UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL QUARTER ENDED JUNE 30, 1999, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO.
COMMISSION FILE NUMBER: 000-23193
___________
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices)
Registrant's telephone number, including area code: (619) 450-9333
___________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
YES [x] NO ___
---
As of July 30, 1999, 26,849,215 shares of the Registrant's Common Stock were
issued and outstanding.
APPLIED MICRO CIRCUITS CORPORATION
INDEX
PAGE
----
Part I. FINANCIAL INFORMATION:
Item 1. a) Condensed Consolidated Balance Sheets at June 30, 1999
(unaudited) and March 31, 1999........................................................ 3
b) Condensed Consolidated Statements of Income (unaudited) for the three months
ended June 30, 1999 and 1998.......................................................... 4
c) Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended June 30, 1999 and 1998..................................... 5
d) Notes to Condensed Consolidated Financial Statements (unaudited)...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 23
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 24
Item 2. Changes in Securities and Use of Proceeds................................................. 24
Item 3. Defaults upon Senior Securities........................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders....................................... 24
Item 5. Other Information......................................................................... 24
Item 6. Exhibits and Reports of Form 8-K.......................................................... 24
Signatures.......................................................................................... 25
================================================================================
2
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
JUNE 30, 1999 MARCH 31, 1999
-------------- ---------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents........................................................... $ 13,834 $ 13,530
Short-term investments - available-for-sale......................................... 74,841 73,010
Accounts receivable, net of allowance for doubtful accounts of $175 and $177
at June 30, 1999 (unaudited) and March 31, 1999, respectively..................... 21,250 19,275
Inventories......................................................................... 10,409 9,813
Deferred income taxes............................................................... 4,273 4,573
Other assets........................................................................ 825 815
Other current assets................................................................ 3,960 4,004
-------- --------
Total current assets...................................................... 129,392 125,020
Property and equipment, net.............................................................. 26,271 23,128
Other assets............................................................................. 2,109 2,507
-------- --------
Total assets........................................................................ $157,772 $150,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 6,069 $ 5,131
Accrued payroll and related expenses................................................ 4,021 4,689
Other accrued liabilities........................................................... 6,300 7,207
Deferred revenue.................................................................... 1,375 1,439
Current portion of long-term debt................................................... 1,323 1,862
Current portion of capital lease obligations........................................ 961 1,075
-------- --------
Total current liabilities................................................. 20,049 21,403
Long-term debt, less current portion..................................................... 4,654 4,995
Long-term capital lease obligations, less current portion................................ 2,376 2,563
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000 shares authorized, none issued and outstanding............................... - -
Common Stock, $0.01 par value:
Authorized shares - 60,000
Issued and outstanding shares - 26,753 at June 30, 1999 (unaudited)
and 26,612 at March 31, 1999............................................ 267 266
Additional paid-in capital........................................................... 104,757 102,525
Deferred compensation, net........................................................... (1,969) (2,123)
Accumulated other comprehensive (loss)............................................... (207) (33)
Retained earnings.................................................................... 28,300 21,514
Notes receivable from stockholders................................................... (455) (455)
-------- --------
Total stockholders' equity.............................................. 130,693 121,694
-------- --------
Total liabilities and stockholders' equity.......................................... $157,772 $150,655
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
THREE MONTHS ENDED
JUNE 30,
--------
1999 1998
---- ----
Net revenues.................................................... $31,643 $23,814
Cost of revenues................................................ 10,283 9,399
------- -------
Gross profit.................................................... 21,360 14,415
Operating expenses:
Research and development..................................... 6,354 4,893
Selling, general and administrative.......................... 5,569 4,164
------- -------
Total operating expenses................................... 11,923 9,057
------- -------
Operating income................................................ 9,437 5,358
Interest income, net............................................ 884 853
------- -------
Income before income taxes...................................... 10,321 6,211
Provision for income taxes...................................... 3,535 2,227
------- -------
Net income...................................................... $ 6,786 $ 3,984
======= =======
Basic earnings per share:
Earnings per share........................................... $ 0.26 $ 0.17
======= =======
Shares used in calculating basic earnings per share.......... 25,715 23,640
======= =======
Diluted earnings per share:
Earnings per share........................................... $ 0.24 $ 0.15
======= =======
Shares used in calculating diluted earnings per share........ 28,528 26,665
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
4
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
THREE MONTHS ENDED
--------------------
JUNE 30,
--------------------
1999 1998
--------- ---------
Operating Activities
Net income........................................................................................ $ 6,786 $ 3,984
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................... 1,916 1,584
Amortization of deferred compensation....................................................... 154 59
Changes in assets and liabilities:
Accounts receivable..................................................................... (1,975) 153
Inventories............................................................................. (596) (660)
Other current assets.................................................................... 342 71
Accounts payable........................................................................ 938 (1,223)
Accrued payroll and other accrued liabilities........................................... (681) 579
Deferred income taxes................................................................... 300 242
Deferred revenue........................................................................ (64) (413)
-------- --------
Net cash provided by operating activities.......................................... 7,120 4,376
Investing Activities
Proceeds from sales and maturities of short-term investments....................................... 38,020 52,287
Purchase of short-term investments................................................................. (40,025) (52,360)
Notes receivable from officers and employees....................................................... 90 162
Purchase of property and equipment................................................................. (5,059) (3,551)
-------- --------
Net cash used for investing activities............................................. (6,974) (3,462)
Financing Activities
Proceeds from issuance of common stock, net........................................................ 1,347 4,594
Repurchase of restricted stock..................................................................... (8) -
Payments on capital lease obligations.............................................................. (301) (1,011)
Proceeds from long-term debt....................................................................... - 533
Payments on long-term debt......................................................................... (880) (138)
-------- --------
Net cash provided by financing activities.......................................... 158 3,978
-------- --------
Net increase in cash and cash equivalents.......................................... 304 4,892
Cash and cash equivalents at beginning of period.......................................................... 13,530 6,460
-------- --------
Cash and cash equivalents at end of period................................................................ $ 13,834 $ 11,352
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest....................................................................................... $ 224 $ 124
Income taxes................................................................................... $ 1,842 $ 24
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 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion
of management, considered necessary for a fair presentation of the results for
the interim periods presented. Interim results are not necessarily indicative of
results for a full year. The Company has experienced significant quarterly
fluctuations in operating results and it expects that these fluctuations in
sales, expenses and net income or losses will continue.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and disclosures made in
the accompanying notes to the financial statements. These estimates include
assessing the collectability of accounts receivable, the use and recoverability
of inventory, estimates to complete engineering contracts, costs of future
product returns under warranty and provisions for contingencies expected to be
incurred. Actual results could differ from those estimates.
The financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto contained in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission for the year ended March 31, 1999.
2. EARNINGS PER SHARE
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
THREE MONTHS ENDED
JUNE 30,
-----------------------------
1999 1998
-----------------------------
Shares used in basic earnings per share
computations-weighted average common shares
outstanding 25,715 23,640
Net effect of dilutive common share
equivalents based on the treasury stock method 2,813 3,025
------ -------
Shares used in diluted earnings per share
computations 28,528 26,665
====== ======
6
3. CERTAIN FINANCIAL STATEMENT INFORMATION
JUNE 30, MARCH 31,
1999 1999
---- ----
Inventories (in thousands):
Finished goods $ 1,447 $ 975
Work in process 8,045 7,688
Raw materials 917 1,150
------- ------
$10,409 $9,813
------- ------
JUNE 30, MARCH 31,
1999 1999
---- ----
Property and equipment (in thousands):
Machinery and equipment $ 33,139 $ 33,280
Leasehold improvements 7,686 7,641
Computers, office furniture and equipment 17,356 16,654
Land 4,808 1,133
-------- --------
62,989 58,708
Less accumulated depreciation and amortization (36,718) (35,580)
-------- --------
$ 26,271 $ 23,128
======== ========
In July 1998, the Company acquired the right to purchase a parcel of land as a
site for future capacity expansion. This parcel of land is located approximately
one quarter mile from the Company's headquarters in San Diego, California. The
Company made payments of $1.0 million related to this transaction through March
31, 1999. In December 1998, the Company exercised its right to acquire the land
and in May 1999, made additional payments of approximately $3.7 million to
acquire the land.
4. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, are as follows (in
thousands):
JUNE 30, JUNE 30,
1999 1998
---- ----
Net income $6,786 $3,984
Change in net unrealized loss
On available-for-sale investments (174) -
------ ------
Comprehensive Income $6,612 $3,984
====== ======
Accumulated other comprehensive (loss) presented in the accompanying
consolidated condensed balance sheets consists of the accumulated net unrealized
loss on available-for-sale investments.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations that are included in
the Annual Report on Form 10-K for the year ended March 31, 1999 for Applied
Micro Circuit Corporation (the "Company" or "AMCC"). This quarterly report on
Form 10-Q, and in particular Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward-looking statements
regarding future events or the future performance of the Company that involve
certain risks and uncertainties including those discussed in "Factors That May
Affect Future Results" below. Actual events or the actual future results of the
Company may differ materially from any forward-looking statements due to such
risks and uncertainties. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as of
the date hereof. The Company assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking assumptions.
OVERVIEW
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by using a
combination of high-frequency analog, mixed-signal and digital design expertise
coupled with system-level knowledge and multiple silicon process technologies.
AMCC believes that its internal bipolar and BiCMOS processes, complemented by
advanced CMOS and silicon germanium processes from external foundries, enable
the Company to offer high-performance, high-speed solutions optimized for
specific applications and customer requirements. The Company further believes
that its products provide significant cost, power, performance and reliability
advantages for system OEMs in addition to accelerating time-to-market. The
Company also leverages its technology to provide products for the automated test
equipment (ATE), high-speed computing and military markets.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED
------------------
JUNE 30, JUNE 30,
1999 1998
---- ----
Net revenues................................................ 100.0% 100.0%
Cost of revenues............................................ 32.5% 39.5%
----- -----
Gross profit................................................ 67.5% 60.5%
Operating expenses:
Research and development.................................. 20.1% 20.5%
Selling, general and administrative....................... 17.6% 17.5%
----- -----
Total operating expenses............................... 37.7% 38.0%
----- -----
Operating income............................................ 29.8% 22.5%
Net interest income......................................... 2.8% 3.6%
----- -----
Income before provisions for income taxes................... 32.6% 26.1%
Provision for income taxes.................................. 11.2% 9.4%
----- -----
Net income.................................................. 21.4% 16.7%
===== =====
Net Revenues. Net revenues for the three months ended June 30, 1999 were
$31.6 million, an increase of 33% over net revenues of $23.8 million for the
three months ended June 30, 1998. Revenues from sales of communications products
increased to 70% of net revenues for the three months ended June 30, 1999 from
50% of net revenues for the three months ended June 30, 1998, reflecting unit
growth in shipments of existing products, as well as the introduction of new
products. Revenues from sales of products to other markets, consisting of the
ATE, high-speed
8
computing and military markets, decreased to 30% of net revenues during the
three months ended June 30, 1999, from 50% of net revenues for the three months
ended June 30, 1998. Sales to Nortel, the Company's largest customer, accounted
for 31% of net revenues for the three months ended June 30, 1999 compared to 17%
for the three months ended June 30, 1998. Sales to Raytheon Systems Co.
(including shipments of $3.3 million relating to the partial fulfillment of an
end of life order) accounted for 11% of net revenues for the three ended June
30, 1999 and were less than 10% of revenues in the comparable period in the
prior fiscal year. Sales to Insight Electronics, Inc., the Company's domestic
distributor, accounted for 14% of net revenues in the three months ended June
30, 1999, compared to less than 10% for the three months ended June 30, 1998.
Sales outside of North America accounted for 25% of net revenues for the three
months ended June 30, 1999, compared to 29% for the three months ended June 30,
1998.
Gross Margin. Gross margin was 67.5% for the three months ended June 30,
1999, compared to 60.5% for the three months ended June 30, 1998. The increase
in gross margin resulted from increased utilization of the Company's wafer
fabrication facility. The Company's gross margin is primarily impacted by
factory utilization, wafer yields, product mix and the Company's timing of
depreciation expense and other costs associated with expanding its manufacturing
capacity. Although AMCC does not expect its gross margin to continue to increase
at the rates reflected above, its strategy is to maximize factory utilization
whenever possible, maintain or improve its manufacturing yields, and focus on
the development and sales of high-performance products that can have higher
gross margins. There can be no assurance, however, that the Company will be
successful in achieving these objectives or that the trend of increasing gross
margins will continue. In addition, these factors can vary significantly from
quarter to quarter, which would likely result in fluctuations in quarterly gross
margin and net income.
Research and Development. Research and development ("R&D") expenses increased
to $6.4 million, or 20.1% of net revenues, for the three months ended June 30,
1999, from $4.9 million, or 20.5% of net revenues, for the three months ended
June 30, 1998. The increase in R&D expenses was due to accelerated new product
and process development efforts. The Company believes that a continued
commitment to R&D is vital to maintain a leadership position with innovative
communications products. Accordingly, the Company expects R&D expenses to
increase in absolute dollars in the future. Currently, R&D expenses are
primarily focused on the development of products and processes for the
communications market, and the Company expects to continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $5.6 million, or 17.6% of net revenues, for the three
months ended June 30, 1999, as compared to $4.2 million, or 17.5% of net
revenues, for the three months ended June 30, 1998. This increase in SG&A
expenses for the three months ended June 30, 1999, primarily reflected increased
compensation costs and product promotion expenses.
Operating Margin. The Company's operating margin increased to 29.8% of net
revenues for the three months ended June 30, 1999, compared to 22.5% for the
three months ended June 30, 1998, principally as a result of the increase in
gross margin.
Net Interest Income. Net interest income increased to $884,000 for the
three months ended June 30, 1999 from $853,000 for the three months ended June
30, 1998. This increase was due principally to higher interest income from
larger cash and short-term investment balances partially offset by higher
interest expense due to larger outstanding debt and capital lease balances.
Income Taxes. The Company's estimated annual effective tax rate used for
the three months ended June 30, 1999 was 34%, compared to an effective tax rate
of 36% for the three months ended June 30, 1998. This decrease in the Company's
estimated effective tax rate is a result of a decrease in the Company's
estimated effective state tax rate and the utilization of certain tax credits.
9
Deferred Compensation. In connection with the grant of certain stock
options to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the deemed fair value of the Common Stock at the date of
grant for accounting purposes and the option exercise price of such options.
Additionally, during the year ended March 31, 1999, the Company recorded
deferred compensation of $2.5 million related to restricted stock and options
granted to founders and employees of Cimaron. Such amounts are presented as a
reduction of stockholders' equity and amortized ratably over the vesting period
of the applicable options. Amortization of deferred compensation recorded for
the three months ended June 30, 1999 and 1998 was $154,000 and $59,000,
respectively. The Company currently expects to record amortization of deferred
compensation with respect to these option grants of approximately $658,000,
$543,000, $414,000, $330,000 and $178,000 during the fiscal years ended March
31, 2000, 2001, 2002, 2003 and 2004, respectively.
Backlog. The Company's sales are made primarily pursuant to standard
purchase orders for delivery of products. Quantities of the Company's products
to be delivered and delivery schedules are frequently revised to reflect changes
in customer needs, and customer orders can be canceled or rescheduled without
significant penalty to the customer. For these reasons, the Company's backlog as
of any particular date is not representative of actual sales for any succeeding
period, and the Company therefore believes that backlog is not a good indicator
of future revenue. The Company's backlog for products requested to be shipped
and nonrecurring engineering services to be completed in the next six months was
$42.0 million on June 30, 1999, compared to $35.2 million on June 30, 1998.
Included in backlog at June 30, 1999 is $6.0 million remaining on the Raytheon
Systems Co. end-of-life buy for integrated circuits used in its high-speed radar
systems.
Year 2000 Compliance. As a semiconductor manufacturer with its own wafer
fabrication facility, the Company is dependent on computer systems and
manufacturing equipment with embedded hardware or software to conduct its
business. The Company has developed and is currently executing a plan designed
to make its computer systems, applications, computer and manufacturing equipment
and facilities Year 2000 ready. The plan covers five stages including (i)
inventory, (ii) assessment, (iii) remediation, (iv) testing, and (v) contingency
planning. The Company has completed the inventory and assessment stages. The
remediation, testing and contingency planning stages are targeted to be
completed by October 1999. The Company will primarily utilize internal resources
to reprogram, or replace where necessary, and test the software for Year 2000
modifications.
The Company is also actively working with suppliers of its products and
services to determine the extent to which the suppliers' operations and the
products and services they provide are year 2000 capable, and to monitor their
progress toward year 2000 capability. Highest priority is being placed on
working with critical suppliers whose failure would shut down manufacturing or
other critical operations within a short period of time. The Company has made
inquiries of its major suppliers and has received responses to its initial
inquiries from 100% of critical suppliers.
Follow-up activities seek to determine whether the supplier is taking all
appropriate steps to fix year 2000 problems and to be prepared to continue
functioning effectively as a supplier in accordance with the Company's
requirements. Plans are being developed to address issues related to suppliers
that are not considered to be making sufficient progress in becoming year 2000
capable.
The Company believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and correcting the year 2000 problems of third
parties, the Company believes the risks are greatest with infrastructure such as
electricity supply, water and sewer service, telecommunications, transportation
supply channels and critical suppliers of materials and services. A worst-case
scenario involving the failure of one or more of the Company's critical third
party suppliers or failure of the Company to execute its Compliance Plan would
be the partial or complete inability to provide customers with products or
services on a timely basis.
The Company is not in the position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur.
Preliminary contingency plans for critical business operations are expected to
be in place by the end of the second quarter of
10
fiscal 2000. These contingency plans involve, among other actions, adjusting
inventory levels, manual workarounds, and adjusting staffing strategies.
The Company has incurred and expensed approximately $500,000 related to the
Year 2000 project and expects to incur an additional $400,000 on completing the
Year 2000 project. Approximately one-half of the costs associated with the Year
2000 project are expected to relate to internal resources that have been
reallocated from other projects, with the balance of costs reflecting
incremental spending for equipment and software upgrades. The costs of the Year
2000 project are expected to be funded through operating cash flows, with the
cost of internal resources expensed as incurred and the cost of equipment and
software upgrades capitalized or expensed in accordance with the Company's
policy on property and equipment.
The costs of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and the ability to identify and
correct equipment with embedded hardware or software and similar uncertainties.
Liquidity and Capital Resources
The Company's principal source of liquidity as of June 30, 1999 consists of
$88.7 million in cash, cash equivalents and short-term investments. Working
capital as of June 30, 1999 was $109.3 million, compared to $103.6 million as of
March 31, 1999. This increase in working capital was primarily due to net cash
provided by operating activities, offset by the purchase of property and
equipment.
For the three months ended June 30, 1999 and 1998, net cash provided by
operating activities was $7.1 million and $4.4 million, respectively. Net cash
provided by operating activities for the three months ended June 30, 1999
primarily reflected net income before depreciation and amortization expense less
decreased accounts payable offset by increases in accounts receivable. Net cash
provided by operating activities for the three months ended June 30, 1998
primarily reflected net income before depreciation and amortization expense,
offset by deceased accounts payable.
Capital expenditures totaled $5.1 for the three months ended June 30, 1999
and included the payment of $3.7 million to complete the purchase of land under
a contract entered into in June 1998, compared to capital expenditures of $3.6
million for the three months ended June 30, 1998. The Company intends to
increase its capital expenditures for manufacturing equipment, test equipment
and computer hardware and software. The Company is also exploring alternatives
for the expansion of its manufacturing capacity which would likely occur after
fiscal year 2000, including expanding its current 4" wafer fabrication facility,
building a new wafer fabrication facility, purchasing a wafer fabrication
facility and/or entering into strategic relationships to obtain additional
capacity. Any of these alternatives could require a significant investment by
the Company including an investment in excess of $80.0 million if the Company
chose to or was required to build a new wafer fabrication facility. The Company
would anticipate financing any such investment through a combination of
available cash, cash equivalents and short term investments, cash from
operations and debt and lease financing. Although the Company believes that it
will be able to obtain financing for a significant portion of the planned
capital expenditures at competitive rates and terms from its existing and new
financing sources, there can be no assurance that the Company will be successful
in these efforts. Furthermore, there can be no assurance that any of the
alternatives for expansion of its manufacturing capacity will be available on a
timely basis or at all.
The Company believes that its available cash, cash equivalents and short-
term investments, and cash generated from operations, will be sufficient to meet
the Company's capital requirements for the next 12 months, although the Company
could be required, or could elect, to seek to raise additional capital during
such period. The Company expects that it will need to raise additional debt or
equity financing in the future. There can be no assurance that such additional
debt or equity financing will be available on commercially reasonable terms or
at all.
11
Factors That May Affect Future Results
Our operating results may fluctuate because of many 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 be
materially and adversely affected.
Some of the factors that affect our quarterly and annual results, but which
are difficult to control or predict are:
. the rescheduling or cancellation of orders by customers;
. fluctuations in the timing and amount of customer requests for product
shipments;
. fluctuations in manufacturing output, yields and inventory levels;
. changes in the mix of products that our customers buy;
. our ability to introduce new products and technologies on a timely basis;
. the announcement or introduction of products and technologies by our
competitors;
. the availability of external foundry capacity, purchased parts and raw
materials;
. competitive pressures on selling prices;
. the amounts and timing of costs associated with warranties and product
returns;
. the amounts and timing of investments in research and development;
. market acceptance of our products and of our customers' products;
. the timing of depreciation and other expenses that we expect to incur in
connection with any required expansion of our manufacturing capacity;
. costs associated with compliance with applicable environmental regulations or
remediation;
. costs associated with future litigation, if any, including without
limitation, litigation or settlements relating to the use or ownership of
intellectual property;
. general semiconductor industry conditions; and
. general economic conditions.
Our expense levels are relatively fixed and are based, in part, on our
expectations of future revenues. We are continuing to increase our operating
expenses for personnel and new product development. However, we have a limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our business, financial condition and operating results would be
adversely affected if we do not achieve increased revenues. We can have revenue
shortfalls for a variety of reasons, including:
. significant pricing pressures that occur because of declines in average
selling prices over the life of a product;
. sudden shortages of raw materials or production capacity constraints that
lead producers to allocate available supplies or capacity to customers with
resources greater than us and, in turn, interrupt our ability to meet our
production obligations;
. fabrication, test or assembly capacity constraints for internally
manufactured devices which interrupt our ability to meet our production
obligations; and
. the rescheduling or cancellation of customer orders.
In addition, our business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially. In addition, from time to time, in response to
anticipated long lead times to obtain inventory and materials from our outside
foundries, we may order materials in advance of anticipated customer demand,
which might result in excess inventory levels or unanticipated inventory write-
downs if expected orders fail to materialize, or other factors render the
customer's products less marketable. Furthermore, we currently anticipate that
an increasing portion of our revenues in future periods will be derived from
sales of application-specific standard products ("ASSPs"), as compared to
application-specific integrated circuits ("ASICs"). Customer orders for ASSPs
typically have shorter lead times than orders for ASICs,
12
which may make it increasingly difficult for us to predict revenues and
inventory levels and adjust production appropriately in future periods. If we
are unable to plan inventory and production levels effectively, our business,
financial condition and operating results could be materially adversely
affected.
One example of the volatility of our results is that we experienced revenue
fluctuations and incurred net losses in fiscal 1995 and 1996. These revenue
fluctuations and net losses were caused by the termination of a relationship
with a strategic foundry partner, decreased orders from two major customers,
charges associated with a reduction in our workforce and charges for excess
inventory. Accordingly, we believe that period-to-period comparisons of
operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not indicative
of results to be expected for a full fiscal year.
Our operating results depend substantially on our manufacturing yields,
which may not meet expectations.
AMCC Fabrication
We manufacture most of our semiconductors at our San Diego 4" wafer
fabrication facility. Our yields can 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 over which we have
little or no control, 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. Unfortunately,
the ongoing expansion of the manufacturing capacity of our existing wafer
fabrication facility could increase the risk of contaminants in the facility. In
addition, many of these problems are difficult to diagnose, and are time
consuming and expensive to remedy and can result in shipment delays
Because the majority of our costs of manufacturing are relatively fixed,
maintenance of the number of shippable die per wafer is critical to our results
of operations. Yield decreases can result in substantially higher unit costs and
may result in reduced gross profit and net income. In the past we have
experienced yield problems in connection with the manufacture of our products.
We estimate yields per wafer in order to estimate the value of inventory. If
yields are materially different than projected, work-in-process inventory may
need to be revalued. We have in the past, and may in the future from time to
time, take inventory write-downs as a result of decreases in manufacturing
yields. We may suffer periodic yield problems in connection with new or existing
products or in connection with the commencement of production in a new or
expanded manufacturing facility.
Fabrication by Third Parties
Semiconductor manufacturing yields are a function both of product design
and process technology. When our products are manufactured by an outside
foundry, the process technology is typically proprietary to the manufacturer.
Since low yields may result from either design or process technology failures,
yield problems may not be effectively determined or resolved until an actual
product exists that can be analyzed and tested to identify process sensitivities
relating to the design rules that are used. As a result, yield problems may not
be identified until well into the production process, and resolution of yield
problems may require cooperation between ourselves and our manufacturer. In some
cases this risk could be compounded by the offshore location of certain of our
manufacturers, increasing the effort and time required to identify, communicate
and resolve manufacturing yield problems.
If we develop relationships with additional outside foundries, yields could
be adversely affected due to difficulties associated with adapting our
technology and product design to the proprietary process technology and design
rules of the new foundries. Because of our limited access to wafer fabrication
capacity from outside foundries for certain products, any decrease in
manufacturing yields of such products could result in an increase in our per
unit costs for such products and force us to allocate available product supply
among customers, which could potentially adversely impact customer relationships
as well as revenues and gross margin. Our outside foundries may not achieve or
maintain acceptable manufacturing yields in the future. Furthermore, we also
face the risk of product recalls resulting from design or manufacturing defects
which are not discovered during the manufacturing and testing process.
Our business strategy is based on increasing dependence on the Wide Area Network
("WAN") and Local Area Network ("LAN") communications markets.
13
An important part of our strategy is to continue our focus on the WAN
market and to leverage our technology and expertise to penetrate further the LAN
market for high-speed ICs. If we are unable to penetrate these markets further,
our short and long term business will suffer. In the short term, we may
experience reduced revenues. In the long term, our revenues could stop growing
and may decline. We anticipate that sales to our other traditional markets will
grow more slowly or not at all and, in some instances, as in the case of
military markets, may decrease over time.
The communications markets are characterized by:
. extreme price competition;
. rapid technological change;
. industry standards that are continually evolving; and
. in many cases, short product life cycles.
These markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. If
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 for the
telecommunications or data communications markets, or if we experience a delay
as short as a few months in bringing a new product to market, or if our
telecommunications or data communications 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 the
Synchronous Optical Network, or SONET, and Synchronous Digital Hierarchy, or
SDH, transmission standards and the Asynchronous Transfer Mode, or ATM,
transmission standard. If the communications market evolves to new standards, we
may not be able to successfully design and manufacture new products that address
the needs of our customers or gain substantial market acceptance. Although we
have developed products for the Gigabit Ethernet and Fibre Channel
communications standards, volume sales of these products are modest, and we may
not be successful in addressing the market opportunities for products based on
these standards.
Our business could be adversely affected if we do not adequately address the
risks associated with our recent acquisition of Cimaron Communications
Corporation.
In March 1999, we completed the acquisition of Cimaron Communications
Corporation. This transaction is accompanied by a number of risks, including:
. the difficulty of assimilating the operations and personnel of Cimaron;
. the potential disruption of AMCC's and Cimaron's ongoing business and
distraction of management;
. possible unanticipated expenses related to technology integration;
. the potential impairment of relationships with employees and customers as a
result of any integration of new
management personnel; and
. potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with the Cimaron acquisition.
In addition, the market price of our common stock could decline as a result
of the merger if:
. the integration of AMCC and Cimaron is unsuccessful;
. the combined company does not achieve the perceived benefits of the merger
as rapidly or to the extent anticipated by financial analysts;
. the effect of the merger on the combined company financial results is not
consistent with the expectations of financial analysts; or
14
. the Company is unsuccessful in the management of Cimaron employees who are
geographically distant from our headquarters, but engaged in developing
technology and products that are vital for future revenues.
We have accounted for the merger under the pooling-of-interests accounting
method and financial reporting rules. To qualify the merger as a pooling-of-
interests for accounting purposes, AMCC and Cimaron and their respective
affiliates must meet the criteria for pooling-of-interests accounting
established in opinions published by the Accounting Principles Board and
interpreted by the Financial Accounting Standards Board and the Commission.
These opinions are complex, and the interpretation of them is subject to change.
However, the availability of pooling-of-interests accounting treatment for the
merger depends in part, upon circumstances and events occurring after the
effective time. For example, there must be no significant changes in the
business of the combined company, including significant dispositions of assets,
for a period of two years following the effective time. The failure of the
merger to qualify for pooling-of-interests accounting treatment for financial
reporting purposes for any reason would materially and adversely affect our
reported earnings and likely, the price of our common stock.
Our business strategy is also based on increasing dependence on application-
specific standard products.
We have under development a number of ASSPs for the communications markets,
from which we expect to derive an increasing portion our future revenues.
However, we have a limited operating history in selling ASSPs, particularly to
customers in the communications markets. In addition, our relationships with
certain customers in these markets have only been established recently. Our
future success in selling ASSPs, and in particular, selling ASSPs to customers
in the telecommunications and data communications markets, will depend in large
part on whether our ASSPs are developed on a timely basis and whether such
products achieve market acceptance among new and existing customers, and on the
timing of the commencement of volume production of products incorporating our
ASSPs, if at all. We have in the past encountered difficulties in introducing
new products in accordance with customers' delivery schedules and initial
expectations. We may encounter similar difficulties in the future, and we may
not be able to develop and introduce ASSPs in a timely manner so as to meet
customer demands.
We currently depend on the automated test equipment market, and that market has
recently experienced declines in demand.
We have historically derived significant revenues from product sales to
customers in the Automated Test Equipment, or ATE, market and currently
anticipate that we will continue to derive revenues from sales to customers in
this market in the near term. During the past year, customers in the ATE market
have experienced decreased demand due primarily to slower growth in the
semiconductor industry and economic turmoil in Asia. Accordingly, our net
revenues in the ATE market has declined from prior periods and it is possible
that our revenue from the ATE market may decline further.
We depend on the high-speed computing market, but we believe that the
average selling prices of our IC products for the high-speed computing market
will decline in future periods and that our gross margin on sales of such
products may also decline in future periods.
The market for high-speed computing integrated circuits ("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. Even if we successfully utilize new processes or
technologies to reduce the manufacturing costs of our high-speed computing
products in a timely manner, our customers in the high-speed computing market
may not purchase these products.
Furthermore, we expect that certain competitors may seek to develop and
introduce products that integrate the functions performed by our high-speed
computing IC products on a single chip. In addition, one or more of our
customers may choose to utilize discrete components to perform the functions
served by our high-speed computing IC products or may use their own design and
fabrication facilities to create a similar product. In either case, the need for
high-speed computing customers to purchase our IC products could be eliminated.
15
Our markets are subject to rapid technological change, so our success depends
heavily on our ability to develop and introduce new products.
The markets for our products are characterized by:
. rapidly changing technologies;
. evolving and competing industry standards;
. short product life cycles;
. changing customer needs;
. emerging competition;
. frequent new product introductions and enhancements;
. increased integration with other functions; and
. rapid product obsolescence.
To develop new products for the communications markets, we must develop,
gain access to and use leading technologies in a cost-effective and timely
manner and continue to develop technical and design expertise. In addition, we
must have our products designed into our customers' future products and maintain
close working relationships with key customers in order to develop new products,
particularly ASSPs, that meet customers' changing needs. We also must respond to
changing industry standards, trends towards increased integration and other
technological changes on a timely and cost-effective basis. Furthermore, if we
fail to achieve design wins with key customers our business will be
significantly hurt 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, ATE and high-speed computing industries are intensely
competitive. We believe that the principal factors of competition in our markets
are price, product performance, product quality and time-to-market. 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;
. price;
. the efficiency of production;
. design wins for our IC products;
. 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.
16
In addition, our competitors may offer enhancements to existing products or
offer new products based on new technologies, industry standards or customer
requirements that are available to customers on a more timely basis than
comparable products from us or that have the potential to replace or provide
lower-cost alternatives to our products. The introduction of enhancements or new
products by our competitors could render our existing and future products
obsolete or unmarketable. In addition, we expect that certain of our
competitors and other semiconductor companies may seek to develop and introduce
products that integrate the functions performed by our IC products on a single
chip, thus eliminating the need for our products.
In the communications markets, we compete primarily against Conexant, Giga,
Hewlett-Packard, Lucent, Maxim, Philips, Sony, Texas Instruments, TriQuint and
Vitesse. Some of these companies use gallium arsenide ("GaAs") process
technologies for certain products. In certain circumstances, most notably with
respect to ASICs supplied to Nortel, our customers or potential customers have
internal IC manufacturing capabilities. In the ATE market, our products compete
primarily against GaAs based products offered by Vitesse and silicon ECL and
BiCMOS products offered principally by semiconductor manufacturers such as
Analog Devices, Lucent Technologies and Maxim. In the high-speed computing
market, we compete primarily against Chrontel, Cypress, ICS, PLX and Tundra.
Many of these companies and potential new competitors have significantly greater
financial, technical, manufacturing and marketing resources than we do.
If we are not successful in expanding our manufacturing capacity, on time, we
may face serious capacity constraints.
We currently manufacture a majority of our IC products at our 4" wafer
fabrication facility located in San Diego, California. We believe that we will
be able to satisfy our production needs from this fabrication facility through
fiscal 2001, although this date may vary depending on, among other things, our
rate of growth. However, if we cannot expand our capacity on a timely basis, we
could experience significant capacity constraints that could render us unable to
meet customer demand or force us to spend more to make wafers to meet demand. We
will be required to hire, train and manage additional production personnel in
order to increase production capacity as scheduled.
We are exploring alternatives for the expansion of our manufacturing
capacity which would likely occur after fiscal year 2000, including expanding
our current 4" wafer fabrication facility, building a new wafer fabrication
facility, purchasing a wafer fabrication facility and/or entering into strategic
relationships to obtain additional capacity. Any of these alternatives could
require a significant investment by the Company including an investment in
excess of $80.0 million if we chose to or were required to build a new
wafer fabrication facility. There can be no assurance that any of the
alternatives for expansion of our manufacturing capacity will be available on a
timely basis, or that we will be able to manage our growth and effectively
integrate our expansion into our current operations.
The cost of any investment we may have to make in expanding our
manufacturing capacity is expected to be funded through a combination of
available cash, cash equivalents and short-term investments, cash from
operations and additional debt, lease or equity financing. We may not be able to
obtain the additional financing necessary to fund the construction and
completion of the new manufacturing facility. Our existing wafer fabrication
facility is, and the potential new wafer fabrication facility may be, located in
California and these facilities may be subject to natural disasters such as
earthquakes or floods. In addition, the depreciation and other expenses that we
will incur in connection with the expansion of our manufacturing capacity may
adversely affect our gross margin in any future fiscal period.
Expanding our current 4" wafer fabrication facility, building a new wafer
fabrication facility or purchasing a wafer fabrication facility entails
significant risks, including:
. shortages of materials and skilled labor;
. unforeseen environmental or engineering problems;
. work stoppages;
. weather interferences; and
17
. unanticipated cost increases.
Any one of these risks could have a material adverse effect on the
building, equipping and production start-up of a new facility or the expansion
of our existing facility. In addition, unexpected changes or concessions
required by local, state or federal regulatory agencies with respect to
necessary licenses, land use permits, site approvals and building permits could
involve significant additional costs and delay the scheduled opening of the
expansion or new facility and could reduce our anticipated revenues. Also, the
timing of commencement of operation of expansion or new facility will depend
upon the availability, timely delivery and successful installation and testing
of the necessary process equipment. As a result of the foregoing and other
factors, the expansion or new facility may not be completed and in volume
production within its current budget or within the period currently scheduled.
Furthermore, we may be unable to achieve adequate manufacturing yields in
expansion or new facility in a timely manner, and our revenues may not increase
commensurate with the anticipated increase in manufacturing capacity associated
with the expansion or new facility. In addition, in the future, we may be
required for competitive reasons to make capital investments in the existing
wafer fabrication facility or to accelerate the timing of the construction of a
new wafer fabrication facility in order to expedite the manufacture of products
based on more advanced manufacturing processes.
The markets for our products are characterized by rapid changes in manufacturing
process technologies; therefore, to provide competitive products to our target
markets, we must develop or otherwise gain access to improved process
technologies.
Our future success will depend, in large part, upon our ability to continue
to improve existing process technologies, to develop new process technologies
including silicon germanium, or SiGe, 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 SiGe process technologies, in a timely or
affordable manner. In addition, products based on these technologies may not
achieve market acceptance.
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 goods will be higher than expected.
We rely on outside foundries for the manufacture of certain products,
including all of our products designed on CMOS processes and all products that
we anticipate will be designed on silicon germanium processes. We generally do
not have long-term wafer supply agreements with our outside foundries that
guarantee wafer or product quantities, prices or delivery lead times. Instead,
our products that are manufactured by outside foundries are manufactured on a
purchase order basis. We expect that, for the foreseeable future, certain
products will be manufactured by a single outside foundry. Because establishing
relationships with new outside foundries takes several months, there is no
18
readily available alternative source of supply for these products. A
manufacturing disruption experienced by one or more of our outside foundries
would impact the production of certain of our products for a substantial period
of time. Furthermore, the transition to the next generation of manufacturing
technologies at one or more of our outside foundries could be unsuccessful or
delayed.
There are additional risks associated with our dependence upon third-party
manufacturers for certain products. These include, but are not limited to:
. reduced control over delivery schedules and quality;
. risks of inadequate manufacturing yields and excessive costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on wafers or products supplied to us;
. potential increases in prices; and
. potential misappropriation of our intellectual property.
With respect to certain of our products, we depend upon external foundries
to produce wafers and, in some cases, finished products of acceptable quality,
to deliver those wafers and products to us on a timely basis and to allocate to
us a portion of their manufacturing capacity sufficient to meet our needs. On
occasion, we have experienced difficulties with our suppliers failing to produce
goods of sufficient quality or quantity or failing to meet delivery deadlines.
Our wafer and product requirements typically represent a very small portion of
the total production of these external foundries. As a result, we are subject to
the risk that a producer will cease production on an older or lower-volume
process that is used to produce our parts. Additionally, we cannot be certain
our external foundries will continue to devote resources to the production of
our products or continue to advance the process design technologies on which the
manufacturing of our products are based.
Certain of our products are assembled and packaged by third-party
subcontractors. We do not have long-term agreements with any of these
subcontractors. Assembly and packaging is conducted on a purchase order basis.
As a result, we cannot directly control product delivery schedules. This could
lead to product shortages or quality assurance problems that could increase the
costs of manufacturing, assembly or packaging of our products. In addition, we
may, from time to time, be required to accept price increases for assembly or
packaging services. Due to the amount of time normally required to qualify
assembly and packaging subcontractors, product shipments could be delayed
significantly if we are required to find alternative subcontractors. In the
future, we may contract with third parties for the testing of our products. Any
problems associated with the delivery, quality or cost of the assembly, testing
or packaging of our products could have a material adverse effect on our
business.
Due to an industry transition to six-inch and eight-inch wafer fabrication
facilities, there is a limited number of suppliers of the four-inch wafers that
we use to build products in our existing manufacturing facility, and we rely on
a single supplier for these wafers. Although we believe that we will have
sufficient access to four-inch wafers to support production in our existing
fabrication facility for the foreseeable future, we cannot be certain that our
current supplier will continue to supply us with four-inch wafers on a long-term
basis. Additionally, the availability of manufacturing equipment needed for a
four-inch process is limited, and certain new equipment required for more
advanced processes may not be available for a four-inch process.
Our customers are concentrated, so the loss of one or more key customers could
significantly reduce our revenues and profits.
Historically, a relatively small number of customers has accounted for a
significant portion of our revenues in any particular period. For example, our
five largest customers accounted for approximately 44%, 46% and 59% of our
revenues in fiscal 1997, 1998 and 1999, respectively, and accounted for 48% and
71% for the three months ended June 30, 1998 and 1999, respectively. Sales to
Nortel accounted for approximately 20%, 21% and 20% and 17% and 31% of our
revenues in each of these periods, respectively. However, we have no long-term
volume purchase commitments from any of our major customers. We anticipate that
sales of products to relatively few customers will continue to account for a
significant portion of our revenues. 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.
19
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 strategy is based on growth, and periods of rapid growth and expansion have
placed, and could continue to place, a significant strain on our limited
personnel and other resources
To manage expanded operations effectively, we will be required to continue
to improve our operational, financial and management systems and to successfully
hire, train, motivate and manage our employees. In addition, the integration of
past and future potential acquisitions, the expansion of our manufacturing
capacity will require significant management, technical and administrative
resources. We cannot be certain that we will be able to manage our growth or
effectively integrate a new or expanded wafer fabrication facility into our
current operations.
Our 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. Although we have entered into an "at-will" employment
agreement with David M. Rickey, the President and Chief Executive Officer, we
have not entered into fixed term employment agreements with any of our executive
officers except for one-year employment agreements with Ram Sudireddy, Vice
President, Cimaron, and Gary Martin, Vice President and Chief Technical Officer,
Cimaron. In addition, we have not obtained key-person life insurance on any of
our executive officers or key employees. Loss of the services of, or failure to
recruit, key design engineers or other technical and management personnel could
be significantly detrimental to our product and process development programs.
We anticipate that we will need to raise additional capital in the future, and
we cannot be certain that additional debt, lease or equity financing will be
available on commercially reasonable terms or at all.
We require substantial working capital to fund our business, particularly
to finance inventories and accounts receivable and for capital expenditures. 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 through the next 12 months, although we could be required, or could
elect, to seek to raise additional financing during this period. Our future
capital requirements will depend on many factors, including:
. the costs associated with the expansion of manufacturing operations;
. the rate of revenue growth;
. the timing and extent of spending to support research and development
programs and expansion of sales and marketing;
. the timing of introductions of new products and enhancements to existing
products; and
. market acceptance of our products.
Additionally, we may elect to acquire other businesses, which would entail
the issuance of stock and/or the payment of cash. We may elect to raise
additional cash to finance such transactions. We may need to raise additional
debt or equity financing in the future, primarily for purposes of financing the
expansion of our manufacturing capacity.
We may not be able to protect our intellectual property adequately.
20
We rely in part on patents to protect our intellectual property. There can
be no assurance that our pending patent applications or any future applications
will be approved, or that any issued patents will provide us with competitive
advantages or will not be challenged by third parties, or that if challenged,
will be found to be valid or enforceable, or that the patents of others will not
have an adverse effect on our ability to do business. Furthermore, others may
independently develop similar products or processes, duplicate our products or
processes or design around any patents that may be issued to us.
To protect our intellectual property, we also rely on the combination of
mask work protection under the Federal Semiconductor Chip Protection Act of
1984, trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements. Despite these efforts, we
cannot be certain that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property, or disclose such intellectual property or trade
secrets, or that we can meaningfully protect our intellectual property.
Our business, operating results and financial condition could be materially
adversely affected by litigation involving patents and proprietary rights.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
We have, in the past and may, in the future, be notified that we may be
infringing the intellectual property rights of third parties. We have certain
indemnification obligations to customers with respect to the infringement of
third-party intellectual property rights by our products. We cannot be certain
that infringement claims by third parties or claims for indemnification by
customers or end users of our products resulting from infringement claims will
not be asserted in the future or that such assertions, if proven to be true,
will not materially adversely affect our business. On July 31, 1998, the
Lemelson Medical, Education & Research Foundation Limited Partnership filed a
lawsuit in the U.S. District Court for the District of Arizona against 26
companies, including us, engaged in the manufacture and/or sale of IC products.
The complaint alleges infringement by the defendants of certain U.S. patents
held by the Lemelson Partnership relating to certain semiconductor manufacturing
processes. On November 25, 1998, we were served a summons pursuant to this
lawsuit. The complaint seeks, among other things, injunctive relief and
unspecified treble damages. Previously, the Lemelson Partnership has offered us
a license under the Lemelson patents. We are monitoring this matter and,
although the ultimate outcome of this matter is not currently determinable, we
believe, based in part on the licensing terms previously offered by the Lemelson
Partnership, that the resolution of this matter will not have a material adverse
effect on our financial position or liquidity; however, there can be no
assurance that the ultimate resolution of this matter will not have a material
adverse effect on our results of operations for any quarter. Furthermore, there
can be no assurance that we would prevail in any such litigation.
Any litigation relating to the intellectual property rights of third
parties, including the Lemelson Patents, whether or not determined in our favor
or settled by us, would at a minimum be costly and could divert the efforts and
attention of our management and technical personnel. In the event of any adverse
ruling in any such litigation, we could be required to pay substantial damages,
cease the manufacturing, use and sale of infringing products, discontinue the
use of certain processes or obtain a license under the intellectual property
rights of the third party claiming infringement. A license might not be
available on reasonable terms, or at all.
Our operating results are subject to fluctuations because we rely substantially
on foreign customers.
International sales (including sales to Canada) accounted for 40%, 42% and
41% of revenues for the years ended March 31, 1997, 1998 and 1999, respectively
and 43% and 52% for the three months ended June 30, 1998 and 1999, respectively.
International sales may increase in future periods and may account for an
increasing portion of our revenues. As a result, an increasing portion of our
revenues may be subject to certain risks, including:
. changes in regulatory requirements;
. tariffs and other barriers;
. timing and availability of export licenses;
. political and economic instability;
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. difficulties in accounts receivable collections;
. natural disasters;
. difficulties in staffing and managing foreign subsidiary and branch
operations;
. difficulties in managing distributors;
. difficulties in obtaining governmental approvals for communications and
other products;
. foreign currency exchange fluctuations;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. potentially adverse tax consequences.
We are subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products. We
cannot predict whether quotas, duties, taxes or other charges or restrictions
upon the importation or exportation of our products will be implemented by the
United States or other countries. Because sales of our products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of our products so that
they become relatively more expensive to customers in the local currency of a
particular country, leading to a reduction in sales and profitability in that
country. Future international activity may result in increased foreign currency
denominated sales. Gains and losses on the conversion to United States dollars
of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in our results of operations. Some of our customer purchase orders and
agreements are governed by foreign laws, which may differ significantly from
United States laws. Therefore, we may be limited in our ability to enforce our
right s under such agreements and to collect damages, if awarded.
We could incur substantial fines or litigation costs associated with our
storage, use and disposal of hazardous materials.
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process. Any
failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production or a cessation of operations.
In addition, these regulations could restrict our ability to expand our
facilities at the present location or construct or operate a new wafer
fabrication facility or could require us to acquire costly equipment or incur
other significant expenses to comply with environmental regulations or clean up
prior discharges. Since 1993, we have been named as a potentially responsible
party, or PRP, 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 PRPs that has
agreed to fund certain remediation efforts at the Omega site, which efforts are
ongoing. To date, our payment obligations with respect to these funding efforts
have not been material, and we believe that our future obligations to fund these
efforts will not have a material adverse effect on our business, financial
condition or operating results. Although we believe that we are currently in
material compliance with applicable environmental laws and regulations, we
cannot assure you that we are or will be in material compliance with these laws
or regulations or that our future obligations to fund any remediation efforts,
including those at the Omega site, will not have a material adverse effect on
our business.
Our ability to manufacture sufficient wafers to meet demand could be severely
hampered by a shortage of water.
We use significant amounts of water throughout our manufacturing process.
Previous droughts in California have resulted in restrictions being placed on
water use by manufacturers and residents in California. In the event of future
drought, reductions in water use may be mandated generally, and it is unclear
how such reductions will be allocated among California's different users. We
cannot be certain that near term reductions in water allocations to
manufacturers will not occur.
Our stock price is volatile.
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The market price of our common stock has fluctuated significantly to date.
In the future, the market price of our common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in:
. our anticipated or actual operating results;
. announcements or introductions of new products;
. technological innovations or setbacks by us or our competitors;
. conditions in the semiconductor, telecommunications, data communications,
ATE, high-speed computing or military markets;
. the commencement of litigation;
. changes in estimates of our performance by securities analysts;
. announcements of merger or acquisition transactions; and
. other events or factors.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, and that have often
been unrelated or disproportionate to the operating performance of companies.
These fluctuations, as well as general economic and market conditions, may
affect adversely the market price of our common stock.
If we are not adequately prepared for the transition to Year 2000, our business,
operating results and financial condition could suffer.
As discussed earlier, we have developed and are currently executing a plan
designed to make our Computer systems, applications, computer and manufacturing
equipment and facilities Year 2000 ready. However, there can be no guarantee
that these plans will be successfully implemented, and actual results could
differ materially from those plans. Among the factors that might cause such
material differences are:
. the availability and cost of personnel trained in this area;
. the ability to locate and correct all relevant computer codes; and
. the ability to identify and correct equipment with embedded hardware or
software and similar uncertainties.
The anti-takeover provisions of our certificate of incorporation and of the
Delaware General Corporation Law may delay, defer or prevent a change of
control.
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of preferred stock that may be issued in the future. The issuance
of preferred stock may delay, defer or prevent a change in control of AMCC, as
the terms of the preferred stock that might be issued could potentially prohibit
our consummation of any merger, reorganization, sale of substantially all of our
assets, liquidation or other extraordinary corporate transaction without the
approval of the holders of the outstanding shares of preferred stock. In
addition, the issuance of preferred stock could have a dilutive effect on
stockholders of AMCC. Section 203 of the Delaware General Corporation Law, to
which we are subject, restricts certain business combinations with any
"interested stockholder" as defined by this statute. The statute may also delay,
alter or prevent a change of control.
ITEM 3. QUANTITATIVE AND QUALTITATIVE DISCLOSURE ABOUT MARKET RISK
At June 30, 1999, the Company's investment portfolio includes fixed-income
securities of $74.8 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short duration
of the Company's investment portfolio, an immediate 100 basis point increase in
interest rates would have no material impact on the Company's financial
condition or results of operations.
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The Company generally conducts business, including sales to foreign
customers, in U.S. dollars and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations on the normal course of business. As of
the date of this Quarterly Report on Form 10-Q, the Company is not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company's business, financial condition or
operating results.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Use of Proceeds
(1) Initial Public Offering
The Company filed a Registration Statement on Form S-1 (the
"Registration Statement"), File No. 333-37609, which was declared effective by
the Securities and Exchange Commission on November 24, 1997, relating to the
initial public offering (IPO) of the Company's Common Stock. The managing
underwriter of the offering were BankAmerica Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate 5,553,000 shares of Common Stock and the price to the
public was $8.00 per share. Of such shares, 3,538,448 were sold by The Company
(which includes the underwriter's over-allotment of 832,950 shares) and
2,847,502 were sold by certain shareholders of the Company.
The Company incurred $3,196,718 of total expenses in connection with
the IPO consisting of $1,981,531 in underwriting discounts and commissions and
$1,215,187 in other expenses. All such expenses were direct or indirect payments
to others. The net offering proceeds to the Company after deducting the
$3,196,718 of total expenses were approximately $25,111,000.
As of June 30, 1999 the company has expended approximately $4,808,000
for the purchase of land for future capacity expansion and invested the
remaining proceeds of $20,303,000 in short-term investments consisting of United
States Treasury Notes, obligations of United States government agencies and
corporate bonds with maturities ranging from July 1, 1999 to March 31, 2001. The
use of proceeds described herein does not represent a material change in the use
of proceeds described in the prospectus of the Registration Statement.
(2) Secondary Public Offering
The Company filed a Registration Statement on Form S-1, File No. 333-
46071 (the "Secondary Registration Statement"), which was declared effective by
the Securities and Exchange Commission on March 12, 1998, relating to the
secondary public offering of the Company's Common Stock. The managing
underwriters for the Offering were BancAmerica Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate of 3,530,000 shares of the Common Stock and the price to
the public was $19,375 per share. Of such shares, 1,500,000 shares were sold by
the Company, and 2,559,5000 shares were sold by certain stockholders of the
Company (which includes the underwriter's overallotment of 529,5000 shares).
The expenses incurred by the Company in connection with the Offering
were approximately $2,181,000, of which $1,515,000 constituted underwriting
discounts and commissions and approximately $666,000 constituted other expenses
including registration and filing fees, printing, accounting and legal expenses.
No direct or indirect payments were made to any directors, officers, owners of
ten percent or more of any class of the Company's equity securities, or other
affiliates of the Company other than for reimbursement of expense incurred on
the road show. Net offering proceeds to the Company after deducting these
expenses were approximately, $26,882,000.
The Company has invested the net offering proceeds in short-term
investments consisting of United States Treasury Notes, obligations of United
States government agencies and corporate bonds with maturities ranging from
July 1, 1999 to March 31, 2001. The use of proceeds described herein does not
represent a material change in the use of proceeds described in the prospectus
of the Secondary Registration Statement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27.1 Financial Data Schedule
(B) The Registrant filed the following current reports on Form 8-K
with the Commission during the during the quarter ended June 30,
1999:
1) On April 8, 1999 the Company filed a current report on form 8-
K to restate the historical financial statements for the nine
months ended December 31, 1998 to reflect the merger with
Cimaron Communications Corporation accounted for as a pooling-
of-interest as if the companies had been combined from the
beginning of the period.
2) On April 22, 1999 the Company filed a current report on form
8-K to announce the combined operating results for AMCC and
Cimaron for the thirty days ended April 17, 1999.
3) On April 29, 1999 the Company filed a current report on form
8-K to restate the historical interim financial statements as
of and for the three months ended: June 30, 1998, September
30, 1998, December 31, 1998 and March 31, 1999 to reflect the
merger with Cimaron Communications Corporation accounted for
as a pooling-of-interest as if the companies had been combined
for all periods presented.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 12, 1999 Applied Micro Circuits Corporation
By: /s/ William Bendush
-------------------
William Bendush
Vice President, Finance and Administration
And Chief Financial Officer
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
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