-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOkhZNGY7p4ndJjFd4LNOxITEm7FPgqpKKqxkFPCKy00rD8HllNcIjWI8cTOum/1 IZOD+yVlm9rsqXnpnYEplQ== 0001012870-98-000313.txt : 19980212 0001012870-98-000313.hdr.sgml : 19980212 ACCESSION NUMBER: 0001012870-98-000313 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19980211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICRO CIRCUITS CORP CENTRAL INDEX KEY: 0000711065 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942586591 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-46071 FILM NUMBER: 98532037 BUSINESS ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194509333 MAIL ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- APPLIED MICRO CIRCUITS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 94-2586591 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
-------------- 6290 SEQUENCE DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 450-9333 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------- DAVID M. RICKEY PRESIDENT AND CHIEF EXECUTIVE OFFICER APPLIED MICRO CIRCUITS CORPORATION 6290 SEQUENCE DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 450-9333 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- COPIES TO: MARK A. MEDEARIS THOMAS W. KELLERMAN GLEN R. VAN LIGTEN CHRISTINA B. ROBINSON CARL L. SPATARO, JR. PATRICIA MONTALVO ROBERT S. SCHLOSSMAN BROBECK, PHLEGER & HARRISON LLP VENTURE LAW GROUP TWO EMBARCADERO PLACE A PROFESSIONAL CORPORATION 2200 GENG ROAD 2800 SAND HILL ROAD PALO ALTO, CA 94303 MENLO PARK, CA 94025
-------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] __________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------- PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE - -------------------------------------------------------------------------------------- Common Stock, par value $0.01.................. 6,900,000 $16.5625 $114,281,250 $33,713 - -------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------
(1) Includes 900,000 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) The proposed maximum offering price per share and the registration fee were calculated in accordance with Rule 457(c) based on the average of the high and low prices for the Company's Common Stock on February 9, 1998, as quoted on the Nasdaq National Market. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998 [LOGO OF AMCC] 6,000,000 SHARES COMMON STOCK Of the 6,000,000 shares of Common Stock offered hereby, 1,000,000 shares are being sold by Applied Micro Circuits Corporation, ("AMCC" or the "Company"), and 5,000,000 shares are being sold by certain stockholders of the Company. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "AMCC." On February 10, 1998, the last reported sale price of the Common Stock on the Nasdaq National Market was $17.25 per share. See "Price Range of Common Stock." ----------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS - -------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ - -------------------------------------------------------------------------------------------- Total(2)................... $ $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $500,000. (2) Certain Selling Stockholders have granted the Underwriters a 30-day option to purchase up to an additional 900,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Selling Stockholders will be $ , $ , and $ , respectively. ----------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California, on or about , 1998. BANCAMERICA ROBERTSON STEPHENS NATIONSBANC MONTGOMERY SECURITIES LLC COWEN & COMPANY The date of this Prospectus is , 1998 AMCC's silicon solutions for high-bandwidth connectivity SONET/SDH/ATM .Three generations of products with increasing levels of integration .Low power, low jitter and low cost [Picture of group of six AMCC integrated circuits layered on a triangular background.] FIBRE CHANNEL/GIGABIT ETHERNET .Evolution to fully integrated transceiver .One chip for two standards [Picture of group of six AMCC integrated circuits layered on a triangular background.] SERIAL BACKPLANE .Crosspoint switches .Serializers/deserializers .Fast acquisition and fast reconfiguration times [Picture of group of four AMCC integrated circuits.] [Picture of cluster of optical fiber lines.] [Picture of AMCC integrated circuits, a computer keyboard, a CD-ROM, a digital video disk and a computer.] [Picture of personal computer monitor.] [Picture of an AMCC integrated circuit on top of a wafer.] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." 2 AMCC's silicon solutions for the advanced telecommunications and data communications solutions This 3Com switch uses AMCC's S3028 OC-12 transceiver chip in an ATM optical interface card [Picture of a computer switch, an ATM optical interface card and an AMCC transceiver chip.] ROUTER BRIDGE ETHERNET SWITCH LAN BACKBONE [Three symbols organized into a pictorial depiction of a LAN backbone.] Nortel's S/DMS Transport Node OC-48 ring uses AMCC's ASIC products [Picture of Nortel's S/DMS Transport Node OC-48 ring.] METROPOLITAN AREA NETWORK [Graphical depiction of a row of eight skyscrapers.] Alcatel uses AMCC's ASICs in OC-48 (2.4 GHz) and OC-192(9.6GHz) transmission equipment. [Picture of Alcatel's OC-48 transmission equipment.] Alcatel uses AMCC's S3017/18 transmitter/receiver pair in an OC-12, 622 Mbps, cross-connect switch. [Picture of Alcatel's OC-12 cross-connect switch and two AMCC.] WAN SONET/SDH World's communications infrastructure solutions AMCC provides high-performance, high-bandwidth products to worldwide industry leaders such as 3Com, Alcatel, GPT, Nortel (Northern Telecom), Sun Microsystems and Vixel. RAID DESKTOP PC FIBRE CHANNEL ATM SERVER WORKSTATION DATA NETWORK [Four symbols organized into a pictorial depiction of a data network.] A Sun Microsystems server with an OC-3/12 ATM interface uses AMCC's S3020/21 transmitter/receiver pair. [Picture of a Sun Microsystems' server and an AMCC transmitter/receiver pair.] WORKSTATION SERVER DISK DRIVE FIBRE CHANNEL FIBRE CHANNEL WORKSTATION ENGINEERING NETWORK [Four symbols organized into a pictorial depiction of an Engineering Network.] Vixel's optical modules for the 1 GHz Fibre Channel interface use AMCC's S2044/45 transmitter/receiver pair. [Picture of Vixel optical modules and an AMCC transmitter/receiver pair.] NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Summary................................................................ 4 Risk Factors........................................................... 6 Use of Proceeds........................................................ 20 Price Range of Common Stock............................................ 20 Dividend Policy........................................................ 20 Capitalization......................................................... 21 Selected Consolidated Financial Data................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 23 Business............................................................... 32 Management............................................................. 48 Certain Transactions................................................... 57 Principal and Selling Stockholders..................................... 59 Description of Capital Stock........................................... 61 Shares Eligible for Future Sale........................................ 63 Underwriting........................................................... 65 Legal Matters.......................................................... 67 Experts................................................................ 67 Additional Information................................................. 67 Index to Consolidated Financial Statements............................. F-1
---------------- The Company intends to furnish its stockholders with annual reports containing audited financial statements examined by independent auditors and make available to its stockholders unaudited quarterly information for the first three quarters of each fiscal year. AMCC(R) is a registered trademark of the Company. All rights are fully reserved. This Prospectus also includes trademarks of companies other than the Company. The Company was incorporated in California in 1979 and reincorporated in Delaware in 1987. The Company's principal executive offices are located at 6290 Sequence Drive, San Diego, California 92121 and its telephone number is (619) 450-9333. 3 SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements and from the results historically experienced. Factors that may cause or contribute to such differences include, but are not limited to, those under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information, including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company utilizes a combination of high-frequency, mixed-signal design expertise, system-level knowledge and multiple silicon process technologies to offer IC products for the telecommunications markets that address the SONET/SDH and ATM transmission standards and for the data communications markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. The Company also leverages its technology to provide solutions for the ATE, high- speed computing and military markets. Customers of the Company include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems and Teradyne. Substantial growth in the Internet, World Wide Web and cellular and facsimile communications, the emergence of new applications such as video conferencing and the growing demand for remote network access and higher speed, data intensive communication between local area networks have caused current network system infrastructures to become bandwidth constrained due to the increasing volume and complexity of data types transmitted. In order to meet these increased bandwidth demands, communications systems OEMs must utilize increasingly complex ICs, which account for a greater portion of the value- added proprietary content of these systems. This trend has created a significant opportunity for IC suppliers with mixed-signal and system-level expertise that are capable of designing solutions that enable the transmission of increasing volumes of complex data at increasingly higher speeds. Dataquest estimates that the worldwide SONET/SDH market for ICs was approximately $240 million in 1996 and will increase to approximately $700 million in 2000 and that the ATM market for ICs was approximately $130 million in 1996 and will increase to approximately $700 million in 2000. The Fibre Channel and Gigabit Ethernet markets for ICs were relatively small in 1996, and Dataquest estimates these combined markets will be approximately $300 million in 2000. The Company addresses these market opportunities by leveraging its advanced bipolar and BiCMOS process technologies at its internal wafer fabrication facility, complemented by advanced CMOS processes from external foundries, to offer high-performance, high-frequency solutions optimized for specific applications and customer requirements. The Company believes silicon-based processes tend to be less expensive, more predictable with respect to yields and better able to ramp to high-volume production than non-silicon processes. By using its silicon-based processes and extensive design libraries, the Company is able to offer products that provide significant cost, power, performance and reliability advantages for communications systems OEMs. The Company has developed multiple generations of many of its products. In the telecommunications market, the Company provides ATM and SONET/SDH physical layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC- 12 standards and is currently developing an OC-48 chip set. In the data communications market, the Company provides physical layer transceivers for Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches for serial backplanes. In the high-speed computing market, the Company provides PCI controllers and high-frequency clock drivers and clock generators. In addition, the Company also provides high-performance, low-power ASIC products for the ATE and military markets. 4 THE OFFERING Common Stock Offered by the Company............. 1,000,000 shares Common Stock Offered by the Selling Stockhold- ers............................................ 5,000,000 shares Common Stock Outstanding after the Offering..... 21,870,368 shares(1) Use of Proceeds................................. For capital expenditures related to expansion of the Company's manufacturing operations, working capital and general corporate purposes Nasdaq National Market Symbol................... AMCC
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, DECEMBER 31, ----------------------------------------- --------------- 1993 1994 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- ------- ------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $42,464 $54,874 Gross profit............ 17,735 20,499 19,437 16,095 27,411 19,664 29,504 Operating income (loss)(2).............. 1,319 1,713 (783) (3,420) 7,004 5,010 9,905 Net income (loss)(2).... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 4,541 $ 9,937 ======= ======= ======= ======= ======= ======= ======= Pro forma basic earnings per share(3): Earnings per share..... $ 0.35 $ 0.25 $ 0.57 ======= ======= ======= Shares used in comput- ing pro forma basic earnings per share.... 17,834 17,824 17,499 ======= ======= ======= Diluted earnings per share(3): Earnings per share..... $ 0.35 $ 0.25 $ 0.51 ======= ======= ======= Shares used in comput- ing diluted earnings per share............. 17,907 17,897 19,306 ======= ======= =======
DECEMBER 31, 1997 ------------------- AS ACTUAL ADJUSTED(4) ------- ----------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $44,695 60,583 Total assets................................................ 73,857 89,745 Long-term capital lease obligations, less current portion... 1,675 1,675 Total stockholders' equity.................................. 59,355 75,243
- ------- (1) Based on the pro forma number of shares of Common Stock outstanding at December 31, 1997. Excludes, as of December 31, 1997: (i) 83,309 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan") at a weighted average exercise price of $0.54 per share; (ii) 2,080,214 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Stock Option Plan (the "1992 Plan") at a weighted average exercise price of $1.53 per share; (iii) 2,428,464 shares reserved for future issuance under the 1992 Plan; (iv) 200,000 shares reserved for future issuance under the Company's 1997 Directors' Plan (the "Directors' Plan"); (v) 400,000 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"); and (vi) 24,753 shares of Common Stock issuable upon exercise of certain other outstanding options at a weighted average exercise price of $0.48 per share. (2) The Company's results of operations during fiscal 1994 includes a net gain of approximately $9.5 million on contract settlement. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion of the net losses in fiscal 1995 and 1996. (3) The earnings per share information was computed applying the requirements of recently effective Statement of Financial Accounting Standards No. 128 and SEC Staff Accounting Bulletin No. 98. See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute the earnings per share amounts. (4) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock by the Company at the assumed public offering price of $17.25 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." Unless otherwise indicated, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." 5 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective purchasers of the Common Stock offered hereby should review carefully the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward- looking statements based upon current expectations that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. FLUCTUATIONS IN OPERATING RESULTS AMCC has experienced and may in the future experience fluctuations in its operating results. The Company had fluctuating revenues and incurred net losses in fiscal 1995 and 1996. The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect revenues, gross profit and operating income, including, but not limited to: the rescheduling or cancellation of orders by customers; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in manufacturing yields and inventory levels; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; the announcement or introduction of products and technologies by the Company's competitors; the availability of external foundry capacity, purchased parts and raw materials; competitive pressures on selling prices; the timing of investments in research and development; market acceptance of the Company's and its customers' products; the timing of depreciation and other expenses to be incurred by the Company in connection with the expansion of its existing manufacturing facility and in connection with its proposed new wafer fabrication facility; costs associated with compliance with applicable environmental regulations; costs associated with future litigation, if any, including without limitation, litigation relating to the use or ownership of intellectual property; general semiconductor industry conditions; and general economic conditions, including, but not limited to, economic conditions in Asia. The Company's expense levels are relatively fixed and are based, in part, on its expectations of future revenues. Because the Company is continuing to increase its operating expenses for personnel and new product development and is limited in its ability to reduce expenses quickly in response to any revenue shortfalls, the Company's business, financial condition and operating results would be adversely affected if increased revenues are not achieved. Furthermore, sudden shortages of raw materials or production capacity constraints can lead producers to allocate available supplies or capacity to customers with resources greater than those of the Company, which could interrupt the Company's ability to meet its production obligations. Finally, average selling prices in the semiconductor industry historically have decreased over the life of a product, and as a result, the average selling prices of the Company's products may be subject to significant pricing pressures in the future. In response to such pressures, the Company may take pricing or other actions that could have a material adverse effect on the Company's business, financial condition and operating results. The Company's business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial noncancellable backlog, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. In addition, from time to time, in response to anticipated long lead times to obtain inventory and materials from its outside foundries, the Company may order materials in advance of anticipated customer demand, which might result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize or other factors render the customer's products less marketable. Furthermore, the Company currently anticipates that an increasing portion of its revenues in future periods will be derived from sales of application- specific standard products ("ASSPs"), as compared to application-specific integrated circuits ("ASICs"). Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which may make it increasingly difficult for the Company to predict its revenues and inventory levels and adjust production appropriately in future periods. A 6 failure by the Company to plan inventory and production levels effectively could have a material adverse effect on the Company's business, financial condition and operating results. As a result of the foregoing or other factors, the Company may experience fluctuations in future operating results on a quarterly or annual basis that could materially and adversely affect its business, financial condition and operating results. For example, as a result of the termination of a relationship with a strategic foundry partner, decreased orders from two major customers, charges associated with a reduction in the Company's workforce and charges for excess inventory, the Company experienced revenue fluctuations and incurred net losses in fiscal 1995 and 1996. Accordingly, the Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. There can be no assurance that the Company will be able to achieve increased sales or maintain its profitability in any future period. In certain future quarters, the Company's operating results may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock could be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." MANUFACTURING YIELDS The fabrication of semiconductors is a complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. In addition, the Company's ongoing expansion of the manufacturing capacity of its existing wafer fabrication facility could increase the risk to the Company of contaminants in such facility. Many of these problems are difficult to diagnose, time consuming and expensive to remedy and can result in shipment delays. As a result, semiconductor companies often experience problems in achieving acceptable wafer 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 7 would require cooperation by and communication between the Company and the manufacturer. In some cases this risk could be compounded by the offshore location of certain of the Company's manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. If the Company develops relationships with additional outside foundries, yields could be adversely affected due to difficulties associated with adapting the Company's technology and product design to the proprietary process technology and design rules of such new foundries. Because of the Company's limited access to wafer fabrication capacity from its outside foundries for certain of its products, any decrease in manufacturing yields of such products could result in an increase in the Company's per unit costs for such products and force the Company to allocate its available product supply among its customers, thus potentially adversely impacting customer relationships as well as revenues and gross margin. There can be no assurance that the Company's outside foundries will achieve or maintain acceptable manufacturing yields in the future. Furthermore, the Company also faces the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and operating results. See "Business -- Manufacturing." RISKS ASSOCIATED WITH 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. See " -- Risks Associated with Dependence on High-Speed Computing Market." A significant portion of the Company's revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on the Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH") transmission standards and the Asynchronous Transfer Mode ("ATM") transmission standard. If the communications market evolves to new standards, there is no assurance the Company will be able to successfully design and manufacture new products that address the needs of its customers or that such new products will meet with substantial market acceptance. Although the Company has developed some initial products for the emerging Gigabit Ethernet and Fibre Channel communications standards, volume sales of these products have only recently commenced, and there is no assurance AMCC will be successful in addressing the market opportunities for products based on these standards. See " -- Rapid Technological Change; Necessity to Develop and Introduce New Products." The Company has under development a number of ASSPs for the telecommunications and data communications markets, from which it expects to derive an increasing portion of its future revenues. The 8 Company has a limited operating history in selling ASSPs, particularly to customers in the telecommunications and data communications markets, upon which an evaluation of the Company's prospects in such markets can be based. In addition, the Company's relationships with certain customers in these markets have been established recently. The Company's future success in selling ASSPs, and in particular, selling ASSPs to customers in the telecommunications and data communications markets, will depend in large part on whether the Company's ASSPs are developed on a timely basis and whether such products achieve market acceptance among new and existing customers, and on the timing of the commencement of volume production of the OEMs' products, if at all. The Company has in the past encountered difficulties in introducing new products in accordance with customers' delivery schedules and the Company's initial expectations. There can be no assurance the Company will not encounter such difficulties in the future or that the Company will be able to develop and introduce ASSPs in a timely manner so as to meet customer demands. Any such difficulties or a failure by the Company to develop and timely introduce such ASSPs could have a material adverse effect on the Company's business, financial condition and operating results. See "-- Rapid Technological Change; Necessity to Develop and Introduce New Products." RISKS ASSOCIATED WITH DEPENDENCE ON HIGH-SPEED COMPUTING MARKET The Company historically has derived significant revenues from product sales to customers in the high-speed computing market and currently anticipates that it will continue to derive significant revenues from sales to customers in this market in the near term. The market for high-speed computing IC products is subject to extreme price competition. The Company believes that the average selling prices of the Company's IC products for the high-speed computing market will decline in future periods and that the Company's gross margin on sales of such products also will decline in future periods. There can be no assurance that the Company will be able to reduce the costs of manufacturing its high-speed computing IC products in response to declining average selling prices. Even if the Company successfully utilizes new processes or technologies to reduce the manufacturing costs of its high-speed computing products in a timely manner, there can be no assurance that the Company's customers in the high-speed computing market will purchase such new products. A failure by the Company to reduce its manufacturing costs sufficiently or a failure by the Company's customers to purchase such products could have a material adverse effect on the Company's business, financial condition and operating results. Furthermore, the Company expects that certain of its competitors may seek to develop and introduce products that integrate the functions performed by the Company's high-speed computing IC products on a single chip. In addition, one or more of the Company's customers may choose to utilize discrete components to perform the functions served by the Company's high-speed computing IC products or may use their own design and fabrication facilities to create a similar product. In either case, the need for high- speed computing customers to purchase the Company's IC products could be eliminated, which could adversely affect the Company's business, financial condition and operating results. See "-- Intense Competition." RAPID TECHNOLOGICAL CHANGE; NECESSITY TO DEVELOP AND INTRODUCE NEW PRODUCTS The markets for the Company's products are characterized by rapidly changing technologies, evolving and competing industry standards, short product life cycles, changing customer needs, emerging competition, frequent new product introductions and enhancements and rapid product obsolescence. The Company's future success will depend, in large part, on its ability to develop, gain access to and use leading technologies in a cost-effective and timely manner and on its ability to continue to develop its technical and design expertise. The Company's ability to have its products designed into its customers' future products, to maintain close working relationships with key customers in order to develop new products, particularly ASSPs, that meet customers' changing needs and to respond to changing industry standards and other technological changes on a timely and cost-effective basis will also be a critical factor in the Company's future success. Furthermore, once a customer has designed a supplier's product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier. Accordingly, the failure by the Company to achieve design wins with its key customers could have a 9 material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Research and Development." Products for telecommunications and data communications applications, as well as for high-speed computing applications are based on industry standards that are continually evolving. The Company's ability to compete in the future will depend on its ability to identify and ensure compliance with evolving industry standards. The emergence of new industry standards could render the Company's products incompatible with products developed by major systems manufacturers. As a result, the Company could be required to invest significant time and effort and to incur significant expense to redesign the Company's products to ensure compliance with relevant standards. If the Company's products are not in compliance with prevailing industry standards for a significant period of time, the Company could miss opportunities to achieve crucial design wins. There can be no assurance that the Company will be successful in developing or using new technologies or in developing new products or product enhancements on a timely basis, or that such new technologies, products or product enhancements will achieve market acceptance. In the past, the Company has encountered difficulties in introducing new products and product enhancements in accordance with customers' delivery schedules and the Company's initial expectations. The Company could encounter such difficulties in the future. The Company's pursuit of necessary technological advances may require substantial time and expense. A failure by the Company, for technological or other reasons, to develop and introduce new or enhanced products on a timely basis that are compatible with industry standards and satisfy customer price and performance requirements could have a material adverse effect on the Company's business, financial condition and operating results. See "-- Fluctuations in Operating Results," and "-- Risks Associated with 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 "-- Risks Associated with Dependence on High- Speed Computing Market." In the telecommunications and data communications markets, the Company competes primarily against gallium arsenide ("GaAs") based companies such as Giga, Rockwell International, TriQuint and Vitesse, and bipolar silicon based products from companies such as Giga, Hewlett-Packard, Maxim, Philips and Sony. In certain circumstances, most notably with respect to ASICs supplied to Nortel, AMCC's customers or potential 10 customers have internal IC manufacturing capabilities, and this internal source is an alternative available to the customer. In the ATE market, the Company's products compete primarily against GaAs based products offered by Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, the Company competes primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower- frequency applications, the Company faces increasing competition from CMOS- based products, particularly as the performance of such products continues to improve. There can be no assurance that the Company will be able to develop new products to compete with new technologies on a timely basis or in a cost- effective manner. Any failure by the Company to compete successfully in its target markets, particularly in the telecommunications and data communications markets, could have a material adverse effect on the Company's business, financial condition and results of operations. See "--Risks Associated with Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products." MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY The Company currently manufactures a majority of its IC products at its four-inch wafer fabrication facility located in San Diego, California. The Company believes that, upon the completion of the capacity expansion of its existing fabrication facility, it will be able to satisfy its production needs of products produced in its fabrication facility through 2000, although this date may vary depending on, among other things, the Company's rate of growth. The Company will be required to hire, train and manage additional production personnel in order to increase its production capacity as scheduled. In the event the Company's expansion of the manufacturing capacity of its fabrication facility is not completed on a timely basis, the Company could face production capacity constraints, which could have a material adverse effect on the Company's business, financial condition and operating results. Based on the Company's current forecasts of its future need for manufacturing capacity, the Company is planning for the construction of a new six-inch wafer fabrication facility, initially to complement, and potentially to replace, its existing facility in San Diego. The Company is also exploring other alternatives for the expansion of its manufacturing capacity, including purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. The Company currently plans to acquire, or acquire rights to, a site no later than mid-1998, 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 late 2000. This new fabrication facility will have room for additional equipment and manufacturing capacity. The Company estimates that the cost of the new wafer fabrication facility will be at least $80.0 million, of which approximately $30.0 million relates to the purchase of land and construction of the building and at least $50.0 million relates to capital equipment purchases necessary to establish the initial manufacturing capacity of the facility. The Company currently anticipates that a significant portion of these capital equipment purchases will occur prior to the end of 1999. The Company intends to fund approximately $24.0 million of the total cost of the new facility with a portion of the proceeds of this offering and the Company's initial public offering (the "IPO"). The balance of the cost of this facility is expected to be funded through a combination of available cash, cash equivalents and short term investments, cash from operations and additional debt, lease or equity financing. There can be no assurance that the Company will be able to obtain the additional financing necessary to fund the construction and completion of the new manufacturing facility. Any failure by the Company to obtain on a timely basis such financing could delay the completion of the facility and have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has not acquired, or acquired rights to, a suitable site for its proposed new manufacturing facility. There can be no assurance that the Company will be able to acquire rights to such a site in a timely manner, if at all. Any significant delay by the 11 Company in finding such a site could have a material adverse effect on the Company's business, financial condition and operating results. In addition, the Company's existing wafer fabrication facility is, and its proposed new wafer fabrication facility is expected to be, located in California. There can be no assurance that these facilities will not be subject to natural disasters such as earthquakes or floods. In addition, the depreciation and other expenses to be incurred by the Company in connection with the expansion of its existing manufacturing facility and in connection with its proposed new wafer fabrication facility may adversely effect the Company's gross margin in any future fiscal period. Furthermore, there can be no assurance that other alternatives to constructing a new wafer fabrication facility will be available on a timely basis or at all. See "--Dependence on Third-Party Manufacturing and Supply Relationships" and "-- Need For Additional Capital." The construction of the new wafer fabrication facility entails significant risks, including shortages of materials and skilled labor, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the building, equipping and production start-up of the new facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the facility and could reduce the Company's anticipated revenues. Also, the timing of commencement of operation of the new facility will depend upon the availability, timely delivery and successful installation and testing of the necessary process equipment. As a result of the foregoing and other factors, there can be no assurance that the new facility will be completed and in volume production within its current budget or within the period currently scheduled by the Company, which could have a material adverse effect on its business, financial condition and operating results. Furthermore, if the Company is unable to achieve adequate manufacturing yields in its proposed new fabrication facility in a timely manner or if the Company's revenues do not increase commensurate with the anticipated increase in manufacturing capacity associated with the new facility, the Company's business, financial condition and operating results could also be materially adversely affected. In addition, in the future, the Company may be required for competitive reasons to make capital investments in its existing wafer fabrication facility or to accelerate the timing of the construction of its new wafer fabrication facility in order to expedite the manufacture of products based on more advanced manufacturing processes. To the extent such capital investments are required, the Company's gross profit and, as a result, its business, financial condition and operating results, could be materially and adversely affected. See "-- Manufacturing Yields." The successful operation of the Company's proposed new wafer fabrication facility, if completed, as well as the Company's overall production operations, will also be subject to numerous risks. The Company has no prior experience with the operation of the equipment or the processes involved in producing finished six-inch wafers, which differ significantly from those involved in the production of four-inch wafers. The Company will be required to hire, train and manage production personnel in order to effectively operate the new facility. The Company does not have sufficient excess production capacity at its existing San Diego facility to fully offset any failure of the proposed new wafer fabrication facility to meet planned production goals. The Company may transfer its current San Diego manufacturing operations into the proposed new wafer fabrication facility subsequent to its completion. Should this transfer occur, there can be no assurance that the Company will not experience delays in completing product testing and documentation required by customers to qualify or requalify the Company's products from this facility as being from an approved source as a result of this transfer, which could materially adversely affect the Company's business, financial condition and operating results. The Company will also have to effectively coordinate and manage two manufacturing facilities to successfully meet its overall production goals. The Company has no experience in coordinating and managing production facilities that are located at different sites or in the transfer of manufacturing operations from one facility to another. As a result of these and other factors, the failure of the Company to successfully operate the proposed new wafer fabrication facility, to successfully coordinate and manage the two sites or to transfer the Company's manufacturing operations could adversely affect the Company's overall 12 production and could have a material adverse effect on its business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Manufacturing." TRANSITION TO NEW PROCESS TECHNOLOGIES The markets for the Company's products are characterized by rapid changes in manufacturing process technologies. To provide competitive products to its target markets, the Company must develop improved process technologies. The Company's future success will depend, in large part, upon its ability to continue to improve its existing process technologies, develop new process technologies, and adapt its process technologies to emerging industry standards. The Company may in the future be required to transition one or more of its products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs and/or improve product performance. There can be no assurance that the Company will be able to improve its process technologies and develop new process technologies, including, but not limited to silicon germanium process technologies, in a timely or affordable manner or that such improvements or developments will result in products that achieve market acceptance. A failure by the Company to improve its existing process technologies or processes or develop new process technologies in a timely or affordable manner could adversely affect the Company's business, financial condition and operating results. See " -- Rapid Technological Change; Necessity to Develop and Introduce New Products," " -- Manufacturing Capacity Limitations; New Production Facility" and "Business -- Research and Development." DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SUPPLY RELATIONSHIPS The Company relies on outside foundries for the manufacture of certain of its products, including all of its products designed on CMOS processes. The Company generally does not have long-term wafer supply agreements with its outside foundries that guarantee wafer or product quantities, prices or delivery lead times. Instead, the Company's products that are manufactured by outside foundries are manufactured on a purchase order basis. The Company expects that, for the foreseeable future, certain of its products will be manufactured by a single outside foundry. Because establishing relationships with new outside foundries takes several months, there is no readily available alternative source of supply for these products. A manufacturing disruption experienced by one or more of the Company's outside foundries would impact the production of the Company's products for a substantial period of time, which could have a material adverse effect on the Company's business, financial condition and operating results. Furthermore, in the event that the transition to the next generation of manufacturing technologies at one or more of the Company's outside foundries is unsuccessful or delayed, the Company's business, financial condition and operating results could be materially and adversely affected. There are additional risks associated with the Company's dependence upon third-party manufacturers for certain of its products, including, but not limited to, reduced control over delivery schedules, quality assurance, manufacturing yields and costs, the potential lack of adequate capacity during periods of excess demand, limited warranties on wafers or products supplied to the Company, increases in prices and potential misappropriation of the Company's intellectual property. With respect to certain of its products, the Company depends upon external foundries to produce wafers and, in some cases, finished products of acceptable quality, to deliver those wafers and products to the Company on a timely basis and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. On occasion, the Company has experienced difficulties in causing these events to occur satisfactorily. The Company's wafer and product requirements typically represent a very small portion of the total production of these external foundries. The Company is subject to the risk that a producer will cease production on an older or lower-volume process that is used to produce the Company's parts. Additionally, there can be no assurance that such external foundries will continue to devote resources to the production of the Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based. Any such 13 difficulties could have a material adverse effect on the Company's business, financial condition and operating results. See "-- Manufacturing Yields." Certain of the Company's products are assembled and packaged by third-party subcontractors. The Company does not have long-term agreements with any of these subcontractors. Such assembly and packaging is conducted on a purchase order basis. As a result of its reliance on third-party subcontractors to assemble and package its products, the Company cannot directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing, assembly or packaging of the Company's products. In addition, the Company may, from time to time, be required to accept price increases for such assembly or packaging services that could have a material adverse effect on the Company's business, financial condition and operating results. Due to the amount of time normally required to qualify assembly and packaging subcontractors, product shipments could be delayed significantly if the Company is required to find alternative subcontractors. In the future, the Company may contract with third parties for the testing of its products. Any problems associated with the delivery, quality or cost of the assembly, testing or packaging of the Company's products could have a material adverse effect on the Company's business, financial condition and operating results. Due to an industry transition to six-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers used by the Company to build products in its existing manufacturing facility, and the Company relies on a single supplier for such wafers. Although the Company believes that it will have sufficient access to four-inch wafers to support production in its existing fabrication facility for the foreseeable future, there can be no assurance that the Company's current supplier will continue to supply the Company with four-inch wafers on a long-term basis. Additionally, the availability of manufacturing equipment needed for a four-inch process is limited and certain new equipment required for more advanced processes may not be available for a four-inch process. If the Company is not able to obtain a sufficient supply of four-inch wafers or to obtain the requisite equipment for a four-inch process, the Company's business, financial condition and operating results would be materially adversely affected. See "Business -- Manufacturing." CUSTOMER CONCENTRATION Historically, a relatively small number of customers has accounted for a significant portion of the Company's revenues in any particular period. The Company has no long-term volume purchase commitments from any of its major customers. In fiscal 1996 and 1997 and for the first nine months of fiscal 1998, the Company's five largest customers accounted for approximately 44% of the Company's revenues in each of such periods and sales to Nortel accounted for approximately 20% of the Company's revenues in each of such periods. The Company anticipates that sales of its products to relatively few customers will continue to account for a significant portion of its revenues. In the event of a reduction, delay or cancellation of orders from one or more significant customers or if one or more of its significant customers select products manufactured by one of the Company's competitors for inclusion in future product generations, the Company's business, financial condition and operating results could be materially and adversely affected. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at current or historical levels or that the Company will be able to obtain orders from new customers. The loss of one or more of the Company's current significant customers could materially and adversely affect the Company's business, financial condition and operating results. See "-- Intense Competition," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business -- Products and Customers." MANAGEMENT OF GROWTH The Company has experienced, and may continue to experience, periods of rapid growth and expansion, which have placed, and could continue to place, a significant strain on the Company's limited personnel and other resources. To manage these expanded operations effectively, the Company will be required to continue to improve its operational, financial and management systems and to successfully hire, train, motivate and 14 manage its employees. In particular, certain of the Company's senior management personnel recently joined the Company. The Company's ability to manage growth successfully will require such personnel to work together effectively. In addition, the expansion of the Company's current wafer fabrication facility, the construction and operation of the Company's planned wafer fabrication facility, the initial integration of the proposed new wafer fabrication facility with the Company's current facility and the subsequent potential transfer of the Company's manufacturing operations to the proposed new wafer fabrication facility will require significant management, technical and administrative resources. There can be no assurance that the Company will be able to manage its growth or effectively integrate its planned wafer fabrication facility into its current operations, and a failure to do so could have a material adverse effect on the Company's business, financial condition and operating results. DEPENDENCE ON QUALIFIED PERSONNEL The Company's future success depends in part on the continued service of its key design engineering, sales, marketing and executive personnel and its ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and there can be no assurance that the Company will be able to continue to attract and train such engineers or other qualified personnel necessary for the development of its business or to replace engineers or other qualified personnel that may leave the Company's employ in the future. The Company's anticipated growth is expected to place increased demands on the Company's resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Although the Company has entered into an "at-will" employment agreement with David M. Rickey, the Company's President and Chief Executive Officer, the Company has not entered into fixed term employment agreements with any of its executive officers. In addition, the Company has not obtained key-man life insurance on any of its executive officers or key employees. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to the Company's product and process development programs or otherwise have a material adverse effect on the Company's business, financial condition and operating results. See "Certain Transactions." 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 that the net proceeds of this offering, together with its available cash, cash equivalents and short-term investments and cash generated from operations, will be sufficient to meet the Company's capital requirements through the next 12 months, although the Company could be required, or could elect, to seek to raise additional financing during such period. The Company's future capital requirements will depend on many factors, including the costs associated with the expansion of its manufacturing operations, the rate of revenue growth, the timing and extent of spending to support research and development programs and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of the Company's products. The Company expects that it will need to raise additional debt or equity financing in the future, primarily for purposes of financing the acquisition of property for its proposed new wafer fabrication facility, the construction of the proposed new wafer fabrication facility and the purchase of equipment for the proposed new wafer fabrication facility. There can be no assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS The Company relies in part on patents to protect its intellectual property. The Company has been issued 13 patents in the United States and one patent in Canada, which patents principally cover certain aspects of 15 the design and architecture of the Company's IC products and have expiration dates ranging from 2004 to 2009. In addition, the Company has six patent applications pending in the United States Patent and Trademark Office (the "PTO"). There can be no assurance that the Company's pending patent applications or any future applications will be approved, or that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that 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 to the Company. To protect its intellectual property, the Company also relies on a combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. A mask work refers to the intangible information content of the set of masks or mask databases used to make a semiconductor chip product. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and operating results. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. The Company in the past has been and in the future may be notified that it may be infringing the intellectual property rights of third parties. The Company has certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by its products. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition or operating results. In March 1997, the Company received a written notice from legal counsel for Dr. Chou Li asserting that the Company manufactures certain of its products in ways that appear to such counsel to infringe a United States patent held by Dr. Li (the "Li Patent"). After a review of its technology in light of such assertion, the Company believes that the Company's processes do not infringe any of the claims of this patent. On January 6, 1998, in a lawsuit between a third party and Dr. Li filed in Federal District Court for the Eastern District of Virginia, the court ruled that the Li Patent was invalid for inequitable conduct. In January 1998, the Company received a written notice from legal counsel for the Lemelson Medical, Education & Research Foundation Limited Partnership (the "Lemelson Partnership") asserting that the Company infringes certain United States Patents (the "Lemelson Patents") and offering the Company a license under the patents. The Company is monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, the Company believes, based in part on the licensing terms offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations for any quarter. Furthermore, there can be no assurance that the Lemelson Partnership will not file a lawsuit against the Company or that the Company would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including, but not limited to the Lemelson Patents, 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 16 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 44%, 40% and 41% of revenues in fiscal 1996, fiscal 1997 and the first nine months of fiscal 1998, respectively. The Company anticipates that international sales may increase in future periods and may account for an increasing portion of the Company's revenues. As a result, an increasing portion of the Company's revenues may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for telecommunications and other products, foreign currency exchange fluctuations, the burden of complying with a wide variety of complex foreign laws and treaties and potentially adverse tax consequences. Although less than seven percent of the Company's revenues were attributable to sales in Asia during the nine months ended December 31, 1997, the recent economic instability in certain Asian countries could adversely affect the Company's business, financial condition and operating results, particularly to the extent that this instability impacts the sales of products manufactured by the Company's customers. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or other countries. Because sales of the Company's products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of the Company's products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in the Company's results of operations. Some of the Company's customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." ENVIRONMENTAL REGULATIONS The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or construct or operate its planned wafer fabrication facility or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. In this regard, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, the Company's payment obligations with respect to such funding efforts have not been material and the Company believes that its future obligations to fund such efforts will not have a material adverse effect on its business, financial condition or operating results. Although the Company believes that it is currently in material 17 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 offering price for Common Stock to be sold by the Company was determined by negotiations among the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of this offering. See "Underwriting" for factors considered in determining such offering 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. Furthermore, a substantial portion of the shares of the Company's Common Stock that were outstanding immediately prior to this offering are held by a large number of individual stockholders. Substantially all of the Company's outstanding Common Stock will be eligible for sale in the public market upon the expiration of certain lock- up agreements, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933 (the "Securities Act"). These lock-up agreements were entered into between the Underwriters and certain stockholders in connection with the IPO, which agreements expire at midnight on May 23, 1998, and between the Underwriters and the selling stockholders in this offering, which agreements expire 90 days after the effective date of the registration statement filed pursuant to this offering. There can be no assurance that sales of Common Stock by such stockholders upon expiration of the Lock-Up Period will not adversely affect the market price of the Common Stock. See "-- Shares Eligible for Future Sale" and "Shares Eligible for Future Sale." YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. Certain of the Company's internal computer systems are not Year 2000 compliant, and the Company utilizes third-party equipment and software that may not be Year 2000 compliant. The Company has commenced taking actions to correct such internal systems and is in the early stages of conducting an audit of its third-party suppliers as to the Year 2000 compliance of their systems. Failure of the Company's internal computer systems or of such third- party equipment or software, or of systems maintained by the Company's suppliers, to operate properly with regard to the Year 2000 and thereafter could require the Company to incur unanticipated expenses to remedy any 18 problems, which could have a material adverse effect on the Company's business, operating results and financial condition. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase the Company's products, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Industry Background." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock (including shares issued upon the exercise of outstanding options) in the public market following this offering could adversely affect the market price for the Common Stock. Such sales could also make it more difficult for the Company to sell its equity or equity-related securities in the future at a time and price that the Company deems appropriate. Upon completion of this offering, the Company will have 21,870,368 shares of Common Stock outstanding (based on the number of shares of Common Stock outstanding at December 31, 1997). The 6,000,000 shares offered hereby will be immediately tradable without restriction. The 6,385,950 shares sold in the IPO are also freely tradeable without restriction. The 9,484,418 remaining shares of Common Stock outstanding upon completion of this offering are "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Of the Restricted Shares, approximately 579,000 shares have been eligible for immediate sale in the public market since the completion of the IPO without restriction pursuant to Rule 144(k) under the Securities Act, some or all of which may have been sold in the public market since the completion of the IPO, and approximately 607,000 shares will be eligible for sale on February 22, 1998 subject, in some cases to volume and other restrictions under Rule 144 and Rule 701 under the Securities Act. As a result of lock-up agreements between certain stockholders and the Company or the representatives of the Underwriters (the "Representatives"), which agreements were entered into in connection with the IPO, approximately Restricted Shares will not be available for immediate sale in the public market until May 24, 1998 subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act. As a result of lock-up agreements that were entered into by the selling stockholders in this Offering and the Representatives of the Underwriters in connection with this offering, the remaining approximately Restricted Shares will not be available for sale in the public market until the expiration of the 90 day period following the effective date of this offering, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act. However, BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to volume and other restrictions. The Company has registered the Common Stock to be issued pursuant to the Company's 1997 Employee Stock Purchase Plan and intends to register all of the shares of Common Stock to be issued pursuant to the Company's other employee benefit plans on or about the date approximately 90 days after the IPO Effective Date. 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. 19 USE OF PROCEEDS The net proceeds to the Company from the sale of 1,000,000 shares of Common Stock offered hereby, at an assumed offering price of $17.25 per share, are estimated to be $15.9 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company currently expects that approximately $10.0 million of the net proceeds will be used for the construction of and the purchase of equipment for a proposed new wafer fabrication facility and that the balance of the net proceeds will be used for working capital and other general corporate purposes. The amounts actually expended for each purpose and the timing of such expenditures may vary significantly depending on numerous factors, including the amount of costs associated with the expansion of the Company's 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 introduction of new products and product enhancements and market acceptance of the Company's products. The Company believes that its available cash and cash equivalents and cash generated from operations, together with the net proceeds of this offering, will be sufficient to meet its capital requirements through the next 12 months. However, there can be no assurance that the Company will not require additional debt, lease or equity financing prior to such time or that such additional debt, lease or equity financing, if required, will be available upon terms acceptable to the Company, or at all. The Company may also use a portion of the proceeds for the acquisition of or investment in complementary businesses, products or technologies, although no acquisitions are currently being planned or negotiated as of the date of this Prospectus, and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the Company intends to invest the net proceeds from this offering in short-term, interest-bearing, investment-grade securities. The Company will not receive any proceeds from the sale of the shares being offered by the Selling Stockholders. See "Risks Factors--Need For Additional Capital." PRICE RANGE OF COMMON STOCK The Company's Common Stock has been traded on the Nasdaq National Market under the symbol AMCC since the Company's initial public offering on November 25, 1997. The following table sets forth the high and low sales prices of the Company's Common Stock as reported by the Nasdaq National Market for the periods indicated.
HIGH LOW ------ ------ FISCAL 1998 Third Quarter (from November 25, 1997)...................... $13.50 $ 8.00 Fourth Quarter (through February 10, 1998).................. $19.75 $12.25
The last reported sale price of the Common Stock on February 10, 1998, was $17.25 per share. As of February 10, 1998, there were approximately 800 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company currently anticipates that it will retain all available funds for use in its business, and does not anticipate paying any cash dividends in the foreseeable future. 20 CAPITALIZATION The following table sets forth the capitalization of the Company (i) actual as of December 31, 1997 and (ii) as adjusted to give effect to the receipt of the estimated net proceeds from the sale by the Company of 1,000,000 shares of Common Stock offered hereby, at an assumed offering price of $17.25 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. This table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
DECEMBER 31, 1997 -------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS) Current portion of capital lease obligations(1)........... $ 2,215 $ 2,215 ======= ======= Long-term capital lease obligations, less current portion. 1,675 1,675 Stockholders' equity: Preferred Stock, $0.01 par value, 2,000,000 shares au- thorized, none issued and outstanding.................. -- -- Common Stock, $0.01 par value, 60,000,000 shares autho- rized; 20,870,368 shares issued and outstanding, actu- al; 21,870,368 shares issued and outstanding, as ad- justed(2).............................................. 208 218 Additional paid-in capital.............................. 59,716 75,594 Deferred compensation................................... (512) (512) Retained earnings....................................... 444 444 Notes receivable from stockholders...................... (501) (501) ------- ------- Total stockholders' equity............................. 59,355 75,243 ------- ------- Total capitalization.................................. $61,030 $76,918 ======= =======
- -------- (1) See Note 6 of Notes to Consolidated Financial Statements for a description of the Company's obligations under capital leases. (2) Excludes, as of December 31, 1997: (i) 83,309 shares of Common Stock issuable upon exercise of options outstanding under the 1982 Plan at a weighted average exercise price of $0.54 per share; (ii) 2,080,214 shares of Common Stock issuable upon exercise of options outstanding under the 1992 Plan at a weighted average exercise price of $1.53 per share; (iii) 2,428,464 shares of Common Stock reserved for future issuance under the 1992 Plan; (iv) 200,000 shares of Common Stock reserved for future issuance under the Directors' Plan; (v) 400,000 shares of Common Stock reserved for issuance under the Purchase Plan; and (vi) 24,753 shares of Common Stock issuable upon the exercise of certain other outstanding options at a weighted average exercise price of $0.48 per share. See "Management --1982 Employee Incentive Stock Option Plan" "--1997 Directors' Stock Option Plan" and "--1997 Employee Stock Purchase Plan" "-- 1992 Stock Option Plan" and Note 4 of Notes to Consolidated Financial Statements. 21 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statements of operations data set forth below for the fiscal years ended March 31, 1995, 1996 and 1997 (except earnings (loss) per share data) and the consolidated balance sheet data at March 31, 1996 and 1997 are derived from the consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors, that are included elsewhere in this Prospectus. The consolidated statements of operations data for the fiscal years ended March 31, 1993 and 1994 and the consolidated balance sheet data as of March 31, 1993, 1994 and 1995 are derived from consolidated financial statements audited by Ernst & Young LLP, which are not included in this Prospectus. The consolidated balance sheet data at December 31, 1997 and the consolidated statements of operations data for the nine months ended December 31, 1996 and 1997 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the Company's consolidated financial position and consolidated results of operations for these periods. Operating results for the nine months ended December 31, 1997 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 1998. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus.
NINE MONTHS ENDED FISCAL YEAR ENDED MARCH 31, DECEMBER 31, ------------------------------------------- --------------- 1993 1994 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $42,464 $54,874 Cost of revenues........ 20,561 29,187 27,513 34,169 30,057 22,800 25,370 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 17,735 20,499 19,437 16,095 27,411 19,664 29,504 Operating expenses: Research and develop- ment.................. 8,617 9,273 10,108 8,283 7,870 5,668 9,339 Selling, general and administrative........ 7,799 9,513 10,112 11,232 12,537 8,986 10,260 ------- ------- ------- ------- ------- ------- ------- Total operating ex- penses................ 16,416 18,786 20,220 19,515 20,407 14,654 19,599 ------- ------- ------- ------- ------- ------- ------- Operating income (loss). 1,319 1,713 (783) (3,420) 7,004 5,010 9,905 Gain on contract settle- ment................... -- 9,530 -- -- -- -- -- Net interest income (ex- pense)................. (308) (464) (358) (242) (29) 5 294 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.................. 1,011 10,779 (1,141) (3,662) 6,975 5,015 10,199 Provision (benefit) for income taxes........... 18 575 (70) 32 659 474 262 ------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 4,541 $ 9,937 ======= ======= ======= ======= ======= ======= ======= Pro forma basic earnings (loss) per share(1): Earnings (loss) per share................. $ 0.06 $ 0.60 $ (0.06) $ (0.21) $ 0.35 $ 0.25 $ 0.57 Shares used in comput- ing basic earnings per share................. 16,852 16,973 17,194 17,394 17,834 17,824 17,499 Diluted earnings (loss) per share(1): Earnings (loss) per share................. $ 0.06 $ 0.60 $ (0.06) $ (0.21) $ 0.35 $ 0.25 $ 0.51 Shares used in comput- ing diluted earnings per share............. 17,160 17,099 17,194 17,394 17,907 17,897 19,306
MARCH 31, --------------------------------------- DECEMBER 31, 1993 1994 1995 1996 1997 1997 ------- ------- ------- ------- ------- ------------ (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital........... $11,338 $19,867 $16,753 $13,977 $19,364 $44,695 Total assets.............. 26,585 45,124 40,180 37,836 41,814 73,857 Long-term obligations, less current portion..... 3,632 7,493 6,516 4,447 3,192 1,675 Total stockholders' equi- ty....................... 15,523 25,829 24,805 21,512 27,743 59,355
- -------- (1) The income (loss) per share information was computed applying the requirements of recently effective Statement of Financial Accounting Standards No. 128 and SEC Staff Accounting Bulletins No. 98. See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute the earnings (loss) per share amounts. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company tailors solutions to customer and market requirements by using a combination of high-frequency, mixed-signal design expertise, system-level knowledge and multiple silicon process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS processes from external foundries, enable the Company to offer high-performance, high- speed solutions optimized for specific applications and customer requirements. The Company further believes that its products provide significant cost, power, performance and reliability advantages for systems OEMs in addition to accelerating time-to-market. The Company also leverages its technology to provide products for the automated test equipment ("ATE"), high-speed computing and military markets. Since inception, the Company has focused primarily on the design, manufacture and sale of high-performance silicon integrated circuits ("ICs"). The Company's first significant revenues were derived from sales of high-speed application-specific integrated circuits ("ASICs") to military and ATE customers. The Company subsequently utilized its high-performance mixed-signal design and process technologies to diversify into the telecommunications and high-speed computing markets and, more recently, the data communications market. Commencing in fiscal 1992, the Company adopted a strategy in which much of its next-generation technology and products were based on a process under development with a strategic foundry partner. In fiscal 1994, the strategic partner elected to end this relationship and paid the Company $10.0 million in connection with termination of the proposed foundry relationship. In fiscal 1995, the Company redirected its strategy to concentrate on the development of application-specific standard products ("ASSPs") for the high- performance telecommunications and high-speed computing markets. As a result of the termination of the relationship with the strategic partner, decreased orders from two major customers, charges associated with reductions in the Company's work force of approximately $626,000 in fiscal 1995 and charges taken for excess inventories of approximately $3.7 million in fiscal 1996 the Company had fluctuating revenues and incurred net losses in fiscal 1995 and 1996. In fiscal 1997, the Company substantially reorganized its management team and increased its focus on becoming the leading supplier of high-performance, high-bandwidth connectivity ICs for the world's communications infrastructure. Accordingly, the Company accelerated the pace of development of new products for high-performance telecommunications and data communications markets. Following the reorganization of the Company's management team in fiscal 1997 and its renewed focus on ASSPs for the telecommunications and data communications markets, the Company returned to profitability and its revenues have increased in each of the last seven fiscal quarters. The Company derives its revenues principally through product sales, which are recognized upon shipment to customers. Revenues from sales to distributors that are made under agreements allowing for price protection and right of return on products unsold by the distributor are not recognized until the distributor ships the product to its customer. The Company also derives a small portion of its revenues from non-recurring engineering contracts, which revenues are recognized using the percentage-of-completion method. 23 All international sales are denominated in United States dollars. In December 1997, the Company completed the initial public offering of its Common Stock, which raised net proceeds of approximately $25.1 million. RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statements of operations data as a percentage of revenues for the periods indicated:
NINE MONTHS FISCAL YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------------- -------------- 1995 1996 1997 1996 1997 ----- ----- ----- ------ ------ Net revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........................ 58.6 68.0 52.3 53.7 46.2 ----- ----- ----- ------ ------ Gross profit............................ 41.4 32.0 47.7 46.3 53.8 Operating expenses: Research and development.............. 21.5 16.5 13.7 13.3 17.0 Selling, general and administrative... 21.6 22.3 21.8 21.2 18.7 ----- ----- ----- ------ ------ Total operating expenses............ 43.1 38.8 35.5 34.5 35.7 ----- ----- ----- ------ ------ Operating income (loss)................. (1.7) (6.8) 12.2 11.8 18.1 Net interest income (expense)........... (0.7) (0.5) (0.1) -- 0.5 ----- ----- ----- ------ ------ Income (loss) before provision for in- come taxes............................. (2.4) (7.3) 12.1 11.8 18.6 Provision (benefit) for income taxes.... (0.1) 0.0 1.1 1.1 0.5 ----- ----- ----- ------ ------ Net income (loss)....................... (2.3)% (7.3)% 11.0% 10.7% 18.1% ===== ===== ===== ====== ======
COMPARISON OF THE NINE MONTHS ENDED DECEMBER 31, 1997 TO THE NINE MONTHS ENDED DECEMBER 31, 1996 Net Revenues. Net revenues for the nine months ended December 31, 1997 were approximately $54.9 million, representing an increase of 29% over net revenues of approximately $42.5 million for the nine months ended December 31, 1996. Revenues from sales of communications products increased from 43% of net revenues for the nine months ended December 31, 1996 to 47% of net revenues for the nine months ended December 31, 1997, 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 57% of net revenues during the nine months ended December 31, 1996, to 53% of net revenues for the nine months ended December 31, 1997 although revenues from sales to these other markets increased in absolute dollars. The increase in absolute dollars in revenues attributed to these other markets was primarily due to an increase in shipments of PCI bus products for high speed computing applications and to increased shipments of products to the ATE market. Sales to Nortel accounted for 20% and 21% of net revenues for the nine months ended December 31, 1997 and 1996, respectively. Sales outside of North America accounted for 24% and 21% of net revenues for the nine months ended December 31, 1997 and 1996, respectively. Although less than seven percent of the Company's revenues were attributable to sales in Asia during the nine months ended December 31, 1997, 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 "Risk Factors--International Sales." Gross Margin. In addition to the costs of internal wafer fabrication and the costs of procuring wafers and finished goods from external foundries, the Company's cost of revenues includes costs associated with packaging, assembly, testing, procurement and quality assurance functions, some of which are performed by third-party vendors. Gross margin (gross profit as a percentage of revenues) was 53.8% for the nine months ended December 31, 1997, as compared to 46.3% for the nine months ended December 31, 1996. The increase in gross margin resulted from increased utilization of the Company's wafer fabrication facility, as well as improved manufacturing 24 yields. The Company's gross margin is primarily impacted by factory utilization, wafer yields and product mix. Although AMCC does not expect its gross margin to continue to increase at the rate reflected above, its strategy is to maximize factory utilization whenever possible, maintain or improve its manufacturing yields, and focus on the development and sales of high- performance products that can have higher gross margins. There can be no assurance, however, that the Company will be successful in achieving these objectives. In addition, these factors can vary significantly from quarter to quarter, which would likely result in fluctuations in quarterly gross margin and net income. See "Risk Factors -- Fluctuations in Operating Results." Research and Development. Research and development ("R&D") expenses consist primarily of compensation and associated costs relating to new product development and new process development. These costs include design and process engineering costs, design tools and prototyping costs (including non- recurring engineering charges from foundries) and photomask and pre-production wafer costs. R&D expenditures are expensed as incurred. R&D expenses increased to approximately $9.3 million, or 17.0% of revenues, for the nine months ended December 31, 1997, from approximately $5.7 million, or 13.3% of net revenues, for the nine months ended December 31, 1996. The increase in R&D expenses was due to accelerated new product and process development efforts, including additions to the Company's engineering staff and related expenses as well as increased prototyping costs. The Company expects R&D expenses in absolute dollars to increase significantly in the future due to planned increases in personnel, prototyping costs and depreciation resulting from increased capital investment for process development and design tools. Currently, R&D expenses are primarily focused on the development of products 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 consist primarily of compensation for sales, marketing and administrative personnel, commissions paid to third-party sales representatives and expenses associated with product promotion. SG&A expenses were approximately $10.3 million, or 18.7% of revenues, for the nine months ended December 31, 1997, as compared to approximately $9.0 million, or 21.2% of net revenues, for the nine months ended December 31, 1996. The increase in SG&A expenses in the nine months ended December 31, 1997 primarily reflected an increase of $229,000 in compensation costs, a $363,000 increase in commissions earned by third-party sales representatives, a $157,000 increase in its provision for doubtful accounts due to the Company's expanding customer base and a $146,000 increase in product promotion expenses. The decrease in SG&A expenses as a percentage of net revenues in the nine months ended December 31, 1997 was a result of net revenues increasing more rapidly than SG&A expenses. The Company expects SG&A expenses to increase in the future due principally to additional staffing in its sales and marketing departments and additional expenses related to being a public company. Net Interest Income. Net interest income consists of interest income generated from the Company's cash, cash equivalents and short-term investments, net of interest expense paid on the Company's debt and capital lease obligations. Net interest income increased to $294,000 for the nine months ended December 31, 1997 from $5,000 for the nine months ended December 31, 1996, reflecting interest income from larger cash and short-term investment balances during the nine months ended December 31, 1997 and a decrease in interest expense associated with outstanding capital lease and debt obligations. Income Taxes. The Company's estimated annual effective tax rate used for the nine months ended December 31, 1997 was 2.6% due to the reduction of a valuation allowance recorded against deferred tax assets. This reduction results from the projected level of income for fiscal 1998, which makes the realization of these deferred tax assets more likely than not. The effective tax rate of 9.5% for the nine months ended December 31, 1996 was a result of alternative minimum taxes ("AMT"). The Company expects its effective tax rate to be closer to statutory rates in fiscal 1999. Deferred Compensation. In connection with the grant of certain stock options to employees during the six months ended September 30, 1997, the Company recorded aggregate deferred compensation of $599,000, representing the difference between the deemed fair value of the Common Stock at the date of grant for 25 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 nine months ended December 31, 1997 was $87,000. The Company currently expects to record amortization of deferred compensation with respect to these option grants of approximately $127,000, $159,000, $159,000, $129,000 and $25,000 during the fiscal years ended March 31, 1998 (including the amount set forth above for the nine months ended December, 1997), 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 scheduled to be shipped and non-recurring engineering services to be completed in the next six months was $28.2 million on December 31, 1997, compared to $18.7 million on December 31, 1996. See "Risk Factors--Fluctuations in Operating Results." Year 2000 Compliance. Certain of the Company's internal computer systems are not Year 2000 compliant and the Company utilizes third-party equipment and software that may not be Year 2000 compliant. The Company has commenced taking actions to correct such internal systems and is in the early stages of conducting an audit of its third-party suppliers as to the Year 2000 compliance of their systems. The Company does not believe that the cost of these actions will have a material adverse affect on the Company's business, financial condition or operating results. However, there can be no assurance that a failure of the Company's internal computer systems or of third-party equipment or software used by the Company, or of systems maintained by the Company's suppliers, to be Year 2000 compliant will not have a material adverse effect on the Company's business, financial condition or operating results. In addition, there can be no assurance that adverse changes in the purchasing patterns of the Company's customers or potential customers as a result of Year 2000 issues affecting such customers will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Risk Factors--Year 2000 Compliance." YEARS ENDED MARCH 31, 1997, 1996 AND 1995 Net Revenues. Net revenues for fiscal 1997 increased to approximately $57.5 million from approximately $50.3 million in fiscal 1996 and $47.0 million in fiscal 1995. Revenues from sales of communications products increased from 32% of net revenues in fiscal 1995 to 41% of net revenues in fiscal 1996 and 44% of net revenues in fiscal 1997, reflecting unit growth in shipments of existing products, as well as the introduction of new products for the communications market. Revenues from sales of products to other markets decreased from 68% of net revenues in fiscal 1995 to 59% of net revenues in fiscal 1996 and to 56% of net revenues in fiscal 1997. In fiscal 1997, 1996 and 1995, sales to Nortel accounted for 20%, 20% and 17%, respectively, of net revenues. Sales to customers outside of North America accounted for 21%, 24% and 14% of net revenues in fiscal 1997, 1996 and 1995, respectively, reflecting an increase in revenues from sales to such customers, but fluctuating percentages of net revenues. The Company is focused on increasing the percentage of net revenues derived from sales to customers outside of North America. Gross Margin. Gross margin was 47.7%, 32.0% and 41.4% in fiscal 1997, 1996 and 1995, respectively. The decrease in gross margin in fiscal 1996 was attributable primarily to a decrease in the utilization of the Company's wafer fabrication facility, as well as an approximately $3.7 million charge taken for excess inventory, primarily of clock products for the high-speed computing market. In addition, decreases in average selling prices ("ASPs") for clock products also contributed to the decrease in gross margin in fiscal 1996. The increase in gross margin in fiscal 1997 resulted primarily from a significant reduction in charges related to excess inventory, as well as from increased utilization of the Company's wafer fabrication facility. See "Risk Factors -- Fluctuations in Operating Results." 26 Research and Development. R&D expenses were approximately $7.9 million, $8.3 million and $10.1 million in fiscal 1997, 1996 and 1995, respectively. R&D expenses accounted for 13.7%, 16.5% and 21.5% of net revenues for fiscal 1997, 1996 and 1995, respectively. The decrease in R&D expenses in fiscal 1996 was due primarily to a $445,000 decrease in payroll and other costs associated with reductions in the Company's research and development engineering staff and to a decrease in prototyping costs of approximately $400,000. The decrease in R&D expense in fiscal 1997 was primarily due to a decrease of $315,000 in prototyping costs. During fiscal 1997, the Company began significant efforts to increase the R&D staff and to accelerate new product development efforts. These efforts resulted in higher R&D expenses beginning in the quarter ended December 31, 1996. Selling, General and Administrative. SG&A expenses were approximately $12.5 million, $11.2 million and $10.1 million in fiscal 1997, 1996 and 1995, respectively. SG&A expenses accounted for 21.8%, 22.3% and 21.6% of revenues for fiscal 1997, 1996 and 1995, respectively. The increase in SG&A expenses in fiscal 1996 was primarily due to $1.1 million of charges related to the turnover of executive personnel and $500,000 of costs associated with implementing a comprehensive management information system, offset by decreases in certain other expenses. SG&A expenses increased in fiscal 1997 primarily due to a $1.3 million increase in compensation expenses and a $300,000 increase in product promotion expenses, offset by decreases in certain other expenses. Net Interest Expense. Net interest expense was $29,000, $242,000 and $358,000 in fiscal 1997, 1996 and 1995, respectively. The decreases in net interest expense were attributable primarily to decreasing levels of capital lease and debt obligations over the three-year period and to increases in interest income as a result of increasing levels of cash, cash equivalents and short-term investments. Income Taxes. The Company's effective tax rate for fiscal 1997 was 9.5%, which was comprised primarily of AMT reduced by net operating loss and research and development tax credits. The tax provision (benefit) for fiscal 1996 and 1995 were not material due to losses incurred during those fiscal years. 27 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly consolidated financial information in dollars and as a percentage of revenues for the seven fiscal quarters ended December 31, 1997. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to state fairly the selected quarterly information when read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED -------------------------------------------------------------------- JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, 1996 1996 1996 1997 1997 1997 1997 -------- --------- -------- --------- -------- --------- -------- (IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $13,845 $14,110 $14,509 $15,004 $17,053 $18,155 $19,666 Cost of revenues........ 7,682 8,072 7,046 7,257 8,156 8,378 8,836 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 6,163 6,038 7,463 7,747 8,897 9,777 10,830 Operating expenses: Research and develop- ment.................. 1,797 1,615 2,256 2,202 2,525 3,477 3,337 Selling, general and administrative........ 2,917 2,977 3,092 3,551 3,339 3,391 3,530 ------- ------- ------- ------- ------- ------- ------- Total operating ex- penses............. 4,714 4,592 5,348 5,753 5,864 6,868 6,867 ------- ------- ------- ------- ------- ------- ------- Operating income........ 1,449 1,446 2,115 1,994 3,033 2,909 3,963 Net interest income (ex- pense)................. (17) 41 (19) (34) 66 85 143 ------- ------- ------- ------- ------- ------- ------- Income before provisions for income taxes....... 1,432 1,487 2,096 1,960 3,099 2,994 4,106 Provision for income taxes.................. 135 141 198 185 81 78 103 ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 1,297 $ 1,346 $ 1,898 $ 1,775 $ 3,018 $ 2,916 $ 4,003 ======= ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF NET REVENUES: Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 55.5 57.2 48.6 48.4 47.8 46.1 44.9 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 44.5 42.8 51.4 51.6 52.2 53.9 55.1 Operating expenses: Research and develop- ment.................. 13.0 11.4 15.5 14.7 14.8 19.2 17.0 Selling, general and administrative........ 21.1 21.1 21.3 23.6 19.6 18.7 17.9 ------- ------- ------- ------- ------- ------- ------- Total operating ex- penses............. 34.1 32.5 36.8 38.3 34.4 37.9 34.9 ------- ------- ------- ------- ------- ------- ------- Operating income........ 10.4 10.3 14.6 13.3 17.8 16.0 20.2 Net interest income (ex- pense)................. (0.0) 0.2 (0.1) (0.2) 0.4 0.5 0.7 ------- ------- ------- ------- ------- ------- ------- Income before provisions for income taxes....... 10.4 10.5 14.5 13.1 18.2 16.5 20.9 Provision for income taxes.................. 1.0 1.0 1.4 1.3 0.5 0.4 0.5 ------- ------- ------- ------- ------- ------- ------- Net income.............. 9.4% 9.5% 13.1% 11.8% 17.7% 16.1% 20.4% ======= ======= ======= ======= ======= ======= =======
The Company's net revenues have increased in each of the seven quarters ended December 31, 1997, primarily due to increased unit shipments of the Company's products as well as the introduction of new products primarily for the communications market. Although gross margin has fluctuated, it generally increased over this period as increased utilization of the Company's wafer fabrication facility resulted in decreased per unit costs. The decrease in gross margin for the three months ended September 30, 1996 was principally due to a decrease in manufacturing yields during that quarter, which adversely impacted the Company's gross profit during the quarter by approximately $600,000. This decrease in manufacturing yields was primarily due to the Company increasing volume production of a single product at less than normal 28 production yields in support of a customer's delivery requirements. The increase in gross margin for the three months ended December 31, 1996 and subsequent quarters was primarily due to improved yields and increased utilization of the Company's wafer fabrication facility. There can be no assurance that this trend will continue. Although R&D expenses fluctuated both in actual amounts and as a percentage of revenues, R&D expenses generally increased over this period as the Company increased its engineering staff and accelerated new product development efforts. In particular, the increase in R&D expenses for the three months ended December 31, 1996 primarily reflected increased recruiting, relocation and compensation expenses for development personnel, as well as prototyping costs related to new product development. The level of R&D expenses increased significantly again in the three months ended September 30, 1997 due to expenses associated with increases in engineering staff and to increased prototyping expenses. R&D expenses decreased in the three months ended December 31, 1997 due to lower recruiting and relocation expenses partially offset by higher compensation costs for development personnel and increased prototyping costs. The Company believes R&D expenses will increase in absolute dollars and as a percentage of net revenues in the future. SG&A expenses remained relatively stable over this period, except in the three months ended March 31, 1997. The increase in SG&A expenses in the three months ended March 31, 1997 reflected, in particular, expenditures for product promotion. The increase in SG&A expenses in the three months ended December 31, 1997 resulted from higher costs associated with increases in sales and marketing personnel. In the three months ended September 30, 1997, costs associated with moving the Company's administration, engineering, test and assembly operations to a new facility contributed to increases in cost of revenues, SG&A and R&D expenses. The Company's quarterly results of operations have varied significantly in the past and may continue to do so in the future. These variations have been, and may in the future be, due to a number of factors, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. These factors include, but are not limited to: the rescheduling or cancellation of orders by customers; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in manufacturing yields and inventory levels; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; the introduction of products and technologies by the Company's competitors; the availability of external foundry capacity, purchased parts and raw materials; competitive pressures on selling prices; the timing of investments in research and development; market acceptance of the Company's and its customers' products; the timing of depreciation and other expenses to be incurred by the Company in connection with the expansion of its existing manufacturing facility and in connection with its proposed new manufacturing facility; the timing and amount of recruiting and relocation expenses, prototyping costs and product promotional expenses; costs associated with future litigation, if any, including without limitation, litigation relating to the use or ownership of intellectual property; costs associated with compliance with applicable environmental regulations; general semiconductor industry conditions; and general economic conditions. Historically, average selling prices in the semiconductor industry have decreased over the life of a product, and as a result, the average selling prices of the Company's products may be subject to significant pricing pressures in the future. Because the Company is continuing to increase its operating expenses for personnel and new product development, and because the Company is limited in its availability to reduce expenses quickly in response to any revenue short falls, the Company's business, financial condition and operating results would be adversely affected if increased sales are not achieved. In addition, the Company's operating results may be below the expectations of public market analysts or investors, which could have a material adverse effect on the market price of the Common Stock. See "Risk Factors -- Fluctuations in Operating Results," "-- Manufacturing Yields," "-- Risks Associated with Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products," "-- Risks Associated with Dependence on High-Speed Computing Market," "-- Rapid Technological Change; Necessity to Develop and Introduce New Products," "-- Manufacturing Capacity Limitations; New Production Facility," "-- Transition to New Process Technologies," "-- Customer Concentration," "-- Intense Competition," "-- Management of Growth" and "-- International Sales." 29 LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity as of December 31, 1997 consisted of $36.2 million in cash, cash equivalents and short-term investments and a $900,000 loan commitment to finance the purchase of fabrication equipment currently expected to occur prior to the end of fiscal 1998. The loan commitment, if used, will have an interest rate of LIBOR plus 0.2% and will be due in 60 monthly installments of equal principal plus interest in arrears, and will be secured by the fabrication equipment. Working capital as of December 31, 1997 was $44.7 million compared to $19.4 million as of March 31, 1997. This increase in working capital was primarily due to the $25.1 million net proceeds from the IPO, and cash provided by operations offset by the repurchase of certain shares of the Company's Preferred Stock. During the fiscal years ended March 31, 1997, 1996 and 1995 and the nine months ended December 31, 1997, the Company financed its operations primarily through cash provided by operations and equipment lease financing. During the nine months ended December 31, 1997, the Company generated $11.8 million of cash from operating activities, compared to $8.2 million in the nine months ended December 31, 1996. The increase in cash provided by operating activities was primarily due to the increase in profitability. For the fiscal years ended March 31, 1997, 1996 and 1995, net cash provided by operating activities was $11.7 million, $6.7 million and $1.4 million, respectively. Net cash provided by operating activities in fiscal 1997 primarily reflected net income before depreciation and amortization expense. Net cash provided by operating activities in fiscal 1996 differed from the net loss primarily due to adjustments for depreciation and amortization expense, a reduction in inventory levels and an increase in accounts payable and accrued liabilities. Net cash provided by operating activities in fiscal 1995 differed from the net loss primarily due to adjustments for depreciation and amortization expense and reduction of accounts receivable, partially offset by funding of increased levels of inventories and reduction of accounts payable and accrued liabilities. Capital expenditures totalled $4.1 million, $2.6 million and $6.2 million for fiscal 1997, 1996 and 1995, respectively, of which $1.2 million, $1.2 million and $3.4 million for fiscal 1997, 1996 and 1995, respectively, were financed using capital leases. During the nine months ended December 31, 1997, capital expenditures totalled $8.4 million, of which approximately $282,000 was financed by capital leases. The Company intends to increase its capital expenditures for manufacturing equipment, test equipment and computer hardware and software. The Company is in the process of expanding the manufacturing capacity of its existing fabrication facility. The Company anticipates that an additional $15.0 million will be spent on this expansion and the purchase of equipment and leasehold improvements related thereto. The Company plans to finance this expansion through a combination of available cash, cash equivalents and short term investments, cash from operations and debt and lease financing. The Company currently expects to spend approximately $26.0 million on capital expenditures in the last quarter of fiscal 1998 and fiscal 1999, of which approximately $12.0 million will be related to the expansion. The Company also plans to initiate construction of a new six-inch wafer fabrication facility during fiscal 1999 and to complete the physical plant during 2000. The Company believes the new facility will not begin commercial production prior to late 2000. The Company estimates that the cost of the new wafer fabrication facility will be at least $80.0 million, of which approximately $30.0 million relates to the purchase of land and construction of the facility and at least $50.0 million relates to capital equipment purchases. The Company plans to finance the new wafer fabrication facility through a combination of available cash, cash equivalents and short term investments, cash from operations, debt and lease financing and approximately $24.0 million of the net proceeds of this offering and the IPO. The Company is also exploring other alternatives for the expansion of its manufacturing capacity, including purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. Although the Company believes that it will be able to obtain financing for a significant portion of the planned capital expenditures at competitive rates and terms from its existing and new financing sources, there can be no assurance that the Company will be successful in these efforts or that the new facility will be completed and in volume production within its current budget or within the period currently scheduled by the Company. Furthermore, there can be no assurance that other alternatives to constructing a new wafer fabrication facility will be available on a timely basis or at all. See "Risk Factors -- Manufacturing Capacity Limitations; New Production Facility," "-- 30 Dependence on Third-Party Manufacturing and Supply Relationships" and "-- Need For Additional Capital." With the exception of the approximately $25.1 million in net proceeds from the IPO, the Company has not raised financing from sales of equity (other than option exercises under employee stock plans) since September 1987, and as a financing strategy has used cash flow from operating activities and equipment debt and lease financing. In June 1997, the Company repurchased 172,300 shares of Preferred Stock (convertible into 2,119,435 shares of Common Stock) for approximately $3.9 million. The Company believes that the net proceeds of this offering, together with 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 "Risk Factors -- Need for Additional Capital" and "Use of Proceeds." 31 BUSINESS The following discussion of the Company's business contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company utilizes a combination of high-frequency mixed-signal design expertise, system-level knowledge and multiple silicon process technologies to offer IC products for the telecommunications markets that address the SONET/SDH and ATM transmission standards and for the data communications markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. The Company also leverages its technology to provide solutions for the ATE, high-speed computing and military markets. Customers of the Company include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems and Teradyne. The Company has developed multiple generations of many of its products. In the telecommunications market, the Company provides ATM and SONET/SDH physical layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC- 12 standards, and is currently developing an OC-48 chip set. In the data communications market, the Company provides physical layer transceivers for Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches for serial backplanes. In the high-speed computing market, the Company provides PCI controllers and high-frequency clock drivers and clock generators. In addition, the Company also provides high-performance, low-power application-specific integrated circuit ("ASIC") products for the ATE and military markets. INDUSTRY BACKGROUND The Communications Industry Communications technology has evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice and data transmitted over hybrid networks of media such as copper, coaxial and fiber optic cables. This evolution has been driven by enormous increases in the number of users and the complexity of the data types transmitted over networks. In addition, the substantial growth in the Internet, the World Wide Web and cellular and facsimile communications; the emergence of new applications such as video conferencing; and the increase in demand for remote network access and higher speed, higher bandwidth communication between local area networks and local and wide area networks have increased network bandwidth requirements. This increase has made current systems architectures inadequate. In the telecommunications market, service providers and equipment suppliers in particular have been impacted by the inadequacy of systems architectures caused by the current public network infrastructure. This infrastructure was designed to optimize voice communications and is not well suited for the high- throughput requirements of data transmission that is transmitted in "bursts." The volume and complexity of this data has led to the increasing deployment of fiber optic technology for use in wide area networks ("WANs"). This technology has substantially greater transmission capacity and is less error prone and easier to maintain than copper networks. The Synchronous Optical Network ("SONET") standard in North America, and the Synchronous Digital Hierarchy ("SDH") standard in the rest of the world, have emerged as the standards for the transmission of signals over optical fiber. The SONET/SDH standards facilitate high data integrity and improved network reliability, while reducing maintenance and other operation costs by standardizing interoperability among equipment from different vendors. A transmission standard complementary to SONET/SDH, Asynchronous Transfer Mode ("ATM"), has emerged to optimize bandwidth utilization. ATM 32 is a network transmission standard that packages data and reduces network delays, enabling the support of not only data traffic, but delay-sensitive voice, video and imaging applications. In the data communications market, similar bandwidth issues have arisen as the convergence of the LAN and WAN as well as the greater computational power of PCs have enabled powerful network applications such as video conferencing and Web communications. However, these new applications and the increasing number of computers on networks have significantly increased the volume of data traffic and, as a result, the network has now become the bottleneck in the delivery of integrated video, audio and data. Ethernet is currently the most widespread LAN standard, operating at 10 to 100 megabits per second. However, LAN backbones are rapidly being upgraded to Gigabit Ethernet and ATM in order to increase available bandwidth. These network protocols, which enable expanded bandwidth in excess of one gigabit per second, are emerging as the new standards for LAN backbones. In addition, the Fibre Channel standard, which also facilitates data transmission at rates exceeding one gigabit per second, has emerged as a practical, cost-effective and expandable method for achieving high-speed, high-volume data transfer among workstations, mainframes, data storage devices and other peripherals. Fibre Channel and Gigabit Ethernet are complementary and compatible transmission standards, and the emergence of Gigabit Ethernet has accelerated the growth of the Fibre Channel standard. The Communications IC Opportunity In order to address the growing requirements of communications networks, equipment suppliers are having to develop and introduce increasingly sophisticated systems at a rapid rate. To achieve the performance and functionality required by such systems, these OEMs must utilize increasingly complex integrated circuits ("ICs"), which now account for a larger portion of the value-added proprietary content of such systems. As a result of the rapid pace of new product introductions, the proliferation of standards to be accommodated and the difficulty of designing and producing requisite ICs, equipment suppliers increasingly outsource these ICs to semiconductor firms with specialized expertise. These trends have created a significant opportunity for IC suppliers that can design cost-effective solutions for the transmission of high-frequency data. Dataquest estimates that the worldwide SONET/SDH markets for ICs were approximately $240 million in 1996 and will increase to approximately $700 million in 2000, and that the ATM markets for ICs were approximately $130 million in 1996 and will increase to approximately $700 million in 2000. The Fibre Channel and Gigabit Ethernet markets were relatively small in 1996 and Dataquest estimates that such combined markets will be approximately $300 million in 2000. IC suppliers must utilize a variety of skills and technologies to satisfy the requirements of communications equipment OEMs. These OEMs require IC suppliers that possess system-level expertise and can quickly bring to market high-performance, highly reliable, power-efficient ICs. Additionally, these OEMs seek suppliers with both analog and digital expertise to provide high- frequency, mixed-signal solutions to bridge the analog physical world and the digital computing environment. In particular, telecommunications OEMs require IC suppliers to provide solutions that minimize jitter (a measure of the stability and crispness of a signal), which degrades transmission quality over distance. Data communications products typically have substantially shorter life cycles than telecommunications products, and the rate of new product introductions is very high. Therefore, data communications OEMs specifically require IC suppliers that can provide IC solutions that accommodate these increased time-to-market demands. Furthermore, the data communications market is highly cost driven and generally involves large volumes. Therefore, OEMs in this market require IC suppliers that can provide increasingly lower cost IC solutions that can quickly be ramped into high-volume production. In the high-performance IC market, a number of process technologies are used to produce ICs. Traditionally, designers have relied on silicon-based manufacturing process technologies for the development of high-speed, mixed- signal analog and digital circuits with precision timing. In some cases, OEMs utilize discrete components or IC solutions based on non-silicon processes such as gallium arsenide ("GaAs") to meet the high-frequency requirements of certain communications products. However, non-silicon processes tend 33 to be more expensive, less predictable with respect to yields and less able to ramp to high-volume production than silicon processes. The Automated Test Equipment Industry Automated test equipment ("ATE") is used for the comprehensive testing of ICs, printed circuit boards and electronic systems. Increasing worldwide demand for ICs has led to a corresponding increase in the demand for IC test equipment. IC manufacturers continue to increase the pace of introduction of increasingly complex and higher speed ICs. Thus, ATE OEMs must provide new systems that are capable of testing ICs and electronic systems with increasingly higher frequencies and that are introduced rapidly enough to support the increased pace at which new ICs and electronic systems are being introduced. In addition, very accurate timing, utilizing precision analog verniers, is critical for the testing of today's advanced microprocessors and other ICs. Furthermore, ATE OEMs differentiate their systems and optimize speed and timing performance through the use of customized ICs. Accordingly, ATE OEMs require IC suppliers that possess the combination of ASIC methodologies, high-performance process technologies and high-speed, mixed- signal design expertise that can deliver ICs with the requisite speeds and precision timing. Generally, ATE equipment requires ICs that operate at faster speeds and have more precise timing than the ICs being tested. This need for speed and precision timing requires that IC suppliers use high-performance processors that are similar to the high-performance processes required to service the advanced telecommunications market. Finally, ATE OEMs require IC suppliers that deliver timely solutions, enabling the OEMs to satisfy their increasingly rapid time-to-market requirements. In today's environment, there are declining numbers of IC suppliers that satisfy these requirements. The High-Speed Computing Industry Increasing worldwide demand for high-performance computing equipment has led to a corresponding increase in the demand for ICs for the high-speed computing industry. High-speed computing equipment manufacturers must deliver increased computational performance that is compatible with, and driven by, rapidly increasing microprocessor speeds. The peripheral devices that communicate with the computer processor must keep pace with the processor to enable the system to deliver optimal performance. The pace of new product introductions in this industry continues to accelerate, and product life cycles continue to shorten. As a result, a premium is placed on time-to-market. High-performance computing equipment manufacturers must rely on suppliers of cost-effective, increasingly complex, standard ICs that can be designed, produced and delivered in time to meet rapidly changing market demands. AMCC SOLUTION 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 utilizing a combination of high-frequency mixed-signal design expertise, system-level knowledge and multiple process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS processes from external foundries, enable the Company to offer high-performance, high- frequency solutions optimized for specific applications and customer requirements. By using its proven silicon-based processes and extensive design libraries, the Company is able to offer products that provide significant cost, power, performance and reliability advantages for communications systems OEMs. In addition, this enables the Company to accelerate its time-to-market as well as quickly ramp into high-volume production. The Company also leverages its technology to provide solutions for the ATE, high-speed computing and military markets. In the telecommunications market, the Company provides IC products for the SONET/SDH and ATM standards. The Company's customers in the telecommunications market include Alcatel, ECI, GPT, Lucent, Nortel and SAT. In the data communications market, the Company supplies products targeted at Gigabit Ethernet, ATM and Fibre Channel applications. The Company's customers in this market include 3Com, 34 Cabletron Systems, Cisco Systems, Compaq, Fujikura and Vixel. In the ATE market, the Company provides high-speed products for memory, mixed-signal and logic testers. The Company's ATE customers include Hewlett-Packard, LTX, Schlumberger, Teradyne and Texas Instruments. Finally, in the high-speed computing market, the Company supplies PCI bus controllers as well as precision timing products. The Company's customers for this market include Ericsson, Hewlett-Packard and NEC. The Company has developed multiple generations of many of its products and has maintained long-term relationships with many of its customers. STRATEGY AMCC's objective is to be the leading supplier of high-performance, high- bandwidth connectivity IC solutions for the world's communications infrastructure. To achieve this objective, the Company employs the following strategies: Focus on High-Growth Telecommunications Markets AMCC targets key high-growth telecommunications markets, including those for SONET/SDH and ATM products. The Company has built substantial competencies focused on the specific requirements of these markets in the areas of process technology and mixed-signal design and substantial expertise in systems architecture and applications support. The Company believes that the integration of these capabilities enables it to optimize solutions addressing the high-bandwidth connectivity requirements of telecommunications systems OEMs. Leverage Telecommunication Capabilities in High-Bandwidth Data Communications Markets AMCC leverages its mixed-signal design expertise, process technologies and systems capabilities in telecommunications to address specific customer requirements in high-bandwidth data communications markets. The Company believes that this strategy enables it to provide data communications OEMs with cost-effective IC solutions that can be introduced and produced rapidly. The Company has targeted, in particular, Gigabit Ethernet, ATM and Fibre Channel applications. Consistent with this strategy, the Company has introduced serial backplane ICs to address the growing demand for high- bandwidth switching. Exploit Established Markets The Company believes it has developed a strong presence in specific segments of the ATE, high-speed computing and military markets, where it maintains established customer relationships and many competitive products. AMCC believes that its high-performance design expertise is directly applicable to the product requirements of these markets. Furthermore, the Company believes that its process technologies are well-suited for the ATE and military applications that are being served by a decreasing number of suppliers. AMCC believes that continued participation in these markets provides it with an opportunity for revenue diversification and stability. Capitalize on Multiple Silicon-Process Technologies to Provide Optimized Solutions The Company is dedicated to utilizing the best silicon process technology available to offer solutions optimized for specific applications and customer requirements. The Company has successfully developed multiple generations of its processes and believes that it will be able to continue the evolution of its processes to deliver the performance required of future communications ICs. AMCC believes its current and future bipolar and BiCMOS processes, complemented by advanced CMOS processes from external foundries, together with its mixed-signal design expertise, provide the Company with the flexibility to design and manufacture products that are tailored to its customers' individual needs. Through this flexible approach, AMCC is better able to transition products over time to new manufacturing processes as product performance requirements and process technologies evolve. 35 Capitalize on Established Silicon-Process Technologies to Provide Cost- Effective Solutions The Company applies its systems expertise and its mixed-signal analog and digital design techniques to architect high-performance products based on established silicon process technologies. The Company believes that these silicon-based processes are proven, stable and predictable relative to non- silicon processes and benefit from the extensive semiconductor industry infrastructure devoted to the support of silicon processes. The process technologies employed by AMCC are designed to deliver high-performance products while being substantially less capital intensive than other advanced semiconductor processes. In addition, the Company's ASIC methodology enables the use of cells that have been successfully characterized and manufactured previously. As a result, the Company believes it is well-positioned to deliver products on time and to meet the rapidly increasing production requirements of its customers. Continue to Develop Internal Wafer Fabrication Capability The Company believes that the continued development of its internal bipolar and BiCMOS wafer fabrication capability provides an important competitive advantage. AMCC believes that this capability improves the Company's ability to design and manufacture new products with short development cycles. It also gives AMCC greater control over its manufacturing process characteristics and costs, and enhances its ability to leverage existing design libraries and methodologies for future products. PRODUCTS AND CUSTOMERS AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company's current IC products address the needs of two primary segments of the communications market: the telecommunications market and the data communications market. The Company's products for the telecommunications and the data communications markets are designed to respond to the growing demand for high-speed networking applications for established WAN standards such as SONET/SDH and ATM and emerging LAN standards such as Gigabit Ethernet, ATM and Fibre Channel. The Company also markets and sells IC products that address the needs of the ATE, high-speed computing and military markets. The Company utilizes its high-performance digital and mixed-signal design expertise and systems knowledge, together with its internal bipolar and BiCMOS processes and CMOS processes from outside foundries, to design and manufacture products that are tailored to its customers' individual needs. The Company has used its design methodologies to successfully develop products ranging from ASSPs designed for industry-wide applications, to ASICs that are custom solutions for specific customer applications. These complementary products enable the Company to provide optimal solutions for its customers' applications. For example, the earlier generation of the Company's standard SONET products used ASIC platforms for quick time-to-market. Recently, the Company used the S2052, its ASSP designed for the Gigabit Ethernet market, as a platform to develop its S2053 and S2054 products, two customer-specific devices that are expected to eventually become standard products. As the Company develops special macros such as Phase Locked Loops ("PLLs") to support a customers' application needs, they become part of the Company's ASIC library, which in turn can be used for other ASICs or ASSPs. The Company believes that it has a particularly strong competence in the design of high-speed, low-jitter PLLs, which are key elements in its mixed- signal transceivers and precision timing products. AMCC's products for SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel applications are primarily focused on very high-speed digital and mixed-signal circuits called physical layer circuits. These circuits consist of a transmitter and receiver that, when integrated, is called a transceiver chip. Most of these circuits are very high-speed, mixed-signal circuits that convert parallel digital inputs into a single analog bit stream that is up to 20 times faster than the original signal. The diagram below illustrates the manner in which a physical layer circuit takes parallel digital data from an overhead processor clocked at speeds of up to 33 MHz and converts it into high-speed digital signals with clock rates of up to 125 MHz. This digital data is 36 then converted into an analog/serial data stream for transmission at clock speeds of up to 1.25 GHz, representing a tenfold increase in speed, to an optical transmitter or other physical media interfaces. The diagram also illustrates the manner in which a high-speed analog serial data stream from an optical receiver is converted into lower speed parallel digital data for transmission to an overhead processor. LOGO [Diagram labeled "Figure 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK DIAGRAM" is comprised of headings, boxes and arrows. The headings "Slow Speed Digital," "High Speed Digital Interface" and "High Speed Digital Analog Interface" appear from left to right across the top of the diagram, below which the staggered headings "Overhead Processor," "Physical Interface" and "Physical Media Interface" appear. Directly below the heading "Overhead Processor" is a rectangular box labeled "Processing Unit" that is connected to a parallel box labeled "Digital I/O" by a line labeled 33 Mhz. The upper half of this box is connected, by several arrows pointing to the right, to a third rectangular box labeled "Transmitter." The "Transmitter" box is connected by a line labeled "Up to 1250 MHz" to a rectangular box labeled "Optical Transmitter." Below the "Optical Transmitter" box is an identical box labeled "Optical Receiver," which, in turn, is connected by an arrow pointing to the left to a box labeled "Receiver." The "Receiver" box is connected by several arrows pointing to the left, to the "Digital I/O" box. Below these arrows, in the center of the diagram, is the heading "AMCC Products." The headings "Digital," "Mixed Signal" and "Analog" appear from left to right across the bottom of the diagram.] FIGURE 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK DIAGRAM Telecommunications Products The following table describes the Company's telecommunications products:
DATE OF PRODUCTION PRODUCTS RELEASE(1) APPLICATION - ------------------------------------------------------------------------------- S3005/6 June 1993 ATM physical layer transceiver products for OC-3 S3020/21 December 1994 (155 Mbps) and/or OC-12 (622 Mbps). - ------------------------------------------------------------------------------- S3015/16 March 1995 ATM/E-4 & STM-1 physical layer transmitter/receiver pair (155 Mbps). - ------------------------------------------------------------------------------- S3017/18 June 1995 SONET/SDH physical layer transceiver products for OC-3 S3028 January 1997 (155 Mbps) and/or OC-12 (622 Mbps). S3029 October 1997 - ------------------------------------------------------------------------------- S3014 December 1993 Clock Recovery and Synthesis Units for SONET/ATM S3025/26/27 March 1997 Modules for OC-3 (155 Mbps) and/or OC- 12 (622 Mbps).
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. AMCC introduced its first generation OC-3 (155 Mbps) physical layer products in 1993. The Company has since developed two additional generations of these products, each integrating greater functionality on each chip while improving jitter performance. "Jitter" is a measure of the degradation in the quality of the signal being transmitted or received. Jitter can be caused by the presence of noise in the system and increases with the distance over which the signal is transmitted. Jitter is usually controlled by special analog circuit techniques that separate the noise in the system from the valid data. Low jitter devices enable the system 37 designer to transmit the signal over longer distances or use less expensive optical devices, thus reducing the overall system cost. The Company's first generation of these products consisted of transmitter/receiver pairs with dual voltage. The second generation consisted of products that are compatible with single +5V optical modules. The Company's third generation physical layer product, the S3028, is a single chip transceiver designed to be compatible with the system needs of optical links. This product offers systems OEMs selectable reference frequencies, a 4 or 8-bit data path, a PECL or TTL level interface, a diagnostic mode and special failure indicators. The Company's S3029 is a multiple-channel OC-3 (155 Mbps) transceiver that incorporates five separate high-frequency PLLs on a single chip and includes an internal loop filter for clock recovery. The Company has under development additional ATM physical layer transceiver products compatible with the OC-3 and OC-12 standard, as well as additional SONET/SDH physical layer transceiver products for OC-12 and OC-48 applications. AMCC's products for the OC-12 (622 Mbps) standard are highly integrated products that consist of parallel-to-serial converters ("Mux"), serial-to- parallel converters ("DeMux"), transmit and receive Phase Locked Loops ("PLLs"), Clock Synthesis Units ("CSU") and Clock Recovery Units ("CRU") with low power dissipation and low output jitter. The superior jitter performance of these products enables customers to use less expensive optical components. The Company has also successfully integrated five PLLs on a single product at 155 Mbps. The power dissipation of this multichannel device is less than 1 watt (less than 200 milliwatt per PLL). All of the Company's telecommunications devices are supported with evaluation boards and design aids for easy implementation by engineers with limited knowledge of high performance circuit layout techniques. The Company's Micropower bipolar standard cell ASIC products are well-suited for high performance telecommunications applications that require up to 20,000 equivalent gates, a high-speed digital interface, low jitter, and PLL macros operating at speeds of up to 2.5 GHz. The Company also uses its Micropower technology for its ASSPs for the SONET/SDH market. Current customers for the Company's telecommunications products include Alcatel, ECI, Fujitsu, GPT, Lucent, Nortel and SAT. The Company has achieved design wins for its ASIC and ASSP products with certain other customers in the telecommunications market, including Ciena, DSC Communications, IBM, NEC, Nokia, Tellabs and Tellium. The design wins with Ciena and Tellium are for wavelength division multiplexing ("WDM") applications. There can be no assurance that these design wins will result in volume shipments to any of such customers. Sales to Nortel accounted for approximately 17%, 20%, 20% and 20%, of the Company's net revenues in fiscal 1995, 1996, 1997 and for the nine months ended December 31, 1997, respectively. No other customer represented greater than 10% of the Company's net revenues during such periods. 38 Data Communications Products The following table describes the Company's data communications products:
DATE OF PRODUCTION PRODUCTS RELEASE(1) APPLICATION - ------------------------------------------------------------------------------- S2046/47................ October 1997 Transceivers/physical layer ICs for Gigabit Ethernet S2052................... June 1997 backbone and Fibre Channel. - ------------------------------------------------------------------------------- S2036................... February 1995 Serial chip sets, GLM Transceivers for Fibre S2042/43................ August 1996 Channel (1.0625 Gbps, 533 and 265 Mbps) and S2044/45................ August 1996 Redundant Array of Independent Disks ("RAID") drives. - ------------------------------------------------------------------------------- S2016................... October 1995 High density switches, physical layer ICs, multi-port S2024................... September 1995 crosspoint switches and transceivers for backplanes S2025................... May 1996 in ISP networks. S2042/43................ August 1996 S2052................... June 1997 S2053................... January 1998 S2054................... January 1998
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. LAN Products. AMCC introduced its first generation of data communications physical layer devices in 1995. The Company has since developed two additional generations of products that support both +5V and +3.3V applications. The Company's first two generations of physical layer devices consisted of transmitter/receiver pairs with 10-bit interfaces or industry-standard 20-bit interfaces for Giga-Link Modules ("GLM") and open fiber control for the Fibre Channel standard. The Company's S2052 product is a single chip transceiver that supports both the Fibre Channel and Gigabit Ethernet transmission standards. This product is compatible with the Fibre Channel pin-out configuration and is capable of directly driving fiber optic or twinaxial cables. Some of the Company's customers also use derivatives of the S2052 for their specific application needs. The S2053, one of the Company's most recent data communications IC products, is a ten-bit transceiver that supports Gigabit Ethernet and Fibre Channel transmission standards. This device supports differential PECL-compatible I/Os for fiber optic component interfaces in order to minimize crosstalk and maximize data integrity. All of the Company's data communications IC products are supported with evaluation boards and design aids for easy implementation by engineers with limited knowledge of high performance circuit layout techniques. The Company has under development additional physical layer ICs for Gigabit Ethernet and Fibre Channel applications. Serial Backplane Products. In addition to the WAN and LAN network equipment and standards developed to address the issue of network bandwidth, network equipment OEMs must also ensure that once high-frequency signals exit the transmission network, they can be switched efficiently, while taking full advantage of the available bandwidth. Backplanes (the boards that distribute signals to various ports of a switching system) are currently emerging as a serious constraint for systems OEMs because redesigning the traditional architecture of parallel channels to accommodate higher frequency signals is prohibitively expensive. Therefore, serial channels, which can accommodate much higher frequencies, are being increasingly employed. The Company believes that this transition has created a significant opportunity for suppliers that can design IC solutions enabling the transmission of high-frequency data through a serial backplane. The Company's S2054, a transceiver similar to the S2053, has dual serial I/Os for serial backplane applications, enabling the facilitation of broadcasting functions. This product also supports TTL- compatible reference inputs. 39 Data communications system designers use three different backplane architectures. All of these architectures use serializer and deserializer chips such as the Company's S2052 and S2042/43 chip sets, and one of these architectures uses crosspoint switches. Based upon the system design, 16-bit or 32-bit crosspoint switches are currently required and, in the future, 64- bit crosspoint switches may be required. AMCC introduced its first generation of crosspoint-based serial backplane products in 1995. These products included 16-bit and 32-bit crosspoint switches with fast reconfiguration time and the S2042/43 serializer/deserializer pair with fast acquisition time. The Company currently offers its second generation 32-bit crosspoint switch and the S2052 single chip serializer/deserializer, as a serial backplane solution. The Company has under development additional multi-port products for backplane applications. Current customers of the Company's IC products in the data communications market include 3Com, Cabletron Systems, Compaq, Digital Equipment Corporation, Fujikura and Vixel. The Company has achieved design wins with certain other customers in this market, including Adaptec, Ascend Communications, Bay Networks, Cisco Systems, FORE Systems, Fujitsu Nexion, Hewlett-Packard, Newbridge Networks and Sun Microsystems. There can be no assurance that these design wins will result in volume shipments to any of such customers. ATE AMCC introduced its current generation gate array Q20000 family of products in 1991 and its Micropower-based standard cell products in 1993. Micropower, one of the first products to offer +3.3V operation for high performance ASICs, uses AMCC's proprietary bipolar process. The high-performance and low-power characteristics of this family of products make it particularly suitable for high performance semiconductor ATE applications that require approximately 4,000 equivalent gates, low jitter and precision circuits. Current customers for the Company's products for the ATE market include Hewlett-Packard, LTX, Schlumberger, Teradyne and Texas Instruments. The Company has achieved design wins with Teradyne for circuits using these products. There can be no assurance that these design wins will result in volume shipments to any of such customers. High-Speed Computing Products The following table describes the Company's high-speed computing products:
DATE OF PRODUCTION PRODUCT FAMILY RELEASE(1) APPLICATION - ------------------------------------------------------------------------------- S5920................... February 1998 PCI controller (target only). S5933................... March 1997 PCI controllers. SC3000 Series........... 1992-96 Clock drivers for servers. SC4400 Series........... 1992-96 Clock generators for servers. S4506................... January 1997 250 MHz Clock generator for Rambus-based systems. S4507................... June 1997 300 MHz Clock generator for Rambus-based systems.
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. AMCC offers two product lines that address the high-speed computing market. The S5933 is a standard master/slave PCI controller chip. The S5920 is a standard target-only PCI controller chip. These devices are supported with comprehensive development kits and third-party driver software. The Company sells these products to a very large and diverse customer base. Current customers of the Company's products include Cisco Systems, Ericsson, IBM and SAT. The Company's S5933 PCI controller chip is also used in reference designs with C-Cube Microsystems for digital video disk products. AMCC's second line of high-speed computing products consists of clocking devices that use the Company's PLL technology for precision clock generation for applications in the workstation, 40 telecommunications and data communications markets. AMCC's 250 MHz and 300 MHz clock generators are being used in Rambus-based systems. The Company's customers with Rambus-based systems also include Chromatic Research, Gateway 2000, Hewlett-Packard, LG Semiconductor, Micron Electronics, NEC and STB. The Company has under development additional PCI controller chips. Military The Company introduced its Q20000 gate array family of ASIC products in 1991. These devices are well suited for military applications and as replacements for ECLinPSTM logic from Motorola. The Company sells ASICs to military customers such as Hughes Electronics, Northrop Grumman, Raytheon, Rockwell International and Texas Instruments. TECHNOLOGY The Company utilizes its technological and design expertise to solve the unique problems of high-speed digital and mixed-signal circuit designs for the world's communications infrastructure. The Company's competencies include the design and manufacture of high-performance digital and mixed-signal ICs, in- depth knowledge of the architecture and functioning of high-bandwidth telecommunications and data communications systems, proven ASIC design methodologies and libraries, and high-performance semiconductor manufacturing and packaging expertise. Design of High-Performance Digital and Mixed-Signal ICs AMCC has developed multiple generations of products that integrate both analog and digital elements on the same chip, while balancing the difficult trade-offs of speed, power and timing inherent in high-speed applications. AMCC was one of the first companies to embed analog PLLs in bipolar chips with digital logic for high-speed data transmission and receiver applications. Since the introduction of AMCC's first on-chip clock recovery and clock synthesis products in 1993 (the S3005/S3006 chip set), the Company has refined these key circuits and has successfully integrated multiple analog functions and multiple channels on the same chip. For example, the Company has under development a quad transceiver with a PLL clock recovery and PLL clock multiplier. The mixing of digital and analog signals poses difficult challenges for IC designers, particularly at high frequencies. The Company has built significant expertise in mixed-signal IC designs through the development of multiple generations of products. The Company believes that one of its primary skills is its ability to integrate increasingly complex analog functions with high-speed digital logic on a single chip. The Company also applies this expertise, developed using bipolar process technology, to IC designs on CMOS processes. Systems and Architecture Expertise AMCC believes that its systems architects, design engineers and technical marketing and applications engineers have a thorough understanding of the telecommunications and data communications systems for which the Company designs and builds ASSPs. Using this systems expertise, AMCC develops semiconductor devices to meet OEMs' high-bandwidth systems requirements. By understanding the systems into which its products are designed, the Company believes that it is better able to anticipate and develop optimal solutions for the various cost, power and performance trade-offs faced by its customers. AMCC believes that its systems knowledge also enables the Company to design its IC products to provide the most cost-effective and performance-optimized solution available using proven process technologies. For example, in its IC design for OC-48 applications, AMCC applied its systems knowledge and mixed- signal design expertise to partition the solution into bipolar and high-speed CMOS chips, which enabled AMCC to offer a substantially lower power alternative and provide the customer with added flexibility in its future design plans. 41 Design Methodology The Company believes that its extensive experience in the use of ASIC design methodologies (gate arrays and standard cells), enables its designers to accelerate the design of new standard products. The Company also has extensive experience in using ASIC methodologies in collaborative product development efforts with its customers. The Company uses extensive libraries of analog and digital blocks that have been well characterized and previously used, which the Company believes decreases design costs and cycle time and minimizes any final redesign that may be required once the circuit is implemented in silicon. The Company's design methodology utilizes advanced computer aided design ("CAD") tools for each of the following phases of the implementation process: design capture, logic synthesis, simulation, physical layout and chip composition and verification. AMCC uses industry-standard CAD tool sets whenever possible, but augments these tool sets with certain proprietary tools that enable its designers to optimize mixed-signal performance at very high frequencies. Industry standard Verilog/VHDL models, developed at the behavioral and the gate level, are given to key customers for system level simulation and verification, and feedback from these customers is used to finalize the Company's device designs to ensure that AMCC's devices will interface appropriately with the OEM's system. The Company believes that this process results in shortened design cycle time and greater first-time correctness of production-worthy devices. Process Technology AMCC utilizes its own internal wafer fabrication facility and has developed and produced multiple generations of cost-effective, high-performance bipolar and BiCMOS processes. Bipolar processes are widely recognized as the technology of choice for circuits that require high-speed, analog-intensive circuitry with low to moderate levels of density (number of gates or functions per chip). Nevertheless, the Company believes that the number of companies possessing this advanced bipolar process capability and applying it to the markets targeted by AMCC is limited. The proven internal silicon-based process technologies employed by the Company have not required the highly capital- intensive facilities needed by certain advanced microprocessor, memory or CMOS ASIC suppliers. The Company believes that its bipolar-based processes are the optimal choice for the performance (speed, timing and stability), power and cost trade-offs that must be made in providing the mixed-signal ICs required by its targeted markets. Packaging AMCC has substantial experience in the development and use of plastic and ceramic packages for high-performance applications. The selection of the optimal package solution is a vital element of the delivery of high- performance products, and involves balancing cost, size, thermal management and technical performance. AMCC's products are designed to reduce power dissipation and die size to enable the use of industry standard packages. AMCC employs a wide variety of package types, and is currently designing products using ball grid arrays, tape ball grid arrays and multi-chip modules with pin counts in excess of 200 pins. The Company's experience with a variety of packages is one of the factors that enables it to provide optimal high- performance IC solutions to its customers. RESEARCH AND DEVELOPMENT AMCC's research and development expertise and efforts are focused on the development of high-performance, mixed-signal ASSPs for advanced communications applications, as well as ASIC products and methodologies for communications and ATE applications. The Company also focuses on the development of silicon wafer fabrication processes that are optimized for these applications. Product Development The Company's product development is focused on building high-performance, analog-intensive design expertise that is incorporated into well-documented blocks that can be reused by AMCC's design group for 42 multiple products. The Company has, and continues to make, significant investments in advanced CAD tools to leverage its design engineering staff, reduce design cycle time and increase first-time design correctness. AMCC is consistently seeking to add engineers with high-performance, mixed-signal experience in both its bipolar and CMOS design groups. The Company's product development is driven by the imperatives of reducing design cycle time, increasing first-time design correctness, adhering to disciplined, well documented design processes and continuing to be responsive to customer needs. Process Development The Company's process development is focused on enhancing its current bipolar processes and developing new processes optimized for high-performance digital and mixed-signal communications applications. These new processes are being designed to provide higher transistor speeds and improved parasitics to address higher frequency communications requirements, as well as the need to constantly improve jitter performance in the circuits, while maintaining low power dissipation and enabling high yields in volume production. AMCC's process engineers are also involved with the selection and management of the Company's relationships with outside foundries to provide the advanced CMOS processes required by certain of AMCC's products. The Company is also developing high-performance packages for its products in collaboration with its packaging suppliers and its customers. The Company's research and development expenses in fiscal years 1995, 1996, 1997 and the nine months ended December 31, 1997 were $10.1, $8.3, $7.9 and $9.3 million, respectively, which were 21.5%, 16.5%, 13.7% and 17.0%, respectively, of revenues for such periods. The Company has 88 employees engaged in engineering and product development related activities. A failure by the Company to improve its existing process technologies in a timely or affordable manner could adversely affect the Company's business, financial condition and operating results. See "Risk Factors--Transition to New Process Technologies," "--Rapid Technological Change; Necessity to Develop and Introduce New Products" and "--Manufacturing Capacity Limitations; New Production Facility." MANUFACTURING Wafer Fabrication AMCC manufactures products at its four-inch wafer fabrication facility in San Diego, California in an 8,200 square foot clean room. The Company is currently expanding the clean room by approximately 2,300 additional square feet to accommodate new equipment that will expand capacity and will be used for process development. The Company believes that its wafer fabrication facility has competitive yields, cycle times and costs, produces large die at acceptable yields and operates on a flexible basis of multiple products and variable lot sizes. However, there can be no assurance that the Company will achieve or obtain acceptable manufacturing yield levels in the future. The Company is currently running several different bipolar and BiCMOS processes in this facility. See "Risk Factors -- Manufacturing Yields" and "Business -- Technology." The Company is currently planning for the construction of a new six-inch wafer fabrication facility that it believes will be located in San Diego, California. AMCC believes that it will need such a facility to be operational in approximately three years in order to support the Company's growth and to build certain new products, although the timing of this need may vary based on, among other things, the Company's rate of growth. The Company currently plans to acquire or acquire rights to a site for this new facility by mid- 1998. The Company is also exploring other alternatives for the expansion of its manufacturing capacity, including purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. There can be no assurance that the Company will be able to manage its growth or effectively integrate its proposed expansion into its current operations. See "Risk Factors -- Manufacturing Yields," "-- Manufacturing Capacity Limitations; New Production Facility" and "-- Management of Growth." 43 AMCC currently utilizes four outside foundries, AMI Semiconductor ("AMI"), IBM, Kawasaki CSI Japan ("Kawasaki") and Taiwan Semiconductor Manufacturing Corporation ("TSMC") for the production of products designed on CMOS processes. The Company does not plan to fabricate its own CMOS wafers. The Company's PCI Bus products are currently produced by AMI in Idaho on a five-inch CMOS process and by Kawasaki in Japan on a six-inch CMOS process. Additionally, certain of AMCC's products are being produced by TSMC on six-inch CMOS and BiCMOS processes. Some of the Company's products are being designed to be produced by IBM on eight-inch CMOS processes. Although the Company has a long term agreement with IBM that provides that AMCC will be able to purchase certain minimum quantities of wafers through March 2000, the Company does not have long-term wafer supply agreements with its other outside foundries that guarantee wafer or product quantities, prices or delivery lead times. There are certain risks associated with the Company's dependence upon external foundries for certain of its products, including reduced control over delivery schedules, quality assurance, manufacturing yields and costs, the potential lack of adequate capacity during periods of excess demand, limited warranties on wafers or products supplied to the Company, increases in prices and potential misappropriation of the Company's intellectual property. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." Components and Raw Materials AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic Corporation ("WSC"). While most silicon wafers now being supplied to the semiconductor industry are larger than four inches, AMCC believes that WSC will continue to supply AMCC's needs for the foreseeable future. AMCC also carries a significant inventory of raw wafers to cushion any interruption in supply. AMCC purchases its ceramic packages from Kyocera America and NTK Ceramics and its plastic packaging from ASAT. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." Assembly and Test The Company assembles prototypes and modest production volumes of specific products in its internal assembly facility in San Diego, California. Most of the Company's production assembly, however, is performed by multiple assembly subcontractors located in the Far East, Europe and the United States. Following assembly, the packaged units are returned to the Company for burn-in (in some cases), final testing and marking prior to shipment to customers. From time to time, some testing is performed by subcontractors. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." SALES AND MARKETING The Company sells its products principally through a direct sales organization consisting of a network of independent manufacturers' representatives in specified territories that work under the direction of the Company's direct sales force and distributors. The Company has a total of 12 direct sales personnel and field applications engineers. The direct sales force is technically trained and is supported by applications engineers in the field as well as applications and design engineers at the Company's headquarters. The Company believes that this "engineering-intensive" relationship with its customers results in strong, long-term customer relationships beneficial to both the Company and its customers. The Company augments this strategic account sales approach with domestic and foreign distributors, which service primarily smaller accounts purchasing ASSPs. In North America, the Company's direct sales effort is supported by 19 independent manufacturers' representatives and one distributor. The Company sells its products through 10 distributors and 2 independent manufacturers' representatives in Europe and eight distributors throughout the rest of the world. In fiscal 1996 and 1997 and during the nine months ended December 31, 1997, approximately 24%, 21% and 24% of the Company's revenues were derived from sales to customers located outside of North America. 44 The Company's sales headquarters is located in San Diego, California. The Company maintains sales offices in Burlington, Massachusetts; Raleigh, North Carolina; San Clemente, California; Plano, Texas; Hollis, New Hampshire; San Jose, California and Munich, Germany. The Company currently intends to lease space for a sales office in Milan, Italy during the first half of 1998. PROPRIETARY RIGHTS The Company relies in part on patents to protect its intellectual property. The Company has been issued 13 patents in the United States and one patent in Canada, which patents principally cover certain aspects of the design and architecture of the Company's IC products and have expiration dates ranging from 2004 to 2009. In addition, the Company has six patent applications pending in the United States Patent and Trademark Office (the "PTO"). There can be no assurance that the Company's pending patent applications or any future applications will be approved, or that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that 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 to the Company. To protect its intellectual property, the Company also relies on a combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. A mask work refers to the intangible information content of the set of masks or mask databases used to make a semiconductor chip product. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and operating results. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. The Company in the past has been and in the future may be notified that it may be infringing the intellectual property rights of third parties. The Company has certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by its products. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition or operating results. In March 1997, the Company received a written notice from legal counsel for Dr. Chou Li asserting that the Company manufactures certain of its products in ways that appear to such counsel to infringe a United States patent held by Dr. Li (the "Li Patent"). After a review of its technology in light of such assertion, the Company believes that the Company's processes do not infringe any of the claims of this patent. On January 6, 1998, in a lawsuit between a third party and Dr. Li filed in Federal District Court for the Eastern District of Virginia, the court ruled that the Li Patent was invalid for inequitable conduct. In January 1998, the Company received a written notice from legal counsel for the Lemelson Medical, Education & Research Foundation Limited Partnership (the "Lemelson Partnership") asserting that the Company infringes certain United States Patents (the "Lemelson Patents") and offering the Company a license under the patents. The Company is monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, the Company believes, based in part on the licensing terms offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations for any quarter. Furthermore, there can be no assurance that the Lemelson Partnership will not file a lawsuit against the Company or that the Company would prevail in any such litigation. Any litigation 45 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. See "Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights." COMPETITION The semiconductor market, particularly the high-performance semiconductor market, is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications, ATE and high-speed computing industries are also becoming intensely competitive due in part to deregulation and heightened international competition. The ability of the Company to compete successfully in its markets depends on a number of factors, including product performance, success in designing and subcontracting the manufacture of new products that implement new technologies, product quality, reliability, price, the efficiency of production, design wins for its IC products, ramp up of production of the Company's products for particular system manufacturers, end-user acceptance of the system manufacturers' products, market acceptance of competitors' products and general economic conditions. In addition, the Company's competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements, that are available to customers on a more timely basis than comparable products from the Company or that have the potential to replace or provide lower cost alternatives to the Company's products. The introduction of such enhancements or new products by the Company's competitors could render the Company's existing and future products obsolete or unmarketable. Furthermore, once a customer has designed a supplier's product into its system, the customer is extremely reluctant to change its supply source due to the significant costs associated with qualifying a new supplier. Finally, the Company expects that certain of its competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by the Company's IC products on a single chip, thus eliminating the need for the Company's products. Each of these factors could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Risks Associated with Dependence on High-Speed Computing Market." In the telecommunications and data communications markets, the Company competes primarily against GaAs-based companies such as Giga, Rockwell International, TriQuint and Vitesse, and bipolar silicon-based products from companies such as Giga, Hewlett-Packard, Maxim, Philips and Sony. In certain circumstances, most notably with respect to ASICs supplied to Nortel, AMCC's customers or potential customers have internal IC manufacturing capability, and this internal source is an alternative available to the customer. In the ATE market, the Company competes primarily against Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, the Company competes primarily against companies such as Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower-frequency applications, the Company faces increasing competition from other CMOS-based products, particularly as the performance of such products continues to improve. There can be no assurance that the Company will be able to develop new products to compete with new technologies on a timely basis or in a cost- effective manner. Any failure by the Company to compete successfully in its target markets, particularly in the telecommunications and 46 data communications markets, would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Intense Competition" and "Risks Associated with Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products." ENVIRONMENTAL MATTERS The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or construct or operate its planned wafer fabrication facility or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. In this regard, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, the Company's payment obligations with respect to such funding efforts have not been material, and the Company believes that its future obligations to fund such efforts will not have a material adverse effect on its business, financial condition or operating results. Although the Company believes that it is currently in material compliance with applicable environmental laws and regulations, there can be no assurance that the Company is or will be in material compliance with such laws or regulations or that the Company's future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on the Company's business, financial condition or operating results. See "Risk Factors -- Environmental Regulations." LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Prospectus, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or operating results. FACILITIES The Company's executive offices, research and development and engineering functions are located in San Diego, California in a 90,000 square foot building that is leased by the Company under a lease that expires in 2007. In addition, the Company occupies a 21,000 square foot building in San Diego, which houses the Company's manufacturing facilities under a lease that expires in 2003, but provides the Company with an option to extend the lease for one additional five year period. The Company leases additional space for sales offices in Burlington, Massachusetts; Raleigh, North Carolina; San Clemente, California; Plano, Texas; Hollis, New Hampshire; San Jose, California and Munich, Germany. The Company currently plans to lease space for a sales office in Milan, Italy during the first half of 1998. EMPLOYEES As of December 31, 1997, the Company had 293 full-time employees: 29 in administration, 88 in engineering and product development, 138 in operations and 38 in marketing and sales. The Company's ability to attract and retain qualified personnel is essential to its continued success. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company ever experienced any work stoppage. The Company believes its employee relations are good. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to the Company's product and process development programs or otherwise have a material adverse effect on the Company's business, financial condition, and operating results. See "Risk Factors -- Dependence on Qualified Personnel." 47 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The executive officers and directors of the Company, and their ages as of December 31, 1997, are as follows:
NAME AGE POSITION ------------------------ --- ------------------------------------------------- David M. Rickey......... 42 President, Chief Executive Officer and Director Joel O. Holliday........ 58 Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary Thomas L. Tullie........ 33 Vice President, Sales Anil K. Bedi............ 47 Vice President, Marketing Laszlo V. Gal........... 50 Vice President, Engineering Roger A. Smullen, Sr. (1).................... 62 Chairman of the Board of Directors Kenneth L. Clark........ 49 Vice President, Operations William K. Bowes, Jr.(1)................. 71 Director Franklin P. Johnson, Jr.(1)(2).............. 69 Director Arthur B. Stabenow(2)... 59 Director R. Clive Ghest(2)....... 60 Director
- -------- (1) Member of Audit Committee (2) Member of Compensation Committee David M. Rickey has served as President, Chief Executive Officer and Director since February 1996. From August 1993 to May 1995, Mr. Rickey served as the Company's Vice President of Operations. From May 1995 to February 1996, Mr. Rickey served as Vice President of Operations at NexGen, a semiconductor company. Previously, Mr. Rickey spent more than eight years with Nortel, a telecommunications manufacturer, where he led the wafer fab engineering and manufacturing operations in both Ottawa, Canada and San Diego, California. Mr. Rickey also worked in various engineering positions with IBM from 1981 to 1985. Mr. Rickey has earned B.S. degrees from both Marietta College (summa cum laude) and Columbia University. In addition, Mr. Rickey received an M.S. in Materials Science and Engineering from Stanford University. Joel O. Holliday has served as the Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary of the Company since November 1981. He has previously served as the Director of Finance during the reorganization of Westgate-California Corporation and as Vice President, Finance of Spin Physics, Inc., an electronics company. Mr. Holliday received a B.A. from Claremont McKenna College and an M.B.A. from Harvard Business School. Thomas L. Tullie joined the Company as Vice President, Sales in August 1996. Prior to joining the Company, from 1989 to 1996 Mr. Tullie held several strategic sales management positions, most recently as Director of East Coast Sales, at S-MOS Systems, a semiconductor company. Prior to joining S-MOS Systems, Mr. Tullie was a designer in the workstations group of Digital Equipment Corporation. Mr. Tullie earned a B.S. from the University of Massachusetts and an M.B.A. from Clark University. Anil K. Bedi joined the Company in August 1996 as Vice President, Marketing. Prior to joining the Company, Mr. Bedi worked at Philips Semiconductor from October 1993 to July 1996, where he served as Director of Strategic Marketing and General Manager of the Mass Storage Product Group. Prior to joining Philips Semiconductor, from 1984 to 1993 Mr. Bedi served in senior marketing and management positions at Oki Semiconductor and Gazelle and TriQuint Semiconductor (two GaAs-based semiconductor companies). Mr. Bedi has also held marketing and sales positions at Xerox Corporation and National Semiconductor. Mr. Bedi earned his B.S.E.E. and M.S.E.E. degrees from the University of Wisconsin and his M.B.A. from the University of Utah. 48 Laszlo V. Gal joined the Company in January 1997 as Vice President, Engineering. From September 1994 to December 1996, he served in various senior management positions, including Director of Product Development at Motorola, Inc. Mr. Gal served as the manager of IC Designs at Burroughs/Unisys from 1983 to 1994 and worked as a staff scientist at the IBM Research Center from 1981 to 1982. From 1979 to 1981 Mr. Gal was a member of the technical staff at Rockwell Corporation, where he worked on GaAs development. Mr. Gal was educated at the Budapest Technical University in Hungary, where he received a B.S. and M.S. and Ph.D in Electrical Engineering. He holds 12 U.S. patents in VLSI design and applications. Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of Directors since October 1982. Mr. Smullen has served as Acting Vice President, Operations of the Company from August 1997 through October 1997. From April 1983 until April 1987, Mr. Smullen served as the Company's Chief Executive Officer. Previously, he was senior vice president of operations of Intersil, Inc.'s semiconductor division. In 1967, Mr. Smullen co-founded National Semiconductor. Prior to that, he was director of integrated circuits at Fairchild Semiconductor. Mr. Smullen is currently a director of Micro Linear Corporation, a manufacturer of integrated circuits. He holds a B.S. in Mechanical Engineering from the University of Minnesota. Kenneth L. Clark joined the Company in November 1997 as Vice President, Operations. Prior to joining the Company, Mr. Clark worked at Integrated Device Technologies, Inc., a semiconductor company, from February 1995 to October 1997, where he served as Director, Fab Operations. From 1990 to 1995, Mr. Clark served in various senior management positions including Director, Fab Operations at Silicon Systems, Inc., a semiconductor company. From 1987 to 1990, Mr. Clark served as Director, Fab Operations at National Semiconductor Corp. Mr. Clark has also held manufacturing and engineering management positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the University of Washington. William K. Bowes, Jr. has served as a director of the Company since April 1980. He has been a general partner of U.S. Venture Partners, a venture capital investment entity, since July 1981. Mr. Bowes serves as a director of Amgen, Inc., XOMA Corporation and several privately-held U.S. Venture Partners portfolio companies. Mr. Bowes holds a B.A. from Stanford University and an M.B.A. from Harvard Business School. Franklin P. Johnson, Jr. has served as a director of the Company since April 1980. He is the general partner of Asset Management Partners, a venture capital partnership. In addition, Mr. Johnson is a general partner of the general partner of Asset Management Associates, a venture capital limited partnership. Mr. Johnson has been a venture capital investor for more than five years. Mr. Johnson is also Chairman of the Board of Boole and Babbage, Inc., and a director of Amgen, Inc. and IDEC Pharmaceuticals Corporation. Mr. Johnson holds a B.S. from Stanford University and an M.B.A. from Harvard Business School. Arthur B. Stabenow has served as a director of the Company since July 1988. Mr. Stabenow has been Chairman, President and Chief Executive Officer of Micro Linear Corporation, a manufacturer of integrated circuits, since April 1986. Mr. Stabenow has over 35 years of experience in the semiconductor industry. From January 1979 to March 1986, he was employed as a vice president and general manager at National Semiconductor Corporation. Mr. Stabenow is currently a director of Zoran, Inc. and Micro Linear Corporation. Mr. Stabenow holds an M.B.A. from the University of New Haven. R. Clive Ghest has served as a director of the Company since July 1997. Since January 1997, Mr. Ghest has been a principal of Ghest Associates Consulting. Mr. Ghest was the Vice President of Business Development at Advanced Micro Devices Inc. from February 1986 to December 1996. He has more than 35 years of experience in various capacities in the computer, communications and semiconductor industries. Mr. Ghest holds an M.S.E.E. from the University of Santa Clara and an Hons. B.Sc. from the University of London. 49 BOARD COMPOSITION The Company currently has authorized six directors. Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until the next annual meeting or until his or her successor is duly elected and qualified. The executive officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. BOARD COMPENSATION Except for reimbursement for reasonable travel expenses relating to attendance at Board meetings and the grant of stock options, directors are not compensated for their services as directors. Directors who are employees of the Company are eligible to participate in the Company's 1992 Stock Option Plan (the "1992 Plan") and in the Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"). Directors who are not employees of the Company are eligible to participate in the Company's 1997 Directors' Stock Option Plan. See "-- 1982 Employee Incentive Stock Option Plan," " -- 1992 Stock Option Plan" and " -- 1997 Directors' Stock Option Plan." The Chairman of the Company's Board of Directors is compensated for certain services provided to the Company. See "Management--Executive Compensation." COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has established a Compensation Committee and an Audit Committee. The Board of Directors does not maintain a Nominating Committee or a committee performing similar functions. The Compensation Committee recommends salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, administers (with the Board of Directors) the various incentive compensation and benefit plans (including the 1992 Plan and the Purchase Plan) of the Company and recommends policies relating to such incentive compensation and benefit plans. The Audit Committee reviews the need for internal auditing procedures and the adequacy of internal controls. The Audit Committee meets periodically with management and the independent auditors. The Board of Directors may also establish additional committees from time to time. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors are currently Mr. Ghest, Mr. Johnson and Mr. Stabenow. None of these directors has at any time been an officer or employee of the Company or any subsidiary of the Company. During fiscal 1997, David M. Rickey and Roger A. Smullen served as members of the Compensation Committee of the Company's Board of Directors. During fiscal 1997, Mr. Smullen was a member of the Board of Directors of Micro Linear Corporation. During fiscal 1997, Arthur B. Stabenow, the Chairman, President and Chief Executive Officer of Micro Linear Corporation, served as a member of the Compensation Committee of the Company's Board of Directors. No other interlocking relationship exists between the Company's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company nor has such an interlocking relationship existed in the past. 50 EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned or paid for services rendered to the Company during the fiscal year ended March 31, 1997 by the Chief Executive Officer, the Chairman of the Board of Directors and each of the other four most highly compensated executive officers (the "Named Officers"), each of whose aggregate compensation during the Company's last fiscal year exceeded, or would exceed on an annualized basis, $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES NAME AND PRINCIPAL -------------------------- UNDERLYING ALL OTHER POSITION SALARY BONUS OPTIONS (#) COMPENSATION - ------------------ ---------- --------- ------------ ------------ David M. Rickey President and Chief Executive Officer....... $277,215(1) $61,500 -- $133,826(2) Joel O. Holliday Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary............... 162,208(1) 41,500 33,333 2,000(3) Roger A. Smullen Chairman of the Board of Directors............... 208,000 41,500 33,333 -- Thomas Tullie Vice President, Sales... 124,934(1)(4) 60,500 133,333 38,863(5) Anil Bedi Vice President, Marketing............... 106,346(1) 56,500 206,666 8,560(6) Laszlo Gal(7) Vice President, Engineering............. 22,885(1) 46,500 206,666 8,522(8)
- -------- (1) Includes pre-tax contributions to the AMCC 401(k) Plan. (2) Includes $128,706 paid to Mr. Rickey in the form of relocation expenses, a matching contribution in the amount of $2,000 that the Company made on Mr. Rickey's behalf to the AMCC 401(k) Plan and annual premiums in the amount of $3,120 paid by the Company on a term life insurance policy. (3) Includes a matching contribution in the amount of $2,000 that the Company made on Mr. Holliday's behalf to the AMCC 401(k) Plan. (4) Includes commissions earned by Mr. Tullie in the amount of $38,396, of which $25,191 was paid to Mr. Tullie in fiscal 1997 and $13,205 was paid to Mr. Tullie in fiscal 1998. (5) Includes a matching contribution in the amount of $565 that the Company made on Mr. Tullie's behalf to the AMCC 401(k) Plan and $38,298 paid to Mr. Tullie for relocation expenses. (6) Includes a matching contribution in the amount of $1,171 that the Company made on Mr. Bedi's behalf to the AMCC 401(k) Plan and $7,389 paid to Mr. Bedi for relocation expenses. (7) Mr. Gal joined the Company in January 1997, and his annualized base salary for the fiscal year ended March 31, 1997 year was $175,000. (8) Includes $8,522 paid to Mr. Gal for relocation expenses. EMPLOYMENT AGREEMENT In January 1996, the Company entered into a letter agreement with David M. Rickey, the Company's President and Chief Executive Officer. This agreement entitles Mr. Rickey to a salary of $275,000 per year and term life insurance purchased by the Company for the benefit of Mr. Rickey's estate. Pursuant to the terms of the agreement, if the Company enters into certain change-of- control transactions, the vesting of Mr. Rickey's options to purchase shares of the Company's Common Stock will accelerate. In addition, the agreement provides that if the Company is acquired and the per share value of the Company's Common Stock is less than $3.00 per share, the Company will compensate Mr. Rickey for the difference between $3.00 per share and the per share merger or sale price determined by the Company's Board of Directors. The letter agreement provides that Mr. Rickey's employment is at will and terminable by the Company or Mr. Rickey for any reason, with or without cause, and with or without notice. See "Certain Transactions." 51 OPTION GRANTS The following table provides certain summary information regarding stock options granted to the Named Officers during the fiscal year ended March 31, 1997. No stock appreciation rights were granted during such fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) -------------------------------------------------- POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(4) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED (#) FISCAL YEAR(2) ($/SHARE)(3) DATE 5% 10% ---- ----------- -------------- ------------ ---------- ---------- ----------- David M. Rickey......... 0 0% N/A N/A N/A N/A Joel O. Holliday........ 33,333 2.35 $0.53 07/17/2006 $ 28,505 $ 45,390 Roger A. Smullen........ 33,333 2.35 $0.53 07/17/2006 28,505 45,390 Thomas Tullie........... 133,333 9.39 $0.53 06/30/2006 114,022 181,562 Anil Bedi............... 206,666 14.55 $0.53 07/17/2006 176,735 281,420 Laszlo Gal.............. 206,666 14.55 $0.53 01/30/2007 176,735 281,420
- -------- (1) Consists of options granted pursuant to the 1992 Plan. See "-- 1992 Stock Option Plan." (2) An aggregate of 1,457,285 options to purchase shares of Common Stock of the Company were granted during fiscal year ended March 31, 1997, of which 1,420,619 shares were granted to employees. (3) The exercise price and tax withholding obligations related to exercise may be paid by delivery of shares that are already owned or by offset of the underlying shares, subject to certain conditions. (4) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the SEC. There can be no assurance that the actual stock price appreciation over the ten-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the Named Officers. OPTION EXERCISES AND HOLDINGS The following table provides certain summary information concerning the shares of Common Stock represented by outstanding stock options held by each of the Named Officers as of March 31, 1997. No stock appreciation rights were exercised during such fiscal year and no stock appreciation rights were outstanding at the end of such fiscal year. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT MARCH 31, 1997(1) AT MARCH 31, 1997(3) ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2) ---- ----------- ---------------- ----------- ---------------- David M. Rickey... 800,000 0 $ 0 $ 0 Joel O. Holliday.. 83,333 0 2,500 0 Roger A. Smullen.. 53,333 0 0 0 Thomas Tullie..... 133,333 0 0 0 Anil Bedi......... 206,666 0 0 0 Laszlo Gal........ 206,666 0 0 0
- -------- (1) No Named Officer exercised options during the fiscal year ended March 31, 1997. (2) Options granted under the 1982 Stock Option Plan (the "1982 Plan") and 1992 Plan are generally immediately exercisable, but subject to a right of repurchase pursuant to the vesting schedule of each such grant. Accordingly, the table reflects those options that are exercisable, not those options that are vested. See "-- 1982 Employee Incentive Stock Option Plan" and "-- 1992 Stock Option Plan." (3) There was no public trading market for the Company's Common Stock as of March 31, 1997. Accordingly, this value has been calculated based on a price of $0.525 per share, the Board of Directors' determination of the fair market value of the Company's Common Stock as of March 31, 1997, minus the applicable per share exercise price. 52 1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN The Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan") was adopted by the Board of Directors in November 1982 and approved by the stockholders in July 1983. A total of 5,338,666 shares of Common Stock has been reserved for issuance under the 1982 Plan. The 1982 Plan expired by its own terms on November 1, 1992; however, options granted under the 1982 Plan remain outstanding as of the date of this offering. The purposes of the 1982 Plan are to encourage selected employees to accept or continue employment with the Company, to provide additional incentives to the Company's employees and to increase the interest of employees in the Company's welfare. The 1982 Plan provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The 1982 Plan is administered by the Board of Directors, which determines the terms of options granted under the 1982 Plan, including the exercise price, number of shares subject to the option and the exercisability thereof. Subject to the discretion of the Board of Directors, options granted under the 1982 Plan generally are immediately exercisable in full and 1/5th of the shares subject to the options vest each year over the five year period measured from the grant date. Unvested shares purchased upon exercise of such options are subject to repurchase by the Company, at its option, upon an optionee's termination of employment. No options granted under the 1982 Plan are transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options granted under the 1982 Plan must be at least equal to the fair market value of the shares subject to such options on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price must equal at least 110% of the fair market value on the grant date. Incentive stock options granted to a participant, may not, on an aggregate basis, become exercisable for more than $100,000 (valued at the time of grant) per calendar year. No options have been granted to date at prices less than 100% of the fair market value on the date of grant. Options granted under the 1982 Plan may not have a term in excess of ten years. However, all stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the Company's outstanding capital stock, may not have a term in excess of five years. In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, the options shall become immediately exercisable or an equivalent option substituted by the successor corporation. The Plan Administrator has the discretion to accelerate the vesting of the option shares at any time. Under the 1982 Plan, as of December 31, 1997, options to purchase 4,218,834 shares of Common Stock had been exercised, options to purchase an aggregate of 83,309 shares of Common Stock were outstanding at a weighted average exercise price of $0.54 per share and no shares remain available for future grant as the 1982 Plan expired in November 1992. The Board of Directors may at any time amend, alter, suspend or discontinue the 1982 Plan as long as such action does not adversely affect any outstanding option and provided that stockholder approval shall be required for an amendment to increase the number of shares of Common Stock reserved for issuance under the 1982 Plan, extend the duration of the 1982 Plan, extend the period over which options may be exercised under the 1982 Plan or change the class of persons eligible to receive options under the 1982 Plan. 1992 STOCK OPTION PLAN The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted by the Board of Directors in July 1992 and approved by the stockholders in September 1992 and subsequently amended. A total of 6,027,304 shares of Common Stock have been reserved for issuance under the Stock Plan. As of December 31, 1997, options to purchase 1,518,626 shares of Common Stock had been exercised, options to purchase a total of 2,080,214 shares at a weighted average exercise price of $1.53 per share were outstanding and 2,428,464 shares remained available for future option grants. 53 The 1992 Plan provides for the granting to employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Code and for the granting to employees and consultants, including nonemployee directors, of nonstatutory stock options. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value (under all plans of the Company and determined for each share as of the date the option to purchase the shares was granted) in excess of $100,000, any such excess options shall be treated as nonstatutory stock options. If not terminated earlier, the 1992 Plan will terminate in July 2002. The 1992 Plan may be administered by the Board of Directors or a committee of the Board (the "Administrator"). The Administrator determines the terms of options granted under the 1992 Plan, including the number of shares subject to the option, exercise price, term and exercisability. The exercise price of all incentive stock options granted under the 1992 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of outstanding capital stock of the Company or any parent or subsidiary corporation of the Company (a "10% Stockholder") must equal at least 110% of the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options must equal at least 85% of the fair market value of the Common Stock on the date of grant; provided, however, that the exercise price of any nonstatutory stock option granted to a Named Executive of the Company must equal at least 100% of the fair market value of the Common Stock on the date of grant. Payment of the exercise price may be made in cash or other consideration, including promissory notes, as determined by the Administrator. The Plan Administrator has the discretion to implement one or more repricing programs whereby outstanding options under the 1992 Plan with exercise prices above the current market price of the Common Stock will be cancelled, and new options will be granted in replacement with an exercise price based on such current market value. The Administrator determines the term of options, which may not exceed 10 years (5 years in the case of an incentive stock option granted to a 10% Stockholder). No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. The Administrator determines when options become exercisable. Subject to the discretion of the Board of Directors, options granted under the 1992 Plan generally are immediately exercisable in full, and (i) for the initial option grant to each optionee (the "Initial Option"), 1/4th of the number of such shares subject to the option generally vest as of the one year anniversary of the vesting commencement date and 1/48th of the remainder vest at the end of each month thereafter; and (ii) for option grants subsequent to the Initial Option, 1/48th of the number of such shares subject to the option generally vest at the end of each month after the vesting commencement date. In the event of the merger of the Company with another corporation, in which the Company is not the surviving entity, then each option shall immediately vest as to one year of additional vesting. Each option may be thereafter assumed or an equivalent option substituted by the successor corporation, otherwise the options will terminate. The Administrator has the authority to amend or terminate the 1992 Plan as long as such action does not adversely affect any outstanding option and provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") or with Section 162(m) or 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain stockholder approval of any amendment to the 1992 Plan in such a manner and to such a degree as required. 1997 DIRECTORS' STOCK OPTION PLAN The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors in October 1997 and approved by the Company's stockholders in November 1997. A total of 200,000 shares of Common Stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan is designed to work automatically, without administration; however, to the extent administration is necessary, it will 54 be provided by the Board of Directors. To the extent they arise, it is expected that conflicts of interest will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which such director has a personal interest. The Directors' Plan provides that each person who is or becomes a nonemployee director of the Company will be granted a nonstatutory stock option to purchase 12,500 shares of Common Stock (the "First Option") on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on April 1 each year (starting in 2000 for nonemployee directors who were serving as directors as of the date of the closing of the IPO), each nonemployee director of the Company will be granted an option to purchase 12,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she has served on the Company's Board of Directors for at least six months. The Directors' Plan sets neither a maximum nor a minimum number of shares for which options may be granted to any one nonemployee director, but does specify the number of shares that may be included in any grant and the method of making a grant. No option granted under the Directors' Plan is transferable by the optionee other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order, and each option is exercisable, during the lifetime of the optionee, only by such optionee. The Directors' Plan provides that the First Option shall become exercisable in installments as to 1/12th of the total number of shares subject to the First Option on each monthly anniversary of the date of grant of the First Option. Each Subsequent Option shall become exercisable in installments as to 1/12th of the total number of shares subject to the Subsequent Option on each monthly anniversary of the grant date of that Subsequent Option. If a nonemployee Director ceases to serve as a Director for any reason other than death or disability, he or she may, but only within 90 days after the date he or she ceases to be a Director of the Company, exercise options granted under the Directors' Plan to the extent that he or she was entitled to exercise it at the date of such termination. To the extent that he or she was not entitled to exercise any such option at the date of such termination, or if he or she does not exercise such option (which he or she was entitled to exercise) within such 90 day period, such option shall terminate. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of the Common Stock on the grant date of the option. Options granted under the Directors' Plan have a term of ten years. In the event of the dissolution or liquidation of the Company, a sale of all or substantially all of the assets of the Company, the merger of the Company with or into another corporation or any other reorganization of the Company in which more than 50% of the shares of the Company entitled to vote are exchanged, each outstanding option will become exercisable for all the option shares as fully vested shares immediately prior to the effectiveness of such dissolution, liquidation, sale, merger or reorganization, at the end of which time the option shall terminate, unless the option is assumed by the corporation succeeding the Company or acquiring its business by reason of such dissolution, liquidation, sale, merger or reorganization. The Board of Directors may amend or terminate the Directors' Plan; provided, however, that no such action may adversely affect any outstanding option. If not terminated earlier, the Directors' Plan will have a term of ten years. 1997 EMPLOYEE STOCK PURCHASE PLAN The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in September 1997 and approved by the Company's stockholders in November 1997. A total of 400,000 shares of Common Stock are reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by offering periods of 24 months duration with new offering periods (other than the first offering period) commencing on or about February 1 and August 1 of each year. Each offering period will consist of four consecutive purchase periods of six months duration, with the last day of each period being designated a purchase date. However, the first offering period commenced on November 25, 1997 and will continue through January 31, 2000, with the first purchase date occurring on July 31, 1998, and subsequent purchase dates to occur every six months thereafter). The Purchase Plan will be administered by the Compensation 55 Committee (comprised of Messrs. Ghest, Johnson and Stabenow, outside directors of the Company who are not eligible to participate in the Purchase Plan). Employees (including officers and employee directors) of the Company, or of any majority-owned subsidiary designated by the Board, are eligible to participate in the Purchase Plan if they are employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 20% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's Common Stock at the beginning of the offering period or the purchase date. If the fair market value of the Common Stock on a purchase date is less than the fair market value at the beginning of the offering period, a new 24-month offering period will automatically begin on the first business day following the purchase date with a new fair market value. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. If not terminated earlier, the Purchase Plan will have a term of 20 years. The Purchase Plan provides that in the event of a merger of the Company with or into another corporation or a sale of all or substantially all of the Company's assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation unless the Board of Directors shortens the offering period so that employees' rights to purchase stock under the Purchase Plan are exercised prior to the merger or sale of assets. The Board of Directors has the power to amend or terminate the Purchase Plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. 401(K) PLAN Effective January 1, 1986, the Company established a 401(k) defined contribution retirement plan (the "Retirement Plan") covering all full-time employees with greater than three months service. The Retirement Plan provides for voluntary employee contributions from 1% to 20% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company may contribute such amounts as determined by the Board of Directors. Employer contributions vest to participants at a rate of 20% per year of service, provided that after five years of service all past and subsequent employer contributions are 100% vested. During the years ended March 31, 1997, 1996 and 1995, the Company contributed $318,000, $182,000 and $116,000, respectively. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law (the "Delaware Law"), the Company has included in its Restated Certificate of Incorporation a provision to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, respectively, subject to certain exceptions. This provision does not affect a director's responsibilities under federal securities laws. In addition, the Company's Bylaws provide that the Company is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware Law. The indemnification agreements require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified and to obtain directors' and officers' insurance if available on reasonable terms. The Company has also obtained directors' and officers' liability insurance. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. 56 CERTAIN TRANSACTIONS In January 1996, the Company entered into a letter agreement with David M. Rickey, the Company's President and Chief Executive Officer. This agreement entitles Mr. Rickey to a salary of $275,000 per year and term life insurance purchased by the Company for the benefit of Mr. Rickey's estate. Pursuant to the terms of the agreement, if the Company enters into certain change-of- control transactions, the vesting of Mr. Rickey's options to purchase shares of the Company's Common Stock will accelerate. In addition, the agreement provides that if the Company is acquired and the per share value of the Company's Common Stock is less than $3.00 per share, the Company will compensate Mr. Rickey for the difference between $3.00 per share and the per share merger or sale price determined by the Company's Board of Directors. The letter agreement provides that Mr. Rickey's employment is at will and terminable by the Company or Mr. Rickey for any reason, with or without cause, and with or without notice. In February 1996, the Company entered into a loan arrangement with Mr. Rickey, pursuant to which the Company loaned to Mr. Rickey $150,000 ("Note No. 1") and $53,000 ("Note No. 2") at an annual interest rate of 5.32%. Note No. 1 was a full recourse, unsecured real estate bridge loan with accrued interest and principal payable upon the earlier of February 12, 1999 or the sale of the house in which Mr. Rickey lived prior to relocating to San Diego to accept employment as the Company's President and Chief Executive Officer. Note No. 2 was the reinstatement of a loan which had been made previously to Mr. Rickey in connection with the exercise of incentive stock options while serving as Vice President, Manufacturing for the Company. Note No. 2 was a full recourse, unsecured promissory note with accrued interest and principal payable no later than February 12, 1999. Note No. 1 and Note No. 2 may be declared payable in full by the Company in the event that Mr. Rickey ceases to be employed by the Company. In May 1996, the Company entered into a loan agreement with Mr. Rickey pursuant to which the Company loaned $750,000 ("Note No. 3") to Mr. Rickey at an interest rate of 5.76% per annum compounded annually. The proceeds of the loan were used to exercise options granted by Mr. Rickey's former employer, which were expiring as a result of Mr. Rickey's termination of employment with the former employer in order to join the Company. The loan is evidenced by a non-recourse promissory note, which is secured by 46,500 shares of Common Stock of Advanced Micro Devices, Inc. The principal and accrued interest on Note No. 3 are due and payable in full on May 1, 1999, unless accelerated in whole or in part in the event of (i) a default under the loan agreement or pledge agreement for Note No. 3, (ii) a default in payment under Note No. 3 or any other promissory note issued to the Company by Mr. Rickey, (iii) the voluntary or involuntary termination of Mr. Rickey's employment with the Company or (iv) the sale of any portion of the Common Stock securing Note No. 3. Each of Note No. 1, Note No. 2 and Note No. 3 were approved by the Board of Directors of the Company pursuant to the approval of Mr. Rickey's offer of employment with the Company. In September 1996, Mr. Rickey repaid approximately $142,000 of the principal on Note No. 1, and in April 1997, Mr. Rickey delivered a full recourse, unsecured promissory note with a principal amount of $12,392 and an interest rate of 5.91% per annum in payment of the balance of the amount owing under Note No. 1. The aggregate principal balance outstanding under such note and Notes No. 2 and No. 3 at December 31, 1997 was $815,392. Mr. Rickey is current in his payments under all such notes. In July 1997, Mr. Rickey exercised stock options granted under the 1992 Plan. In payment of the purchase price for the exercised shares, Mr. Rickey delivered full recourse promissory notes in principal amounts of approximately $400,000, $20,000 and $35,000 bearing interest at rates of 5.98%, 5.98% and 6.54%, respectively. The notes and accrued interest thereon are payable in full in February 2000, February 2000 and April 2001, respectively. The Company has entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. For a description of limitations of liability 57 and certain indemnification arrangements with respect to the Company's officers and directors, see "Management -- Limitation of Liability and Indemnification Matters." Certain stockholders are entitled to certain registration rights with respect to the Common Stock held by such stockholders. See "Description of Capital Stock -- Registration Rights." For a description of compensation of officers and directors of the Company and the eligibility of officers and directors of the Company to participate in the Company's employee benefit plans, see "Management --Board Compensation" and "-- Executive Compensation." The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal stockholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 58 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of December 31, 1997 and as adjusted to reflect the sale of the Common Stock offered by the Company pursuant to this Prospectus by (i) each of the Company's directors and Named Officers, (ii) all directors and executive officers as a group and (iii) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO OFFERING(1) OWNED AFTER OFFERING(1) -------------------- NUMBER OF ----------------------- NUMBER PERCENT(2) SHARES OFFERED NUMBER PERCENT(2) --------- ---------- -------------- ------------- ------------- David M. Rickey (3)..... 893,332 4.28% -- 893,332 4.08% Joel O. Holliday (4).... 505,261 2.41 -- 505,261 2.30 Roger A. Smullen (5).... 540,746 2.59 -- 540,746 2.47 Thomas Tullie (6)....... 166,665 * -- 166,665 * Anil K. Bedi (7)........ 226,666 1.08 -- 226,666 1.03 Laszlo V. Gal (8)....... 213,332 1.01 -- 213,332 * William K. Bowes, Jr., including shares held by affiliates of U.S. Venture Partners (9)... 850,226 4.06 -- 790,223 3.60 Franklin P. Johnson, Jr., including shares held by Asset Management Partners and Asset Management Associates (10)........ 650,398 3.11 -- 650,398 2.97 Arthur B. Stabenow (11). 86,663 * -- 86,663 * R. Clive Ghest (12)..... 50,000 * -- 50,000 * Sequoia Capital (13).... 1,199,992 5.75 -- 1,199,992 5.49 3000 Sand Hill Road Menlo Park, CA 94025 U.S. Venture Partners (14)................... 780,993 3.74 60,003 720,990 3.30 2180 Sand Hill Road Menlo Park, CA 94025 Additional Selling Stockholders (15)..... 4,939,997 23.67 4,939,997 -- -- All directors and execu- tive officers as a group (10 persons) (15)(16)............... 4,183,289 19.47 4,123,286 18.33
- -------- * Less than 1% of the outstanding shares (1) Assumes no exercise of the Underwriters' over-allotment option. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, to the Company's knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder. (2) Applicable percentage of ownership for each stockholder is based on 20,870,368 shares of Common Stock outstanding as of December 31, 1997. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to the shares. In computing the shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of December 31, 1997 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. (3) Includes 440,554 shares that are no longer subject to repurchase by the Company. (4) Includes 321,931 shares held in the name of Joel O. Holliday and Rosanne R. Holliday, Co-Trustees of the Joel O. Holliday Family Trust dated April 1, 1985 and 66,666 shares held in the name of the Holliday Children 1985 Trust. Includes 55,556 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights in favor of the Company, of which 9,722 shares are no longer subject to repurchase by the Company. Mr. Holliday disclaims beneficial ownership of the shares held of record by the Holliday Children 1985 Trust. 59 (5) Includes 523,245 shares of Common Stock that are no longer subject to repurchase by the Company. (6) Includes 62,500 shares that are no longer subject to repurchase by the Company. (7) Includes 174,666 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights in favor of the Company, of which 25,360 shares are no longer subject to repurchase by the Company. (8) Represents Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights in favor of the Company, of which 61,666 shares are no longer subject to repurchase by the Company. (9) William K. Bowes, Jr., a director of the Company, holds 5,901 shares of Common Stock directly. In addition, Mr. Bowes holds immediately exercisable options to purchase 63,332 shares of Common Stock which are subject to repurchase rights in favor of the Company, of which 27,220 shares are no longer subject to repurchase by the Company. In addition, Mr. Bowes is a partner of the general partner of U.S. Venture Partners, which holds 393,374 shares; U.S. Venture Partners III, which holds 327,616 shares; Second Ventures, L.P., which holds 53,336 shares; and U.S. Ventures, S.A., which holds 6,667 shares. Mr. Bowes disclaims beneficial ownership of the shares held by U.S. Venture Partners, U.S. Venture Partners III, Second Ventures, L.P. and U.S. Ventures, S.A., except to the extent of his pecuniary interest therein. See Note 14. (10) Includes 63,332 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights, of which 27,220 shares are no longer subject to repurchase by the Company. Mr. Johnson is a general partner of AMC Partners, the general partner of Asset Management Partners, which holds 236,449 shares. In addition, AMC Partners is a general partner of Asset Management Associates, which holds 350,617 shares. Mr. Johnson disclaims beneficial ownership with respect to the shares held by Asset Management Partners and Asset Management Associates, except to the extent of his pecuniary interest therein. (11) Includes 59,037 shares that are no longer subject to repurchase by the Company. (12) Represents shares of Common Stock issuable upon exercise of immediately exercisable options which are subject to repurchase rights in favor of the Company, of which 9,722 shares are no longer subject to repurchase by the Company. (13) Includes 1,142,856 shares held by Sequoia Capital Growth Fund and 57,136 shares held by Sequoia Technology Partners III. (14) Includes 393,374 shares held by U.S. Venture Partners, 327,616 shares held by U.S. Venture Partners III, 53,336 shares held by Second Ventures L.P. and 6,667 shares held by U.S. Ventures, S.A. William K. Bowes, Jr., a director of the Company, is a general partner of the general partner of each of these partnerships. Mr. Bowes disclaims beneficial ownership of such shares, except to the extent of his pecuniary interest therein. See Note 9. (15) Includes 1,368,059 shares held by entities affiliated with certain directors as described in Notes 9, 10 and 14. Also includes 160,910 shares subject to immediately exercisable options and for which the repurchase rights have lapsed. (16) Does not include 100,000 shares of Common Stock issuable upon exercise of immediately exercisable options granted to Kenneth L. Clark, the Company's Vice President, Operations. Mr. Clark joined the Company in November 1997. All of the shares issuable upon exercise of the options held by Mr. Clark are subject to repurchase rights in favor of the Company. 60 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 60,000,000 shares of Common Stock, $.01 par value, and 2,000,000 shares of undesignated Preferred Stock, $.01 par value. COMMON STOCK As of December 31, 1997, there were 20,870,368 shares of Common Stock outstanding, held of record by approximately 800 stockholders, and options to purchase an aggregate of 2,188,276 shares of Common Stock were also outstanding. There will be 21,870,368 shares of Common Stock outstanding (assuming no exercise of options outstanding under the Company's 1982 Plan and 1992 Plan or other options outstanding as of December 31, 1997) after giving effect to the sale of the shares of Common Stock to the public offered hereby. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon completion of this offering will be, fully paid and non- assessable. PREFERRED STOCK The Board of Directors is authorized to issue Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including voting rights, of the holders of Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. As of the closing of the offering, no shares of Preferred Stock will be outstanding and the Company currently has no plans to issue any shares of Preferred Stock. REGISTRATION RIGHTS The holders of 1,333,059 shares of Common Stock (the "Registrable Securities") or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of agreements between the Company and the holders of the Registrable Securities. Subject to certain limitations in the agreement, the holders of at least 40% of the Registrable Securities (the "Initiating Holders") may require, on two occasions after the closing of the offering, that the Company use its best efforts to register the Registrable Securities for public resale provided that a minimum of $5,000,000 in Common Stock must be sold by the Initiating Holders in such public resale. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in such registration, subject to the ability of the underwriters to limit the number of shares included in this offering. The holders of Registrable Securities may also require the Company to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company. All registration expenses must be borne by the Company and all selling expenses relating to the Registrable Securities must be borne by the holders of the securities being registered. 61 TRANSFER AGENT AND REGISTRAR The name and address of transfer agent and registrar for the Company's Common Stock is Harris Trust Company of California, 601 South Figueroa St., Ste. 4900, Los Angeles, California, 90017. Its telephone number at that address is (213) 239-0671. LISTING The Company's Common Stock is listed on the Nasdaq National Market under the trading symbol AMCC. The Company's Common Stock is not listed on any other exchange. See "Risk Factors--Volatility of Stock Price." 62 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the offering, the Company will have outstanding 21,870,368 shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option and no exercise of options outstanding under the Company's 1982 Plan and 1992 Plan or other options outstanding after December 31, 1997). Of these shares, the 6,000,000 shares sold in the offering (plus any shares issued upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The 6,385,950 shares sold in the IPO (the "IPO Shares") are also freely tradable without restriction. The remaining 9,484,418 shares of Common Stock outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. Approximately 579,000 shares of the remaining Common Stock have been eligible for immediate sale in the public market without restriction under rule 144(k) since the effective date of the Registration Statement filed pursuant to the Company's IPO (the "IPO Effective Date"), some or all of which shares may have been sold in the public market as of December 31, 1997. The holders of approximately 8,905,418 shares of the remaining Common Stock of the Company are subject to lock-up agreements (the "IPO Lock-Up Agreements") with the Representatives of the Underwriters generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock of the Company or any securities exercisable for or convertible into the Company's Common Stock owned by them until May 24, 1998, the date 180 days after the IPO Effective Date, without the prior written consent of BancAmerica Robertson Stephens, the designated representative of the Underwriters. In addition, the holders of approximately shares of the remaining Common Stock have entered into similar lock-up agreements ("Lock-up Agreements") with the Representatives of the Underwriters, which agreements expire 90 days after the effective date of the registration statement filed pursuant to this offering (the "Effective Date"). As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144 (as described below), 144(k) and 701, shares subject to Lock-Up Agreements and IPO Lock-Up Agreements will not be saleable until such agreements expire or are waived by the designated Underwriters' Representative. Taking into account the Lock-Up Agreements and IPO Lock-Up Agreements, and assuming the designated Underwriters' Representative does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: beginning on the Effective Date, only the shares sold in this offering, the IPO Shares and up to approximately 579,000 shares pursuant to Rule 144(k), will be immediately available for sale in the public market; beginning on February 22, 1998, which is the date 90 days after the IPO Effective Date, approximately 607,000 additional shares will be eligible for sale, subject in some cases to volume and other restrictions under Rule 144; beginning May 24, 1998, the date 180 days after the IPO Effective Date, approximately shares will be freely tradeable, subject in some cases to the volume and other restrictions of Rule 144, and beginning 90 days after the Effective Date approximately additional shares will be freely tradeable, subject in some cases to the volume and other restrictions of Rule 144. In general, under Rule 144 as currently in effect, and beginning after the expiration of the applicable lock-up agreement, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 218,704 shares immediately after the offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been 63 an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. All Company employees who acquire Common Stock pursuant to stock option grants under the 1992 Plan are restricted from selling securities of the Company until May 24, 1998, the date 180 days after the IPO Effective Date, with the exception that employees who have entered into Lock-Up Agreements are restricted from selling securities of the Company until 90 days after the Effective Date. The 1982 Plan contains no such lock-up provisions. Therefore, beginning 90 days after the IPO Effective Date, any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to the 1982 Plan and who has not entered into a Lock-Up Agreement or IPO Lock-Up Agreement may be entitled to rely on the resale provisions of Rule 701 to the extent that such shares were purchased after May 20, 1988. In addition, beginning upon expiration of the time period specified in the applicable Lock-Up Agreement or IPO Lock-Up Agreement, any employee, officer or director of or consultant to the Company who purchased his or her shares after May 20, 1988, pursuant to options that were granted under the Company's 1982 Plan or who purchased his or her shares pursuant to options that were granted under the Company's 1992 Plan and who has entered into a Lock-Up Agreement or IPO Lock-Up Agreement, as applicable, may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, the Company has filed a registration statement under the Securities Act to register the shares of Common Stock to be issued pursuant to the Company's Purchase Plan on the Effective Date and intends to file registration statements under the Securities Act on or about February 22, 1998 to register all of the shares to be issued pursuant to the Company's other employee benefit plans. As a result, any options exercised under the 1982 Plan, the 1992 Plan or any other benefit plan after the effectiveness of such registration statement will also be freely tradeable in the public market, except to the extent restricted under Lock-Up Agreements or IPO Lock- Up Agreements as described above, and except that shares held by affiliates will be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resaleable under Rule 701. As of December 31, 1997, there were outstanding options for the purchase of 2,188,276 shares, of which options for 2,188,276 shares were exercisable, subject in certain cases to repurchase rights of the Company. No shares have been issued to date under the Company's Purchase Plan or Directors Plan. See "Risk Factors -- Shares Eligible for Future Sale," "Management -- 1982 Employee Incentive Stock Option Plan," "-- 1992 Stock Option Plan," "1997 Directors' Plan" and "-- 1997 Employee Stock Purchase Plan" and "Description of Capital Stock -- Registration Rights." 64 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC and Cowen & Company (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER UNDERWRITER OF SHARES ----------- --------- BancAmerica Robertson Stephens..................................... NationsBanc Montgomery Securities LLC.............................. Cowen & Company.................................................... --------- Total............................................................ 6,000,000 =========
The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession of not more than $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. Certain Selling Stockholders have granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an additional 900,000 shares of Common Stock at the same price per share as the Company and the Selling Stockholders receive for the 6,000,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 6,000,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 6,000,000 shares are being sold. Certain Selling Stockholders will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over- allotments made in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and liability arising from breaches of representations and warranties contained in the Underwriting Agreement. Pursuant to the terms of the Lock-Up Agreements, the holders of shares of the Company's Common Stock have agreed with the Company or the Representatives that, until the expiration of the 90 day period following the effective date of the registration statement filed pursuant to this offering (the "Effective Date"), subject to certain limited exceptions, they will not, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, pledge, or otherwise dispose of or transfer, any shares of Common Stock, or any securities convertible into or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, now owned or hereafter acquired by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. In addition, pursuant to the IPO Lock-Up Agreements, shares of Common Stock are subject to a similar lockup agreement that expires after May 23, 1998. BancAmerica Robertson Stephens may, in its sole discretion, 65 without notice, release all or any portion of the securities subject to the Lock-up Agreements or the IPO Lock-Up Agreements. See "Shares Eligible for Future Sale." Approximately shares of Common Stock subject to the IPO Lock-Up Agreements will be eligible for immediate public sale on May 24, 1998 and approximately shares of Common Stock subject to Lock-Up Agreements will be available for immediate public sale following the expiration of the 90 day period following the Effective Date, subject to Rule 144. In addition, the Company has agreed that, until the expiration of the 180 day period following the Effective Date, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain exceptions, sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and warrants, or the Company's grant of options and issuance of stock under existing stock option or stock purchase plans. See "Shares Eligible for Future Sale." The Representatives have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Representatives have advised the Company that, pursuant to Regulation M under the Exchange Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing or maintaining the market price of Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with this offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. As permitted by Rule 103 under the Exchange Act, Underwriters or prospective Underwriters that are market makers ("passive market makers") in the Common Stock may make bids for or purchases of Common Stock on the Nasdaq National Market until such time, if any, when a stabilizing bid for such securities has been made. Rule 103 generally provides that: (i) a passive market maker's net daily purchases of the Common Stock may not exceed 30% of its average daily trading volume in such securities for the two full consecutive calendar months (or any 60 consecutive days ending within the 10 days) immediately preceding the filing date of the registration statement of which this Prospectus forms a part; (ii) a passive market maker may not effect transactions or display bids for the Common Stock at a price that exceeds the highest independent bid for the Common Stock by persons who are not passive market makers; and (iii) bids made by passive market makers must be identified as such. 66 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Venture Law Group, A Professional Corporation, Menlo Park, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The consolidated financial statements of Applied Micro Circuits Corporation at March 31, 1996 and 1997, and for each of the three years in the period ended March 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission, a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected, without charge, at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 500 West Madison Street, Chicago, IL 60661, and 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration Statement and the exhibits thereto may also be accessed through the EDGAR terminals in the Commission's public reference facilities in Washington, D.C. or through the World Wide Web at http://www.sec.gov. 67 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPLIED MICRO CIRCUITS CORPORATION
PAGE ---- Report of Ernst & Young LLP, Independent Auditors......................... F-2 Consolidated Balance Sheets as of March 31, 1996 and 1997 and December 31, 1997 (Unaudited)......................................................... F-3 Consolidated Statements of Operations for each of the three years in the period ended March 31, 1997 and for the nine months ended December 31, 1996 and 1997 (Unaudited)................................................ F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 1997 and for the nine months ended December 31, 1997 (Unaudited)............................................ F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1997 and for the nine months ended December 31, 1996 and 1997 (Unaudited)................................................ F-6 Notes to Consolidated Financial Statements................................ F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Applied Micro Circuits Corporation We have audited the accompanying consolidated balance sheets of Applied Micro Circuits Corporation as of March 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Applied Micro Circuits Corporation at March 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP San Diego, California April 25, 1997, except footnote 4, as to which the date is February 9, 1998 F-2 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, ----------------- ------------ 1996 1997 1997 -------- ------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents................... $ 4,277 $ 5,488 $ 9,923 Short-term investments -- available-for- sale....................................... 4,541 8,109 26,307 Accounts receivable, net of allowance for doubtful accounts of $90 and $200 at March 31, 1996 and 1997, respectively, and $350 at December 31, 1997 (unaudited)........... 9,476 8,418 10,529 Inventories................................. 6,836 7,530 8,002 Deferred income taxes....................... -- -- 1,813 Notes receivable from officer and employee.. 150 8 21 Other current assets........................ 574 690 927 -------- ------- ------- Total current assets....................... 25,854 30,243 57,522 Notes receivable from officer and employees... 53 803 908 Property and equipment, net................... 11,929 10,768 15,427 -------- ------- ------- Total assets................................. $ 37,836 $41,814 $73,857 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................ $ 3,981 $ 2,428 $ 5,010 Accrued payroll and related expenses........ 1,291 3,102 3,407 Other accrued liabilities................... 2,130 1,881 934 Deferred revenue............................ 831 806 1,261 Current portion of long-term debt........... 582 37 -- Current portion of capital lease obliga- tions...................................... 3,062 2,625 2,215 -------- ------- ------- Total current liabilities.................. 11,877 10,879 12,827 Long-term debt, less current portion.......... 37 -- -- Long-term capital lease obligations, less cur- rent portion................................. 4,410 3,192 1,675 Commitments and contingencies (Notes 6 and 10) Stockholders' equity: Preferred Stock, $0.01 par value: 2,000,000 shares authorized, none issued and outstanding............................ -- -- -- Convertible preferred stock, $0.01 par val- ue: Authorized shares -- 1,350,000.............. Issued and outstanding shares -- 1,223,594 at March 31, 1996 and 1997................. Liquidation value -- $25,695 at March 31, 1996 and 1997 and none at December 31, 1997....................................... 12 12 -- Common stock, $0.01 par value: Authorized shares -- 34,500,000 at March 31, 1996 and 1997 and 60,000,000 at December 31, 1997 (unaudited) Issued and outstanding shares -- 4,968,316 and 5,025,357 at March 31, 1996 and 1997, respectively, and 20,870,368 at December 31, 1997, (unaudited)...................... 49 50 208 Additional paid-in capital.................. 36,971 36,974 59,716 Deferred compensation....................... -- -- (512) Retained earnings (deficit)................. (15,444) (9,235) 444 Notes receivable from stockholders.......... (76) (58) (501) -------- ------- ------- Total stockholders' equity................. 21,512 27,743 59,355 -------- ------- ------- Total liabilities and stockholders' equity... $ 37,836 $41,814 $73,857 ======== ======= =======
See accompanying notes. F-3 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------- --------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- (Unaudited) Net revenues........................ $46,950 $50,264 $57,468 $42,464 $54,874 Cost of revenues.................... 27,513 34,169 30,057 22,800 25,370 ------- ------- ------- ------- ------- Gross profit........................ 19,437 16,095 27,411 19,664 29,504 Operating expenses: Research and development.......... 10,108 8,283 7,870 5,668 9,339 Selling, general and administra- tive............................. 10,112 11,232 12,537 8,986 10,260 ------- ------- ------- ------- ------- Total operating expenses........ 20,220 19,515 20,407 14,654 19,599 ------- ------- ------- ------- ------- Operating income (loss)............. (783) (3,420) 7,004 5,010 9,905 Interest income (expense), net...... (358) (242) (29) 5 294 ------- ------- ------- ------- ------- Income (loss) before income taxes... (1,141) (3,662) 6,975 5,015 10,199 Provision (benefit) for income tax- es................................. (70) 32 659 474 262 ------- ------- ------- ------- ------- Net income (loss)................... $(1,071) $(3,694) $ 6,316 $ 4,541 $ 9,937 ======= ======= ======= ======= ======= Primary net income (loss) per share. $ (0.06) $ (0.20) $ 0.33 ======= ======= ======= Shares used in calculating primary net income (loss) per share........ 18,380 18,580 19,185 ======= ======= ======= Pro forma basic earnings per share: Earnings per share................ $ 0.25 $ 0.57 ======= ======= Shares used in calculating basic earnings per share............... 17,824 17,499 ======= ======= Diluted earnings per share: Earnings per share................ $ 0.25 $ 0.51 ======= ======= Shares used in computing diluted earnings per share............... 17,897 19,306 ======= =======
See accompanying notes. F-4 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RETAINED RECEIVABLE TOTAL ------------------ ------------------ PAID-IN DEFERRED EARNINGS FROM STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) STOCKHOLDERS EQUITY ---------- ------ ---------- ------ ---------- ------------ --------- ------------ ------------- Balance, March 31, 1994................ 1,223,594 $ 12 4,247,977 $ 42 $36,655 $ -- $(10,646) $(234) $25,829 Issuance of stock pursuant to exer- cise of stock op- tions............. -- -- 204,558 2 91 -- -- -- 93 Repurchase of com- mon stock......... -- -- (26,278) -- (13) -- (33) -- (46) Net loss........... -- -- -- -- -- -- (1,071) -- (1,071) ---------- ----- ---------- ---- ------- ----- -------- ----- ------- Balance, March 31, 1995................ 1,223,594 12 4,426,257 44 36,733 -- (11,750) (234) 24,805 Issuance of stock pursuant to exer- cise of stock op- tions............. -- -- 547,767 5 251 -- -- -- 256 Repurchase of com- mon stock......... -- -- (5,708) -- (13) -- -- -- (13) Payments on and forgiveness of notes............. -- -- -- -- -- -- -- 158 158 Net loss........... -- -- -- -- -- -- (3,694) -- (3,694) ---------- ----- ---------- ---- ------- ----- -------- ----- ------- Balance, March 31, 1996................ 1,223,594 12 4,968,316 49 36,971 -- (15,444) (76) 21,512 Issuance of stock pursuant to exer- cise of stock op- tions............. -- -- 92,680 1 41 -- -- -- 42 Repurchase of com- mon stock......... -- -- (35,639) -- (38) -- (107) -- (145) Payment on notes... -- -- -- -- -- -- -- 18 18 Net income......... -- -- -- -- -- -- 6,316 -- 6,316 ---------- ----- ---------- ---- ------- ----- -------- ----- ------- Balance, March 31, 1997................ 1,223,594 12 5,025,357 50 36,974 -- (9,235) (58) 27,743 Issuance of Common Stock, net of is- suance costs (un- audited).......... -- -- 3,538,448 36 25,076 -- -- -- 25,112 Conversion of pre- ferred stock to common (unau- dited)............ (1,051,294) (11) 10,717,317 107 (96) -- -- -- -- Issuance of stock pursuant to exer- cise of stock op- tions. (unau- dited)............ -- -- 1,535,975 15 781 -- -- (455) 341 Exercise of war- rants (unaudited). -- -- 53,271 -- -- -- -- -- -- Payments on notes (unaudited)....... -- -- -- -- -- -- -- 12 12 Repurchase of pre- ferred stock on June 20, 1997 (unaudited)....... (172,300) (1) -- -- (3,618) -- (258) -- (3,877) Deferred compensa- tion related to stock options (unaudited)....... -- -- -- -- 599 (599) -- -- -- Amortization of de- ferred compensa- tion (unaudited).. -- -- -- -- -- 87 -- -- 87 Net income (unau- dited)............ -- -- -- -- -- -- 9,937 -- 9,937 ---------- ----- ---------- ---- ------- ----- -------- ----- ------- Balance at December 31, 1997 (unau- dited).............. -- $ -- 20,870,368 $208 $59,716 $(512) $ 444 $(501) $59,355 ========== ===== ========== ==== ======= ===== ======== ===== =======
See accompanying notes. F-5 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------------------- --------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------ ------- (Unaudited) Operating activities Net income (loss)................. $(1,071) $(3,694) $ 6,316 $4,541 $ 9,937 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization..... 5,092 5,311 5,185 3,999 4,053 Write-offs of inventories......... 1,227 3,663 452 378 598 Amortization of deferred compen- sation........................... -- -- -- -- 87 Loss on debt forgiveness.......... -- 150 -- -- -- Changes in assets and liabili- ties: Accounts receivable.............. 2,021 (594) 1,058 451 (2,111) Inventories...................... (2,312) (1,776) (1,146) (630) (1,070) Other current assets............. (224) 320 (116) (1,066) (237) Accounts payable................. (2,079) 1,853 (1,553) (905) 2,582 Accrued payroll and other ac- crued liabilities............... (1,290) 1,047 1,562 1,274 (642) Deferred income taxes............ -- -- -- -- (1,813) Deferred revenue................. 30 416 (25) 128 455 ------- ------- ------- ------ ------- Net cash provided by operating activities..................... 1,394 6,696 11,733 8,170 11,839 Investing activities Proceeds from sales and maturities of short-term investments........ 1,500 11,238 7,944 6,466 23,268 Purchase of short-term invest- ments............................ (1,677) (10,859) (11,512) (8,061) (41,466) Notes receivable from officer and employees........................ -- (203) (608) (608) (118) Purchase of property and equip- ment............................. (2,761) (1,427) (2,855) (1,907) (8,431) ------- ------- ------- ------ ------- Net cash used for investing ac- tivities....................... (2,938) (1,251) (7,031) (4,110) (26,747) Financing activities Proceeds from issuance of common stock, net....................... 93 256 42 29 25,454 Repurchase of common stock........ (46) (13) (145) (24) -- Repurchase of preferred stock..... -- -- -- -- (3,877) Payments on notes receivable from stockholders..................... -- 8 18 18 12 Payments on capital lease obliga- tions............................ (3,224) (2,750) (2,824) (2,594) (2,209) Payments on long-term debt........ (800) (864) (582) (337) (37) ------- ------- ------- ------ ------- Net cash provided by (used for) financing activities........... (3,977) (3,363) (3,491) (2,908) 19,343 ------- ------- ------- ------ ------- Net increase (decrease) in cash and cash equivalents........... (5,521) 2,082 1,211 1,152 4,435 Cash and cash equivalents at begin- ning of period.................... 7,716 2,195 4,277 4,277 5,488 ------- ------- ------- ------ ------- Cash and cash equivalents at end of period............................ $ 2,195 $ 4,277 $ 5,488 $5,429 $ 9,923 ======= ======= ======= ====== ======= Supplemental disclosure of cash flow information: Cash paid for: Interest.......................... $ 799 $ 715 $ 656 $ 459 $ 358 ======= ======= ======= ====== ======= Income taxes...................... $ 48 $ 48 $ 770 $ 411 $ 2,559 ======= ======= ======= ====== =======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations of approximately $3.4 million, $1.2 million and $1.2 million were incurred during fiscal years 1995, 1996 and 1997, respectively, and $1.2 million and $282,000 during the nine month periods ended December 31, 1996 and 1997, respectively. During the nine months ended December 31, 1997, notes were received for the exercise of stock options totalling $455,000. See accompanying notes. F-6 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information (Unaudited) The accompanying consolidated financial statements at December 31, 1997 and for the nine months ended December 31, 1996 and 1997 are unaudited but include all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the financial position and the operating results and cash flows for the interim date and periods presented. Results for the interim period ended December 31, 1997 are not necessarily indicative of results for the entire year or future periods. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of highly liquid debt instruments with original maturities of three months or less at date of acquisition, or money market type funds. Short-term investments consist of United States treasury notes, obligations of U.S. government agencies and corporate bonds. The Company maintains its excess cash in financial institutions with strong credit ratings and has not experienced any significant losses on its investments. The estimated fair value of each investment security approximates cost and, therefore, no unrealized gains or losses existed as of March 31, 1997 and 1996 or at December 31, 1997. The following is a summary of available-for-sale securities (in thousands):
MARCH 31, ------------- DECEMBER 31, 1996 1997 1997 ------ ------ ------------ U.S. treasury securities and obligations of U.S. government agencies.................... $2,502 $4,189 $12,683 U.S. corporate debt securities............... 1,743 3,628 13,124 Other........................................ 296 292 500 ------ ------ ------- $4,541 $8,109 $26,307 ====== ====== =======
Available-for-sale securities by contractual maturity are as follows (in thousands):
MARCH 31, DECEMBER 31, 1997 1997 --------- ------------ Due in one year or less............................ $5,005 $21,860 Due after one year through two years............... 3,104 3,047 Greater than two years............................. -- 1,400 ------ ------- $8,109 $26,307 ====== =======
F-7 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) Concentration of Credit Risk The Company believes that the concentration of credit risk in its trade receivables is mitigated by the Company's credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral. The Company has not experienced significant losses on trade receivables from any particular customer or geographic region for any period presented. The Company invests its excess cash in debt instruments of the U.S. Treasury, governmental agencies and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its cash equivalents or short-term investments. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include assessing the collectability of accounts receivable, the use and recoverability of inventory, estimates to complete engineering contracts, costs of future product returns under warranty and provisions for contingencies expected to be incurred. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. The Company's inventory valuation process is done on a part-by-part basis. Lower of cost to market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. Once established, these adjustments are considered permanent and are not reversed until the related inventory is sold or disposed. Property and Equipment Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (3 to 7 years) using the straight-line method. Leasehold improvements are stated at cost and amortized over the shorter of the useful life of the asset or the lease term. Property and equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the assets or the lease term. Leased assets purchased at the expiration of the lease term are capitalized at acquisition cost. Impairment of Long-Lived Assets On April 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The adoption of SFAS No. 121 did not impact the financial position or results of operations of the Company. Advertising Cost Advertising costs are expensed as incurred. F-8 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) Revenues Revenues related to product sales are generally recognized when the products are shipped to the customer. Recognition of revenues and the related cost of revenues on shipments to distributors that are made under agreements allowing for price protection and right of return on products unsold by the distributor are deferred until the distributor ships the product to its customer. Revenues on engineering design contracts are recognized using the percentage-of- completion method based on actual cost incurred to date compared to total estimated costs of the project. Deferred revenue represents the margin on shipments of products to distributors that will be recognized when the distributors ship the products to their customers and billings in excess of costs and estimated earnings on uncompleted engineering design contracts. Warranty Reserves Estimated expenses for warranty obligations are accrued as revenue is recognized. Reserve estimates are adjusted periodically to reflect actual experience. Research and Development Research and development costs are expensed as incurred. Substantially all research and development expenses are related to new product development, designing significant improvements to existing products and new process development. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee and director stock options because the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123") requires the use of option valuation models that were not developed for use in valuing employee and director stock options. Under SFAS 123 compensation cost is determined using the fair value of stock- based compensation determined as of the grant date, and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value accounting method specified in APB 25 to account for stock-based compensation and disclose in the footnotes to the financial statements the pro forma effect of using the fair value method for its stock based compensation. Reclassification Certain prior period amounts have been reclassified to conform with the current period presentation. Earnings (Loss) Per Share Earnings (loss) per share is computed using the weighted average number of common shares and common equivalent shares outstanding during the periods presented. Common equivalent shares result from stock options and warrants. For loss periods, common equivalent shares are excluded from the computation as their effect would be antidilutive, except that the Securities and Exchange Commission (SEC) has historically required common and common share equivalents issued during the twelve-month period prior to the initial filing of a proposed public offering, to be included in the calculation as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price). F-9 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 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, will also be required to present "Diluted EPS" that reflects the potential dilution of securities such as employee stock options and warrants to purchase common stock. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. On February 3, 1998, the SEC issued Staff Accounting Bulletin (SAB) No. 98 which revised the previous instructions for determining the dilutive effects in earnings per share computations of common stock and common stock equivalents issued at prices below the IPO price prior to the effectiveness of the IPO. Earnings (loss) per share computed under SFAS No. 128 and SAB 98 would be as follows:
YEARS ENDED MARCH 31, NINE MONTHS ENDED ---------------------- ------------------------- DECEMBER 31, DECEMBER 31, 1995 1996 1997 1996 1997 ------ ------ ------ ------------ ------------ (UNAUDITED) (UNAUDITED) Earnings (loss) per share: Basic....................... $ (.06) $(0.21) $ 0.35 $ 0.25 $ 0.57 Diluted..................... $ (.06) $(0.21) $ 0.35 $ 0.25 $ 0.51 Average shares outstanding: Basic (in thousands)........ 17,194 17,394 17,834 17,824 17,499 Diluted (in thousands)...... 17,194 17,394 17,907 17,897 19,306
Recently Issued Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Segment Information. Both of these standards are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. The Company does not believe that comprehensive income or loss has been materially different than net income or loss. 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 financial information is required to be reported on the basis that is used internally for evaluating the segment performance. The Company believes it operates in one business and operating segment and does not believe adoption of SFAS No. 131 will have a material impact on the Company's financial statements. F-10 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 2. CERTAIN FINANCIAL STATEMENT INFORMATION
MARCH 31, ------------------ DECEMBER 31 1996 1997 1997 -------- -------- ----------- Inventories (in thousands): Finished goods............................ $ 2,631 $ 1,076 $ 2,347 Work in process........................... 2,651 4,279 4,344 Raw materials............................. 1,554 2,175 1,311 -------- -------- ------- $ 6,836 $ 7,530 $ 8,002 ======== ======== ======= Property and equipment (in thousands): Machinery and equipment................... $ 19,168 $ 21,211 $24,390 Leasehold improvements.................... 5,588 5,789 6,758 Computers, office furniture and equipment. 11,396 11,701 14,475 -------- -------- ------- 36,152 38,701 45,623 Less accumulated depreciation and amortiza- tion....................................... (24,223) (27,933) (30,196) -------- -------- ------- $ 11,929 $ 10,768 $15,427 ======== ======== =======
The cost and accumulated amortization of machinery and equipment under capital leases at March 31, 1997 were approximately $12.2 million and $7.3 million, respectively ($14.9 million and $7.8 million, at March 31, 1996). Amortization of assets held under capital leases is included with depreciation expense. During the years ended March 31, 1995, 1996 and 1997 and the nine month periods ended December 31, 1996 and 1997 the Company earned interest income of $441,000, $473,000, $627,000, $444,000 and $648,000, respectively, and incurred interest expense of $799,000, $715,000, $656,000, $439,000 and $355,000, respectively. 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
MARCH 31 ------------ 1996 1997 ----- ----- Notes payable with interest rates ranging from 8.3% to 10.5%, paid in January 1997........................................ $ 162 $ -- 10.0% notes payable, paid in April 1997...................... 457 37 ----- ----- 619 37 Less current portion......................................... (582) (37) ----- ----- $ 37 $ -- ===== =====
F-11 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 4. STOCKHOLDERS' EQUITY Common Stock On October 6, 1997, the Board of Directors authorized, which the stockholders subsequently approved, a two for three reverse stock split of all outstanding common stock. All share and per share amounts and stock option data have been restated to retroactively reflect a stock split. During the quarter ending December 31, 1997, the Company completed its initial public offering of 3,538,448 shares of common stock (including an exercised underwriters' over-allotment option for 832,950 shares) at a price of $8.00 per share, providing the Company with net proceeds of approximately $25.1 million, after deducting underwriting discounts and commissions of approximately $2.0 million and offering costs of approximately $1.2 million. During November 1997, the certificate of incorporation of the Company was amended to provide that the authorized number of shares of common and preferred stock issuable by the Company was 60,000,000 shares of common stock ($0.01 par value) and 2,000,000 shares of preferred stock ($0.01 par value). Convertible Preferred Stock A summary of the shares of convertible preferred stock issued and outstanding at March 31 which were converted into 10,717,317 shares of common stock in November 1997 (unaudited) is as follows (in thousands, except share data):
MARCH 31, 1997 ----------------------------- SHARES PREFERENCE PAR ISSUED AND IN VALUE OUTSTANDING LIQUIDATION ----- ----------- ----------- Series 1....................................... $ 4 408,692 $ 8,582 Series 2....................................... 2 238,096 5,000 Series 3....................................... 6 576,806 12,113 --- --------- ------- Total........................................ $12 1,223,594 $25,695 === ========= =======
Each share of Series 1, 2 and 3 preferred stock was convertible at the option of the holder into approximately 16, 7 and 8 shares of common stock, respectively, subject to certain anti-dilution adjustments. The Series 1, 2 and 3 preferred shares may have been redeemed upon approval of the Company's Board of Directors and only with the vote of 60% of the outstanding preferred stock at a redemption price of $23.10 per share. Each share of preferred stock was entitled to one vote for each share of common stock into which it would convert. No dividends were allowed to be paid to common stockholders unless equivalent dividends were paid to preferred stockholders. Additionally, the preferred stockholders had certain rights of first refusal on any new securities offering (other than certain securities issued to employees), which rights of first refusal terminated upon completion of the Company's initial public offering, and certain registration rights. On April 24, 1997 the Board authorized the Company to repurchase up to $4 million of convertible preferred stock, with priority given to the holders of convertible preferred stock that submitted bids for the sale of their shares of convertible preferred stock at the lowest price per share. On June 20, 1997, the Company repurchased an aggregate of 172,300 shares of convertible preferred stock for approximately $3.9 million at prices between $1.20 and $2.61 per share on as converted to common stock basis. F-12 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) Preferred Stock On October 6, 1997, the Board of Directors adopted, which the stockholders subsequently approved, an amendment to the Certificate of Incorporation to allow the issuance of up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restriction thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of such series, without further vote or action by the stockholders. Stock Options The Company's 1992 Stock Option Plan provides for the granting of incentive stock options to employees. Generally, options are granted at prices at least equal to fair value of the Company's common stock on the date of grant as determined by the Company's Board of Directors. In addition, certain officers and directors have been granted nonqualified stock options. The Company's 1982 Employee Incentive Stock Option Plan expired in 1992. Options to purchase an aggregate of 83,309 shares of common stock under the 1982 Plan remain outstanding as of December 31, 1997 (unaudited). Options under both plans expire not more than ten years from the date of grant and are immediately exercisable after the date of grant but are subject to certain repurchase rights by the Company, at the Company's option, until such ownership rights have vested. Vesting generally occurs over four years. At March 31, 1997 and December 31, 1997, 267 shares and 673,729 (unaudited) shares of common stock were subject to repurchase, respectively. Pursuant to an executive employment agreement between the Company and an executive, the Company granted an option to purchase 800,000 shares of the Company's common stock at $0.53 per share under the 1992 Stock Option Plan. The option vests ratably over four years. In the event the Company is acquired, the agreement stipulates that under certain circumstances the executive is eligible for certain additional compensation. These options as well as 66,667 additional options issued in April 1997 were exercised in July 1997. The exercise was paid for with various notes which aggregate $455,000 at interest rates between 5.98% and 6.54% which are due at the earlier of February 12, 2000 ($420,000) and April 9, 2001 ($35,000) or the termination of employment. Certain other option agreements provide for the exercise of stock options with long-term promissory notes. These notes bear interest at rates ranging from 5.32% to 5.91%, are payable at the earlier of termination of employment or January 1998 and are secured by the shares of common stock purchased with the notes. Pro forma information regarding net income (loss) and net income (loss) per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the minimum value method using the following weighted average assumptions for fiscal year 1997 and 1996, respectively: risk free interest rate of 6.20% and 6.15%; an expected option life of four years; and no annual dividends. F-13 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expenses over the vesting period of such options. The effects of applying Statement 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma net income in future years because they do not take into consideration pro forma compensation expenses related to grants made prior to 1996. The Company's pro forma information follows:
1996 1997 ----------- ---------- Pro forma net income (loss)............................ $(3,718,000) $6,225,000 Pro forma net income (loss) per share.................. $ (0.22) $ 0.33 Weighted average fair value of options granted during the year.............................................. $ 0.12 $ 0.15
A summary of the Company's stock option activity, including those issued outside of the plans, and related information are as follows:
MARCH 31, -------------------------------------------------------------- 1995 1996 1997 DECEMBER 31, 1997 -------------------- -------------------- -------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- --------- --------- --------- --------- ---------- --------- Outstanding at beginning of period.............. 1,911,566 $0.48 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51 Granted............... 195,332 0.53 1,017,000 0.53 1,457,285 0.53 1,140,082 $2.36 Exercised............. (204,558) 0.45 (547,767) 0.47 (92,680) 0.45 (1,535,975) $0.52 Forfeited............. (269,286) 0.50 (412,127) 0.51 (212,472) 0.53 (258,124) $0.53 --------- ----- --------- ----- --------- ----- ---------- ----- Outstanding at end of period................. 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51 2,188,276 $1.48 ========= ===== ========= ===== ========= ===== ========== ===== Vested at end of period. 917,449 $0.48 349,337 $0.51 851,764 $0.51 657,148 $1.48 ========= ===== ========= ===== ========= ===== ========== =====
The weighted-average remaining contractual life of the options outstanding at March 31, 1997 is 8.4 years. Exercise prices of all options outstanding as of March 31, 1997 range from $0.45 to $0.53. The weighted-average remaining contractual life of the vested options is 6.5 years as of March 31, 1997. The range of exercise prices for options outstanding as of December 31, 1997 was $0.45 to $8.25 per share (unaudited). From April 1, 1997 through September 30, 1997, the Company recorded deferred compensation expense for the difference between the exercise price and the deemed fair value for financial statement presentation purposes of the Company's common stock, as determined by the Board of Directors, for all options granted in the first and second quarters of fiscal 1998. This deferred compensation aggregates to $599,000, which is being amortized over the four year vesting period of the related options. Warrants In connection with certain notes payable secured by equipment, capital leases for equipment and revolving lines of credit issued in 1989 and 1990, the Company had outstanding warrants to purchase 83,807 shares of common stock at $2.63 to $3.00 per share, subject to certain anti-dilution adjustments and adjustments in the event of certain mergers or acquisitions. No value was placed on the warrants at the time F-14 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) of issuance as it was deemed to be immaterial. These warrants expired not more than ten years from date of grant or five years after the Company's initial public offering, whichever is later. In November 1997 53,271 shares of common stock were issued upon the net exercise of these warrants at the initial public offering price of $8.00 per share. 1997 Employee Stock Purchase Plan The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors on October 6, 1997 which the stockholders subsequently approved. A total of 400,000 shares of Common Stock are reserved for issuance under the 1997 Purchase Plan. 1997 Directors' Stock Option Plan The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors on October 6, 1997, which the stockholders subsequently approved. A total of 200,000 shares of Common Stock are reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of non-statutory options to nonemployee directors of the Company. Common Shares Reserved for Future Issuance At December 31, 1997, shares of the Company's common stock are reserved for issuance upon the conversion or exercise of the following equity instruments (unaudited): Stock options: Issued and outstanding........................................... 2,188,276 Authorized for future grants..................................... 2,628,464 Stock purchase plan................................................ 400,000 --------- 5,216,740
5. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
YEAR ENDED MARCH 31, ------------------------ 1995 1996 1997 ------- ------ ------- CURRENT Federal................................................. $ -- $ 27 $ 380 State................................................... (70) 5 279 ------- ------ ------- $ (70) $ 32 $ 659 ======= ====== =======
F-15 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) The provision (credit) for income taxes reconciles to the amount computed by applying the federal statutory rate (35%) to income before income taxes as follows (in thousands):
YEAR ENDED MARCH 31, ----------------------- 1995 1996 1997 ----- ------- ------- Tax at federal statutory rate......................... $(399) $(1,282) $ 2,441 Net operating loss without benefit.................... 399 1,282 -- Utilization of net operating loss and research and de- velopment tax credit carryforwards................... -- -- (2,061) State taxes, net of federal benefit and credits....... (70) 5 279 Federal alternative minimum tax....................... -- 27 -- ----- ------- ------- $ (70) $ 32 $ 659 ===== ======= =======
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of March 31, 1997 and 1996 are as shown below. As of March 31, 1997, a valuation allowance had been recognized to offset the deferred tax assets as realization of such assets was uncertain. The estimated annualized effective tax rate for fiscal 1998, which was used to determine the provision for the nine month period ended December 31, 1997, is computed based on the Company's projected 1998 income which will allow for a full reduction of the valuation allowance and realization of the deferred tax asset.
MARCH 31, ---------------- 1996 1997 ------- ------- Deferred tax assets (in thousands): Reserves................................................... $ 2,512 $ 2,233 Capitalization of inventory and research and development costs..................................................... 334 226 Research and development credit carryforwards.............. 2,405 1,667 Depreciation and amortization.............................. 335 200 Net operating loss carryforwards........................... 2,102 -- Other credit carryforwards................................. 886 768 ------- ------- Subtotal..................................................... 8,574 5,094 Valuation allowance.......................................... (8,574) (5,094) ------- ------- Net deferred taxes........................................... $ -- $ -- ======= =======
At March 31, 1997, the Company has federal alternative minimum tax, investment and research and development tax credit carryforwards of approximately $366,000, $270,000 and $1.6 million, respectively, which will begin to expire in 1998 unless previously utilized. Under Internal Revenue Code Section 382, the Company's use of its tax credit carryforwards could be limited in the event of certain cumulative changes in the Company's stock ownership. For the nine months ended December 31, 1996 and 1997, income taxes have been provided based on the estimated annual effective tax rate applied to pre tax income for the interim period. F-16 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 6. LEASE COMMITMENTS The Company leases its present manufacturing facilities under a long-term operating lease expiring in March 1998. The lease expiring is renewable for up to ten years. This lease requires the Company to pay property taxes and incidental maintenance expenses and contains escalation clauses based upon increases in the Consumer Price Index. In September 1997, the Company moved into a new administration and manufacturing facility which is leased under a long-term operating lease. This lease expires in September 2007, requires the Company to pay property taxes and incidental maintenance expenses and is renewable for up to ten years. The lease provides for defined rent increases over the term of the lease. Annual future minimum lease payments, including machinery and equipment under capital leases and the Company's commitment relating to its new administration and manufacturing facility, as of March 31, 1997 are as follows (in thousands):
OPERATING CAPITAL FISCAL YEAR ENDING MARCH 31, LEASES LEASES ---------------------------- --------- ------- 1998..................................................... $1,037 $2,980 1999..................................................... 848 2,170 2000..................................................... 848 759 2001..................................................... 870 320 2002..................................................... 889 225 Thereafter............................................... 5,070 -- ------ ------ Total minimum lease payments........................... $9,562 6,454 ====== Less amount representing interest......................... 637 ------ Present value of remaining minimum capital lease payments (including current portion of $2,625).................... $5,817 ======
Rent expense (including short-term leases and net of sublease income) for the years ended March 31, 1995, 1996 and 1997 was $1.7 million, $2.3 million and $1.2 million, respectively. Rent expense for the nine months ended December 31, 1996 and 1997 was $876,000 and $879,000, respectively. Included in the 1996 rent expense is an accrual of $565,000 for losses on facilities for which sublease income was expected to be less than the remaining minimum lease payments. Sublease income was $16,000, $0 and $208,000 for the years ended March 31, 1995 1996 and 1997, respectively. 7. RELATED PARTY TRANSACTIONS As of March 31, 1996, the Company had advanced $203,000 to an officer of the Company. During 1997, an additional $750,000 was advanced to this officer and $142,000 of the advances made during 1996 were repaid. Notes were received by the Company providing for interest on the balance at rates from 5.32% to 5.76%. Principal and interest under the notes are due on or before February 28, 1999 and $750,000 of the balance is secured by marketable securities owned by the officer. F-17 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO DECEMBER 31, 1997 AND THE NINE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1997 IS UNAUDITED) 8. EMPLOYEE RETIREMENT PLAN Effective January 1, 1986, the Company established a 401(k) defined contribution retirement plan (the "Retirement Plan") covering all full-time employees with greater than three months of service. The Retirement Plan provides for voluntary employee contributions from 1% to 20% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company may contribute such amounts as determined by the Board of Directors. Employer contributions vest to participants at a rate of 20% per year of service, provided that after five years of service all past and subsequent employer contributions are 100% vested. The contributions charged to operations totalled $116,000, $182,000 and $318,000 for the years ended March 31, 1995, 1996 and 1997, respectively, and $202,000 and $241,000 for the nine months ended December 31, 1996 and 1997, respectively. 9. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION During the years ended March 31, 1995, 1996 and 1997 and the nine month periods ended December 31, 1996 and 1997, 17%, 20% and 20% and 21% and 20%, respectively, of net revenues were from one customer. No other customer accounted for more than 10% of revenues in any period. Revenue by geographic region for the years ended March 31, 1995, 1996 and 1997, and the nine months ended December 31, 1996 and 1997 were as follows (in thousands):
NINE MONTHS ENDED DECEMBER YEAR ENDED MARCH 31, 31, ----------------------- --------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- Net revenues: United States...................... $32,554 $28,134 $34,424 $24,508 $32,183 Canada............................. 8,030 10,116 10,943 8,976 9,693 Europe and Israel.................. 4,075 6,525 8,216 5,892 9,434 Asia............................... 2,291 5,489 3,885 3,088 3,564 ------- ------- ------- ------- ------- Total............................ $46,950 $50,264 $57,468 $42,464 $54,874 ======= ======= ======= ======= =======
10. CONTINGENCIES The Company is party to various claims and legal actions arising in the normal course of business, including notification of possible infringement on the intellectual property rights of third parties. In addition, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site for which the Company has accrued approximately $50,000. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse affect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company's results of operation in any quarter. F-18 High-Speed Computing Products AMCC's S5933 is used for DVD, communications and industrial computer applications. [Picture of AMCC integrated circuits, a computer keyboard, a CD-ROM, a digital video disk and a computer.] Automated Test Equipment [Picture of a man working on a computer.] [Picture of wafer in the process of being manufactured.] Teradyne high-speed logic and mixed-signal testers use AMCC's Micropower ASICs with high-precision timing elements. [Picture of a Teradyne high-speed logic and mixed-signal tester, a computer and an integrated circuit.] (22)[Picture of fiber optic cables.] (23)[Picture of fiber optic cables.] (24)[Picture of AMCC integrated circuits and wafers.] [LOGO OF AMCC] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- SEC registration fee.......................................... $ 33,713 NASD filing fee............................................... 11,926 Nasdaq National Market listing fee............................ 17,500 Printing and engraving expenses............................... 150,000 Legal fees and expenses....................................... 150,000 Accounting fees and expenses.................................. 75,000 Blue Sky qualification fees and expenses...................... 5,000 Transfer Agent and Registrar fees............................. 10,000 Miscellaneous fees and expenses............................... 46,861 -------- Total....................................................... $500,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware Law") authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article Seven of the Company's Certificate of Incorporation (Exhibit 3.1 hereto) and Article IX of the Company's Bylaws (Exhibit 3.2 hereto) provide for indemnification of the Company's directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, the Company has entered into Indemnification Agreements (Exhibit 10.1 hereto) with its officers and directors. The Underwriting Agreement (Exhibit 1.1 hereto) also provides for cross- indemnification among the Company, the Selling Stockholders and the Underwriters with respect to certain matters, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) Since December 31, 1994, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities (as adjusted to reflect the Registrant's 2-for-3 reverse stock split of the Preferred Stock and Common Stock effected upon the closing of the IPO): (1) As of December 31, 1997, 991,333 shares of Common Stock had been issued upon exercise of options with an average exercise price of $0.45 per share, all of which were paid for in cash, and 83,309 shares of Common Stock were issuable upon exercise of outstanding options with an average exercise price of $0.54 per share pursuant to grants to certain employees and directors of the Company under the Company's 1982 Plan. (2) As of December 31, 1997, 1,498,898 shares of Common Stock had been issued upon exercise of options, each with an exercise price of $0.53 per share, paid for by cash or full recourse promissory notes secured by the underlying Common Stock of the Company, pursuant to grants to certain employees and directors of the Company under the Company's 1992 Plan. In addition, 2,080,214 shares of Common Stock were issuable upon exercise of outstanding options with an average exercise price of $1.53 per share pursuant to grants to certain employees and directors of the Company under the Company's 1992 Plan. II-1 (3) As of December 31, 1997, 23,332 shares of Common Stock had been issued upon exercise of options with an average exercise price of $0.45 per share, paid for by cash or full recourse promissory notes secured by the underlying Common Stock of the Company, and 24,753 shares of Common Stock were issuable upon exercise of outstanding options with an average exercise price of $0.48 per share pursuant to grants to certain employees, directors and consultants of the Company. (4) At the effective date of the registration statement of the IPO, warrants to purchase 83,807 shares of Common Stock were exercised at a weighted average exercise price of $2.91 per share, pursuant to which 53,271 shares of Common Stock were issued on a net exercise basis at the company's initial public offering of $8.00 per share. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). The issuances described in Items 15(a)(1) and 15(a)(2) were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated thereunder in that they were offered and sold pursuant to a written compensatory plan. In addition, such issuances were deemed to be exempt from registration under the Securities Act under Section 4(2) of the Securities Act as transactions not involving any public offering. The issuances described in Item 15(a)(3) and 15(a)(4) were deemed to be exempt from registration under the Securities Act under Section 4(2) of the Securities Act as transactions not involving any public offering. The recipients of securities in each of the transactions described in Item 15(a)(1) through 15(a)(4) represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1(1) Restated Certificate of Incorporation of the Company. 3.2(2) Amended and Restated Bylaws of the Company. 4.1(3) Specimen Stock Certificate. 5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being registered. 10.1(3) Form of Indemnification Agreement between the Company and each of its Officers and Directors. 10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of Option Agreement. 10.3(3) 1992 Stock Option Plan as proposed to be amended, and form of Option Agreement. 10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement. 10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement. 10.6(3) 401(k) Plan, effective April 1, 1985 and form of Enrollment Agreement. 10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement, dated December 8, 1983. 10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated September 16, 1987. 10.9(3) Industrial Real Estate Lease, dated October 29, 1996 between the Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive Lease). 10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the Registrant and Mira Mesa Business Park (the Oberlin Drive Lease). 10.11(3) Security Agreements, dated January 30, 1992 by and between the Registrant and Roger Smullen. 10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between the Registrant and Roger Smullen. 10.13(3) Loan Agreement, dated May 1, 1996 and Exercise Notice and Restricted Stock Purchase Agreements dated July 23, 1997 by and between Registrant and David Rickey. 10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997 and July 23, 1997 by and between the Registrant and David Rickey. 10.15(3) Patent License Agreement, dated January 1, 1988, as amended by and between Registrant and Motorola, Inc. 10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and between Registrant and International Business Machines Corporation. 10.17(3) Patent License Agreement, dated June 1, 1997 by and between Registrant and International Business Machines Corporation. 10.18(3) Letter Agreement, dated January 30, 1996 by and between the Registrant and David Rickey. 10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and between Registrant and Alcatel Network Systems, Inc. 10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2 Purchase Agreement, dated September 16, 1987 and Convertible Preferred Stock, Series 3 Purchase Agreement, dated September 16, 1987. 11.1 Computation of Per Share Data under SFAS No. 128.
II-3
NUMBER DESCRIPTION ------ ----------- 23.1 Consent of Independent Auditors (see page II-6). 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedules.
- -------- (1) Incorporated by reference to Exhibit 3.2 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (2) Incorporated by reference to Exhibit 3.4 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (3) Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Diego, State of California on February 10, 1998. APPLIED MICRO CIRCUITS CORPORATION /s/ David M. Rickey By: _________________________________ DAVID M. RICKEY PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, David M. Rickey and Joel O. Holliday, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the Offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ David M. Rickey President and Chief February 10, 1998 ____________________________________ Executive Officer (Principal DAVID M. RICKEY Executive Officer) /s/ Joel O. Holliday Chief Financial Officer February 10, 1998 ____________________________________ (Principal Financial and JOEL O. HOLLIDAY Accounting Officer) /s/ Roger A. Smullen, Sr. Director and Chairman of the February 10, 1998 ____________________________________ Board of Directors ROGER A. SMULLEN, SR. /s/ William K. Bowes, Jr. Director February 10, 1998 ____________________________________ WILLIAM K. BOWES, JR. /s/ R. Clive Ghest Director February 10, 1998 ____________________________________ R. CLIVE GHEST /s/ Franklin P. Johnson, Jr. Director February 10, 1998 ____________________________________ FRANKLIN P. JOHNSON, JR. /s/ Arthur B. Stabenow Director February 10, 1998 ____________________________________ ARTHUR B. STABENOW
II-5 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated April 25, 1997 (except footnote 4, as to which the date is February 9, 1998), in the Registration Statement (Form S-1) and related Prospectus of Applied Micro Circuits Corporation for the registration of 6,900,000 shares of its common stock. Our audits also included the financial statement schedule of Applied Micro Circuits Corporation for the three years ended March 31, 1997 listed in Item 16(b). This schedule is the responsibility of Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP San Diego, California February 10, 1998 II-6 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) - -----------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E - ----------------------------------------------------------------------------------------------------- ADDITIONS ------------------------- (1) (2) CHARGED CHARGED BALANCE AT TO COSTS TO OTHER BALANCE BEGINNING AND ACCOUNTS- DEDUCTIONS- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD - ----------------------------------------------------------------------------------------------------- Nine Months Ended December 31, 1997: $200 $157 $ -- $ 7 $350 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1997: $ 90 $198 $ 88 $ -- $200 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1996: $115 $ -- $ -- $ 25 $ 90 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1995 $ 60 $ 81 $ -- $ 26 $115 Allowance for doubtful accounts
- -------------------------------------------------------------------------------- EXHIBIT INDEX
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1(1) Restated Certificate of Incorporation of the Company. 3.2(2) Amended and Restated Bylaws of the Company. 4.1(3) Specimen Stock Certificate. 5.1 Opinion of Venture Law Group regarding the legality of the Common Stock being registered. 10.1(3) Form of Indemnification Agreement between the Company and each of its Officers and Directors. 10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of Option Agreement. 10.3(3) 1992 Stock Option Plan as proposed to be amended, and form of Option Agreement. 10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement. 10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement. 10.6(3) 401(k) Plan, effective April 1, 1985 and form of Enrollment Agreement. 10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement, dated December 8, 1983. 10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated September 16, 1987. 10.9(3) Industrial Real Estate Lease, dated October 29, 1996 between the Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive Lease). 10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the Registrant and Mira Mesa Business Park (the Oberlin Drive Lease). 10.11(3) Security Agreements, dated January 30, 1992 by and between the Registrant and Roger Smullen. 10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between the Registrant and Roger Smullen. 10.13(3) Loan Agreement, dated May 1, 1996 and Exercise Notice and Restricted Stock Purchase Agreements dated July 23, 1997 by and between Registrant and David Rickey. 10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997 and July 23, 1997 by and between the Registrant and David Rickey. 10.15(3) Patent License Agreement, dated January 1, 1988, as amended by and between Registrant and Motorola, Inc. 10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and between Registrant and International Business Machines Corporation. 10.17(3) Patent License Agreement, dated June 1, 1997 by and between Registrant and International Business Machines Corporation. 10.18(3) Letter Agreement, dated January 30, 1996 by and between the Registrant and David Rickey. 10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and between Registrant and Alcatel Network Systems, Inc. 10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2 Purchase Agreement, dated September 16, 1987 and Convertible Preferred Stock, Series 3 Purchase Agreement, dated September 16, 1987. 11.1 Computation of Per Share Data under SFAS No. 128.
NUMBER DESCRIPTION ------ ----------- 23.1 Consent of Independent Auditors (see page II-6). 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedules.
- -------- (1) Incorporated by reference to Exhibit 3.2 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (2) Incorporated by reference to Exhibit 3.4 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (3) Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 [SUBJECT TO NEGOTIATION] 6,000,000 SHARES/1/ APPLIED MICRO CIRCUITS CORPORATION COMMON STOCK UNDERWRITING AGREEMENT ---------------------- March ____, 1998 BANCAMERICA ROBERTSON STEPHENS NATIONSBANC MONTGOMERY SECURITIES LLC COWEN & COMPANY As Representatives of the several Underwriters c/o BancAmerica Robertson Stephens 555 California Street Suite 2600 San Francisco, California 94104 Ladies/Gentlemen: Applied Micro Circuits Corporation, a Delaware corporation (the "Company"), and certain stockholders of the Company named in Schedule B hereto (hereafter called the "Selling Stockholders") address you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirm their respective agreements with the several Underwriters as follows: 1. Description of Shares. The Company proposes to issue and sell --------------------- 1,000,000 shares of its authorized and unissued Common Stock, $0.01 par value, to the several Underwriters. The Selling Stockholders, acting severally and not jointly, propose to sell an aggregate of 5,000,000 shares of the Company's authorized and outstanding Common Stock, $0.01 par value, to the several Underwriters. The 1,000,000 shares of Common Stock, $0.01 par value, of the Company to be sold by the Company are hereinafter called the "Company Shares" and the 5,000,000 shares of Common Stock, $0.01 par value, to be sold by the Selling Stockholders are hereinafter called the "Selling Stockholder Shares." The Company Shares and the Selling Stockholder Shares are hereinafter collectively referred to as the "Firm Shares." Certain Selling Stockholders propose to grant, severally and not jointly, to the Underwriters an option to purchase up to 900,000 additional shares of the Company's Common Stock, $0.01 par value (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, $0.01 par value, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." ______________________ /1/ Plus an option to purchase up to 900,000 additional shares from certain stockholders of the Company to cover over-allotments. 2. Representations, Warranties and Agreements of the Company. --------------------------------------------------------- I. The Company represents and warrants to and agrees with each Underwriter that: (a) A registration statement on Form S-1 (File No. 33- _____) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses"), including all documents incorporated by reference therein, and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, -------- however, that if in reliance on Rule 434 of the Rules and Regulations and with - ------- the consent of BancAmerica Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such 2. revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and -------- ------- warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. Any documents filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), prior to or as of the Closing Date, when such documents were filed (or, if any amendment with respect to any such document was filed, when such amendment was filed), conformed in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder, any further such documents so filed, will, when they are filed, conform in all material respects with he requirements of the Exchange Act and the rules and regulations of the Commission thereunder; no such document when it was filed (or, if an amendment with respect to any such document was filed, when such amendment was filed), contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and no such further amendment will contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (c) Each of the Company and AMCC (Barbados) Ltd., the wholly- owned subsidiary of the Company (the "Subsidiary"), has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of the Subsidiary free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and the Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise; no proceeding has been instituted in any such jurisdiction, 3. revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and the Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor the Subsidiary is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound; and neither the Company nor the Subsidiary is in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign known to the Company, having jurisdiction over the Company or the Subsidiary or over their respective properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than AMCC (Barbados) Ltd. (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or the Subsidiary is a party or by which it or the Subsidiary or their respective properties may be bound, (ii) the charter or bylaws of the Company or the Subsidiary, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign known to the Company, having jurisdiction over the Company or the Subsidiary or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company or the Subsidiary of the transactions herein contemplated, except such as may be required under the Act, the Exchange Act (if applicable) or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, the Subsidiary or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or the Subsidiary or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise or might materially and adversely affect their properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus by the Act and the Rules and Regulations or by the Exchange Act or the rules or regulations of the Commission thereunder and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or the Subsidiary of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly authorized and validly issued and are fully paid and nonassessable, have been 4. issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares to be purchased from the Company hereunder or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Exchange Act or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included or incorporated by reference in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown by the Act and the Rules and Regulations with respect to such plans, arrangements, options and rights. (g) Ernst & Young LLP, which has examined the consolidated financial statements of the Company, together with the related schedules and notes, as of March 31, 1995, 1996 and 1997 and for each of the years in the three (3) years ended March 31, 1997 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the consolidated financial position and the results of operations of the Company and the Subsidiary at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary consolidated financial and statistical data included or incorporated by reference in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited consolidated financial statements presented therein. No other financial statements or schedules are required by the Act and the Rules and Regulations to be included or incorporated by reference in the consolidated Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise, (ii) any transaction that is material to the Company and the Subsidiary considered as one enterprise, except transactions entered into in the 5. ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and the Subsidiary considered as one enterprise, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and the Subsidiary considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary, or (vi) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and the Subsidiary has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise, (ii) the agreements to which the Company or the Subsidiary is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and the Subsidiary (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and the Subsidiary has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted as described in the Registration Statement and the Prospectus. (j) The Company and the Subsidiary have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or the Subsidiary that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and the Subsidiary. (k) The Company and the Subsidiary maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or the Subsidiary against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor the Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor the Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise. (l) To the best of Company's knowledge, no labor disturbance by the employees of the Company or the Subsidiary exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, independent manufacturers representatives, subcontractors, external foundries or international distributors that might be expected to result in 6. a material adverse change in the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) To the best of the Company's knowledge, each of the Company and the Subsidiary owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and, except as otherwise disclosed in the Registration Statement and the Prospectus, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (n) The Common Stock is registered pursuant to Section 12(g) of the Exchange Act and is listed on The Nasdaq National Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from The Nasdaq National Market, nor has the Company received any notification that the Commission or the National Association of Securities Dealers, Inc. ("NASD") is contemplating terminating such registration or listing. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) Neither the Company nor the Subsidiary has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each Selling Stockholder has agreed in writing that each 7. such person will not, for a period equal to at least 90 days from the date that the Registration Statement is declared effective by the Commission (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) with respect to certain stockholders, as a bona fide gift or gifts or as a distribution to partners or stockholders of such person, provided that the donee(s) or distributees thereof, as the case may be, agree in writing to be bound by the terms of this restriction, or (ii) with the prior written consent of the Company or BancAmerica Robertson Stephens. The foregoing restriction has been expressly agreed to preclude such holders of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than any of such holders. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. Each of the stockholders who is a party to a Lock-up Agreement has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of BancAmerica Robertson Stephens. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except where the failure to be in compliance would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement or the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) other than capital expenditures to be made by the Company in connection with the remediation of the site operated by Omega Chemical Corporation, the Company, to the best of its knowledge, will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under -- --- applicable state or local law. (u) The Company and the Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of 8. any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. II. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Stockholder now has and on the Closing Date and on any later date on which Option Shares are purchased, will have valid marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing David M. Rickey and Joel O. Holliday as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with Harris Trust Company of California, as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(i) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Selling Stockholder Shares under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Selling Stockholder Shares and any Option Shares to be sold by such Selling Stockholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Such Selling Stockholder will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such Selling Stockholder or with respect to which such Selling Stockholder has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such Selling Stockholder, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of BancAmerica Robertson 9. Stephens. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the Selling Stockholder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such Selling Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the securities held by such Selling Stockholder except in compliance with this restriction. (e) Certificates in negotiable form for all Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (f) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder, or any Selling Stockholder Shares or any Option Shares to be sold by such Selling Stockholder hereunder, may be bound or, to the best of such Selling Stockholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or over the properties of such Selling Stockholder, or, if such Selling Stockholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Stockholder. (g) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (h) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. (i) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder and the Selling Stockholder Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Power of Attorney or set forth in the Registration Statement or the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date, and on any later date on which Option Shares are to be purchased, was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined), and on any later date on which Option Shares are to be purchased, will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (j) Such Selling Stockholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or 10. prior to the Closing Date, or such later date on which Option Shares are to be purchased, as the case may be, and will advise one of its Attorneys and BancAmerica Robertson Stephens prior to the Closing Date, or such later date on which Option Shares are to be purchased, as the case may be, if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(i) would be inaccurate if made as of the Closing Date. (k) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capirtal stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (l) Such Selling Stockholder is not aware (without having conducted any investigation or inquiry) that any of the representations and warranties of the Company set forth in Section 2.I. above is untrue or inaccurate in any material respect. 3. Purchase, Sale and Delivery of Shares. On the basis of the ------------------------------------- representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agree, severally and not jointly, to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, respectively, at a purchase price of $_____ per share, the respective number of Firm Shares as hereinafter set forth and Selling Stockholder Shares set forth opposite the names of the Company and the Selling Stockholders in Schedule B hereto. The obligation of each Underwriter to the Company and to each Selling Stockholder shall be to purchase from the Company or such Selling Stockholder that number of Company Shares or Selling Stockholder Shares, as the case may be, which (as nearly as practicable, as determined by you) is in the same proportion to the number of Company Shares or Selling Stockholder Shares, as the case may be, set forth opposite the name of the Company or such Selling Stockholder in Schedule B hereto as the number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10) is to the total number of Firm Shares to be purchased by all the Underwriters under this Agreement. The certificates in negotiable form for the Selling Stockholder Shares have been placed in custody (for delivery under this Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the certificates for the Selling Stockholder Shares of such Selling Stockholder so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for such custody, including the Power of Attorney is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Selling Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters drawn 11. in same-day funds, payable to the order of the Company with regard to the Shares being purchased from the Company, and to the order of the Custodian for the respective accounts of the Selling Stockholders with regard to the Shares being purchased from such Selling Stockholders at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025 (or at such other place as may be agreed upon among the Representatives and the Company and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company and the Attorneys may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, -------- however, that if the Company has not made available to the Representatives - ------- copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under all but the fifth paragraph under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company and the Selling Shareholders that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. Further Agreements of the Company. The Company agrees with the --------------------------------- several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration 12. Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if BancAmerica Robertson Stephens, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. 13. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company or the Subsidiary, and (vi) any additional information of a public nature concerning the Company or the Subsidiary, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and the Subsidiary are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company or any Selling Stockholder to perform any agreement on their respective parts to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (j) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (k) During the Lock-up Period, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, effect the Disposition of, directly or indirectly, any Securities other than the sale of the Firm Shares and the Option Shares to be sold by the Company hereunder and the Company's 14. issuance of options or Common Stock under the Company's presently authorized 1982 Employee Incentive Stock Option Plan, 1992 Stock Option Plan, 1997 Directors' Stock Option Plan and 1997 Employee Stock Purchase Plan (collectively, the "Stock Plans"). [ (l) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under the Stock Plans or any other employee benefit plan, except for the filing of a registration statement registering shares under the 1997 Employee Stock Purchase Plan.] 5. Expenses. -------- (a) The Company and the Selling Stockholders agree with each Underwriter that: i) The Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. Each Selling Stockholder will pay and bear all costs and expenses incurred by such Selling Stockholder in connection with the performance of its obligations hereunder including, but not limited to, all underwriting discounts and selling commissions applicable to the Shares being sold by such Selling Stockholder and all fees and disbursements of counsel for such Selling Stockholder. Any additional expenses incurred as a result of the sale of the Shares by the Selling Stockholders will be borne collectively by the Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the 15. Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. iii) In addition to their other obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof relating to such Selling Stockholder, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholders, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(c) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c) hereof, they will reimburse the Company and each Selling Stockholder on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such Selling Stockholder for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such Selling Stockholder shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and each such Selling Stockholder within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(e) hereof. 6. Conditions of Underwriters' Obligations. The obligations of the --------------------------------------- several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Stockholders herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: 16. (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Stockholder or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of counsel of the Company and the Selling Stockholders, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that: i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the Subsidiary considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than AMCC (Barbados) Ltd.; iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; v) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon 17. issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right of the stockholders or the Company; vi) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company; viii) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom and other financial data and statistical information included therein as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; x) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; xi) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; xii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to by the Act and the applicable Rules and Regulations in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; xiii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any agreement that has been filed with the Commission as an exhibit to the Registration Statement or pursuant to Section (b)(10) of Item 601 of Regulation S-K, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations, provided, however, that such counsel need not express an ----------------- opinion or belief with respect to state securities or Blue Sky laws; 18. xiv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; xv) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; xvi) To such counsel's knowledge, the Company is not presently in material violation of its charter or bylaws; xvii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights; xviii) Assuming that (i) each Selling Stockholder which is not a natural person has full right, power and authority to enter into and to perform its obligations under the Power of Attorney and Custody Agreement to be executed and delivered by it in connection with the transactions contemplated herein; (ii) the Power of Attorney and Custody Agreement of each Selling Stockholder that is not a natural person has been duly authorized by such Selling Stockholder; and (iii) the Power of Attorney and Custody Agreement of each Selling Stockholder has been duly executed and delivered by or on behalf of such Selling Stockholder, the Power of Attorney and Custody Agreement of each Selling Stockholder constitutes the valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; xix) Each of the Selling Stockholders has full right, power and authority to enter into and to perform its obligations under this Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder hereunder; xx) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of each Selling Stockholder; and xxi) Upon the delivery of and payment for the Shares with all necessary endorsements as contemplated in this Agreement, each of the Underwriters will be the owner of the Shares purchased by it from such Selling Stockholder, free and clear of any adverse claim. In rendering such opinion, such counsel may assume that the Underwriters are acquiring the shares in good 19. faith and without notice of any defect in the title of the Shares being purchased from the Selling Stockholders or of any adverse claim. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Furthermore, counsel rendering the opinions set forth under (xix) and (xx) above may rely as to all matters exclusively without further investigation on the delivery of the Custody Agreement and Power of Attorney by the Selling Stockholders and on the representations and warranties of the Selling Stockholders contained in such agreements. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Pennie & Edmonds LLP, special patent counsel to the Company, dated the Closing Date and on any later date on which Option Shares are to be purchased, to the effect that: i) To the best of such counsel's knowledge, except as otherwise may be noted on the Schedule, the Company is the owner of records of each United States patent application which is referred to in the Prospectus and listed in Exhibit A and each United States patent which is referred to in the Prospectus and listed in Exhibit B; ii) to the best of such counsel's knowledge, and except for (i) the letter dated __________ from Dr. Li and (ii) the letter dated __________ from the Lemelson Foundation (the "Lemelson letter") the Company has not received any written notice challenging the validity of enforceability of any of the United States patents which are referred to in the Prospectus and listed in Exhibit B; iii) to the best of such counsel's knowledge, the Company has not provided written notice to, or filed any presently-pending claim against, any third party, asserting infringement, by that third part, of any of the United States patents which are referred to in the Prospectus and listed in Exhibit B; 20. iv) to the best of such counsel's knowledge, except as set forth in the Prospectus, in Exhibit C and in the Lemelson letter, the Company has not received any written notice relating to the potential infringement of, or conflict with, any United States patents; v) to the best of such counsel's knowledge, based solely upon: (a) our review of the Li patent and its prosecution history, and (b) the representations of the Company as to its process for manufacturing semiconductor devices, the Company's process, as presently practiced, does not infringe the Li patent; and vi) Nothing has come to the attention of such counsel that has caused it to believe that the information contained in the sections of the Registration Statement entitled "Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights" and "Business--Proprietary Rights" at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or on any later date on which Option Shares are to be purchased, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading or that the information in such sections of any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of March 31, 1997 and related consolidated statements of operations, stockholders' equity, and cash flows for the twelve (12) months ended March 31, 1997, (iii) state that Ernst & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as 21. described in SAS 71 on the financial statements for each of the six month periods ended September 30, 1997 and 1996 (the "Interim Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Interim Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and (v) address other matters agreed upon by Ernst & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of March 31, 1997, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (h) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise, (b) any transaction that is material to the Company and the Subsidiary considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and the Subsidiary considered as one enterprise, incurred by the Company or the Subsidiary, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or the Subsidiary that is material to the Company and 22. the Subsidiary considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or the Subsidiary, or (f) any loss or damage (whether or not insured) to the property of the Company or the Subsidiary which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and the Subsidiary considered as one enterprise. (i) You shall be satisfied that, and you shall have received a certificate, dated the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, they have not been informed that: i) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date or such later date on which Option Shares are to be purchased, as the case may be; or ii) Such Selling Stockholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be. (j) The Company shall have obtained and delivered to you an agreement from each Selling Stockholder in writing prior to the date hereof that each such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) with respect to certain stockholders, as a bona fide gift or gifts or as a distribution to partners or stockholders of such person, provided that the donee(s) or distributees thereof, as the case may be, agree in writing to be bound by the terms of this restriction, or (ii) with the prior written consent of the Company or BancAmerica Robertson Stephens. Such persons will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The foregoing restriction shall have been expressly agreed to preclude such holders of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than any of such holders. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. 7. Option Shares. ------------- (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, certain Selling Stockholders hereby grant, severally and not jointly, to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase the respective number of Option Shares as hereinafter set forth opposite the names of certain of the Selling Stockholders in Schedule B hereto at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Attorneys. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number 23. of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. The certificates in negotiable form for the Option Shares to be sold by certain Selling Stockholders have been placed in custody (for delivery under this Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the certificates for the Option Shares of such Selling Stockholder so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for such custody, including the Power of Attorney is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Option Shares hereunder, the Option Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters drawn in same-day funds, payable to the order of the Custodian for the respective accounts of the Selling Stockholders. In the event of any breach of the foregoing, such Selling Stockholders shall reimburse the Underwriters for the interest lost and any other expenses borne by them by reason of such breach. Such delivery and payment shall take place at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025 or at such other place as may be agreed upon among the Representatives, the Company and the Attorneys (i) on the Closing Date, if written notice of the exercise of such option is received by the Attorneys at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Attorneys receive written notice of the exercise of such option, if such notice is received by the Attorneys less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Selling Stockholders who are selling Option Shares herein, to the accuracy 24. of the statements of such Selling Stockholders made pursuant to the provisions hereof, to the performance by such Selling Stockholders of their respective obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company and such Selling Stockholders or the satisfaction of any of the conditions herein contained. 8. Indemnification and Contribution. -------------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in -------- ------- any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this -------- ------- Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter) under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any 25. Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Stockholder, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, -------- ------- that the indemnity agreement provided in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which such Selling Stockholder may otherwise have. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company or such Selling Stockholder may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company and each such Selling Stockholder for any legal or other expenses reasonably incurred by the Company and each such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, each Selling Stockholder and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled 26. to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if -------- ------- the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided that such consent shall not be unreasonably withheld. No -------- indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (e) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an indemnified party under subsection (a), (b) or (c) above, then in lieu of indemnifying an indemnified party thereunder, such indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to therein, (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, each Selling Stockholder and the Underwriters, respectively, shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Shares received by the Company, each Selling Stockholder and the total underwriting discount received by the Underwriters, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (e) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (e). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this 27. paragraph (e). Notwithstanding the provisions of this paragraph (e), no Underwriter shall be required to contribute any amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has been otherwise required to pay. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this paragraph (e) to contribute are several in proportion to their respective underwriting obligations and not joint. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (f) The liability of each Selling Stockholder under the representations, warranties and agreements contained herein and under the indemnity and contribution agreements contained in the provisions of this Section 8 shall be limited to an amount equal to the initial public offering price of the Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters minus the amount of the underwriting discount paid thereon to the Underwriters by such Selling Stockholder. The Company and such Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 9. Representations, Warranties, Covenants and Agreements to Survive ---------------------------------------------------------------- Delivery. All representations, warranties, covenants and agreements of the - -------- Company, the Selling Stockholders and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or any of their officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. Substitution of Underwriters. If any Underwriter or Underwriters ---------------------------- shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty- four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall 28. have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company nor any Selling Stockholder shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, the Selling Stockholders and the other Underwriters for damages, if any, resulting from such default) be liable to the Company or any Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 11. Effective Date of this Agreement and Termination. ------------------------------------------------ (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company or any Selling Stockholder shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or, as described in the Registration Statement and the Prospectus, the business prospects of the Company and the Subsidiary considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on 29. either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company and the Attorneys by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you and the Attorneys by telephone, telecopy or telegram, in each case, confirmed by letter. 12. Notices. All notices or communications hereunder, except as ------- herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to Applied Micro Circuits Corporation, 6290 Sequence Drive, San Diego, California 92121 telecopier number (619) 535-6800, Attention: David M. Rickey, President and Chief Executive Officer; if sent to one or more of the Selling Stockholders, such notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to David M. Rickey and Joel O. Holliday, as Attorneys-in-Fact for the Selling Stockholders, at 6290 Sequence Drive, San Diego, California 92121 telecopier number (619) 535-6800. 13. Parties. This Agreement shall inure to the benefit of and be ------- binding upon the several Underwriters and the Company and the Selling Stockholders and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by BancAmerica Robertson Stephens on behalf of you. 14. Applicable Law. This Agreement shall be governed by, and -------------- construed in accordance with, the laws of the State of California. 30. 15. Counterparts. This Agreement may be signed in several ------------ counterparts, each of which will constitute an original. 31. If the foregoing correctly sets forth the understanding among the Company, the Selling Stockholders and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, APPLIED MICRO CIRCUITS CORPORATION By ________________________________ David M. Rickey, President and Chief Executive Officer SELLING STOCKHOLDERS By ________________________________ David M. Rickey By ________________________________ Joel O. Holliday Attorneys-in-Fact for the Selling Stockholders named in Schedule B hereto Accepted as of the date first above written: BANCAMERICA ROBERTSON STEPHENS NATIONSBANC MONTGOMERY SECURITIES, INC. COWEN & COMPANY as representatives of the several underwriters By BANCAMERICA ROBERTSON STEPHENS By ________________________________ Authorized Signatory 32. SCHEDULE A
Underwriters Number of - ------------------------------- Firm Shares To Be Purchased ----------- BancAmerica Robertson Stephens........................... ----------- NationsBanc Montgomery Securities LLC ................... ----------- Cowen & Company.......................................... ----------- ----------- Total............................................... 6,000,000 ===========
SCHEDULE B
Number of Firm Shares To Company Be Sold - -------------------------------------- --------- Applied Micro Circuits Corporation 1,000,000 Total................................................. --------- 1,000,000 ========= Number of Number of Selling Option Stockholder Shares Shares to be Name of Selling Stockholder To Be Sold Sold --------------------------- ---------- ------- Total................................................... 5,000,000 900,000 ========= =======
3. EX-5.1 3 OPINION OF VENTURE LAW GROUP EXHIBIT 5.1 February 11, 1998 Applied Micro Circuits Corporation 6290 Sequence Drive San Diego, California 92121 REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-37609) ------------------------------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (the "Registration Statement") filed by you, Applied Micro Circuits Corporation, with ---------------------- the Securities and Exchange Commission on February 11, 1998, in connection with the registration under the Securities Act of 1933, as amended, of shares of your Common Stock (the "Shares"). As your counsel in connection with this ------ transaction, we have examined the proceedings taken and we are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Shares. It is our opinion that upon conclusion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Shares when issued and sold in the manner described in the Registration Statement will be legally and validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name wherever appearing in the Registration Statement, including the Prospectus constituting a part thereof, and in any amendment thereto. Very truly yours, VENTURE LAW GROUP A Professional Corporation /s/ Venture Law Group EX-11.1 4 COMPUTATION OF PER SHARE DATA EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF PER SHARE DATA, UNDER SFAS NO. 128 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Years Ended March 31, Nine Months Ended ---------------------------------------------------------------------------------- 1995 1996 1997 Dec. 96 Dec 97 ---------------------------------------------------------------------------------- Net income (loss) $(1,071) $(3,694) $ 6,316 $ 4,541 $ 9,937 ================================================================================== Average common shares outstanding 4,365 4,564 5,005 4,995 7,588 Effect of assumed conversion of preferred stock from date of issuance 12,829 12,829 12,829 12,829 9,911 ---------------------------------------------------------------------------------- Shares used in Basic computations 17,194 17,393 17,834 17,824 17,499 ================================================================================== Earnings (loss) per share - Basic $ (0.06) $ (0.21) $ 0.35 $ 0.25 $ 0.57 ================================================================================== Net effect of dilutive common share equivalents based on the treasury stock method (using average market price as the buyback price) - - 73 73 1,807 ---------------------------------------------------------------------------------- Shares used in Diluted computations 17,194 17,393 17,907 17,897 19,306 ================================================================================== Earnings (loss) per share - Diluted $ (0.06) $ (0.21) $ 0.35 $ 0.25 $ 0.51 ==================================================================================
STATEMENT RE: COMPUTATION OF PER SHARE DATA, UNDER APB 15 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Fiscal Years Ended March 31, --------------------------------------------------- 1995 1996 1997 --------------------------------------------------- Net income (loss) $(1,701) $(3,694) $ 6,316 =================================================== Average common shares outstanding 4,365 4,564 5,005 Net effect of dilutive common share equivalents based on the treasury stock method (using the ending market price as the buyback price) - - 164 Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83) 1,187 1,187 1,187 Effect of assumed conversion of preferred stock from date of issuance 12,829 12,829 12,829 --------------------------------------------------- Shares used in per share computations 18,380 18,580 19,185 =================================================== Net earnings (loss) per share $ (0.06) $ (0.20) $ 0.33 ===================================================
Note: SAB 83 shares include common stock, and common stock options that were issued within the twelve month period preceding the initial filing for the Company's public offering. Under SFAS No. 128, these shares are not shown as SAB 82 shares, but are included within average common shares outstanding, the conversion of preferred stock, or in the dilutive share equivalents, as appropriate. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 EXPECTED TO BE FILED ON FEBRUARY 11, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 9-MOS MAR-31-1997 MAR-31-1998 APR-01-1996 APR-01-1997 MAR-31-1997 DEC-31-1997 5,488 9,923 8,109 26,307 8,618 10,879 (200) (350) 7,530 8,002 30,243 57,522 38,701 45,623 (27,933) (30,196) 41,814 73,857 10,879 12,827 0 0 0 0 12 0 50 208 27,681 59,147 41,814 73,857 57,468 54,874 57,468 54,874 30,057 25,370 30,057 25,370 20,209 19,440 198 159 29 (294) 6,975 10,199 659 262 0 0 0 0 0 0 0 0 6,316 9,937 0.35 0.57 0.35 0.51
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