the years ended March 31, 1998, 1997 and 1996, respectively, of which $3.6
million, $1.2 million and $1.2 million for the years ended March 31, 1998,
1997 and 1996, respectively, were financed using debt or capital leases. The
Company intends to increase its capital expenditures for manufacturing
equipment, test equipment and computer hardware and software. The Company has
tentative plans to expand the cleanroom in its existing wafer fabrication
facility to accommodate new equipment that would expand capacity and would be
used for process development, however the Company is also evaluating other
alternatives to provide for additional capacity and process development. The
Company also plans to initiate construction of a new six-inch wafer
fabrication facility during 1999 and to complete the physical plant during
2000. The Company believes the new facility will not begin commercial
production prior to late 2000. The Company currently expects to spend
approximately $18.0 million on capital expenditures in fiscal 1999, of which
approximately $6.0 million is currently estimated to be related to the
potential expansion of its existing wafer fabrication facility and
approximately $6.0 million will relate to the initial site acquisition and
construction of its new wafer fabrication facility. In the course of acquiring
land and financing for this new facility, the Company may be required to
expend additional funds and to provide marketable securities as collateral.
The Company estimates that the total cost of the new wafer fabrication
facility will be at least $80.0 million, of which at least $30.0 million
relates to the purchase of land and construction of the facility and at least
$50.0 million relates to capital equipment purchases. The Company plans to
finance the new wafer fabrication facility through a combination of available
cash, cash equivalents and short term investments, cash from operations, debt
and lease financing and approximately $24.0 million of the net proceeds of its
initial and secondary public offerings. The Company is also exploring other
alternatives for the expansion of its manufacturing capacity, including
purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. Although the Company believes
that it will be able to obtain financing for a significant portion of the
planned capital expenditures at competitive rates and terms from its existing
and new financing sources, there can be no assurance that the Company will be
successful in these efforts or that the new facility will be completed and in
volume production within its current budget or within the period currently
scheduled by the Company. Furthermore, there can be no assurance that other
alternatives to constructing a new wafer fabrication facility will be
available on a timely basis or at all. See "Item 1. Business--Factors That May
Affect Future Results-Manufacturing Capacity Limitations; New Production
Facility," "--Dependence on Third-Party Manufacturing and Supply
Relationships" and "--Need For Additional Capital."
With the exception of the approximately $52.0 million in net proceeds from
the initial and secondary public offerings, the Company has not raised
financing from sales of equity (other than option exercises under employee
stock plans) since September 1987, and as a financing strategy has used cash
flow from operating activities and equipment debt and lease financing. In June
1997, the Company repurchased 172,300 shares of Preferred Stock (convertible
into 2,119,435 shares of Common Stock) for approximately $3.9 million.
The Company believes that its available cash, cash equivalents and short-
term investments, and cash generated from operations, will be sufficient to
meet the Company's capital requirements for the next 12 months, although the
Company could be required, or could elect, to seek to raise additional capital
during such period. The Company expects that it will need to raise additional
debt or equity financing in the future. There can be no
37
assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all. See "Item 1. Business--Factors That
May Affect Future Operating Results--Need for Additional Capital."
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's results of operations have varied significantly in the past
and may continue to do so in the future. These variations have been, and may
in the future be, due to a number of factors, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. These factors include, but are not limited to: the
rescheduling or cancellation of orders by customers; fluctuations in the
timing and amount of customer requests for product shipments; fluctuations in
manufacturing yields and inventory levels; changes in product mix; the
Company's ability to introduce new products and technologies on a timely
basis; the introduction of products and technologies by the Company's
competitors; the availability of external foundry capacity, purchased parts
and raw materials; competitive pressures on selling prices; the timing of
investments in research and development; market acceptance of the Company's
and its customers' products; the timing of depreciation and other expenses to
be incurred by the Company in connection with the increase of capacity for its
existing manufacturing facility and in connection with its proposed new
manufacturing facility; the timing and amount of recruiting and relocation
expenses, prototyping costs and product promotional expenses; costs associated
with future litigation, if any, including without limitation, litigation
relating to the use or ownership of intellectual property; costs associated
with compliance with applicable environmental regulations; general
semiconductor industry conditions; and general economic conditions, including,
but not limited to, economic conditions in Asia. Historically, average selling
prices in the semiconductor industry have decreased over the life of a
product, and as a result, the average selling prices of the Company's products
may be subject to significant pricing pressures in the future. Because the
Company is continuing to increase its operating expenses for personnel and new
product development, and because the Company is limited in its availability to
reduce expenses quickly in response to any revenue short falls, the Company's
business, financial condition and operating results would be adversely
affected if increased sales are not achieved. In addition, the Company's
operating results may be below the expectations of public market analysts or
investors, which could have a material adverse effect on the market price of
the Common Stock. See "Item 1. Business--Factors That May Affect Future
Results--Fluctuations in Operating Results," "--Manufacturing Yields," "--
Increasing Dependence on Telecommunications and Data Communications Markets
and Increasing Dependence on Application-Specific Standard Products," "--
Dependence on High-Speed Computing Market," "--Rapid Technological Change;
Necessity to Develop and Introduce New Products," "--Manufacturing Capacity
Limitations; New Production Facility," "--Transition to New Process
Technologies," "--Customer Concentration," "--Intense Competition," "--
Management of Growth," and "--International Sales."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Refer to the Index on Page F-l of the Financial Report included herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
PART III
Certain information required by Part III is omitted from this report because
the Company will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for
its Annual Meeting of Stockholders to be held August 4, 1998, 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 Registrant's
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and the stock benefit
plan proposals in the Registrant's Proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
sections entitled "Common Stock Ownership of Certain Beneficial Owners and
Management" of the Registrant's 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 Registrant's Proxy
Statement.
PART IV
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 on the pages indicated:
For the three fiscal years ended March 31, 1998 -- Schedule II
Valuation and Qualifying Accounts
(3) Exhibits
The following exhibits are filed or incorporated by reference into this
report.
(a) EXHIBITS
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
39
4.1(3) Specimen Stock Certificate.
Form of Indemnification Agreement between the Company and each of its
10.1(3) Officers and Directors.
1982 Employee Incentive Stock Option Plan, as amended, and form of
10.2(3) Option Agreement.
10.3(3) 1992 Stock Option Plan as amended, and form of Option Agreement.
10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement.
10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement.
401(k) Plan, effective April 1, 1985 and form of Enrollment
10.6(3) Agreement.
Convertible Preferred Stock, Series 1 and Series 2, Purchase
10.7(3) Agreement, dated December 8, 1983.
Convertible Preferred Stock Series 3 Purchase Agreement, dated
10.8(3) September 16, 1987.
10.9(3) Industrial Real Estate Lease, dated October 29, 1996 between the
Registrant and ADI Mesa Partners AMCC, L.P. (the Sequence Drive
Lease).
10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the
Registrant and Mira Mesa Business Park (the Oberlin Drive Lease).
10.11(3) Security Agreements, dated January 30, 1992 by and between the
Registrant and Roger Smullen.
10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between
the Registrant and Roger Smullen.
10.13(3) Loan Agreement, dated May 1, 1996 and Exercise Notice and Restricted
Stock Purchase Agreements dated July 23, 1997 by and between
Registrant and David Rickey.
10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997
and July 23, 1997 by and between the Registrant and David Rickey.
10.15(3) Patent License Agreement, dated January 1, 1998, as amended by and
between Registrant and Motorola, Inc.
10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and
between Registrant and International Business Machines Corporation.
10.17(3) Patent License Agreement, dated June 1, 1997 by and between
Registrant and International Business Machines Corporation.
10.18(3) Letter Agreement, dated January 30, 1996 by and between the
Registrant and David Rickey.
10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and
between Registrant and Alcatel Network Systems, Inc.
10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2
Purchase Agreement, dated September 16, 1987 and Convertible
Preferred Stock, Series 3 Purchase Agreement, dated September 16,
1987.
10.21(4) Loan Agreement Secured by Property, dated February 19, 1998 by and
between Registrant and Laszlo Gal and Agnes Gal.
10.22(4) Note Secured by Deed of Trust, dated February 19, 1998 by and between
Registrant and Laszlo Gal and Agnes Gal.
10.23(4) Loan and Pledge Agreement, dated February 19, 1998 by and between
Registrant and Anil Bedi.
11.1(5) Computation of Per Share Data under SFAS No. 128.
21.1 Subsidiary of the Registrant.
23.1 Consent of Independent Auditors
24.1 Power of Attorney (see page 42).
27.1 Financial Data Schedules.
40
(b) Current reports on Form 8-K. The registrant filed the following current
reports on Form 8-K with the Commission during the fourth quarter of the
fiscal year ended March 31, 1998:
(1) On February 27, 1998, the Company filed a report on Form 8-K
reporting under Item 5 thereof, regarding the audited consolidated
financial statements for the three year periods ended March 31, 1997
and unaudited financial statements for the nine month periods ended
December 31, 1996 and 1997, respectively.
- --------
(1) Incorporated by reference to Exhibit 3.2 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 Exhibit 3.4 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.
(3) 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.
(4) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-46071) filed February 11, 1998, or
with any Amendments thereto, which registration statement became effective
March 12, 1998.
(5) The Computation of Per Share Data under SFAS No. 128 is included on page
F-9 of this report.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
41
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 15, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David M. Rickey and Joel O. Holliday, 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.
SIGNATURE TITLE DATE
/s/ David M. Rickey President and Chief June 15, 1998
- ----------------------------------- Executive Officer
David M. Rickey
/s/ Joel O. Holliday Chief Financial June 15, 1998
- ----------------------------------- Officer
Joel O. Holliday
/s/ Roger A. Smullen, Sr. Director and Chairman June 15, 1998
- ----------------------------------- of the Board of
Roger A. Smullen, Sr. Directors
/s/ William K. Bowes, Jr. Director June 15, 1998
- -----------------------------------
William K. Bowes, Jr.
/s/ R. Clive Ghest Director June 15, 1998
- -----------------------------------
R. Clive Ghest
/s/ Franklin P. Johnson, Jr. Director June 15, 1998
- -----------------------------------
Franklin P. Johnson, Jr.
/s/ Arthur B. Stabenow Director June 15, 1998
- -----------------------------------
Arthur B. Stabenow
42
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets as of March 31, 1997 and 1998................. F-3
Consolidated Statements of Operations for the fiscal years ended March 31,
1996, 1997 and 1998...................................................... F-4
Consolidated Statements of Stockholders' Equity for the fiscal years March
31, 1996, 1997 and 1998.................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ending March
31, 1996, 1997 and 1998.................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
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, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended March 31, 1998. 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 generally accepted auditing
standards. 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, 1997 and 1998, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
ERNST & YOUNG LLP
San Diego, California
April 21, 1998
F-2
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
-----------------
ASSETS 1997 1998
------ ------- --------
Current assets:
Cash and cash equivalents................................. $ 5,488 $ 6,460
Short-term investments--available-for-sale................ 8,109 61,436
Accounts receivable, net of allowance for doubtful
accounts of $200 and $350 at March 31, 1997 and 1998,
respectively............................................. 8,418 12,179
Inventories............................................... 7,530 8,185
Deferred income taxes..................................... -- 3,882
Notes receivable from officer and employees............... 8 87
Other current assets...................................... 690 2,297
------- --------
Total current assets.................................... 30,243 94,526
Notes receivable from officers and employees................ 803 1,090
Property and equipment, net................................. 10,768 17,218
------- --------
Total assets.............................................. $41,814 $112,834
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.......................................... $ 2,428 $ 5,215
Accrued payroll and related expenses...................... 3,102 5,057
Other accrued liabilities................................. 1,881 2,344
Deferred revenue.......................................... 806 1,873
Current portion of long-term debt......................... 37 567
Current portion of capital lease obligations.............. 2,625 2,053
------- --------
Total current liabilities............................... 10,879 17,109
Long-term debt, less current portion........................ -- 2,736
Long-term capital lease obligations, less current portion... 3,192 1,355
Commitments and contingencies (Notes 6 and 10)..............
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000,000 shares authorized, none issued and outstanding. -- --
Convertible preferred stock, $0.01 par value:
Authorized shares--1,350,000 and none at March 31, 1997,
and 1998, respectively..................................
Issued and outstanding shares--1,223,594 and none at
March 31, 1997, and 1998, respectively..................
Liquidation value--$25,695 and none at March 31, 1997 and
March 31, 1998, respectively............................ 12 --
Common Stock, $0.01 par value:
Authorized shares--34,500,000 and 60,000,000 at March 31,
1997 and 1998, respectively.............................
Issued and outstanding shares--5,025,357 and 22,536,013
at March 31, 1997 and 1998, respectively................ 50 225
Additional paid-in capital................................ 36,974 86,660
Deferred compensation, net................................ -- (472)
Retained earnings (deficit)............................... (9,235) 5,722
Notes receivable from stockholders........................ (58) (501)
------- --------
Total stockholders' equity.............................. 27,743 91,634
------- --------
Total liabilities and stockholders' equity................ $41,814 $112,834
======= ========
See accompanying notes
F-3
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED MARCH
31,
-------------------------
1996 1997 1998
------- ------- -------
Net revenues......................................... $50,264 $57,468 $76,618
Cost of revenues..................................... 34,169 30,057 34,321
------- ------- -------
Gross Profit......................................... 16,095 27,411 42,297
Operating expenses:
Research and development........................... 8,283 7,870 13,268
Selling, general and administrative................ 11,232 12,537 14,278
------- ------- -------
Total operating expenses......................... 19,515 20,407 27,546
------- ------- -------
Operating income (loss).............................. (3,420) 7,004 14,751
Interest income (expense), net....................... (242) (29) 871
------- ------- -------
Income (loss) before income taxes.................... (3,662) 6,975 15,622
Provision for income taxes........................... 32 659 406
------- ------- -------
Net income (loss).................................... $(3,694) $ 6,316 $15,216
======= ======= =======
Basic earnings (loss) per share:
Earnings (loss) per share.......................... $ (0.21) $ 0.35 $ 0.84
======= ======= =======
Shares used in calculating basic earnings (loss)
per share......................................... 17,394 17,834 18,028
======= ======= =======
Diluted earnings (loss) per share:
Earnings (loss) per share.......................... $ (0.21) $ 0.35 $ 0.75
======= ======= =======
Shares used in calculating diluted earnings (loss)
per share......................................... 17,394 17,907 20,294
======= ======= =======
See accompanying notes.
F-4
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE TOTAL
------------------ ------------------ PAID-IN DEFERRED EARNINGS FROM STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCKHOLDERS EQUITY
---------- ------ ---------- ------ ---------- ------------ --------- ------------ -------------
Balance, March 31,
1995.................. 1,223,594 $ 12 4,426,257 $ 44 $36,733 $ -- $(11,750) $(234) $24,805
Issuance of stock
pursuant to exercise
of stock options.... -- -- 547,767 5 251 -- -- -- 256
Repurchase of common
stock............... -- -- (5,708) -- (13) -- -- -- (13)
Payments on and
forgiveness of notes -- -- -- -- -- -- -- 158 158
Net loss............. -- -- -- -- -- -- (3,694) -- (3,694)
---------- ---- ---------- ---- ------- ----- -------- ----- -------
Balance, March 31,
1996.................. 1,223,594 12 4,968,316 49 36,971 -- (15,444) (76) 21,512
Issuance of stock
pursuant to exercise
of stock options.... -- -- 92,680 1 41 -- -- -- 42
Repurchase of common
stock............... -- -- (35,639) -- (38) -- (107) -- (145)
Payments on notes.... -- -- -- -- -- -- -- 18 18
Net income........... -- -- -- -- -- -- 6,316 -- 6,316
---------- ---- ---------- ---- ------- ----- -------- ----- -------
Balance, March 31,
1997.................. 1,223,594 12 5,025,357 50 36,974 -- (9,235) (58) 27,743
Issuance of Common
Stock, net of
issuance costs...... -- -- 5,038,448 51 51,942 -- -- -- 51,993
Conversion of
convertible preferred
stock to common
Stock................ (1,051,294) (11) 10,717,317 107 (96) -- -- -- --
Issuance of stock
pursuant to exercise
of stock options.... -- -- 1,701,620 17 858 -- -- (455) 420
Net exercise of
warrants............ -- -- 53,271 -- -- -- -- -- --
Payments on notes.... -- -- -- -- -- -- -- 12 12
Repurchase of
convertible preferred
stock............... (172,300) (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.................. -- $ -- 22,536,013 $225 $86,660 $(472) $ 5,722 $(501) $91,634
========== ==== ========== ==== ======= ===== ======== ===== =======
See accompanying notes.
F-5
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED MARCH 31,
-----------------------------
1996 1997 1998
-------- -------- ---------
Operating Activities
Net income (loss)............................. $ (3,694) $ 6,316 $ 15,216
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................. 5,311 5,185 5,174
Write-offs of inventories..................... 3,663 452 600
Amortization of deferred compensation......... -- -- 127
Loss on debt forgiveness...................... 150 -- --
Changes in assets and liabilities:
Accounts receivable.......................... (594) 1,058 (3,761)
Inventories.................................. (1,776) (1,146) (1,255)
Other current assets......................... 320 (116) (1,607)
Accounts payable............................. 1,853 (1,553) 2,787
Accrued payroll and other accrued
liabilities................................. 1,047 1,562 2,418
Deferred income taxes........................ -- -- (3,882)
Deferred revenue............................. 416 (25) 1,067
-------- -------- ---------
Net cash provided by operating activities.. 6,696 11,733 16,884
Investing Activities
Proceeds from sales and maturities of short-
term investments............................. 11,238 7,944 66,547
Purchase of short-term investments............ (10,859) (11,512) (119,874)
Notes receivable from officers and employees.. (203) (608) (366)
Purchase of property and equipment............ (1,427) (2,855) (11,342)
-------- -------- ---------
Net cash used for investing activities..... (1,251) (7,031) (65,035)
Financing Activities
Net proceeds from issuance of common stock,
net.......................................... 256 42 52,413
Repurchase of common stock.................... (13) (145) --
Repurchase of convertible preferred stock..... -- -- (3,877)
Payments on notes receivable from
stockholders................................. 8 18 12
Payments on capital lease obligations......... (2,750) (2,824) (2,691)
Payments on long-term debt.................... (864) (582) (37)
Issuance of long-term debt.................... -- -- 3,303
-------- -------- ---------
Net cash provided by (used for) financing
activities................................ (3,363) ( 3,491) 49,123
-------- -------- ---------
Net increase in cash and cash equivalents.. 2,082 1,211 972
Cash and cash equivalents at beginning of
period......................................... 2,195 4,277 5,488
-------- -------- ---------
Cash and cash equivalents at end of period...... $ 4,277 $ 5,488 $ 6,460
======== ======== =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest...................................... $ 715 $ 656 $ 380
======== ======== =========
Income taxes.................................. $ 48 $ 770 $ 3,251
======== ======== =========
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of approximately $1.2 million, $1.2 million and
$282,000 were incurred during fiscal years 1996, 1997 and 1998, respectively.
During the fiscal year 1998, notes were received for the exercise of stock
options totaling $455,000.
See accompanying notes.
F-6
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company designs, develops, manufactures and markets high-performance,
high-bandwidth silicon solutions for the world's communications
infrastructure.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. 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 and corporate bonds.
The Company maintains its excess cash in financial institutions with strong
credit ratings and has not experienced any significant losses on its
investments. The estimated fair value of each investment security approximates
cost and, therefore, no unrealized gains or losses existed as of March 31,
1997 and 1998.
The following is a summary of available-for-sale securities (in thousands):
MARCH 31,
--------------
1997 1998
------ -------
U.S. treasury securities and obligations of U.S. Government
agencies................................................... $4,189 $15,908
U.S. corporate debt securities.............................. 3,628 45,528
Other....................................................... 292 --
------ -------
$8,109 $61,436
====== =======
Available-for-sale securities by contractual maturity are as follows (in
thousands):
MARCH 31,
1998
---------
Due in one year or less............................................ $50,510
Due after one year through two years............................... 5,663
Greater than two years............................................. 5,263
-------
$61,436
=======
Concentration of Credit Risk
The Company believes that the concentration of 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. The Company 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.
F-7
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 to 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 shorter of
the useful life of the asset or the lease term. Property and equipment under
capital leases are recorded at the net present value of the minimum lease
payments and are amortized over the shorter of the useful life of the assets
or the lease term. Leased assets purchased at the expiration of the lease term
are capitalized at acquisition cost.
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,
1998, 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 made under agreements allowing
for price protection and right of return on products unsold by the distributor
are deferred until the distributor ships the product to its customer. 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 the margin on
shipments of products to distributors that will be recognized when the
distributors ship the products to their customers and billings in excess of
costs 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.
F-8
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
Earnings (Loss) Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128. "Earnings per Share," which supersedes APB Opinion No. 15. SFAS No. 128
replaces the presentation of primary earnings per share (EPS) with "Basic EPS"
which includes no dilution and is based on weighted-average common shares
outstanding for the period. Companies with complex capital structures,
including the Company, will also be required to present "Diluted EPS" that
reflects the potential dilution of securities such as employee stock options
and warrants to purchase common stock. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997. On February 3,
1998, the SEC issued Staff Accounting Bulletin (SAB) No. 98 which revised the
previous instructions for determining the dilutive effects in earnings per
share computations of common stock and common stock equivalents issued at
prices below the IPO price prior to the effectiveness of the IPO.
The reconciliation of shares used to calculate basic and diluted earnings
(loss) per share consists of the following (in thousands):
MARCH 31,
--------------------
1996 1997 1998
------ ------ ------
Weighted average common shares outstanding............. 4,566 5,006 10,594
Effect of assumed conversion of preferred stock from
date of issuance...................................... 12,828 12,828 7,434
------ ------ ------
Shares used in basic earnings (loss) per share
computations.......................................... 17,394 17,834 18,028
Net effect of dilutive common share equivalents based
on treasury stock method.............................. -- 73 2,266
------ ------ ------
Shares used in diluted earnings (loss) per share
computations.......................................... 17,394 17,907 20,294
====== ====== ======
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of
these standards are effective for fiscal years beginning
F-9
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
after December 15, 1997. SFAS No. 130 requires that all components of
comprehensive income, including net income, be reported in the financial
statements in the period in which they are recognized. Comprehensive income is
defined as the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and other
comprehensive income, including foreign currency translation adjustments, and
unrealized gains and losses on investments, shall be reported, net of their
related tax effect, to arrive at comprehensive income. The Company does not
believe that comprehensive income or loss has been materially different than
net income or loss as reported. SFAS No. 131 amends the requirements for
public enterprises to report financial and descriptive information about their
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment and does not believe adoption of SFAS No. 131 will have a
material impact on the Company's financial statements.
NOTE 2. CERTAIN FINANCIAL STATEMENT INFORMATION
MARCH 31,
------------------
1997 1998
-------- --------
Inventories (in thousands):
Finished goods......................................... $ 1,076 $ 1,817
Work in process........................................ 4,279 5,161
Raw materials.......................................... 2,175 1,207
-------- --------
$ 7,530 $ 8,185
======== ========
Property and equipment (in thousands):
Machinery and equipment................................ $ 21,211 $ 25,983
Leasehold improvements................................. 5,789 7,476
Computers, office furniture and equipment.............. 11,701 13,219
-------- --------
38,701 46,678
Less accumulated depreciation and amortization........... (27,933) (29,460)
-------- --------
$ 10,768 $ 17,218
======== ========
The cost and accumulated amortization of machinery and equipment under
capital leases at March 31, 1998 were approximately $10.0 million and $7.2
million, respectively ($12.2 million and $7.3 million, at March 31, 1997).
Amortization of assets held under capital leases is included with depreciation
expense.
During the years ended March 31, 1996, 1997 and 1998, the Company earned
interest income of $473,000, $627,000 and $1,252,000, respectively, and
incurred interest expense of $715,000, $656,000 and $381,000, respectively.
NOTE 3. LONG-TERM DEBT
The Company has an equipment line of credit agreement with a bank for $5
million, of which $3.3 million was utilized at March 31, 1998 and which
expires March 31, 1999. Advances under the line of credit are collateralized
by the equipment purchased. Borrowings under the line of credit are required
to be repaid in equal monthly installments over five to seven years and bear
interest at a rate based on 5 year Treasury Bills plus 1.9% which is fixed as
of the date of the note. At March 31, 1998, the Company had approximately $1.7
million available under the line of credit.
F-10
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt consists of the following (in thousands):
MARCH 31,
------------
1997 1998
---- ------
10% notes payable, paid in April 1997......................... $ 37 $ --
Notes Payable (under line of credit), principal and interest
payable in monthly installments of $66,000 through March 2003
at 7.42%..................................................... -- 3,303
---- ------
37 3,303
Less current portion.......................................... (37) (567)
---- ------
$ -- $2,736
==== ======
Principal maturities of the note payable at March 31, 1998 are as follows
for years ending March 31: $567,000, 1999; $610,000, 2000; $657,000, 2001;
$707,000, 2002 and $762,000, 2003.
NOTE 4. STOCKHOLDERS' EQUITY
On October 6, 1997, the Board of Directors authorized, which the
stockholders subsequently approved, a two for three reverse stock split of all
outstanding common stock. All share and per share amounts and stock option
data have been restated to retroactively reflect the stock split. In November
1997, the Certificate of Incorporation of the Company was amended to provide
that the authorized number of shares of common and preferred stock issuable by
the Company was 60,000,000 shares of common stock ($0.01 par value) and
2,000,000 shares of preferred stock ($0.01 par value).
Stock Offerings
In December 1997, the Company completed an 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 offering of
common stock in which the Company raised net proceeds of approximately $26.9.
Convertible Preferred Stock
On April 24, 1997 the Board authorized the Company to repurchase up to $4
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 10,717,317 shares of common stock.
Preferred Stock
In November 1997, the Certificate of Incorporation was amended to allow the
issuance of up to 2,000,000 shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions 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
The Company's 1992 Stock Option Plan provides for the granting of incentive
and nonqualified stock options to employees. Generally, options are granted at
prices at least equal to fair value of the Company's
F-11
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock on the date of grant. In addition, certain officers and directors
have been granted nonqualified stock options. The Company's 1982 Employee
Incentive Stock Option Plan expired in 1992. Options to purchase an aggregate
of 54,812 shares of common stock under the 1982 Plan remain outstanding as of
March 31, 1998.
Options under both plans expire not more than ten years from the date of
grant and are immediately exercisable after the date of grant but are subject
to certain repurchase rights by the Company, at the Company's option, until
such ownership rights have vested. Vesting generally occurs over four years.
At March 31, 1997 and 1998, 42 shares and 651,842 shares of common stock were
subject to repurchase, respectively.
Pursuant to an employment agreement between the Company and an executive,
the Company granted an option to purchase 800,000 shares of the Company's
common stock at $0.53 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 66,667
additional options issued in April 1997 were exercised in July 1997. The
exercise was paid for with various notes, which aggregated $455,000 and bear
interest at rates between 5.98% and 6.54%, and are due at the earlier of
February 12, 2000 ($420,000) and April 9, 2001 ($35,000) or the termination of
employment.
Certain other option agreements provide for the exercise of stock options
with long-term promissory notes. These notes bear interest at rates ranging
from 5.32% to 5.91%, are payable at the earlier of termination of employment
or January 1999 and are secured by the shares of common stock purchased with
the notes.
Pro forma information regarding net income (loss) and net income (loss) 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 using the following weighted average assumptions for fiscal year
1996, 1997 and 1998; risk free interest rate of 6%; an expected option life of
four years; no annual dividends, and an expected volatility of .92 (used only
for the options valued using the Black Scholes method.).
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expenses over the vesting period of such options. The
effects of applying SFAS No. 123 for pro forma disclosure purposes are not
likely to be representative of the effects on pro forma net income in future
years because they do not take into consideration pro forma compensation
expenses related to grants made prior to 1996.
The Company's pro forma information follows:
YEAR ENDED MARCH 31,
-----------------------
1996 1997 1998
------- ------ -------
Net income (loss):
As reported....................................... $(3,694) $6,316 $15,216
Pro forma......................................... $(3,718) $6,225 $14,856
Earnings (loss) per share:
As reported:
Basic........................................... $ (0.21) $ 0.35 $ 0.84
Diluted......................................... $ (0.21) $ 0.35 $ 0.75
Pro forma:
Basic........................................... $ (0.21) $ 0.35 $ 0.82
Diluted......................................... $ (0.21) $ 0.35 $ 0.73
Weighted fair value of options granted during the
year............................................... $ 0.12 $ 0.15 $ 6.84
F-12
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information are as follows:
MARCH 31,
---------------------------------------------------------------
1996 1997 1998
-------------------- -------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- ---------- ---------
Outstanding at
Beginning of year..... 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51
Granted............. 1,017,000 0.53 1,457,285 0.53 1,798,873 10.00
Exercised........... (547,767) 0.47 (92,680) 0.45 (1,701,620) 0.51
Forfeited........... (412,127) 0.51 (212,472) 0.53 (257,095) 0.64
--------- ----- --------- ----- ---------- -----
Outstanding at end of
year................... 1,690,160 $0.51 2,842,293 $0.51 2,682,451 $6.87
========= ===== ========= ===== ========== =====
Vested at end of year... 349,337 $0.51 851,764 $0.51 635,050 $0.60
========= ===== ========= ===== ========== =====
The following is a further breakdown of the options outstanding at March 31,
1998:
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE
PRICE OUTSTANDING LIFE PRICE
-------- ----------- ----------- --------
$0.45--$ 0.97 1,737,064 8.19 $ 0.53
$0.98--$ 8.25 286,596 9.51 $ 7.72
$8.26--$23.87 658,791 9.98 $23.21
------------- --------- ---- ------
$0.45--$23.87 2,682,451 8.77 $ 6.87
============= ========= ==== ======
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 first and second quarters of fiscal 1998. This deferred compensation
aggregates to $599,000, which is being amortized over the four year vesting
period of the related options. Amortization during fiscal 1998 was $127,000.
Warrants
In connection with certain notes payable secured by equipment, capital
leases for equipment and revolving lines of credit issued in 1989 and 1990,
the Company had outstanding warrants to purchase 83,807 shares of common stock
at $2.63 to $3.00 per share, subject to certain anti-dilution adjustments and
adjustments in the event of certain mergers or acquisitions. No value was
placed on the warrants at the time of issuance as it was considered to be
immaterial. In November 1997, 53,271 shares of common stock were issued upon
the net exercise of these warrants at the initial public offering price of
$8.00 per share.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 6, 1997, which the
stockholders subsequently approved. A total of 400,000 shares of Common Stock
are reserved for issuance under the 1997 Purchase Plan. At March 31, 1998, no
shares had been issued under the 1997 Purchase Plan.
F-13
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 Directors' Stock Option Plan
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors on October 6, 1997, which the stockholders
subsequently approved. A total of 200,000 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, 1998, no shares had been issued under the Directors' Plan.
Common Shares Reserved for Future Issuance
At March 31, 1998, the Company has the following shares of common stock
reserved for issuance upon the exercise of equity instruments:
Stock Options:
Issued and outstanding........................................... 2,682,451
Authorized for future grants..................................... 1,982,639
Stock purchase plan................................................ 400,000
---------
5,065,090
=========
NOTE 5. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED MARCH
31,
-----------------
1996 1997 1998
---- ---- -------
Current:
Federal................................................. $27 $380 $ 3,606
State................................................... 5 279 682
--- ---- -------
Total Current......................................... $32 $659 $ 4,288
Deferred:
Federal................................................. -- -- (3,558)
State................................................... -- -- (324)
--- ---- -------
Total Deferred........................................ -- -- (3,882)
--- ---- -------
$32 $659 $ 406
=== ==== =======
The provision (credit) for income taxes reconciles to the amount computed by
applying the federal statutory rate (35%) to income before income taxes as
follows (in thousands):
YEAR ENDED MARCH 31,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
$ % $ % $ %
------- --- ------- --- ------- ---
Tax at federal statutory rate..... $(1,282) (35)% $ 2,441 35 % $ 5,468 35 %
Increase (decrease) in valuation
allowance of deferred tax assets. 1,282 35 (2,343) (34) (5,094) (32)
Foreign Sales Corporation......... -- -- -- -- (309) (2)
Federal Alternative Minimum Tax... 27 -- 380 5 -- --
State taxes, net of federal
benefit.......................... 5 -- 181 3 233 1
Federal Tax Credits............... -- -- -- -- (281) (2)
Other............................. -- -- -- -- 389 3
------- --- ------- --- ------- ---
$ 32 -- $ 659 9 % $ 406 3 %
======= === ======= === ======= ===
F-14
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 1997 and 1998 are as shown
below. As of March 31, 1997, a valuation allowance had been recognized to
offset the deferred tax assets as realization of such assets was uncertain. 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.
MARCH 31,
---------------
1997 1998
------- ------
Deferred tax assets (in thousands):
Reserves..................................................... $ 2,233 $1,814
Capitalization of inventory and research and development
costs....................................................... 226 242
Research and development credit carryforwards................ 1,667 898
Depreciation and amortization................................ 200 242
State income taxes........................................... -- 239
Other credit carryforwards................................... 768 447
------- ------
Subtotal....................................................... 5,094 3,882
Valuation allowance............................................ (5,094) --
------- ------
Net deferred taxes............................................. $ -- $3,882
======= ======
At March 31, 1998, the Company has federal alternative minimum tax and
research and development tax credit carryforwards of approximately $447,000
and $898,000, respectively, which will begin to expire in 2008 unless
previously utilized. Under Internal Revenue Code Section 382, the Company's
use of its tax credit carryforwards could be limited in the event of certain
cumulative changes in the Company's stock ownership.
NOTE 6. LEASE COMMITMENTS
The Company leases its present manufacturing facilities under a long-term
operating lease expiring in March 2003. The lease is renewable for up to an
additional five years. This lease requires the Company to pay property taxes
and incidental maintenance expenses and contains escalation clauses based upon
increases in the Consumer Price Index.
In September 1997, the Company moved into a new administration and
manufacturing facility which is leased under a long-term operating lease. This
lease expires in September 2007, requires the Company to pay property taxes
and incidental maintenance expenses and is renewable for up to ten years. The
lease provides for defined rent increases over the term of the lease.
F-15
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, 1998 are as follows:
OPERATING CAPITAL
YEAR ENDING MARCH 31, LEASES LEASES
- --------------------- --------- -------
1999....................................................... $1,062 $2,236
2000....................................................... 1,055 811
2001....................................................... 1,077 386
2002....................................................... 1,096 275
2003....................................................... 1,096 34
Thereafter................................................. 4,180 --
------ ------
Total minimum lease payments............................. $9,566 3,742
======
Less amount representing interest............................ 334
------
Present value of remaining minimum capital lease payments
(including current portion of $2,053)....................... $3,408
======
Rent expense (including short-term leases and net of sublease income) for
the years ended March 31, 1996, 1997 and 1998 was $2.3 million, $1.2 million
and $1.2 million, respectively. Sublease income was $0, $208,000 and $119,000
for the years ended March 31, 1996, 1997 and 1998, respectively.
NOTE 7. RELATED PARTY TRANSACTIONS
At March 31, 1997 and 1998, the Company had outstanding notes receivables
from officer(s) of $803,000 and $1,065,000, respectively. These notes bear
interest at the rates of 5.32% to 5.91%, and are due at the earlier of, one to
three years from the date of the note or termination of employment with the
Company.
NOTE 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 $182,000, $318,000 and $412,000 for the years ended
March 31, 1996, 1997 and 1998, respectively.
NOTE 9. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
During the years ended March 31, 1996, 1997 and 1998, 20%, 20% and 21%
respectively, of net revenues were from one customer and in 1998.
Additionally, in 1998, another customer accounts for 11% of net revenues. No
other customer accounted for more than 10% of net revenues in any period. At
March 31, 1998, included in the accounts receivable were $2.3 million of
outstanding receivables from the customer that represented 21% of the net
revenues for fiscal 1998.
F-16
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net revenues by geographic region were as follows (in thousands):
YEAR ENDED MARCH 31,
-----------------------
1996 1997 1998
------- ------- -------
Net revenues:
United States......................................... $28,134 $34,424 $44,448
Canada................................................ 10,116 10,943 14,204
Europe and Israel..................................... 6,525 8,216 13,773
Asia.................................................. 5,489 3,885 4,193
------- ------- -------
$50,264 $57,468 $76,618
======= ======= =======
NOTE 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.
F-17
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COL. A COL. B COL. C COL. D COL. E
------ ---------- ------------------ ----------- ---------
ADDITIONS
------------------
(1) (2)
CHARGED CHARGED
BALANCE AT TO COSTS TO OTHER BALANCE
BEGINNING AND ACCOUNTS- DEDUCTIONS- AT END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
----------- ---------- -------- --------- ----------- ---------
Year ended March 31, 1998:
Allowance for doubtful
accounts................. $200 $157 $-- $ 7 $350
Year ended March 31, 1997:
Allowance for doubtful
accounts................. $ 90 $198 $88 $-- $200
Year ended March 31, 1996:
Allowance for doubtful
accounts................. $115 $ -- $-- $25 $ 90