SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED DEEMBER 31, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO.
COMMISSION FILE NUMBER: 000-23193
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (858) 450-9333
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
As of February 5, 2001, 298,475,800 shares of the Registrant's Common Stock
were issued and outstanding.
APPLIED MICRO CIRCUITS CORPORATION
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
a) Condensed Consolidated Balance Sheets at December 31, 2000
(unaudited) and March 31, 2000............................... 3
b) Condensed Consolidated Statements of Operations (unaudited)
for the three and nine months ended December 31, 2000
and 1999..................................................... 4
c) Consolidated Statements of Cash Flows (unaudited)
for the nine months ended December 31, 2000 and 1999......... 5
d) Notes to Condensed Consolidated Financial Statements
(unaudited).................................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................... 25
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................ 26
Signatures............................................................... 26
================================================================================
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31, March 31,
2000 2000
------------ ---------
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents.............................................................. $ 88,747 $ 170,102
Short-term investments - available-for-sale............................................ 1,040,058 784,449
Accounts receivable, net of allowance for doubtful accounts of $2,828 and
$314 at December 31, 2000 (unaudited) and March 31, 2000, respectively.............. 87,030 25,459
Inventories (see Note 3)............................................................... 33,546 10,925
Deferred income taxes.................................................................. -- 4,148
Other current assets................................................................... 21,103 10,321
---------- ----------
Total current assets................................................................ 1,270,484 1,005,404
Property and equipment, net.............................................................. 79,069 37,842
Purchased intangibles, net of $149,118 of accumulated amortization at December 31, 2000.. 4,209,378 --
Other assets............................................................................. 2,948 3,636
---------- ----------
Total assets........................................................................ $5,561,879 $1,046,882
========== ==========
Liabilities And Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable....................................................................... $ 35,100 $ 8,818
Accrued payroll and related expenses................................................... 17,040 7,618
Other accrued liabilities.............................................................. 18,850 6,448
Deferred revenue....................................................................... 4,425 2,776
Deferred income taxes, current......................................................... 87,105 --
Current portion of long-term debt...................................................... 657 1,394
Current portion of capital lease obligations........................................... 662 729
---------- ----------
Total current liabilities........................................................... 163,839 27,783
Deferred income taxes, long-term......................................................... 68,775 --
Long-term debt, less current portion..................................................... 1,387 3,599
Long-term capital lease obligations, less current portion................................ 1,184 1,695
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000 shares authorized, none issued and outstanding................................. -- --
Common Stock, $0.01 par value:
Authorized shares - 630,000; issued and outstanding shares - 296,424 at.............. 2,964 2,436
December 31, 2000 (unaudited) and 243,684 at March 31, 2000
Additional paid-in capital............................................................. 5,897,299 943,294
Deferred compensation, net............................................................. (402,313) (1,443)
Accumulated other comprehensive income (loss).......................................... 1,129 (166)
Retained earnings (deficit)............................................................ (172,338) 70,139
Notes receivable from stockholders..................................................... (47) (455)
---------- ----------
Total stockholders' equity.......................................................... 5,326,694 1,013,805
---------- ----------
Total liabilities and stockholders' equity.......................................... $5,561,879 $1,046,882
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
2000 1999 2000 1999
--------- -------- --------- --------
Net revenues.................................................... $ 143,269 $ 45,762 $ 314,464 $115,303
Cost of revenues (1) and (see Note 3)........................... 61,196 13,209 105,042 34,818
--------- -------- --------- --------
Gross profit.................................................... 82,073 32,553 209,422 80,485
Operating expenses:
Research and development (1).................................. 31,285 8,281 65,342 21,829
Selling, general and administrative (1)....................... 20,498 7,061 45,731 19,178
Stock-based compensation...................................... 35,954 -- 36,698 --
Amortization of goodwill and purchased intangibles............ 127,574 -- 138,421 --
Acquired in-process research and development.................. 176,700 -- 202,100 --
--------- -------- --------- --------
Total operating expenses................................... 392,011 15,342 488,292 41,007
--------- -------- --------- --------
Operating income (loss)......................................... (309,938) 17,211 (278,870) 39,478
Interest income, net............................................ 14,771 1,225 40,513 3,114
--------- -------- --------- --------
Income (loss) before income taxes............................... (295,167) 18,436 (238,357) 42,592
Income tax expense (benefit).................................... (25,680) 6,324 4,120 14,597
--------- -------- --------- --------
Net income (loss)............................................... $(269,487) $ 12,112 $(242,477) $ 27,995
========= ======== ========= ========
Basic earnings (loss) per share:
Earnings (loss) per share..................................... $ (0.95) $ 0.06 $ (0.94) $ 0.13
========= ======== ========= ========
Shares used in calculating basic earnings (loss) per share.... 282,313 212,476 257,688 209,456
========= ======== ========= ========
Diluted earnings (loss) per share:
Earnings (loss) per share..................................... $ (0.95) $ 0.05 $ (0.94) $ 0.12
========= ======== ========= ========
Shares used in calculating diluted earnings (loss) per share.. 282,313 235,216 257,688 231,720
========= ======== ========= ========
(1) For presentation purposes, the functional line items exclude stock-based compensation charges related to acquired companies as
follows (in thousands):
Cost of revenues................................................ $ 1,203 $ -- $ 1,203 $ --
Research and development........................................ 18,122 -- 18,708 --
Selling, general and administrative............................. 16,629 -- 16,787 --
-------- -------- -------- -------
$ 35,954 $ -- $ 36,698 $ --
======== ======== ======== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
NINE MONTHS ENDED
DECEMBER 31,
------------
2000 1999
----------- ---------
Operating Activities
Net income (loss)......................................................................... $ (242,477) $ 27,995
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization............................................................ 9,589 5,802
Amortization of purchased intangibles.................................................... 149,118 --
Acquired in-process research and development............................................. 202,100 --
Amortization of deferred compensation.................................................... 36,807 462
Tax benefit of disqualifying dispositions................................................ 140,620 4,838
Changes in assets and liabilities:
Accounts receivable.................................................................... (45,411) (1,579)
Inventories............................................................................ 14,669 (709)
Other assets........................................................................... (6,166) (956)
Accounts payable....................................................................... 13,447 3,108
Accrued payroll and other accrued liabilities.......................................... 20,225 1,482
Deferred income taxes.................................................................. (136,973) 300
Deferred revenue....................................................................... 741 877
----------- ---------
Net cash provided by operating activities............................................ 156,289 41,620
Investing Activities
Proceeds from sales and maturities of short-term investments.............................. 1,496,588 92,870
Purchase of short-term investments........................................................ (1,750,830) (112,595)
Notes receivable from officers and employees.............................................. 16 815
Cash received from purchase acquisitions, net of cash paid and merger expenses............ 13,970 --
Purchase of property and equipment........................................................ (38,149) (16,673)
----------- ---------
Net cash used for investing activities............................................... (278,405) (35,583)
Financing Activities
Proceeds from issuance of common stock.................................................... 43,909 5,737
Repurchase of restricted stock............................................................ (56) (11)
Payments on capital lease obligations..................................................... (579) (989)
Payments on stockholder's notes........................................................... 455 --
Payments on long-term debt................................................................ (2,948) (1,530)
Other..................................................................................... (20) --
----------- ---------
Net cash provided by financing activities............................................ 40,761 3,207
----------- ---------
Net increase (decrease) in cash and cash equivalents........................................ (81,355) 9,244
Cash and cash equivalents at beginning of period............................................ 170,102 13,530
----------- ---------
Cash and cash equivalents at end of period.................................................. $ 88,747 $ 22,774
=========== =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest............................................................................... $ 340 $ 495
=========== =========
Income taxes........................................................................... $ 3,796 $ 9,620
=========== =========
See accompanying Notes to Condensed Consolidated Financial Statements.
5
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION - INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited interim condensed financial statements of Applied
Micro Circuits Corporation (the "Company" or "AMCC") have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Therefore, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting of normal recurring accruals), which are, in the opinion of
management, considered necessary for a fair presentation of the results for the
interim periods presented. Interim results are not necessarily indicative of
results for a full year. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
sales, expenses and net income or losses will continue.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. These estimates include
assessing the collectibility 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.
On each of October 30, 2000, March 24, 2000 and September 10, 1999, the
Company effected two-for-one stock splits in the form of 100% stock dividends.
Accordingly, all prior share, per share, common stock, and stock option amounts
in this Quarterly Report on Form 10-Q have been restated to reflect the stock
splits.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these accompanying financial statements should be read in
conjunction with the audited financial statements and the related notes thereto
contained in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission for the year ended March 31, 2000.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
2. EARNINGS (LOSS) PER SHARE
The reconciliation of shares used to calculate basic and diluted earnings
(loss) per share, restated to reflect the two-for-one stock splits, consists of
the following (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------
Shares used in basic earnings (loss) per share computations.... 282,313 212,476 257,688 209,456
Net effect of dilutive common share equivalents................ -- 22,740 -- 22,264
------- ------- ------- -------
Shares used in diluted earnings (loss) per share computations.. 282,313 235,216 257,688 231,720
======= ======= ======= =======
Because the Company incurred losses in the three and nine months ended
December 31, 2000, the effect of dilutive securities totaling 23,478 and 23,229
equivalent shares, respectively, have been excluded from the loss per share
computation as their impact would be antidilutive.
6
3. CERTAIN FINANCIAL STATEMENT INFORMATION
DECEMBER 31, MARCH 31,
2000 2000
------------ ---------
Inventories (in thousands):
Finished goods.................................................................. $ 8,024 $ 2,666
Work in process................................................................. 11,152 6,966
Raw materials................................................................... 3,607 1,293
------- -------
22,783 10,925
Purchased inventory fair value adjustment (Note 5).............................. 10,763 --
------- -------
$33,546 $10,925
======= =======
DECEMBER 31, MARCH 31,
2000 2000
------------ --------
Property and equipment (in thousands):
Machinery and equipment......................................................... $ 62,736 $ 46,375
Leasehold improvements.......................................................... 14,541 8,352
Computers, office furniture and equipment....................................... 61,262 20,743
Land............................................................................ 4,881 4,808
-------- --------
143,420 80,278
Less accumulated depreciation and amortization.................................... (64,351) (42,436)
-------- --------
$ 79,069 $ 37,842
======== ========
Cost of sales includes certain amortization of purchased intangibles and other
acquisition-related charges as follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 1999 2000 1999
--------- ------- --------- -------
Amortization of developed core technology....... $ 10,696 $ -- $ 10,696 $ --
Amortization of purchased inventory fair value
adjustment (see Note 4)........................ 16,144 -- 16,144 --
-------- -------- -------- -------
$ 26,840 $ -- $ 26,840 $ --
======== ======== ======== =======
Payroll taxes paid in association with an employee's exercise of stock
options on the difference between the exercise price and the fair value of
acquired stock are treated as operating expenses. Payroll taxes on stock option
exercises were $1.0 million and $3.5 million for the three and nine months ended
December 31, 2000, respectively. Comparative charges were not significant in the
nine months ended December 31, 1999.
4. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of tax, are as
follows (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
2000 1999 2000 1999
--------- ------- --------- -------
Net income (loss)........................................... $(269,487) $12,112 $(242,477) $27,995
Change in market value of available-for-sale investments.... 645 (67) 1,316 (241)
Foreign currency translation adjustment..................... (3) -- (21) --
--------- ------- --------- -------
Comprehensive income (loss)................................. $(268,845) $12,045 $(241,182) $27,754
========= ======= ========= =======
5. BUSINESS COMBINATIONS
In the nine months ended December 31, 2000, the Company completed a
number of purchase acquisitions. The accompanying consolidated financial
statements include the results of operations from the date of acquisition. The
acquired companies are as follows:
MMC Networks, Inc. - On October 25, 2000, the Company acquired MMC Networks,
Inc. ("MMC"), a fabless semiconductor company that provides network processors,
traffic management and switch fabric technology. Under the terms of the merger
agreement, in exchange for all of the outstanding stock of MMC, the Company
issued 41,392,404 shares of its common stock and assumed options to purchase
7,981,595 shares of its common stock.
YuniNetworks, Inc. - On June 8, 2000, the Company completed the acquisition of
YuniNetworks, Inc. ("YuniNetworks"), a developer of scalable switch fabric
silicon solutions for communication equipment. Under the terms of the merger
agreement, in exchange for all YuniNetworks' shares of common and preferred
stock, the Company issued 4,048,646 shares of its common stock and assumed
options to purchase 225,776 shares of its common stock. Pursuant to a separate
agreement, AMCC
7
purchased 10% of the YuniNetworks' shares held by the majority stockholder of
YuniNetworks for $8.9 million in cash.
Other - In the nine months ended December 31, 2000, the Company also completed
the acquisitions of pBaud Logic, Inc., Chameleon Technologies and SiLUTIA, Inc.
("SiLUTIA") for a total purchase price of $67.4 million.
In connection with each of these transactions, the Company conducted
independent valuations of the intangible assets acquired in order to allocate
the purchase price in accordance with Accounting Principles Board Opinion No.
16. The Company has allocated the excess purchase price over the fair value of
net tangible assets acquired to the following identifiable intangible assets:
developed core and existing technology, assembled workforce, acquired in-process
research and development ("IPR&D"), and trademarks/tradenames. The total
purchase price was allocated as follows (in thousands):
MMC YuniNetworks Other Total
----------- ------------ -------- ----------
Net tangible assets (liabilities)............ $ 126,866 $ 2,118 $ (165) $ 128,819
In-process research & development............ 176,700 21,800 3,600 202,100
Goodwill and other intangibles............... 4,128,686 192,365 37,445 4,358,496
Deferred tax liabilities..................... (301,129) -- (16,849) (317,978)
Deferred compensation........................ 391,821 2,488 43,368 437,677
Purchased inventory fair value adjustment.... 26,907 -- -- 26,907
---------- -------- -------- ----------
Total consideration.......................... $4,549,851 $218,771 $ 67,399 $4,836,021
========== ======== ======== ==========
Total consideration issued in the purchase acquisitions is as follows (in
thousands):
MMC YuniNetworks Other Total
---------- ------------ ------- ----------
Value of securities issued.................. $3,919,085 $197,545 $58,099 $4,174,729
Assumption of options....................... 578,093 11,467 6,246 595,806
---------- -------- ------- ----------
4,497,178 209,012 64,345 4,770,535
Cash paid and merger fees................... 52,673 9,759 3,054 65,486
---------- -------- ------- ----------
$4,549,851 $218,771 $67,399 $4,836,021
========== ======== ======= ==========
The purchased inventory fair value adjustment represents the difference
between the carrying value of work in process and finished goods inventory and
the estimated selling price of the related inventory at the date of acquisition.
This accounting adjustment will be charged to cost of sales as the related
inventory is sold. In the three months ended December 31, 2000, $16.1 million
of the total adjustment was charged to cost of sales. The Company expects that
the remaining $10.8 million will be charged to cost of sales in the fourth
quarter of fiscal 2001.
The related purchased IPR&D for each of the above acquisitions represents
the present value of the estimated after-tax cash flows expected to be generated
by the purchased technology, which, at the acquisition dates, had not yet
reached technological feasibility. The cash flow projections for revenues were
based on estimates of relevant market sizes and growth factors, expected
industry trends, the anticipated nature and timing of new product introductions
by the Company and its competitors, individual product sales cycles and the
estimated life of each product's underlying technology. Estimated operating
expenses and income taxes were deducted from estimated revenue projections to
arrive at estimated after-tax cash flows. Projected operating expenses include
cost of goods sold, marketing and selling expenses, general and administrative
expenses, and research and development, including estimated costs to maintain
the products once they have been introduced into the market and are generating
revenue. The remaining identified intangibles, including goodwill, will be
amortized on a straight-line basis over lives ranging from three to six years.
The following unaudited pro forma summary presents the consolidated results
of operations of the Company, excluding acquired IPR&D charges above, as if the
acquisitions had occurred at the beginning of each period presented and does not
purport to be indicative of what would have occurred had the acquisition been
made as of that date or of the results which may occur in the future (in
thousands).
NINE MONTHS ENDED
DECEMBER 31,
---------------------------
2000 1999
--------- ---------
Net sales................................ $ 361,051 $ 169,530
========= =========
Net loss................................. $(653,275) $(618,942)
========= =========
Basic loss per share..................... $ (2.54) $ (2.95)
========= =========
8
6. 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 $100,000. On September 14, 2000, the Company entered into
a consent decree with the Environmental Protection Agency, pursuant to which the
Company agreed to fund its proportionate share of the initial remediation
efforts at the Whittier site. 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.
7. NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued FASB Interpretation No. 44
("Interpretation"), "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of Accounting Principles Board Opinion No. 25",
clarifying the guidance for certain stock compensation issues, including the
treatment of unvested stock and stock options issued in purchase business
combinations. The Interpretation requires that unvested stock and stock options
granted by the acquiring Company in exchange for unvested stock and stock
options held by employees of the target company be accounted for at intrinsic
value and such amount be recorded as deferred compensation by the acquiring
company. Accordingly, the Company recorded approximately $43.4 million and
$391.8 million in deferred compensation in conjunction with the acquisitions of
SiLUTIA and MMC, respectively (Note 5). Additionally, the Interpretation
requires companies to value vested options at fair value and include such value
in the determination of the total value of consideration issued in a
transaction.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The Company is
required to adopt SAB 101 in the quarter ending March 31, 2001. The Company
believes its current revenue recognition policies comply with SAB 101.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. The Company does not believe
this will have a material effect on the Company's operations. Implementation of
this standard has recently been delayed by the FASB for a 12-month period. The
Company will adopt SFAS 133 as required for its first quarterly filing of fiscal
year 2002.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations that are included in
the Annual Report on Form 10-K for the year ended March 31, 2000 for Applied
Micro Circuits Corporation. This Quarterly Report on Form 10-Q, and in
particular this Management's Discussion and Analysis of Financial Condition and
Results of Operations, contains forward-looking statements regarding future
events or the future financial performance of the Company that involve certain
risks and uncertainties including, but not limited to, those set forth in the
"Risk Factors" discussed below. Actual events or the actual future results of
the Company may differ materially from any forward-looking statements due to
such risks and uncertainties. Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking assumptions.
OVERVIEW
We design, develop, manufacture and market high-performance, high-bandwidth
silicon solutions for the world's optical networks. We utilize a combination of
high-frequency analog, mixed-signal and digital design expertise coupled with
system-level knowledge and multiple silicon process technologies to offer
integrated circuit, or IC, products that enable the transport of voice and data
over fiber optic networks. Our products target the SONET/SDH, ATM, Gigabit
Ethernet and Fibre Channel semiconductor markets. We recently introduced silicon
ICs targeted for DWDM systems. We provide our customers with complete silicon IC
solutions including physical media dependent devices such as laser drivers,
physical layer products such as transceivers, overhead processor products such
as framers and mappers, and network processor and switch fabrics. Our products
span data rates from OC-3, or 155 megabits per second, to OC-192, or 10 gigabits
per second. We also supply silicon ICs for the automated test equipment, or ATE,
high-speed computing and military markets.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 1999 2000 1999
------ ----- ------ -----
Net revenues...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 42.7% 28.9% 33.4% 30.2%
------ ----- ------ -----
Gross profit...................................... 57.3% 71.1% 66.6% 69.8%
Operating expenses:
Research and development........................ 21.8% 18.1% 20.8% 18.9%
Selling, general and administrative............. 14.3% 15.4% 14.5% 16.6%
Stock-based compensation........................ 25.1% -- 11.7% --
Amortization of goodwill and purchased
intangibles.................................... 89.0% -- 44.0% --
Acquired in-process research and development.... 123.3% -- 64.3% --
------ ----- ------ -----
Total operating expenses..................... 273.6% 33.5% 155.3% 35.6%
------ ----- ------ -----
Operating income (loss)........................... (216.3)% 37.6% (88.7)% 34.2%
Interest income, net.............................. 10.3% 2.7% 12.9% 2.7%
------- ----- ------ -----
Income (loss) before income taxes................. (206.0)% 40.3% (75.8)% 36.9%
Income tax expense (benefit)...................... (17.9)% 13.8% 1.3% 12.7%
------- ----- ------ -----
Net income (loss)................................. (188.1)% 26.5% (77.1)% 24.3%
======= ===== ====== =====
Net Revenues. Net revenues for the three and nine months ended December 31,
2000 were $143.3 million and $314.5 million, respectively, representing
increases of 213% and 173%, respectively, over net revenues of $45.8 million and
$115.3 million for the three and nine months ended December 31, 1999,
respectively. Revenues from sales of communications products increased to 91%
and 87% of net revenues for the three and nine months ended December 31, 2000,
respectively, from 83% and 79% of net revenues for the three and nine months
ended December 31, 1999, respectively. Of this increase, $20.6 million is
directly attributable to the acquisition of MMC. The remaining increase
reflects both unit growth in shipments of existing products, as well as the
introduction of new products for these markets. Revenues from sales of non-
10
communication products, consisting of the ATE, high-speed computing and military
products, decreased to 9% and 13% of net revenues during the three and nine
months ended December 31, 2000, respectively, from 17% and 21% of net revenues
for the three and nine months ended December 31, 1999, respectively. Sales to
Nortel and their contract manufacturers accounted for 18% and 23% of net
revenues for the three and nine months ended December 31, 2000, respectively, as
compared to 40% and 36% for the three and nine months ended December 31, 1999,
respectively. Sales to Insight Electronics, Inc., the Company's domestic
distributor, accounted for 21% and 19% of net revenues in the three and nine
months ended December 31, 2000, respectively, compared to 16% and 15% for the
three and nine months ended December 31, 1999, respectively. Sales to Cisco and
their contract manufacturers accounted for 10% and 7% of net revenues for the
three and nine months ended December 31, 2000, respectively, compared to less
than 1% in both the three and nine months ended December 31, 1999. Sales outside
of North America accounted for 19% and 18% of net revenues for the three and
nine months ended December 31, 2000, respectively, compared to 27% and 25% for
the three and nine months ended December 31, 1999.
Gross Margin. Gross margin was 57.3% and 66.6% for the three and nine months
ended December 31, 2000, respectively, as compared to 71.1% and 69.8% for the
three and nine months ended December 31, 1999, respectively. Gross margin was
adversely affected by a $16.1 million purchase accounting charge to cost of
revenues based on an increase in the value of the MMC inventory as of the
acquisition date, as well as $10.7 million of developed core technology
amortization. Excluding the effect of these purchase accounting adjustments,
gross margin actually increased to 76.0% and 75.1% for the three and nine months
ended December 31, 2000, respectively. This increase in gross margin was driven
principally by the increasing mix of our communications standard products which
have higher average selling prices.
Research and Development. Research and development ("R&D") expenses
increased to approximately $31.3 million for the three months ended December 31,
2000, from approximately $8.3 million for the three months ended December 31,
1999, and increased to $65.3 million for the nine months ended December 31, 2000
from $21.8 million for the nine months ended December 31, 1999. The increase is
a result of new product and process development efforts, investments made in new
design tools for the development of new products, an increase in personnel costs
as a result of acquisitions and internal hiring of R&D personnel. We believe
that a continued commitment to R&D is vital to maintain a leadership position
with innovative communications products. Accordingly, we expect R&D expenses to
increase in the future. Currently, R&D expenses are focused on the development
of products and processes for the communications markets, and we expect to
continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $20.5 million and $45.7 million for the
three and nine months ended December 31, 2000, as compared to approximately $7.1
million and $19.2 million for the three and nine months ended December 31, 1999.
The increase in SG&A expenses for the three and nine months ended December 31,
2000 was primarily attributable to investments made in our corporate
infrastructure, an increase in the size of our sales force and related
commissions, additional marketing and advertising investments associated with
the introduction of new products, general corporate branding and increases in
our reserves for bad debt. The remaining increase is the result of our
acquisition of MMC which had similar expenses not included in the comparison
period as a result of purchase accounting. We expect SG&A expenses to increase
in the future due principally to additional staffing in our sales and marketing
departments, as well as increased spending on information technology and product
promotion.
Stock-based Compensation. During the three and nine months ended December
31, 2000, deferred compensation of $391.8 million and $437.7 million was
recorded, respectively, related to restricted stock and options granted to
employees of acquired companies. Stock-based compensation charges were $36.0
million and $36.7 million for the three and nine months ended December 31, 2000,
respectively. There were no stock-based compensation charges arising from
purchase acquisitions in the nine months ended December 31, 1999. We currently
expect to record amortization of deferred compensation with respect to these
option grants of approximately $79.8 million, $151.6 million, $137.8 million,
$65.8 million, and $4.2 million during the fiscal years ended March 31, 2001,
2002, 2003, 2004 and 2005, respectively. Future acquisitions of businesses may
result in additional substantial charges. Such charges may cause fluctuations
in our interim or annual operating results.
Amortization of Goodwill and Purchased Intangibles. Amortization of goodwill
and purchased intangible assets was $138.3 million and $149.1 million for the
three and nine months ended December 31, 2000, respectively. These charges are
related to the purchases of MMC, SiLUTIA, YuniNetworks, pBaud Logic, Inc. and
Chameleon Technologies. At December 31, 2000, we expect amortization expense to
be $334.1 million, $739.2 million, $739.1 million, $737.1 million and $734.4
million for the years ended March 31, 2001, 2002, 2003, 2004 and 2005,
respectively. There can be no assurance that acquisitions of businesses by us
in the future will not result in substantial changes to the expected
amortization, which may cause fluctuations in our interim or annual operating
results.
11
Acquired In-process Research and Development. For the three and nine months
ended December 31, 2000, we recorded $176.7 million and $202.1 million,
respectively, of acquired in-process research and development resulting from the
acquisition of YuniNetworks, SiLUTIA and MMC. This amount was expensed on the
acquisition date because the acquired technology had not yet reached
technological feasibility and had no future alternative uses. There can be no
assurance that acquisitions of businesses, products or technologies by us in the
future will not result in substantial charges for acquired in-process research
and development that may cause fluctuations in our interim or annual operating
results.
Net Interest Income. Net interest income increased to $14.8 million for the
three months ended December 31, 2000 from $1.2 million for the three months
ended December 31, 1999 and increased to $40.5 million for the nine months ended
December 31, 2000 from $3.1 million for the nine months ended December 31, 1999.
This increase was due principally to increased funds available for investment
generated by our operations, public stock offerings and employee stock option
exercises.
Income Tax Expense (Benefit). The provision for income taxes for the three
and nine months ended December 31, 2000 differed from statutory rates primarily
due to the nondeductibility of in-process research and development and the
amortization of purchased intangibles.
Backlog. Our sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of our products to be delivered and
delivery schedules are frequently revised to reflect changes in customer needs,
and customer orders can be canceled or rescheduled without significant penalty
to the customer. For these reasons, our backlog as of any particular date is not
representative of actual sales for any succeeding period, and we therefore
believe that backlog is not a good indicator of future revenue. Our backlog for
products requested to be shipped and nonrecurring engineering services to be
completed in the next six months was $195.4 million on December 31, 2000,
compared to $62.1 million on December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of liquidity as of December 31, 2000 consists of
$1.1 billion in cash, cash equivalents and short-term investments. Working
capital as of December 31, 2000 was $1.1 billion, compared to $1.0 billion
as of March 31, 2000. The increase in cash, cash equivalents and short-term
investments was primarily due to net cash provided by operating activities and
net cash obtained through acquired businesses, offset by the purchase of
property and equipment.
For the nine months ended December 31, 2000 and 1999, net cash provided by
operating activities was $156.3 million and $41.6 million, respectively. Net
cash provided by operating activities for the nine months ended December 31,
2000 primarily reflected our operating results before depreciation, amortization
and other non-cash charges plus net decreases in liabilities, less increased
accounts receivable.
Capital expenditures totaled $38.1 million for the nine months ended December
31, 2000, which included approximately $15.3 million for engineering hardware
and design software and $18.7 million for test and manufacturing equipment,
compared to capital expenditures of $16.7 million for the nine months ended
December 31, 1999. As we continue to expand our operations and as we integrate
and upgrade the capital equipment, software and facilities of our acquired
companies, we intend to increase our capital expenditures for engineering
hardware/software and manufacturing and test equipment.
We are exploring alternatives for the expansion of our manufacturing
capacity, including entering into strategic relationships to obtain additional
capacity, qualifying second source manufacturers of our products, building a new
wafer fabrication facility, and purchasing a wafer fabrication facility. Any of
these alternatives could require a significant investment by us, and there can
be no assurance that any of the alternatives for the expansion of our
manufacturing capacity will be available on a timely basis.
We believe that our available cash, cash equivalents and short-term
investments, and cash generated from operations will be sufficient to meet our
capital requirements for the next 12 months, although we could elect or could be
required to raise additional capital during such period. There can be no
assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all.
12
RISK FACTORS
Our operating results may fluctuate because of a number of factors, many of
which are beyond our control.
If our operating results are below the expectations of public market analysts
or investors, then the market price of our common stock could decline. Some of
the factors that affect our quarterly and annual results, but which are
difficult to control or predict are:
. the reduction, rescheduling or cancellation of orders by customers, whether
as a result of stockpiling of our products or otherwise;
. fluctuations in the timing and amount of customer requests for
product shipments;
. the availability of external foundry capacity, purchased parts and raw
materials;
. increases in the costs of products or discontinuance of products by
suppliers;
. discontinuance of products by suppliers;
. fluctuations in product life cycles;
. fluctuations in manufacturing output, yields and inventory levels or other
potential problems or delays in the fabrication, assembly, testing or
delivery of our products;
. changes in the mix of products that our customers buy;
. our ability to introduce new products and technologies on a timely basis;
. the announcement or introduction of products and technologies by our
competitors;
. competitive pressures on selling prices;
. market acceptance of our products and our customers' products;
. the amounts and timing of costs associated with warranties and product
returns;
. the amounts and timing of investments in research and development;
. the amount and timing of the costs associated with payroll taxes related to
stock option exercises;
. the timing of depreciation and other expenses that we expect to incur in
connection with any expansion of our manufacturing capacity;
. costs associated with acquisitions and the integration of acquired
companies, including MMC;
. costs associated with compliance with applicable environmental regulations
or remediation;
. costs associated with litigation, including without limitation, litigation
or settlements relating to the use or ownership of intellectual property;
. the ability of our customers to obtain components from their other
suppliers;
. general communications systems industry and semiconductor industry
conditions; and
. general economic conditions.
Our expense levels are relatively fixed and are based, in part, on our
expectations of future revenues. We are continuing
13
to increase our operating expenses for additional manufacturing capacity,
personnel and new product development. We have limited ability to reduce
expenses quickly in response to any revenue shortfalls.
Our business, financial condition and operating results would be harmed if we do
not achieve anticipated revenues. We can have revenue shortfalls for a variety
of reasons, including:
. the reduction, rescheduling or cancellation of customer orders;
. sudden decrease in end customer demand caused by a general slowdown in the
communication systems industry;
. customers stockpiling inventory causing a reduction in their order
patterns as they work through the excess inventory;
. significant pricing pressures that occur because of declines in
average selling prices over the life of a product;
. sudden shortages of raw materials or production capacity
constraints that lead our suppliers to allocate available supplies or
capacity to customers with resources greater than us and, in turn,
interrupt our ability to meet our production obligations; and
. fabrication, test or assembly capacity constraints for internally
manufactured devices which interrupt our ability to meet our production
obligations.
Our business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without significant
penalty to the customer. Because we do not have substantial noncancellable
backlog, we typically plan our production and inventory levels based on internal
forecasts of customer demand which are highly unpredictable and can fluctuate
substantially. From time to time, in response to anticipated long lead times to
obtain inventory and materials from our outside suppliers and foundries, we may
order materials in advance of anticipated customer demand. This advance ordering
might result in excess inventory levels or unanticipated inventory write-downs
if expected orders fail to materialize, or other factors render the customers'
products less marketable. We currently anticipate that an increasing portion of
our revenues in future periods will be derived from sales of application-
specific standard products, or ASSPs, as compared to application specific
integrated circuits, or ASICs. Customer orders for ASSPs typically have shorter
lead times than orders for ASICs, which may make it increasingly difficult for
us to predict revenues and inventory levels and adjust production appropriately.
If we are unable to plan inventory and production levels effectively, our
business, financial condition and operating results could be materially harmed.
A disruption in the manufacturing capabilities of our outside foundries would
negatively impact the production of certain of our products.
We rely on outside foundries for the manufacture of the majority of our
products, including all of our products designed on CMOS processes and silicon
germanium processes. These outside foundries manufacture our products on a
purchase order basis. Currently, a majority of our products are only qualified
for production at a single foundry. These suppliers can allocate, and in the
past have allocated, capacity to the production of other companies' products
while reducing deliveries to us on a short notice. Because establishing
relationships and ramping production with new outside foundries may take over a
year, there is no readily available alternative source of supply for these
products. A manufacturing disruption experienced by one or more of our outside
foundries or a disruption of our relationship with an outside foundry would
negatively impact the production of certain of our products for a substantial
period of time. The transition to the next generation of manufacturing
technologies at one or more of our outside foundries could be unsuccessful or
delayed.
If we do not successfully expand our manufacturing capacity on time, we may face
serious capacity constraints.
We are exploring alternatives for the further expansion of our manufacturing
capacity, including:
. entering into strategic relationships to obtain additional
capacity;
. qualifying second source manufacturers of our products;
. building a new fabrication facility; or
. purchasing a fabrication facility.
14
Any of these alternatives, either singly or in combination, could require a
significant investment by us. We cannot assure you that any of the alternatives
for expansion of our manufacturing capacity will be available on a timely basis
or that we will be able to manage our growth and effectively integrate the
expansion into our current operations.
The cost of any investment we may have to make to expand our manufacturing
capacity is expected to be funded through a combination of available cash, cash
equivalents and short-term investments, cash from operations and additional
debt, lease or equity financing. We may not be able to obtain the additional
financing necessary to fund the construction and completion of the expanded
manufacturing facility.
Building a new fabrication facility or purchasing a fabrication facility
entails significant risks, including:
. shortages of materials and skilled labor;
. unforeseen environmental or engineering problems;
. inability to obtain building permits or necessary approvals;
. work stoppages;
. weather interferences; and
. unanticipated cost increases.
Any one of these risks could have a material adverse effect on the building,
equipping and production start-up of a new facility. 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 a
new facility and could reduce our anticipated revenues. Also, the timing of
commencement of operation of a new facility will depend upon the availability,
timely delivery, successful installation and testing of the necessary process
equipment. As a result of the foregoing and other factors, a new facility may
not be completed and production volume may not be within budget or within the
necessary timeframe. In addition, we may be unable to achieve adequate
manufacturing yields in a new facility in a timely manner, and our revenues may
not increase commensurate with the increase in manufacturing capacity associated
with a facility.
We currently manufacture a significant portion of our IC products at our
fabrication facility in San Diego, California. We believe that we will be able
to satisfy our production needs of the products built in the San Diego facility
through the end of fiscal 2001, although this date may vary depending on, among
other things, our rate of growth.
We have in the past and may in the future make acquisitions where advisable,
which will involve numerous risks. We may not be able to address these risks
successfully without substantial expense, delay or other operational or
financial problems.
The risks involved with acquisitions include:
. diversion of management's attention;
. failure to retain key personnel;
. amortization of acquired intangible assets and deferred compensation;
. client dissatisfaction or performance problems with an acquired
firm;
. the cost associated with acquisitions and the integration of
acquired operations;
. ability of the acquired companies to meet their financial projections; and
. assumption of unknown liabilities, or other unanticipated events or
circumstances.
A future acquisition could adversely affect operating results. In particular,
if we were to acquire a company or assets and record the acquisition as a
purchase, we may capitalize a significant amount of goodwill and purchased
intangibles. These assets would be amortized over their expected period of
benefit. The resulting amortization expense could seriously impact operating
results for many years.
In addition, acquisitions accounted for using the pooling of interest methods
of accounting are subject to rules established by the Financial Accounting
Standards Board and the Securities and Exchange Commission. These rules are
complex and the interpretation of them is subject to change. The availability of
pooling of interests accounting treatment for a business combination depends in
part upon circumstances and events occurring after the effective time. The
failure of a past business combination or a future potential business
combination that has been accounted for under the pooling of interests
15
accounting method to qualify for this accounting treatment would materially harm
our reported and future earnings and likely, the price of our common stock.
Any of these risks could materially harm our business, financial condition
and results of operations. Any business that we acquire may not achieve
anticipated revenues or operating results.
The merger with MMC may not realize the anticipated benefits.
On October 25, 2000, we completed a merger with MMC. We entered the merger
agreement with MMC with the expectation that the merger would result in benefits
to us including:
. combining complementary technologies to permit us to provide products with
more complete solutions than we can now provide on our own;
. a combined company with greater financial, technological and human
resources for developing new products and providing greater sales and
marketing resources to promote and sell our products; and
. providing us with access to the MMC customer base to increase distribution
of our products.
We must minimize the risk that the merger will result in the loss of key
employees or the continued diversion of our management's attention. The
integration of sales of MMC products into our business model may jeopardize our
success. MMC technology and products address the network processor market, which
is a new market for us.
As a result of the merger, we recorded a significant amount of intangible
assets, goodwill and deferred compensation. These items will be amortized over
the period of expected benefit and have, and will continue to, materially
adversely affect our operating results reported under generally accepted
accounting principles ("GAAP"). In addition, we recorded a charge of $176.7
million for acquired in-process research and development which further decreased
our GAAP basis operating results for the third quarter of fiscal 2001.
Our integration with MMC may not realize any of the anticipated benefits.
Failure to successfully integrate the two companies could have a material
adverse effect on our business, financial condition and operating results.
Our operating results substantially depend on manufacturing output and yields,
which may not meet expectations.
We manufacture a significant portion of our ICs at our San Diego fabrication
facility. Manufacturing ICs requires manufacturing tools which are unique to
each product being produced. If one of these unique manufacturing tools was
damaged or destroyed, then our ability to manufacture the related product would
be impaired and our business would suffer until the tools were repaired or
replaced.
Our yields decline whenever a substantial percentage of wafers must be
rejected or a significant number of die on each wafer are nonfunctional. Such
declines can be caused by many factors, including minute levels of contaminants
in the manufacturing environment, design issues, defects in masks used to print
circuits on a wafer and difficulties in the fabrication process. Design
iterations and process changes by our suppliers can cause a risk of
contamination. Many of these problems are difficult to diagnose, and are time
consuming and expensive to remedy and can result in shipment delays.
We estimate yields per wafer in order to estimate the value of inventory. If
yields are materially different than projected, work-in-process inventory may
need to be revalued. We have in the past, and may in the future from time to
time, take inventory write-downs as a result of decreases in manufacturing
yields. We may suffer periodic yield problems in connection with new or existing
products or in connection with the commencement of production at a new or
expanded manufacturing facility.
In addition, our manufacturing output or yields may decline as a result of
power outages, supply shortages, accidents, natural disasters or other
disruptions to the manufacturing process.
Because the majority of our costs of manufacturing are relatively fixed,
yield decreases can result in substantially higher unit costs and may result in
reduced gross profit and net income. Yield decreases could force us to allocate
available product supply among customers, which could potentially harm customer
relationships.
16
Our dependence on third-party manufacturing and supply relationships increases
the risk that we will not have an adequate supply of products to meet demand or
that our cost of materials will be higher than expected.
The risks associated with our dependence upon third parties which
manufacture, assemble or package certain of our products, include:
. the potential lack of adequate capacity during periods of excess demand;
. reduced control over delivery schedules and quality;
. risks of inadequate manufacturing yields and excessive costs;
. difficulties selecting and integrating new subcontractors;
. limited warranties on products supplied to us;
. potential increases in prices; and
. potential misappropriation of our intellectual property.
Difficulties associated with adapting our technology and product design to
the proprietary process technology and design rules of outside foundries can
lead to reduced yields. The process technology of an outside foundry is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems may require
cooperation between ourselves and our manufacturer. This risk could be
compounded by the offshore location of certain of our manufacturers, increasing
the effort and time required to identify, communicate and resolve manufacturing
yield problems. Manufacturing defects that we do not discover during the
manufacturing or testing process may lead to costly product recalls. These risks
may lead to increased costs or delay product delivery, which would harm our
profitability and customer relationships.
If the subcontractors we use to manufacture our products discontinue the
manufacturing processes needed to meet our demands, or fail to upgrade their
technologies needed to manufacture our products, we may face production delays.
Our requirements typically represent a very small portion of the total
production of the third-party foundries. As a result, we are subject to the risk
that a producer will cease production on an older or lower-volume process that
it uses to produce our parts. We cannot be certain our external foundries will
continue to devote resources to the production of our products or continue to
advance the process design technologies on which the manufacturing of our
products are based. Each of these events could increase our costs and harm our
ability to deliver our products on time.
Due to an industry transition to six-inch, eight-inch and twelve-inch wafer
fabrication facilities, there is a limited number of suppliers of the four-inch
wafers that we use to build products in our existing manufacturing facility, and
we rely on a single supplier for these wafers. Although we believe that we will
have sufficient access to four-inch wafers to support production in our existing
fabrication facility for the foreseeable future, we cannot be certain that our
current supplier will continue to supply us with four-inch wafers on a long-term
basis. 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.
We must develop or otherwise gain access to improved process technologies.
Our future success will depend upon our ability to continue to improve
existing process technologies, to develop or acquire new process technologies
including silicon germanium processes, and to adapt our process technologies to
emerging industry standards. In the future, we may be required to transition one
or more of our products to process technologies with smaller geometries, other
materials or higher speeds in order to reduce costs and/or improve product
performance. We may not be able to improve our process technologies and develop
or otherwise gain access to new process technologies, including but not limited
to silicon germanium process technologies, in a timely or affordable manner. In
addition, products based on these
17
technologies may not achieve market acceptance.
Our customers are concentrated, so the loss of one or more key customers could
significantly reduce our revenues and profits.
A relatively small number of customers has accounted for a significant
portion of our revenues in any particular period. We have no long-term volume
purchase commitments from any of our major customers. We anticipate that sales
of products to relatively few customers will continue to account for a
significant portion of our revenues. If a significant customer overstocked our
products, additional orders for our products could be harmed. A reduction,
delay or cancellation of orders from one or more significant customers or the
loss of one or more key customers could significantly reduce our revenues and
profits. We cannot assure you that our current customers will continue to place
orders with us, that orders by existing customers will continue at current or
historical levels or that we will be able to obtain orders from new customers.
Our ability to maintain or increase sales to key customers and attract new
significant customers is subject to a variety of factors, including:
. customers may stop incorporating our products into their own
products with limited notice to us and suffer little or no penalty;
. design wins with customers may not result in significant sales to
such customers;
. the introduction of a customer's new products may be late or less
successful in the market than planned;
. a significant customer's product line using our products may rapidly
decline or be phased out;
. significant customers may not incorporate our products in their future
product designs;
. agreements with customers typically do not require them to purchase a
minimum amount of our products;
. many of our customers have pre-existing relationships with current or
potential competitors that may cause them to switch from our products to
competing products;
. we may not be able to successfully develop relationships with additional
significant network equipment vendors; and
. our relationship with some of our larger customers may deter other
potential customers (who compete with these customers) from buying our
products.
Any one of the factors above could have a material adverse effect on our
business, financial condition and results of operation.
Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and we may not be able to continue to
attract and train engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future. Our anticipated growth is expected to
place increased demands on our resources and will likely require the addition of
new management personnel and the development of additional expertise by existing
management personnel. Loss of the services of, or failure to recruit, key design
engineers or other technical and management personnel could be significantly
detrimental to our product and process development programs.
Periods of rapid growth and expansion could continue to place a significant
strain on our limited personnel and other resources.
To manage expanded operations effectively, we will be required to continue to
improve our operational, financial and management systems and to successfully
hire, train, motivate and manage our employees. The integration of past and
future potential acquisitions and the expansion of our manufacturing capacity
will require significant additional management,
18
technical and administrative resources. We cannot be certain that we will be
able to manage our growth or effectively integrate a new or expanded wafer
fabrication facility into our current operations.
An important part of our strategy is to continue our focus on the markets for
high-speed communications ICs and to begin focus on the market for network
processors. If we are unable to expand our share of these markets further, our
revenues could stop growing and may decline.
Our markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. If
our products are unable to support the new features or performance levels
required by OEMs in these markets, we would be likely to lose business from an
existing or potential customer and, moreover, would not have the opportunity to
compete for new design wins until the next product transition occurs. If we fail
to develop products with required features or performance standards, or if we
experience a delay as short as a few months in bringing a new product to market,
or if our customers fail to achieve market acceptance of their products, our
revenues could be significantly reduced for a substantial period.
A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of products based on SONET, SDH
and ATM transmission standards. If the communications market evolves to new
standards, we may not be able to successfully design and manufacture new
products that address the needs of our customers or gain substantial market
acceptance. Although we have developed products for the Gigabit Ethernet and
Fibre Channel communications standards, volume sales of these products are
modest, and we may not be successful in addressing the market opportunities for
products based on these standards.
Customers for network processors have substantial technological capabilities
and financial resources. They traditionally use these resources to internally
develop the ASIC components and develop programs for the general-purpose
processors utilized in our network processor products. Our future prospects are
dependent upon our customers' acceptance of network processors as an alternative
to ASIC components and general-purpose processors. Future prospects also are
dependent upon acceptance of third-party sourcing for network processors as an
alternative to in-house development. Network equipment vendors may in the future
continue to use internally-developed ASIC components and general-purpose
processors. They also may decide to develop or acquire components, technologies
or network processors that are similar to, or that may be substituted for, our
network processor products.
If our network equipment vendor customers fail to accept network processors
as an alternative, if they develop or acquire the technology to develop such
components internally rather than purchase our network processor products, or if
we are otherwise unable to develop strong relationships with network equipment
vendors, our business, financial condition and results of operations would be
materially and adversely affected.
Our markets are subject to rapid technological change, so our success depends
heavily on our ability to develop and introduce new products.
The markets for our products are characterized by:
. rapidly changing technologies;
. evolving and competing industry standards;
. short product life cycles;
. changing customer needs;
. emerging competition;
. frequent new product introductions and enhancements;
. increased integration with other functions; and
. rapid product obsolescence.
19
To develop new products for the communications markets, we must develop, gain
access to and use leading technologies in a cost-effective and timely manner and
continue to develop technical and design expertise. In addition, we must have
our products designed into our customers' future products and maintain close
working relationships with key customers in order to develop new products that
meet customers' changing needs. We must respond to changing industry standards,
trends towards increased integration and other technological changes on a timely
and cost-effective basis. If we fail to achieve design wins with key customers,
our business will significantly suffer because once a customer has designed a
supplier's product into its system, the customer typically is extremely
reluctant to change its supply source due to significant costs associated with
qualifying a new supplier.
Products for communications applications, as well as for high-speed computing
applications, are based on industry standards that are continually evolving. Our
ability to compete in the future will depend on our ability to identify and
ensure compliance with these evolving industry standards. The emergence of new
industry standards could render our products incompatible with products
developed by major systems manufacturers. As a result, we could be required to
invest significant time and effort and to incur significant expense to redesign
our products to ensure compliance with relevant standards. If our products are
not in compliance with prevailing industry standards for a significant period of
time, we could miss opportunities to achieve crucial design wins. We may not be
successful in developing or using new technologies or in developing new products
or product enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense.
The markets in which we compete are highly competitive and subject to rapid
technological change, price erosion and heightened international competition.
The communications IC market is highly competitive and we expect that
competition will increase in these markets. Our ability to compete successfully
in our markets depends on a number of factors, including:
. success in designing and subcontracting the manufacture of new products
that implement new technologies;
. product quality, reliability and performance;
. customer support;
. time-to-market;
. price;
. the efficiency of production;
. design wins;
. expansion of production of our products for particular systems
manufacturers;
. end-user acceptance of the systems manufacturers' products;
. market acceptance of competitors' products; and
. general economic conditions.
In addition, our competitors or customers may offer enhancements to our
existing products or offer new products based on new technologies, industry
standards or customer requirements including, but not limited to, all optical
networking systems that are available to customers on a more timely basis than
comparable products from us or that have the potential to replace or provide
lower-cost or higher performance alternatives to our products. The introduction
of enhancements or new products by our competitors could render our existing and
future products obsolete or unmarketable. We expect that certain of our
competitors and other semiconductor companies may seek to develop and introduce
products that integrate the functions performed by our IC products on a single
chip, thus eliminating the need for our products.
In the communications markets, we compete primarily against Broadcom,
Conexant, Galileo Technology,
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Infineon, Intel, Lucent, Maxim, Philips, PMC-Sierra, TriQuint and Vitesse. Some
of these companies have significantly greater financial and other resources than
us, and some of these companies use other process technologies such as gallium
arsenide which may have certain advantages over technology we currently use. In
certain circumstances, most notably with respect to ASICs supplied to Nortel,
our customers or potential customers have internal IC manufacturing
capabilities.
Revenues that are currently derived from non-communications markets have been
declining and we expect them to continue to decline in future periods.
We have derived significant revenues from product sales to customers in the
automated test equipment, or ATE, high-speed computing and military markets and
currently anticipate that we will continue to derive revenues from sales to
customers in these markets in the near term. We are not currently funding
product development efforts in these markets, and revenues from products in
these markets have been declining and we expect them to continue to decline in
future periods. The market for ATE and high-speed computing IC products is
subject to extreme price competition, and we may not be able to reduce the costs
of manufacturing high-speed computing IC products in response to declining
average selling prices.
We expect that certain competitors will seek to develop and introduce
products that integrate the functions performed by our ATE and high speed
computing IC products on single chips. One or more of our customers may choose
to utilize discrete components to perform the functions served by our high-speed
computing IC products or may use their own design and fabrication facilities to
create a similar product. In either case, the need for ATE and high-speed
computing customers to purchase our IC products could be eliminated.
The complexity of our network processor products frequently leads to errors,
defects and bugs when they are first introduced, which could negatively impact
our reputation with customers.
Products as complex as network processors frequently contain errors, defects
and bugs when first introduced or as new versions are released. Our network
processors have in the past experienced such errors, defects and bugs. Delivery
of products with production defects or reliability, quality or compatibility
problems could significantly delay or hinder market acceptance of the network
processor products. This, in turn, could damage our reputation and adversely
affect our ability to retain existing customers and to attract new customers.
Errors, defects or bugs could cause problems, interruptions, delays or cessation
of sales to our network processor customers.
We may be required to make significant expenditures of capital and resources
to resolve such problems. There can be no assurance that problems will not be
found in new products after commencement of commercial production, despite
testing by us, our suppliers or our customers. This could result in:
. additional development costs;
. loss of, or delays in, market acceptance;
. diversion of technical and other resources from our combined company's
other development efforts;
. claims by our customers or others against it; and
. loss of credibility with our current and prospective customers.
Any such event could have a material adverse effect on our business,
financial condition and results of operations.
We may not be able to protect our intellectual property adequately.
We rely in part on patents to protect our intellectual property. We cannot
assure you that our pending patent applications or any future applications will
be approved, or that any issued patents will provide us with competitive
advantages or will not be challenged by third parties, or that if challenged,
will be found to be valid or enforceable, or that the patents of others will not
have an adverse effect on our ability to do business. Furthermore, others may
independently develop similar products or processes, duplicate our products or
processes or design around any patents that may be issued to us.
To protect our intellectual property, we also rely on the combination of mask
work protection under the Federal Semiconductor Chip Protection Act of 1984,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure
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agreements and licensing arrangements. Despite these efforts, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or otherwise gain access to our trade secrets or
intellectual property, or disclose such intellectual property or trade secrets,
or that we can meaningfully protect our intellectual property.
We could be harmed by litigation involving patents and proprietary rights.
Litigation may be necessary to enforce our intellectual property rights, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or misappropriation. The semiconductor
industry is characterized by substantial litigation regarding patent and other
intellectual property rights. Such litigation could result in substantial costs
and diversion of resources, including the attention of our management and
technical personnel and could have a material adverse effect on our business,
financial condition and results of operations. We may be accused of infringing
the intellectual property rights of third parties. We have certain
indemnification obligations to customers with respect to the infringement of
third-party intellectual property rights by our products. We cannot be certain
that infringement claims by third parties or claims for indemnification by
customers or end users resulting from infringement claims will not be asserted
in the future or that such assertions, if proven to be true, will not harm our
business.
Any litigation relating to the intellectual property rights of third parties,
whether or not determined in our favor or settled by us, would at a minimum be
costly and could divert the efforts and attention of our management and
technical personnel. In the event of any adverse ruling in any such litigation,
we could be required to pay substantial damages, cease the manufacturing, use
and sale of infringing products, discontinue the use of certain processes or
obtain a license under the intellectual property rights of the third party
claiming infringement. A license might not be available on reasonable terms, or
at all.
Our operating results are subject to fluctuations because we rely substantially
on international sales.
International sales account for a significant part of our revenues and may
account for an increasing portion of our future revenues. As a result, an
increasing portion of our revenues may be subject to certain risks, including:
. foreign currency exchange fluctuations;
. changes in regulatory requirements;
. tariffs and other barriers;
. timing and availability of export licenses;
. political and economic instability;
. difficulties in accounts receivable collections;
. natural disasters;
. difficulties in staffing and managing foreign subsidiary operations;
. difficulties in managing distributors;
. difficulties in obtaining governmental approvals for communications and
other products;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. potentially adverse tax consequences.
We are subject to the risks associated with the imposition of legislation and
regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of our products so that
they become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to United States dollars
of accounts receivable,
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accounts payable and other monetary assets and liabilities arising from
international operations may contribute to fluctuations in our results of
operations. Some of our customer purchase orders and agreements are governed by
foreign laws, which may differ significantly from United States laws. Therefore,
we may be limited in our ability to enforce our rights under such agreements and
to collect damages, if awarded.
We could incur substantial fines or litigation costs associated with our
storage, use and disposal of hazardous materials.
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process. Any
failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production or a cessation of operations.
These regulations could restrict our ability to expand our facilities at the
present location or construct or operate a new fabrication facility or could
require us to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. Since 1993,
we have been named as a potentially responsible party, along with a large number
of other companies that used Omega Chemical Corporation in Whittier, California
to handle and dispose of certain hazardous waste material. We are a member of a
large group of potentially responsible parties that has agreed to fund certain
remediation efforts at the Omega site, which efforts are ongoing. To date, our
payment obligations with respect to these funding efforts have not been
material, and we believe that our future obligations to fund these efforts will
not have a material adverse effect on our business, financial condition or
operating results. Although we believe that we are currently in material
compliance with applicable environmental laws and regulations, we cannot assure
you that we are or will be in material compliance with these laws or regulations
or that our future obligations to fund any remediation efforts, including those
at the Omega site, will not have a material adverse effect on our business.
Our ability to manufacture a sufficient number of products to meet demand could
be severely hampered by a shortage of water, electricity or other supplies, or
by natural disasters.
We use significant amounts of water throughout our manufacturing process.
Previous droughts in California have resulted in restrictions being placed on
water use by manufacturers and residents in California. In the event of future
drought, reductions in water use may be mandated generally, and it is unclear
how such reductions will be allocated among California's different users.
California has experienced shortages in the available power supply. We are
currently exploring alternatives to insure continuous and reliable sources of
power in the event of blackouts. Such alternatives may not be implemented in a
timely manner. Shortages may also affect our vendors and customers.
Our existing fabrication facility is located in San Diego, California and is
subject to natural disasters such as earthquakes or floods. We do not have
earthquake insurance for these facilities, because adequate coverage is not
offered at economically justifiable rates. A significant natural disaster could
have a material adverse impact on our business, financial condition and
operating results.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly. In the
future, the market price of our common stock could be subject to significant
fluctuations due to general economic and market conditions and in response to
quarter-to-quarter variations in:
. our anticipated or actual operating results;
. announcements or introductions of new products;
. technological innovations or setbacks by us or our competitors;
. conditions in the semiconductor, telecommunications, data communications or
high-speed computing markets;
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. the commencement of litigation;
. changes in estimates of our performance by securities analysts;
. announcements of merger or acquisition transactions; and
. other events or factors.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations may harm the market price of our common stock.
The anti-takeover provisions of our certificate of incorporation and of the
Delaware general corporation law may delay, defer or prevent a change of
control.
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of common stock
will be subject to, and may harmed by, the rights of the holders of any shares
of preferred stock that may be issued in the future. The issuance of preferred
stock may delay, defer or prevent a change in control, as the terms of the
preferred stock that might be issued could potentially prohibit our consummation
of any merger, reorganization, sale of substantially all of our assets,
liquidation or other extraordinary corporate transaction without the approval of
the holders of the outstanding shares of preferred stock. The issuance of
preferred stock could have a dilutive effect on our stockholders.
If we issue additional shares of stock in the future, it may have a dilutive
effect on our stockholders.
We have a significant number of authorized and unissued shares of our common
stock available. These shares will provide us with the flexibility to issue our
common stock for proper corporate purposes, which may include making
acquisitions through the use of stock, adopting additional equity incentive
plans and raising equity capital. Any subsequent issuance of our common stock
may result in immediate dilution of our then current stockholders.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2000, our investment portfolio included fixed-income
securities of $1,040.1 million. These securities are subject to interest rate
risk and will decline in value if interest rates increase. Because the average
maturity date of the investment portfolio is relatively short, an immediate 100
basis point increase in interest rates would have no material impact on our
financial condition or results of operations.
We generally conduct business, including sales to foreign customers, in U.S.
dollars and as a result, have limited foreign currency exchange rate risk. The
effect of an immediate 10 percent change in foreign exchange rates would not
have a material impact on our financial condition or results of operations.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.36 Agreement to Acquire Land in Poway, California by and between Tech
Business Center LLC and Registrant dated September 29, 2000.
(B) REPORTS ON FORM 8-K
We filed the following current reports on Form 8-K with the Commission
during the three months ended December 31, 2000:
1) On October 12, 2000, we filed a Current Report on Form 8-K to
announce the approval of a two-for-one stock split, implemented as a
100% stock dividend, to shareholders on record at October 16, 2000.
2) On November 9, 2000, we filed a Current Report on Form 8-K to
announce the acquisition of MMC Networks, Inc., effective October
25, 2000.
3) On December 18, 2000, we filed an Amended Current Report on Form
8-K/A to amend the Current Report on Form 8-K filed on November 9,
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 14, 2001 Applied Micro Circuits Corporation
By: /s/ William Bendush
-----------------------
William Bendush
Vice President
And Chief Financial Officer
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
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