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 SEPTEMBER 30, 1998, 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 September 30, 1998, 23,191,697 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 September
30, 1998 (unaudited) and March 31, 1998............... 1
b) Condensed Consolidated Statements of Income
(unaudited) for the three months ended and six months
ended September 30, 1998 and 1997...................... 2
c) Condensed Consolidated Statements of Cash Flows
(unaudited) for the six months ended September 30,
1998 and 1997......................................... 3
d) Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 6
Part II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 24
Item 2. Changes in Securities and Use of Proceeds................. 25
Item 3 Defaults upon Senior Securities........................... 25
Item 4. Submission of Matters to a Vote of Security Holders....... 25
Item 5. Other Information......................................... 26
Item 6. Exhibits and Reports on Form 8-K.......................... 26
Signatures............................................................. 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and cash equivalents........................................................... $ 6,431 $ 6,460
Short-term investments - available-for-sale......................................... 60,330 61,436
Accounts receivable, net of allowance for doubtful accounts of $337 and $350
at September 30, 1998 (unaudited) and March 31, 1998, respectively................ 17,582 12,179
Inventories......................................................................... 9,450 8,185
Deferred income taxes............................................................... 3,282 3,882
Notes receivable from officer and employees......................................... 828 87
Other current assets................................................................ 2,144 2,297
-------- --------
Total current assets...................................................... 100,047 94,526
Property and equipment, net.............................................................. 21,141 17,218
Other assets............................................................................. 2,061 1,090
-------- --------
Total assets........................................................................... $123,249 $112,834
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................................................... $ 4,282 $ 5,215
Accrued payroll and related expenses................................................ 4,053 5,057
Other accrued liabilities........................................................... 3,618 2,344
Deferred revenue.................................................................... 1,219 1,873
Current portion of long-term debt................................................... 681 567
Current portion of capital lease obligations........................................ 1,119 2,053
-------- --------
Total current liabilities................................................. 14,972 17,109
Long-term debt, less current portion..................................................... 2,853 2,736
Long-term capital lease obligations, less current portion................................ 952 1,355
Stockholders' equity:
Preferred Stock, $0.01 par value:
2,000,000 shares authorized, none issued and outstanding........................... - -
Common Stock, $0.01 par value:
Authorized shares 60,000,000
Issued and outstanding shares - 23,191,697 at September 30, 1998 (unaudited)
and 22,536,013 at March 31, 1998........................................ 232 225
Additional paid-in capital........................................................... 90,424 86,660
Deferred compensation, net........................................................... (392) (472)
Retained earnings.................................................................... 14,663 5,722
Notes receivable from stockholders................................................... (455) (501)
-------- --------
Total stockholders' equity................................................ 104,472 91,634
-------- --------
Total liabilities and stockholders' equity............................................. $123,249 $112,834
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
-------- ------- ------- -------
Net revenues.................................................... $25,096 $18,155 $48,783 $35,208
Cost of revenues................................................ 9,347 8,378 18,746 16,534
------- ------- ------- -------
Gross profit.................................................... 15,749 9,777 30,037 18,674
Operating expenses:
Research and development..................................... 4,873 3,477 9,529 6,002
Selling, general and administrative.......................... 4,086 3,391 8,182 6,730
------- ------- ------- -------
Total operating expenses................................... 8,959 6,868 17,711 12,732
------- ------- ------- -------
Operating income................................................ 6,790 2,909 12,326 5,942
Interest income, net............................................ 832 85 1,643 151
------- ------- ------- -------
Income before income taxes...................................... 7,622 2,994 13,969 6,093
Provision for income taxes...................................... 2,743 78 5,028 159
------- ------- ------- -------
Net income...................................................... $ 4,879 $ 2,916 $ 8,941 $ 5,934
======= ======= ======= =======
Basic earnings per share:
Earnings per share........................................... $0.22 $0.55 $0.40 $1.14
======= ======= ======= =======
Shares used in calculating basic earnings per share.......... 22,497 5,338 22,277 5,185
======= ======= ======= =======
Diluted earnings per share:
Earnings per share........................................... $0.20 $0.16 $0.36 $0.32
======= ======= ======= =======
Shares used in calculating diluted earnings per share........ 24,604 18,594 24,538 18,768
======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
2
APPLIED MICRO CIRCUITS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- --------
Operating Activities
Net income........................................................................................ $ 8,941 $ 5,934
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................... 3,311 2,731
Write-offs of inventories................................................................... - 598
Amortization of deferred compensation....................................................... 80 47
Changes in assets and liabilities:
Accounts receivable..................................................................... (5,403) (1,391)
Inventories............................................................................. (1,265) (1,029)
Other current assets.................................................................... 153 (163)
Accounts payable........................................................................ (933) 2,302
Accrued payroll and other accrued liabilities........................................... 2,321 (1,115)
Deferred income taxes................................................................... 600 (1,096)
Deferred revenue........................................................................ (654) 123
-------- -------
Net cash provided by operating activities........................................... 7,151 6,941
Investing Activities
Proceeds from sales and maturities of short-term investments....................................... 93,046 6,463
Purchase of short-term investments................................................................. (91,940) (7,715)
Payments on notes receivable from officer and employees............................................ 235 (123)
Purchase of property and equipment and other assets................................................ (9,181) (4,008)
-------- -------
Net cash used for investing activities.............................................. (7,840) (5,383)
Financing Activities
Proceeds from issuance of common stock, net........................................................ 1,720 259
Repurchase of preferred stock...................................................................... - (3,877)
Payments on notes receivable from stockholders..................................................... 46 12
Payments on capital lease obligations.............................................................. (1,174) (1,362)
Proceeds from long-term debt....................................................................... 533 -
Payments on long-term debt......................................................................... (465) (37)
-------- -------
Net cash provided by (used for) financing activities................................ 660 (5,005)
-------- -------
Net decrease in cash and cash equivalents.......................................... (29) (3,447)
Cash and cash equivalents at beginning of period.......................................................... 6,460 5,488
-------- -------
Cash and cash equivalents at end of period................................................................ $ 6,431 $ 2,041
======== =======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest....................................................................................... $ 242 $ 261
Income taxes................................................................................... $ 1,104 $ 1,700
See accompanying Notes to Condensed Consolidated Financial Statements.
3
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. 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 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, 1998.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128.
"Earnings per Share," which supersedes APB Opinion No. 15. SFAS 128 replaces the
presentation of primary earnings per share (EPS) with "Basic EPS" which includes
no dilution and is based on weighted-average common shares outstanding for the
period. Companies with complex capital structures, including AMCC, are also
required to present "Diluted EPS" that reflects the potential dilution of
securities such as employee stock options and warrants to purchase common stock.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997. On February 3, 1998, the SEC issued Staff Accounting Bulletin
(SAB) No. 98 which revised the previous instructions for determining the
dilutive effects in earnings per share computations of common stock and common
stock equivalents issued at prices below the Company's initial public offering
(the "IPO") price prior to the effectiveness of the IPO.
4
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
THREE MONTHS SIX MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ -------------
Shares used in Basic Earnings Per Share
Computations - Weighted average common
shares outstanding 22,497 5,338 22,277 5,185
Effect of conversion of preferred stock from
date of issuance - 10,728 - 11,660
Net effect of dilutive common share
equivalents based on the treasury stock method 2,107 2,528 2,261 1,923
------ ------ ------ ------
Shares used in diluted earnings per share
computations 24,604 18,594 24,538 18,768
====== ====== ====== ======
NEW ACCOUNTING STANDARDS
On April 1, 1998 the Company adopted, the Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Segment Information. SFAS No. 130 requires that all components of comprehensive
income, including net income, be reported in the financial statements in the
period in which they are recognized. Comprehensive income is defined as the
change in equity during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income for the six months
ended September 30, 1998 and 1997 did not differ from net income for the same
periods. SFAS No. 131 amends the requirements for public enterprises to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in SFAS No. 131, are components of an enterprise
for which separate financial information is available and is evaluated regularly
by the Company in deciding how to allocate resources and in assessing
performance. The Company believes it operates in one business and operating
segment. The adoption of SFAS No. 131 did not have a material impact on the
Company's operations or financial position.
2. CERTAIN FINANCIAL STATEMENT INFORMATION
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
Inventories (in thousands):
Raw materials $1,273 $1,207
Work in process 6,300 5,161
Finished goods 1,877 1,817
------ ------
$9,450 $8,185
====== ======
5
3. RIGHT TO PURCHASE LAND
In July 1998 the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for its new wafer fabrication facility.
This parcel of land is located approximately one quarter mile from the Company's
headquarters in San Diego, California. The Company made payments of $0.9
million related to this transaction in July 1998. The lease provides the Company
with the option, subject to certain conditions, to acquire the land for
additional payments of approximately $3.8 million through May 31, 1999.
However, if certain conditions are met the landlord can require the Company to
purchase the land by May 31, 1999. This lease may not be extended beyond May
31, 1999.
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, 1998 for Applied
Micro Circuits 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, mixed-signal design expertise, system-level
knowledge and multiple silicon process technologies. AMCC believes that its
internal bipolar and BiCMOS processes, complemented by advanced CMOS and planned
silicon germanium BiCMOS processes from external foundries, enable the Company
to offer high-performance, high-speed solutions optimized for specific
applications and customer requirements. The Company further believes that its
products provide significant cost, power, performance and reliability advantages
for systems OEMs in addition to accelerating time to market. The Company also
provides products for the automated test equipment ("ATE"), high-speed computing
and military markets.
In fiscal 1997, the Company substantially reorganized its management team
and increased its focus on becoming the leading supplier of high-performance,
high-bandwidth connectivity integrated circuits ("ICs") for the world's
communications infrastructure. Accordingly, the Company accelerated the pace of
development of new products for high-performance telecommunications and data
communications markets. Following the reorganization of the Company's management
team in fiscal 1997 and its renewed focus on application specific standard
products ("ASSPs") for the telecommunications and data communications markets,
the Company returned to profitability after two years of incurring net losses.
The Company's revenues have increased in each of the last ten fiscal quarters.
In addition, as a result primarily of the $30.5 million of net income generated
in fiscal 1997, fiscal 1998 and the first half of fiscal 1999, the Company
transitioned from an accumulated deficit of $15.4 million at March 31, 1996 to
retained earnings of $14.7 million at September 30, 1998.
6
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 SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net revenues................................................ 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................................ 37.2% 46.1% 38.4% 47.0%
----- ----- ----- -----
Gross profit................................................ 62.8% 53.9% 61.6% 53.0%
Operating expenses:
Research and development.................................. 19.4% 19.2% 19.5% 17.0%
Selling, general and administrative....................... 16.3% 18.7% 16.8% 19.1%
----- ----- ----- -----
Total operating expenses............................... 35.7% 37.9% 36.3% 36.1%
----- ----- ----- -----
Operating income............................................ 27.1% 16.0% 25.3% 16.9%
Net interest income......................................... 3.3% 0.5% 3.3% 0.4%
----- ----- ----- -----
Income before provisions for income taxes................... 30.4% 16.5% 28.6% 17.3%
Provision for income taxes.................................. 11.0% .4% 10.3% .4%
----- ----- ----- -----
Net income.................................................. 19.4% 16.1% 18.3% 16.9%
===== ===== ===== =====
Net Revenues. Net revenues for the three months and six months ended
September 30, 1998 were approximately $25.1 million and $48.8 million
representing increases of 38% and 39%, respectively, over net revenues of $18.2
million and $35.2 million for the three months and six months ended September
30, 1997, respectively. Revenues from sales of communications products increased
from 45% and 46% of net revenues for the three months and six months ended
September 30, 1997, respectively, to 51% of net revenues for both the three
months and six months ended September 30, 1998, reflecting unit growth in
shipments of existing products, as well as the introduction of new products for
these markets. Revenues from sales of products to other markets, consisting of
the ATE, high-speed computing and military markets, decreased from 55% and 54%
of net revenues during the three months and six months ended September 30, 1997,
respectively, to 49% of net revenues for both the three months and six months
ended September 30, 1998, although aggregate revenues from sales to these other
markets increased in absolute dollars. The increase in revenues in absolute
dollars attributable to these other markets was primarily due to $2.9 million of
shipments in the three months ended September 30, 1998 relating to the partial
fulfillment of an end-of-life order from Raytheon Systems Co. See "--Backlog"
and "--Factors That May Affect Future Results-- Fluctuations in Operating
Results" and "-- Customer Concentration." Sales to Nortel accounted for 16% and
17% of net revenues for the three months and six months ended September 30,
1998, respectively, as compared to 18% and 19% for the three months and six
months ended September 30, 1997, respectively. Sales to Raytheon Systems Co.
accounted for 18% and 12% of net revenues for the three months and six months
ended September 30, 1998, respectively, and were less than 10% of revenues in
previous periods. Sales to Insight Electronics, Inc., the Company's domestic
distributor, accounted for 13% and 11% of net revenues in the three months and
six months ended September 30, 1998, respectively. Sales outside of North
America accounted for 26% and 27% of net revenues for the three months and six
months ended September 30, 1998, respectively, as compared to 25% for both the
three months and six months ended September 30, 1997. Although less than eight
percent of the Company's revenues were attributable to sales in Asia during the
six months ended September 30, 1998, the recent economic instability in certain
Asian countries could adversely affect the Company's business, financial
condition and operating results, particularly to the extent that this
instability impacts the sales of products manufactured by the Company's
customers. See "-- Factors That May Affect Future Results-- International
Sales."
Gross Margin. Gross margin (gross profit as a percentage of net revenues)
was 62.8% and 61.6% for the three months and six months ended September 30,
1998, respectively, as compared to 53.9% and 53.0% for the three months and six
months ended September 30, 1997, respectively. The increase in gross margin
resulted from increased utilization of the Company's wafer fabrication facility,
as well as cost reductions of approximately $600,000 and $1 million for the
three months and six months ended September 30, 1998, respectively, on purchased
parts, direct materials and services. 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
7
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.
See "Factors That May Affect Future Results--Fluctuations in Operating Results."
Research and Development. Research and development ("R&D") expenses
increased to approximately $4.9 million, or 19.4% of net revenues, for the three
months ended September 30, 1998, from approximately $3.5 million, or 19.2% of
net revenues, for the three months ended September 30, 1997, and increased to
approximately $9.5 million, or 19.5% of net revenues, for the six months ended
September 30, 1998 from approximately $6.0 million, or 17.0% of net revenues for
the six months ended September 30, 1997. The increases in R&D expenses for both
the three months and six months ended September 30, 1998 were due to accelerated
new product and process development efforts including increases in personnel
costs of $600,000 and $1.4 million, respectively, and increases in prototyping
and outside contractor costs of $1.0 million and $2.3 million, respectively
which increases were partially offset by decreases in certain other expenses.
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 telecommunications and data communications markets, and the
Company expects to continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $4.1 million, or 16.3% of net revenues, for
the three months ended September 30, 1998, as compared to approximately $3.4
million, or 18.7% of net revenues, for the three months ended September 30, 1997
and were approximately $8.2 million, or 16.8% of net revenues, for the six
months ended September 30, 1998, as compared to approximately $6.7 million, or
19.1% of net revenues, for the six months ended September 30, 1997. The increase
in SG&A expenses in absolute dollars for the three months and six months ended
September 30, 1998, primarily reflected increases of $500,000 and $900,000,
respectively, in personnel costs, increases of $100,000 and $200,000,
respectively, in product promotion expenses, and an increase of $200,000 in
commissions earned by third-party sales representatives in both the three months
and six months ended September 30, 1998. The decreases in SG&A expenses as a
percentage of net revenues in the three months and six months ended September
30, 1998 were a result of net revenues increasing more rapidly than SG&A
expenses. The Company expects SG&A expenses to increase in the future due to
additional staffing in its sales and marketing departments, due to increased
spending on information technology and due to increased product promotion
expenses.
Operating Margin. The Company's operating margin increased to 27.1% and
25.3% of net revenues for the three months and six months ended September 30,
1998, respectively, compared to 16.0% and 16.9% for the three months and six
months ended September 30, 1997, respectively, principally as a result of the
increase in gross margin and the decrease in SG&A expenses as a percentage of
net revenues, offset partially by increases in R&D expense as a percentage of
net revenues.
Net Interest Income. Net interest income increased to $832,000 for the
three months ended September 30, 1998 from $85,000 for the three months ended
September 30, 1997 and increased to $1.6 million for the six months ended
September 30, 1998 from $151,000 for the six months ended September 30, 1997.
These increases were due principally to higher interest income from larger cash
and short-term investment balances generated by the proceeds from the Company's
public offerings completed in the second half of the fiscal year ended March 31,
1998.
Income Taxes. The Company's estimated annual effective tax rate used for
the six months ended September 30, 1998 was 36%, compared to an effective tax
rate of 2.6% for the six months ended September 30, 1997. This increase in the
tax rate was to due to the Company's expectation that its effective tax rate
will approximate statutory rates in fiscal 1999. Fiscal 1998's effective tax
rate was decreased from statutory rates due to the reduction of a valuation
allowance recorded against deferred tax assets for net operating loss
carryforwards and credits.
8
Deferred Compensation. In connection with the grant of certain stock
options to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the fair value of the Common Stock at the date of grant for
accounting purposes and the option exercise price of such options. Such amount
is presented as a reduction of stockholders' equity and amortized ratably over
the vesting period of the applicable options. Amortization of deferred
compensation recorded for the six months ended September 30, 1998 was $80,000.
The Company currently expects to record amortization of deferred compensation
with respect to these option grants of approximately $159,000, $159,000,
$129,000 and $25,000 during the fiscal years ended March 31, 1999, 2000, 2001
and 2002, respectively.
Backlog. The Company's sales are made primarily pursuant to standard
purchase orders for delivery of products. Quantities of the Company's products
to be delivered and delivery schedules are frequently revised to reflect changes
in customer needs, and customer orders can be canceled or rescheduled without
significant penalty to the customer. For these reasons, the Company's backlog as
of any particular date is not representative of actual sales for any succeeding
period, and the Company therefore believes that backlog is not a good indicator
of future revenue. The Company's backlog for products requested to be shipped
and nonrecurring engineering services to be completed in the next six months was
$40.0 million on September 30, 1998, compared to $24.2 million on September 30,
1997. Included in backlog at September 30, 1998 is the $16.2 million balance of
an order received during the six months ended September 30, 1998 from Raytheon
Systems Co. related to a end-of-life buy for integrated circuits used in its
high speed radar systems. See "Factors That May Affect Future Results--
Fluctuations in Operating Results."
Recently Adopted Accounting Standards. In April 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The adoption of these standards did not
effect the operations or financial position of the Company at September 30, 1998
or for the three months and six months then ended.
Year 2000. 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 risk-based 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. As of September 30, 1998, the Company is in the process of performing
the inventory and assessment stages and expects to complete these stages in
January 1999. The Company will primarily utilize internal resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation, testing and contingency planning stages are
targeted to be completed in September 1999.
The Company is initiating communications with its critical external
suppliers to determine the extent to which the Company may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. Where practicable, the
Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The effect, if any, on the
Company's results of operations from the failure of such parties to be Year 2000
ready, is not reasonably estimable.
To date, the Company has incurred and expensed approximately $150,000
related to the Year 2000 project and expects to incur an additional $750,000 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.
9
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, the ability to identify and
correct equipment with embedded hardware or software and similar uncertainties.
See "--Factors That May Affect Future Results--Year 2000".
Liquidity and Capital Resources
The Company's principal source of liquidity as of September 30, 1998
consisted of $66.8 million in cash, cash equivalents and short-term investments.
Working capital as of September 30, 1998 was $85.1 million, compared to $77.4
million as of March 31, 1998.
For the six months ended September 30, 1998 and 1997, net cash provided by
operating activities was $7.2 million and $6.9 million, respectively. Net cash
provided by operating activities for the six months ended September 30, 1998
primarily reflected net income before depreciation and amortization expense plus
increased accrued liabilities less increased accounts receivable and
inventories. Net cash provided by operating activities for the six months ended
September 30, 1997 primarily reflected net income before depreciation and
amortization expense plus increased accounts payables less increased accounts
receivables, deferred income taxes, and inventories and less decreased accrued
liabilities.
Capital expenditures and the purchase of other assets totaled $9.2 million
and $4.0 million for the six months ended September 30, 1998, and 1997,
respectively, of which $500,000 was financed using debt for the six months ended
September 30, 1998. The Company intends to increase its capital expenditures for
manufacturing equipment, test equipment and computer hardware and software. The
Company has tentative plans to initiate construction of a new six-inch wafer
fabrication facility during 1999 and to complete the physical plant during 2000.
The Company believes the new facility will not begin commercial production prior
to 2001. However, the Company is also evaluating other alternatives to provide
for additional capacity and process development. The Company currently expects
to spend approximately $8.5 million on capital expenditures and the purchase of
other assets in the second half of fiscal 1999, of which approximately $1.6
million is currently estimated to be related to the expansion of capacity of its
existing wafer fabrication facility and approximately $900,000 is planned to
relate to the initial site acquisition and planning of the Company's new wafer
fabrication facility. In July 1998 the Company acquired the right to purchase,
in the form of a ground lease, a parcel of land as a site for its new wafer
fabrication facility. This parcel of land is located approximately one-quarter
mile from the Company's headquarters in San Diego, California. The Company made
payments of $0.9 million related to this transaction in July 1998. The lease
provides the Company with the option, subject to certain conditions, to acquire
the land for total additional payments of approximately $3.8 million through May
31, 1999. However, the lease provides that, if certain conditions are met, the
landlord can require the Company to purchase the land by May 31, 1999. The
lease may not be extended beyond May 31, 1999. In the course of acquiring land
and securing financing for the proposed new facility, the Company may be
required to expend additional funds and to provide marketable securities as
collateral. The Company estimates that the total cost of the new wafer
fabrication facility will be at least $80.0 million, of which at least $35.0
million relates to the purchase of land and construction of the facility and at
least $45.0 million relates to capital equipment purchases. The Company plans to
finance the new wafer fabrication facility through a combination of available
cash, cash equivalents and short term investments, cash from operations and debt
and lease financing. The Company is also exploring other alternatives for the
expansion of its manufacturing capacity, including purchasing a wafer
fabrication facility or entering into strategic relationships to obtain
additional capacity. Although the Company believes that it will be able to
obtain financing for a significant portion of the planned capital expenditures
at competitive rates and terms from its existing and new financing sources,
there can be no assurance that the Company will be successful in these efforts
or that the new facility will be completed and in volume production within its
current budget or within the period currently
10
scheduled by the Company. Furthermore, there can be no assurance that other
alternatives to constructing a new wafer fabrication facility will be available
on a timely basis or at all. See "Factors That May Affect Future Results--
Manufacturing Capacity Limitations; New Production Facility," "--Dependence on
Third-Party Manufacturing and Supply Relationships" and "--Need For Additional
Capital."
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. See " Factors That May Affect Future Results--Need for Additional
Capital."
FACTORS THAT MAY AFFECT FUTURE RESULTS
Fluctuations in Operating Results
AMCC has experienced and may in the future experience fluctuations in its
operating results. The Company had fluctuating revenues and incurred net losses
in fiscal 1995 and 1996. The Company's quarterly and annual operating results
are affected by a wide variety of factors that could materially and adversely
affect revenues, gross profit and operating income, including, but not limited
to: the rescheduling or cancellation of orders by customers; fluctuations in the
timing and amount of customer requests for product shipments; fluctuations in
manufacturing output and yields and inventory levels; changes in product mix;
the Company's ability to introduce new products and technologies on a timely
basis; the announcement or introduction of products and technologies by the
Company's competitors; the availability of external foundry capacity, purchased
parts and raw materials; competitive pressures on selling prices; the timing of
costs associated with warranties and product returns; the timing of investments
in research and development; market acceptance of the Company's and its
customers' products; the timing of depreciation and other expenses to be
incurred by the Company in connection with its proposed new wafer fabrication
facility; costs associated with compliance with applicable environmental
regulations; costs associated with future litigation, if any, including without
limitation, litigation or settlements relating to the use or ownership of
intellectual property; general semiconductor industry conditions; and general
economic conditions, including, but not limited to, economic conditions in Asia.
The Company's expense levels are relatively fixed and are based, in part,
on its expectations of future revenues. Because the Company is continuing to
increase its operating expenses for personnel and new product development and is
limited in its ability to reduce expenses quickly in response to any revenue
shortfalls, the Company's business, financial condition and operating results
would be adversely affected if increased revenues are not achieved. Furthermore,
sudden shortages of raw materials or production capacity constraints can lead
producers to allocate available supplies or capacity to customers with resources
greater than those of the Company, which could interrupt the Company's ability
to meet its production obligations. Finally, average selling prices in the
semiconductor industry historically have decreased over the life of a product,
and as a result, the average selling prices of the Company's products may be
subject to significant pricing pressures in the future. In response to such
pressures, the Company may take pricing or other actions that could have a
material adverse effect on the Company's business, financial condition and
operating results.
The Company's business is characterized by short-term orders and shipment
schedules, and customer orders typically can be canceled or rescheduled without
significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, the Company typically plans its production and inventory
levels based on internal forecasts of customer demand, which is highly
unpredictable and can fluctuate substantially. In addition, from time to time,
in response to anticipated long lead times to obtain inventory and materials
from its outside foundries, the Company may order materials in advance of
anticipated customer demand, which might result in excess inventory levels or
unanticipated inventory write-downs if expected orders fail to materialize or
other factors render the customer's products less marketable. Furthermore, the
Company currently anticipates that an increasing portion of its revenues in
future periods will be derived from sales of application-specific standard
products
11
("ASSPs"), as compared to application-specific integrated circuits ("ASICs").
Customer orders for ASSPs typically have shorter lead times than orders for
ASICs, which may make it increasingly difficult for the Company to predict its
revenues and inventory levels and adjust production appropriately in future
periods. A failure by the Company to plan inventory and production levels
effectively could have a material adverse effect on the Company's business,
financial condition and operating results.
As a result of the foregoing or other factors, the Company may experience
fluctuations in future operating results on a quarterly or annual basis that
could materially and adversely affect its business, financial condition and
operating results. For example, as a result of the termination of a relationship
with a strategic foundry partner, decreased orders from two major customers,
charges associated with a reduction in the Company's workforce and charges for
excess inventory, the Company experienced revenue fluctuations and incurred net
losses in fiscal 1995 and 1996. Accordingly, the Company believes that period-
to-period comparisons of its operating results should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year.
There can be no assurance that the Company will be able to achieve increased
sales or maintain its profitability in any future period. In certain future
quarters, the Company's operating results may be below the expectations of
public market analysts or investors. In such event, the market price of the
Company's Common Stock could be materially and adversely affected.
Manufacturing Yields
The fabrication of semiconductors is a complex and precise process. Minute
levels of contaminants in the manufacturing environment, defects in masks used
to print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. In addition, the
Company's ongoing expansion of the manufacturing capacity of its existing wafer
fabrication facility could increase the risk to the Company of contaminants in
such facility. Many of these problems are difficult to diagnose, time consuming
and expensive to remedy and can result in shipment delays. As a result,
semiconductor companies often experience problems in achieving acceptable wafer
manufacturing yields, which are represented by the number of good die as a
proportion of the total number of die on any particular wafer, particularly in
connection with the commencement of production in a new fabrication facility or
the transfer of manufacturing operations between fabrication facilities. Because
the majority of the Company's costs of manufacturing are relatively fixed,
maintenance of the number of shippable die per wafer is critical to the
Company's results of operations. Yield decreases can result in substantially
higher unit costs and may result in reduced gross profit and net income. The
Company has in the past experienced yield problems in connection with the
manufacture of its products. For example, in the second quarter of fiscal 1997
the Company experienced a decrease in internal yields primarily due to the
Company's increasing volume production of a single product at less than normal
production yields in support of a customer's delivery requirements. This
decrease in internal yields adversely impacted the Company's gross margin for
the quarter by approximately $600,000. The Company estimates yields per wafer in
order to estimate the value of inventory. If yields are materially different
than projected, work-in-process inventory may need to be revalued. The Company
has in the past and may in the future from time to time take inventory write-
downs as a result of decreases in manufacturing yields. There can be no
assurance that the Company will not suffer periodic yield problems in connection
with new or existing products or in connection with the commencement of
production in the Company's proposed new manufacturing facility or the transfer
of the Company's manufacturing operations to such facility, any of which
problems could cause the Company's business, financial condition and operating
results to be materially and adversely affected. See "--Manufacturing Capacity
Limitations; New Production Facility."
Semiconductor manufacturing yields are a function both of product design
and process technology. In cases where products are manufactured for the Company
by an outside foundry, the process technology is typically proprietary to the
manufacturer. Since low yields may result from either design or process
technology failures, yield problems may not be effectively determined or
resolved until an actual product exists that can be analyzed and tested to
identify process sensitivities relating to the design rules that are used. As a
result, yield problems may not be identified until well into the production
process, and resolution of yield problems would require cooperation by and
communication between the Company and the manufacturer. In some cases this risk
could be compounded
12
by the offshore location of certain of the Company's manufacturers, increasing
the effort and time required to identify, communicate and resolve manufacturing
yield problems. If the Company develops relationships with additional outside
foundries, yields could be adversely affected due to difficulties associated
with adapting the Company's technology and product design to the proprietary
process technology and design rules of such new foundries. Because of the
Company's limited access to wafer fabrication capacity from its outside
foundries for certain of its products, any decrease in manufacturing yields of
such products could result in an increase in the Company's per unit costs for
such products and force the Company to allocate its available product supply
among its customers, thus potentially adversely impacting customer relationships
as well as revenues and gross margin. There can be no assurance that the
Company's outside foundries will achieve or maintain acceptable manufacturing
yields in the future. Furthermore, the Company also faces the risk of product
recalls resulting from design or manufacturing defects which are not discovered
during the manufacturing and testing process. Any of the foregoing factors could
have a material adverse effect on the Company's business, financial condition
and operating results.
Increasing Dependence on Telecommunications and Data Communications Markets and
Increasing Dependence on Application-Specific Standard Products
An important part of the Company's strategy is to continue its focus on the
telecommunications market and to leverage its technology and expertise to
penetrate further the data communications market for high-speed ICs. The Company
anticipates that sales to its other traditional markets will grow more slowly or
not at all and, in some instances, as in the case of military markets, may
decrease over time. The telecommunications and data communications markets are
characterized by extreme price competition, rapid technological change, industry
standards that are continually evolving and, in many cases, short product life
cycles. These markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry wide basis.
If, at the beginning of each such transition, the Company's products are unable
to support the new features or performance levels being required by OEMs in
these markets, the Company would be likely to lose business from an existing or
potential customer and, moreover, would not have the opportunity to compete for
new design wins until the next product transition occurs. There can be no
assurance that the Company will be able to penetrate the telecommunications or
data communications market successfully. A failure by the Company to develop
products with required features or performance standards for the
telecommunications or data communications markets, a delay as short as a few
months in bringing a new product to market or a failure by the Company's
telecommunications or data communications customers to achieve market acceptance
of their products by end-users could significantly reduce the Company's revenues
for a substantial period, which would have a material adverse effect on the
Company's business, financial condition and operating results.
A significant portion of the Company's revenues in recent periods has been,
and is expected to continue to be, derived from sales of products based on the
Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH")
transmission standards and the Asynchronous Transfer Mode ("ATM") transmission
standard. If the communications market evolves to new standards, there is no
assurance the Company will be able to successfully design and manufacture new
products that address the needs of its customers or that such new products will
meet with substantial market acceptance. Although the Company has developed
products for the Gigabit Ethernet and Fibre Channel communications standards,
volume sales of these products have only recently commenced, and there is no
assurance AMCC will be successful in addressing the market opportunities for
products based on these standards. See "--Rapid Technological Change; Necessity
to Develop and Introduce New Products."
The Company has under development a number of ASSPs for the
telecommunications and data communications markets, from which it expects to
derive an increasing portion of its future revenues. The Company has a limited
operating history in selling ASSPs, particularly to customers in the
telecommunications and data communications markets, upon which an evaluation of
the Company's prospects in such markets can be based. In addition, the Company's
relationships with certain customers in these markets have been established
recently. The Company's future success in selling ASSPs, and in particular,
selling ASSPs to customers in the telecommunications and data communications
markets, will depend in large part on whether the Company's
13
ASSPs are developed on a timely basis and whether such products achieve market
acceptance among new and existing customers, and on the timing of the
commencement of volume production of the OEMs' products, if at all. The Company
has in the past encountered difficulties in introducing new products in
accordance with customers' delivery schedules and the Company's initial
expectations. There can be no assurance the Company will not encounter such
difficulties in the future or that the Company will be able to develop and
introduce ASSPs in a timely manner so as to meet customer demands. Any such
difficulties or a failure by the Company to develop and timely introduce such
ASSPs could have a material adverse effect on the Company's business, financial
condition and operating results. See "--Rapid Technological Change; Necessity to
Develop and Introduce New Products."
Dependence on the Automated Test Equipment Market
The Company historically has derived significant revenues from product sales
to customers in the Automated Test Equipment ("ATE") market and currently
anticipates that it will continue to derive significant revenues from sales to
customers in this market in the near term. Customers in the ATE market have
recently experienced decreased demand due primarily to changing growth in the
slower semiconductor industry and economic turmoil in Asia. Accordingly, the
Company's net revenues in the ATE markets have declined for two consecutive
quarters, and the Company believes that revenue from the ATE market will decline
further.
There can be no assurance that conditions in the semiconductor industry
will improve or that the economic situation in Asia will improve. Because the
Company's revenues in the ATE market depend on the demand for its customers' ATE
products, any further reduction in such demand due to further downturns in the
semiconductor industry or continued economic turmoil in Asia could adversely
affect the Company's business, operating results and financial condition .
Dependence on High-Speed Computing Market
The Company historically has derived significant revenues from product
sales to customers in the high-speed computing market and currently anticipates
that it will continue to derive significant revenues from sales to customers in
this market in the near term. The market for high-speed computing IC products is
subject to extreme price competition. The Company believes that the average
selling prices of the Company's IC products for the high-speed computing market
will decline in future periods and that the Company's gross margin on sales of
such products may also decline in future periods. There can be no assurance that
the Company will be able to reduce the costs of manufacturing its high-speed
computing IC products in response to declining average selling prices. Even if
the Company successfully utilizes new processes or technologies to reduce the
manufacturing costs of its high-speed computing products in a timely manner,
there can be no assurance that the Company's customers in the high-speed
computing market will purchase such new products. A failure by the Company to
reduce its manufacturing costs sufficiently or a failure by the Company's
customers to purchase such products could have a material adverse effect on the
Company's business, financial condition and operating results. Furthermore, the
Company expects that certain of its competitors may seek to develop and
introduce products that integrate the functions performed by the Company's high-
speed computing IC products on a single chip. In addition, one or more of the
Company's customers may choose to utilize discrete components to perform the
functions served by the Company's high-speed computing IC products or may use
their own design and fabrication facilities to create a similar product. In
either case, the need for high-speed computing customers to purchase the
Company's IC products could be eliminated, which could adversely affect the
Company's business, financial condition and operating results. See "--Intense
Competition."
Rapid Technological Change; Necessity to Develop and Introduce New Products
The markets for the Company's products are characterized by rapidly
changing technologies, evolving and competing industry standards, short product
life cycles, changing customer needs, emerging competition, frequent new product
introductions and enhancements and rapid product obsolescence. The Company's
future success will depend, in large part, on its ability to develop, gain
access to and use leading technologies in a cost-effective and timely manner and
on its ability to continue to develop its technical and design expertise. The
Company's ability to
14
have its products designed into its customers' future products, to maintain
close working relationships with key customers in order to develop new products,
particularly ASSPs, that meet customers' changing needs and to respond to
changing industry standards and other technological changes on a timely and
cost-effective basis will also be a critical factor in the Company's future
success. Furthermore, once a customer has designed a supplier's product into its
system, the customer typically is extremely reluctant to change its supply
source due to significant costs associated with qualifying a new supplier.
Accordingly, the failure by the Company to achieve design wins with its key
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Products for telecommunications and data communications applications, as
well as for high-speed computing applications are based on industry standards
that are continually evolving. The Company's ability to compete in the future
will depend on its ability to identify and ensure compliance with evolving
industry standards. The emergence of new industry standards could render the
Company's products incompatible with products developed by major systems
manufacturers. As a result, the Company could be required to invest significant
time and effort and to incur significant expense to redesign the Company's
products to ensure compliance with relevant standards. If the Company's products
are not in compliance with prevailing industry standards for a significant
period of time, the Company could miss opportunities to achieve crucial design
wins. There can be no assurance that the Company will be successful in
developing or using new technologies or in developing new products or product
enhancements on a timely basis, or that such new technologies, products or
product enhancements will achieve market acceptance. In the past, the Company
has encountered difficulties in introducing new products and product
enhancements in accordance with customers' delivery schedules and the Company's
initial expectations. The Company could encounter such difficulties in the
future. The Company's pursuit of necessary technological advances may require
substantial time and expense. A failure by the Company, for technological or
other reasons, to develop and introduce new or enhanced products on a timely
basis that are compatible with industry standards and satisfy customer price and
performance requirements could have a material adverse effect on the Company's
business, financial condition and operating results. See "--Fluctuations in
Operating Results," and "--Increasing Dependence on Telecommunications and Data
Communications Markets and Increasing Dependence on Application-Specific
Standard Products."
Intense Competition
The semiconductor market is highly competitive and subject to rapid
technological change, price erosion and heightened international competition.
The telecommunications, data communications, ATE and high-speed computing
industries in particular are intensely competitive. The Company believes that
the principal factors of competition in its markets are price, product
performance, product quality and time-to-market. The ability of the Company to
compete successfully in its markets depends on a number of factors, including
success in designing and subcontracting the manufacture of new products that
implement new technologies, product quality, reliability, price, the efficiency
of production, design wins for its IC products, ramp up of production of the
Company's products for particular systems manufacturers, end-user acceptance of
the systems manufacturers' products, market acceptance of competitors' products
and general economic conditions. In addition, the Company's competitors may
offer enhancements to existing products or offer new products based on new
technologies, industry standards or customer requirements that are available to
customers on a more timely basis than comparable products from the Company or
that have the potential to replace or provide lower-cost alternatives to the
Company's products. The introduction of such enhancements or new products by the
Company's competitors could render the Company's existing and future products
obsolete or unmarketable. Furthermore, once a customer has designed a supplier's
product into its system, the customer is extremely reluctant to change its
supply source due to the significant costs associated with qualifying a new
supplier. Finally, the Company expects that certain of its competitors and other
semiconductor companies may seek to develop and introduce products that
integrate the functions performed by the Company's IC products on a single chip,
thus eliminating the need for the Company's products. Each of these factors
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "--Dependence on High-Speed Computing
Market."
15
In the telecommunications and data communications markets, the Company
competes primarily against gallium arsenide ("GaAs") based companies such as
Giga, Rockwell International, TriQuint and Vitesse, and silicon based products
from companies such as Giga, Hewlett-Packard, Maxim, Philips, Sony and Texas
Instruments. In certain circumstances, most notably with respect to ASICs
supplied to Nortel, AMCC's customers or potential customers have internal IC
manufacturing capabilities, and this internal source is an alternative available
to the customer. In the ATE market, the Company's products compete primarily
against GaAs based products offered by Vitesse and silicon ECL and BiCMOS
products offered principally by semiconductor manufacturers such as Analog
Devices, Lucent Technologies and Maxim. In the high-speed computing market, the
Company competes primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many
of these companies and potential new competitors have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
There can be no assurance that the Company will be able to develop new products
to compete with new technologies on a timely basis or in a cost-effective
manner. Any failure by the Company to compete successfully in its target
markets, particularly in the telecommunications and data communications markets,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "-- Increasing Dependence on
Telecommunications and Data Communications Markets and Increasing Dependence on
Application-Specific Standard Products."
Manufacturing Capacity Limitations; New Production Facility
The Company currently manufactures a majority of its IC products at its
four-inch wafer fabrication facility located in San Diego, California. The
Company believes that, upon the completion of further potential expansion of
capacity at its existing fabrication facility, it will be able to satisfy its
production needs of products produced in its fabrication facility through early
2001, although this date may vary depending on, among other things, the
Company's rate of growth. The Company will be required to hire, train and manage
additional production personnel in order to increase its production capacity as
scheduled. In the event the Company's expansion of the manufacturing capacity of
its fabrication facility is not completed on a timely basis, the Company could
face production capacity constraints, which could have a material adverse effect
on the Company's business, financial condition and operating results.
Based on the Company's current forecasts of its future need for
manufacturing capacity, the Company has tentative plans for the construction of
a new six-inch wafer fabrication facility, initially to complement, and
potentially to replace, its existing facility in San Diego. The Company is also
exploring other alternatives for the expansion of its manufacturing capacity,
including purchasing a wafer fabrication facility or entering into strategic
relationships to obtain additional capacity. In July 1998 the Company acquired
the right to purchase, in the form of a ground lease, a parcel of land as a site
for its new wafer fabrication facility. This parcel of land is located
approximately one quarter mile from the Company's headquarters in San Diego,
California. The Company made payments of $0.9 million related to this
transaction in July 1998. This lease provides the Company with the option,
subject to certain conditions, to acquire the land for total additional payments
of approximately $3.8 million through May 31, 1999. However, the lease provides
that if certain conditions are met, the landlord can require the Company to
purchase the land by May 31, 1999. The lease may not be extended beyond May 31,
1999. The Company currently plans to acquire the site to which it has rights by
mid-1999, to initiate construction of the new facility during 1999 and to
complete the physical plant during 2000. Following the completion of the
physical plant, the Company must install equipment and perform necessary testing
prior to commencing commercial production at the facility, a process which the
Company anticipates will take at least nine months. Accordingly, the Company
believes the new facility will not commence commercial production prior to 2001.
This new fabrication facility will have room for additional equipment and
manufacturing capacity. The Company estimates that the cost of the new wafer
fabrication facility will be at least $80.0 million, of which at least $35.0
million relates to the purchase of land and construction of the building and at
least $45.0 million relates to capital equipment purchases necessary to
establish the initial manufacturing capacity of the facility. The Company
currently anticipates that a significant portion of these capital equipment
purchases will occur prior to the end of 1999. The Company intends to fund
approximately $24.0 million of the total cost of the new facility with a portion
of the proceeds from the Company's initial and secondary public offering which
are now invested in short-term investments. The balance of the cost of this
facility is expected to be funded through a combination of available cash, cash
equivalents and
16
short-term investments, cash from operations and additional debt, lease or
equity financing. There can be no assurance that the Company will be able to
obtain the additional financing necessary to fund the construction and
completion of the new manufacturing facility. Any failure by the Company to
obtain such financing on a timely basis could delay the completion of the
facility and have a material adverse effect on the Company's business, financial
condition and results of operations. As the rights to acquire the site for the
Company's proposed new manufacturing facility are subject to certain conditions,
there can be no assurance that the Company will be able to acquire the site in a
timely manner, if at all. Any significant delay by the Company in acquiring the
site or, if such site becomes unavailable, finding a new site for the potential
wafer fabrication facility, could have a material adverse effect on the
Company's business, financial condition and operating results. In addition, the
Company's existing wafer fabrication facility is, and its proposed new wafer
fabrication facility is expected to be, located in California. There can be no
assurance that these facilities will not be subject to natural disasters such as
earthquakes or floods. In addition, the depreciation and other expenses to be
incurred by the Company in connection with the expansion of its existing
manufacturing facility and in connection with its proposed new wafer fabrication
facility may adversely effect the Company's gross margin in any future fiscal
period. Furthermore, there can be no assurance that other alternatives to
constructing a new wafer fabrication facility will be available on a timely
basis or at all. See "--Dependence on Third-Party Manufacturing and Supply
Relationships" and "--Need For Additional Capital."
The construction of the new wafer fabrication facility entails significant
risks, including shortages of materials and skilled labor, unforeseen
environmental or engineering problems, work stoppages, weather interferences and
unanticipated cost increases, any of which could have a material adverse effect
on the building, equipping and production start-up of the new facility. In
addition, unexpected changes or concessions required by local, state or federal
regulatory agencies with respect to necessary licenses, land use permits, site
approvals and building permits could involve significant additional costs and
delay the scheduled opening of the facility and could reduce the Company's
anticipated revenues. Also, the timing of commencement of operation of the new
facility will depend upon the availability, timely delivery and successful
installation and testing of the necessary process equipment. As a result of the
foregoing and other factors, there can be no assurance that the new facility
will be completed and in volume production within its current budget or within
the period currently scheduled by the Company, which could have a material
adverse effect on its business, financial condition and operating results.
Furthermore, if the Company is unable to achieve adequate manufacturing
yields in its proposed new fabrication facility in a timely manner or if the
Company's revenues do not increase commensurate with the anticipated increase in
manufacturing capacity associated with the new facility, the Company's business,
financial condition and operating results could also be materially adversely
affected. In addition, in the future, the Company may be required for
competitive reasons to make capital investments in its existing wafer
fabrication facility or to accelerate the timing of the construction of its new
wafer fabrication facility in order to expedite the manufacture of products
based on more advanced manufacturing processes. To the extent such capital
investments are required, the Company's gross profit and, as a result, its
business, financial condition and operating results, could be materially and
adversely affected. See "--Manufacturing Yields."
The successful operation of the Company's proposed new wafer fabrication
facility, if completed, as well as the Company's overall production operations,
will also be subject to numerous risks. The Company has no prior experience with
the operation of the equipment or the processes involved in producing finished
six-inch wafers, which differ significantly from those involved in the
production of four-inch wafers. The Company will be required to hire, train and
manage production personnel in order to effectively operate the new facility.
The Company does not have sufficient excess production capacity at its existing
San Diego facility to fully offset any failure of the proposed new wafer
fabrication facility to meet planned production goals. The Company may transfer
its current San Diego manufacturing operations into the proposed new wafer
fabrication facility subsequent to its completion. Should this transfer occur,
there can be no assurance that the Company will not experience delays in
completing product testing and documentation required by customers to qualify or
requalify the Company's products from this facility as being from an approved
source as a result of this transfer, which could materially adversely affect the
Company's business, financial condition and operating results. The Company will
also have to effectively coordinate and manage two manufacturing facilities to
successfully meet its overall production goals. The
17
Company has no experience in coordinating and managing production facilities
that are located at different sites or in the transfer of manufacturing
operations from one facility to another. As a result of these and other factors,
the failure of the Company to successfully operate the proposed new wafer
fabrication facility, to successfully coordinate and manage the two sites or to
transfer the Company's manufacturing operations could adversely affect the
Company's overall production and could have a material adverse effect on its
business, financial condition and operating results.
Transition to New Process Technologies
The markets for the Company's products are characterized by rapid changes
in manufacturing process technologies. To provide competitive products to its
target markets, the Company must develop or otherwise gain access to improved
process technologies. The Company's future success will depend, in large part,
upon its ability to continue to improve its existing process technologies,
develop new process technologies, and adapt its process technologies to emerging
industry standards. The Company may in the future be required to transition one
or more of its products to process technologies with smaller geometries, other
materials or higher speeds in order to reduce costs and/or improve product
performance. There can be no assurance that the Company will be able to improve
its process technologies and develop or otherwise gain access to new process
technologies, including, but not limited to silicon germanium process
technologies, in a timely or affordable manner or that such improvements or
developments will result in products that achieve market acceptance. A failure
by the Company to improve its existing process technologies or processes or
develop or otherwise gain access to new process technologies in a timely or
affordable manner could adversely affect the Company's business, financial
condition and operating results. See "--Rapid Technological Change; Necessity to
Develop and Introduce New Products," and "--Manufacturing Capacity Limitations;
New Production Facility."
Dependence on Third-Party Manufacturing and Supply Relationships
The Company relies on outside foundries for the manufacture of certain of
its products, including all of its products designed on CMOS processes, and all
of its products that it anticipates will be designed on silicon germanium
processes. The Company generally does not have long-term wafer supply agreements
with its outside foundries that guarantee wafer or product quantities, prices or
delivery lead times. Instead, the Company's products that are manufactured by
outside foundries are manufactured on a purchase order basis. The Company
expects that, for the foreseeable future, certain of its products will be
manufactured by a single outside foundry. Because establishing relationships
with new outside foundries takes several months, there is no readily available
alternative source of supply for these products. A manufacturing disruption
experienced by one or more of the Company's outside foundries would impact the
production of the Company's products for a substantial period of time, which
could have a material adverse effect on the Company's business, financial
condition and operating results. Furthermore, in the event that the transition
to the next generation of manufacturing technologies at one or more of the
Company's outside foundries is unsuccessful or delayed, the Company's business,
financial condition and operating results could be materially and adversely
affected.
There are additional risks associated with the Company's dependence upon
third-party manufacturers for certain of its products, including, but not
limited to, reduced control over delivery schedules, quality assurance,
manufacturing yields and costs, the potential lack of adequate capacity during
periods of excess demand, limited warranties on wafers or products supplied to
the Company, increases in prices and potential misappropriation of the Company's
intellectual property. With respect to certain of its products, the Company
depends upon external foundries to produce wafers and, in some cases, finished
products of acceptable quality, to deliver those wafers and products to the
Company on a timely basis and to allocate to the Company a portion of their
manufacturing capacity sufficient to meet the Company's needs. On occasion, the
Company has experienced difficulties in causing these events to occur
satisfactorily. The Company's wafer and product requirements typically represent
a very small portion of the total production of these external foundries. The
Company is subject to the risk that a producer will cease production on an older
or lower-volume process that is used to produce the Company's parts.
Additionally, there can be no assurance that such external foundries will
continue to devote resources to the production of the Company's products or
continue to advance the process design technologies on which the manufacturing
of the
18
Company's products are based. Any such difficulties could have a material
adverse effect on the Company's business, financial condition and operating
results. See "--Manufacturing Yields."
Certain of the Company's products are assembled and packaged by third-party
subcontractors. The Company does not have long-term agreements with any of these
subcontractors. Such assembly and packaging is conducted on a purchase order
basis. As a result of its reliance on third-party subcontractors to assemble and
package its products, the Company cannot directly control product delivery
schedules, which could lead to product shortages or quality assurance problems
that could increase the costs of manufacturing, assembly or packaging of the
Company's products. In addition, the Company may, from time to time, be required
to accept price increases for such assembly or packaging services that could
have a material adverse effect on the Company's business, financial condition
and operating results. Due to the amount of time normally required to qualify
assembly and packaging subcontractors, product shipments could be delayed
significantly if the Company is required to find alternative subcontractors. In
the future, the Company may contract with third parties for the testing of its
products. Any problems associated with the delivery, quality or cost of the
assembly, testing or packaging of the Company's products could have a material
adverse effect on the Company's business, financial condition and operating
results.
Due to an industry transition to six-inch and eight-inch wafer fabrication
facilities, there is a limited number of suppliers of the four-inch wafers used
by the Company to build products in its existing manufacturing facility, and the
Company relies on a single supplier for such wafers. Although the Company
believes that it will have sufficient access to four-inch wafers to support
production in its existing fabrication facility for the foreseeable future,
there can be no assurance that the Company's current supplier will continue to
supply the Company with four-inch wafers on a long-term basis. Additionally, the
availability of manufacturing equipment needed for a four-inch process is
limited and certain new equipment required for more advanced processes may not
be available for a four-inch process. If the Company is not able to obtain a
sufficient supply of four-inch wafers or to obtain the requisite equipment for
be four-inch process, the Company's business, financial condition and operating
results would be materially adversely affected.
Customer Concentration
Historically, a relatively small number of customers has accounted for a
significant portion of the Company's revenues in any particular period. The
Company has no long-term volume purchase commitments from any of its major
customers. In fiscal 1997, fiscal 1998, the first half of fiscal 1999 and the
quarter ended September 30, 1998, the Company's five largest customers accounted
for approximately 44%, 46%, 55% and 61% of the Company's revenues in each of
such periods and sales to Nortel accounted for approximately 20%, 21%, 17% and
16% of the Company's revenues in each of such periods. Raytheon Systems Co.
accounted for 18% and 12% of the net revenues for the three months and six
months ended September 30, 1998, including $2.9 million of shipments in the
three months ending September 30, 1998, relating to the partial fulfillment of
an end-of-life order for integrated circuits used in its high speed radar
systems. The Company believes that the $16.2 million balance of this end-of-life
order, which is included in the Company's backlog of $40.0 million at September
30, 1998, is expected to be shipped over the next 3 to 5 quarters. The Company
anticipates that sales of its products to relatively few customers will continue
to account for a significant portion of its revenues. In the event of a
reduction, delay or cancellation of orders from one or more significant
customers or if one or more of its significant customers select products
manufactured by one of the Company's competitors for inclusion in future product
generations, the Company's business, financial condition and operating results
could be materially and adversely affected. There can be no assurance that the
Company's current customers will continue to place orders with the Company, that
orders by existing customers will continue at current or historical levels or
that the Company will be able to obtain orders from new customers. The loss of
one or more of the Company's current significant customers could materially and
adversely affect the Company's business, financial condition and operating
results. See"--Intense Competition," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations".
19
Management of Growth
The Company has experienced, and may continue to experience, periods of
rapid growth and expansion, which have placed, and could continue to place, a
significant strain on the Company's limited personnel and other resources. To
manage these expanded operations effectively, the Company will be required to
continue to improve its operational, financial and management systems and to
successfully hire, train, motivate and manage its employees. The Company's
ability to manage growth successfully will require such personnel to work
together effectively. In addition, the expansion of the Company's current wafer
fabrication facility, the construction and operation of the Company's planned
wafer fabrication facility, the initial integration of the proposed new wafer
fabrication facility with the Company's current facility and the subsequent
potential transfer of the Company's manufacturing operations to the proposed new
wafer fabrication facility will require significant management, technical and
administrative resources. There can be no assurance that the Company will be
able to manage its growth or effectively integrate its planned wafer fabrication
facility into its current operations, and a failure to do so could have a
material adverse effect on the Company's business, financial condition and
operating results.
Dependence on Qualified Personnel
The Company's future success depends in part on the continued service of
its key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel. There is intense
competition for qualified personnel in the semiconductor industry, in particular
design engineers, and there can be no assurance that the Company will be able to
continue to attract and train such engineers or other qualified personnel
necessary for the development of its business or to replace engineers or other
qualified personnel who may leave the Company's employ in the future. The
Company's anticipated growth is expected to place increased demands on the
Company's resources and will likely require the addition of new management
personnel and the development of additional expertise by existing management
personnel. Although the Company has entered into an "at-will" employment
agreement with David M. Rickey, the Company's President and Chief Executive
Officer, the Company has not entered into fixed term employment agreements with
any of its executive officers. In addition, the Company has not obtained key-man
life insurance on any of its executive officers or key employees. Loss of the
services of, or failure to recruit, key design engineers or other technical and
management personnel could be significantly detrimental to the Company's product
and process development programs or otherwise have a material adverse effect on
the Company's business, financial condition and operating results.
Need for Additional Capital
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company believes its available cash, cash equivalents and
short-term investments and cash generated from operations, will be sufficient to
meet the Company's capital requirements through the next 12 months, although the
Company could be required, or could elect, to seek to raise
20
additional financing during such period. The Company's future capital
requirements will depend on many factors, including the costs associated with
the expansion of its manufacturing operations, the rate of revenue growth, the
timing and extent of spending to support research and development programs and
expansion of sales and marketing, the timing of introductions of new products
and enhancements to existing products, and market acceptance of the Company's
products. The Company expects that it will need to raise additional debt or
equity financing in the future, primarily for purposes of financing the
acquisition of property for its proposed new wafer fabrication facility, the
construction of the proposed new wafer fabrication facility and the purchase of
equipment for the proposed new wafer fabrication facility. There can be no
assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all.
Uncertainty Regarding Patents and Protection of Proprietary Rights
The Company relies in part on patents to protect its intellectual property.
There can be no assurance that the Company's pending patent applications or any
future applications will be approved, or that any issued patents will provide
the Company with competitive advantages or will not be challenged by third
parties, or that if challenged, will be found to be valid or enforceable, or
that the patents of others will not have an adverse effect on the Company's
ability to do business. Furthermore, there can be no assurance that others will
not independently develop similar products or processes, duplicate the Company's
products or processes or design around any patents that may be issued the
Company.
To protect its intellectual property, the Company also relies 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, there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such intellectual
property or trade secrets, or that the Company can meaningfully protect its
intellectual property. A failure by the Company to meaningfully protect its
intellectual property could have a material adverse effect on the Company's
business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
The Company in the past has been and in the future may be notified that it may
be infringing the intellectual property rights of third parties. The Company has
certain indemnification obligations to customers with respect to the
infringement of third-party intellectual property rights by its products. There
can be no assurance that infringement claims by third parties or claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition or operating results. In March 1997, the
Company received a written notice from legal counsel for Dr. Chou Li asserting
that the Company manufactures certain of its products in ways that appear to
such counsel to infringe a United States patent held by Dr. Li (the "Li
Patent"). After a review of its technology in light of such assertion, the
Company believes that the Company's processes do not infringe any of the claims
of this patent. On January 6, 1998, in a lawsuit between a third party and Dr.
Li filed in Federal District Court for the Eastern District of Virginia, the
court ruled that the Li Patent was invalid for inequitable conduct. On July 31,
1998, the Lemelson Medical, Education & Research Foundation Limited Partnership
(the "Lemelson Partnership") filed a lawsuit in the U.S. District Court for the
District of Arizona against 26 companies, including the Company, engaged in the
manufacture and/or sale of IC products. The complaint alleges infringement by
the defendants of certain U.S. patents (the "Lemelson Patents") held by the
Lemelson Partnership relating to certain semiconductor manufacturing processes.
The complaint seeks, among other things, injunctive relief and unspecified
treble damages. Previously, the Lemelson Partnership has offered the Company a
license under the Lemelson patents. The Company is monitoring this matter and,
although the ultimate outcome of this matter is not currently determinable, the
Company believes, based in part on the licensing terms previously offered by the
Lemelson Partnership, that the resolution of this matter will not have a
material adverse effect on the Company's financial position or liquidity;
however, there can be no assurance that the ultimate resolution of this matter
will not have a
21
material adverse effect on the Company's results of operations for any quarter.
Furthermore, there can be no assurance that the Company would prevail in any
such litigation.
Any litigation relating to the intellectual property rights of third
parties, including, but not limited to the Lemelson Patents, whether or not
determined in the Company's favor or settled by the Company, would at a minimum
be costly and could divert the efforts and attention of the Company's management
and technical personnel, which could have a material adverse effect on the
Company's business, financial condition or operating results. In the event of
any adverse ruling in any such matter, the Company could be required to pay
substantial damages, which could include treble damages, cease the
manufacturing, use and sale of infringing products, discontinue the use of
certain processes or obtain a license under the intellectual property rights of
the third party claiming infringement. There can be no assurance, however, that
a license would be available on reasonable terms or at all. Any limitations on
the Company's ability to market its products, any delays and costs associated
with redesigning its products or payments of license fees to third parties or
any failure by the Company to develop or license a substitute technology on
commercially reasonable terms could have a material adverse effect on the
Company's business, financial condition and operating results.
International Sales
International sales (including sales to Canada) accounted for 40%, 42% and
42% of revenues in fiscal 1997, fiscal 1998 and the first half of fiscal 1999,
respectively. The Company anticipates that international sales may increase in
future periods and may account for an increasing portion of the Company's
revenues. As a result, an increasing portion of the Company's revenues may be
subject to certain risks, including changes in regulatory requirements, tariffs
and other barriers, timing and availability of export licenses, political and
economic instability, difficulties in accounts receivable collections, natural
disasters, difficulties in staffing and managing foreign subsidiary and branch
operations, difficulties in managing distributors, difficulties in obtaining
governmental approvals for telecommunications and other products, foreign
currency exchange fluctuations, the burden of complying with a wide variety of
complex foreign laws and treaties and potentially adverse tax consequences.
Although less than eight percent of the Company's revenues were attributable to
sales in Asia during the six months ended September 30, 1998, the recent
economic instability in certain Asian countries could adversely affect the
Company's business, financial condition and operating results, particularly to
the extent that this instability impacts the sales of products manufactured by
the Company's customers. The Company is also subject to the risks associated
with the imposition of legislation and regulations relating to the import or
export of high technology products. The Company cannot predict whether quotas,
duties, taxes or other charges or restrictions upon the importation or
exportation of the Company's products will be implemented by the United States
or other countries. Because sales of the Company's products have been
denominated to date primarily in United States dollars, increases in the value
of the United States dollar could increase the price of the Company's products
so that they become relatively more expensive to customers in the local currency
of a particular country, leading to a reduction in sales and profitability in
that country. Future international activity may result in increased foreign
currency denominated sales. Gains and losses on the conversion to United States
dollars of accounts receivable, accounts payable and other monetary assets and
liabilities arising from international operations may contribute to fluctuations
in the Company's results of operations. Some of the Company's customer purchase
orders and agreements are governed by foreign laws, which may differ
significantly from United States laws. Therefore, the Company may be limited in
its ability to enforce its rights under such agreements and to collect damages,
if awarded. Any of the foregoing factors could have a material adverse effect on
the Company's business, financial condition and operating results.
Environmental Regulations
The Company is subject to a variety of federal, state and local
governmental regulations related to the use, storage, discharge and disposal of
toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. Any failure to comply with present or future regulations could result
in the imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
22
Company's ability to expand its facilities at its present location or construct
or operate its planned wafer fabrication facility or could require the Company
to acquire costly equipment or incur other significant expenses to comply with
environmental regulations or clean up prior discharges. In this regard, since
1993 the Company has been named as a potentially responsible party ("PRP") along
with a large number of other companies that used Omega Chemical Corporation
("Omega") in Whittier, California to handle and dispose of certain hazardous
waste material. The Company is a member of a large group of PRPs that has agreed
to fund certain remediation efforts at the Omega site, which efforts are
ongoing. To date, the Company's payment obligations with respect to such funding
efforts have not been material and the Company believes that its future
obligations to fund such efforts will not have a material adverse effect on its
business, financial condition or operating results. Although the Company
believes that it is currently in material compliance with applicable
environmental laws and regulations, there can be no assurance that the Company
is or will be in material compliance with such laws or regulations or that the
Company's future obligations to fund any remediation efforts, including those at
the Omega site, will not have a material adverse effect on the Company's
business, financial condition or operating results.
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California have resulted in restrictions being
placed on water use by manufacturers and residents in California. In the event
of future drought, reductions in water use may be mandated generally, and it is
unclear how such reductions will be allocated among California's different
users. There can be no assurance that near term reductions in water allocations
to manufacturers will not occur, which could have a material adverse affect on
the Company's business, financial condition or operating results.
Volatility of Stock Price
The market price of the Common Stock has fluctuated significantly to date.
In addition, the market price of the Common Stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in the Company's anticipated or actual operating
results; announcements or introductions of new products; technological
innovations or setbacks by the Company or its competitors; conditions in the
semiconductor, telecommunications, data communications, ATE, high-speed
computing or military markets; the commencement of litigation; changes in
estimates of the Company's performance by securities analysts; and other events
or factors. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that have affected the market prices of
many high technology companies, particularly semiconductor companies, and that
have often been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may affect adversely the market price of the Common Stock.
Year 2000
- ----------
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 risk-based 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. As of September 30, 1998, the Company is in the process of performing
the inventory and assessment stages and expects to complete these stages in
January 1999. The Company will primarily utilize internal resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications. The remediation, testing and contingency planning stages are
targeted to be completed in September 1999.
The Company is initiating communications with its critical external
suppliers to determine the extent to which the Company may be vulnerable to such
parties' failure to resolve their own Year 2000 issues. Where practicable, the
Company will assess and attempt to mitigate its risks with respect to the
failure of these entities to be Year 2000 ready. The effect, if any, on the
Company's results of operations from the failure of such parties to be Year 2000
ready, is not reasonably estimable.
23
To date, the Company has incurred and expensed approximately $150,000
related to the Year 2000 project and expects to incur an additional $750,000 on
completing the Year 2000 project. Approximately one-half the costs associated
with the Year 2000 project will be 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 will 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, the ability to identify and
correct equipment with embedded hardware or software and similar uncertainties.
See "--Factors That May Affect Future Results--Year 2000".
Effect of Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any shares of Preferred Stock that may be issued in
the future. The issuance of Preferred Stock may delay, defer or prevent a change
in control of the Company, as the terms of the Preferred Stock that might be
issued could potentially prohibit the Company's consummation of any merger,
reorganization, sale of substantially all of its assets, liquidation or other
extraordinary corporate transaction without the approval of the holders of the
outstanding shares of Preferred Stock. In addition, the issuance of Preferred
Stock could have a dilutive effect on stockholders of the Company. Section 203
of the Delaware General Corporation Law, to which the Company is subject,
restricts certain business combinations with any "interested stockholder" as
defined by such statute. The statute may delay, defer or prevent a change of
control of the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 31, 1998, the Lemelson Medical, Education & Research Foundation
Limited Partnership (the "Lemelson Partnership") filed a lawsuit in the
U.S. District Court for the District of Arizona against 26 companies,
including the Company, engaged in the manufacture and/or sale of IC
products. The Company has not to date been served in the litigation. The
complaint alleges infringement by the defendants of certain U.S. patents
(the "Lemelson Patents") held by the Lemelson Partnership relating to
certain semiconductor manufacturing processes. The complaint seeks, among
other things, injunctive relief and unspecified treble damages. Previously,
the Lemelson Partnership has offered the Company a license under the
Lemelson patents. The Company is monitoring this matter and, although the
ultimate outcome of this matter is not currently determinable, the Company
believes, based in part on the licensing terms previously offered by the
Lemelson Partnership, that the resolution of this matter will not have a
material adverse effect on the Company's financial position or liquidity;
however, there can be no assurance that the ultimate resolution of this
matter will not have a material adverse effect on the Company's results of
operations for any quarter. Furthermore, there can be no assurance that
the Company would prevail in such litigation.
24
The Company is party to various claims and legal actions arising in the
normal course of business, including notification of possible infringement
on the intellectual property rights of third parties. In addition, since
1993 the Company has been named as a potentially responsible party ("PRP")
along with a large number of other companies that used Omega Chemical
Corporation ("Omega") in Whittier, California to handle and dispose of
certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega
site for which the Company has accrued approximately $50,000. Although the
ultimate outcome of these matters is not presently determinable, management
believes that the resolution of all such pending matters, net of amounts
accrued, will not have a material adverse affect on the Company's financial
position or liquidity; however, there can be no assurance that the ultimate
resolution of these matters will not have a material impact on the
Company's results of operations in any period.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Use of Proceeds
(1) Registration Statement on Form S-1 (the "Registration
Statement") File No. 333-37609 which was declared effective on
November 24, 1997
As of September 30, 1998, the Company had invested the net offering
proceeds of $25,111,000 in short-term investments consisting of United
States Treasury Notes, obligations of United States government agencies and
corporate bonds with maturities ranging from October 1, 1998 to November
13, 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) Registration Statement on Form S-1, File No. 333-46071 which
was declared effective on March 11, 1998
As of September 30, 1998, the Company had invested the net offering
proceeds of $26,882,000 in short-term investments consisting of United
States Treasury Notes, obligations of United States government agencies and
corporate bonds with maturities ranging from October 1, 1998 to November
13, 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
The Company held its Annual Meeting of Stockholders (the "Annual
Meeting") on August 4, 1998. Of the 22,784,553 shares of Common Stock
which could be voted at the Annual Meeting, 16,184,458 shares of Common
Stock, representing 71%, were represented at the Annual Meeting in
person or by proxy, which constituted a quorum. Voting results were as
follows:
(a) Election of the following persons to the Company's Board of
Directors, to hold office until the next annual meeting of
stockholders and until their successors have been duly elected and
qualified:
For Withheld
---------- --------
William K. Bowes, Jr. 16,158,216 26,242
25
R. Clive Ghest 16,164,446 20,012
Franklin P. Johnson, Jr. 16,157,216 27,242
David M. Rickey 16,161,447 23,011
Roger A. Smullen, Sr. 16,161,447 23,011
Arthur B. Stabenow 16,149,071 35,387
(b) Approval of the Company's 1998 Employee Stock Purchase Plan and
reserve up to 400,000 shares of Common Stock for issuance thereunder:
For Against Abstain
---------- ------- -------
15,983,837 170,757 100
(c) Ratification of the appointment of Ernst & Young LLP as the
independent auditors of the Company for the fiscal year ending March
31, 1999:
For Against Abstain
---------- ------- -------
16,177,242 50 7,166
ITEM 5 OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
10.24 (*) 1998 Employee Stock Purchase Plan and form of
Subscription Agreement
10.25 Agreements related to the Company's right to acquire
land:
a) Ground Lease, by and between Applied Micro Circuits
Corporation and Kilroy Realty L.P.
b) Agreement for Consulting Services
27.1 Financial Data Schedule
(*) Incorporated by reference to Appendix I filed with the
Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders filed on June 15, 1998.
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter ended
September 30, 1998
26
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: November 16, 1998 Applied Micro Circuits Corporation
By: /s/ Joel O. Holliday
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Joel O. Holliday
Vice President, Finance and Administration
And Chief Financial Officer
(Duly Authorized Signatory and Principal
Financial and Accounting Officer)
27
Exhibit Index
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Exhibit
Number Description
- ------- -----------
10.24 (*) 1998 Employee Stock Purchase Plan and form of
Subscription Agreement
10.25 Agreements related to the Company's right to acquire
land:
a) Ground Lease, by and between Applied Micro Circuits
Corporation and Kilroy Realty L.P.
b) Agreement for Consulting Services
27.1 Financial Data Schedule
(*) Incorporated by reference to Appendix I filed with the
Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders filed on June 15, 1998.