-----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, Q43bhljVk4qL2E/4GKg8aaOu0q0prtkmrdWDmNSDmKCjTEYPxTxrLReXNgqFACEa 45hYmnxRlDm/xR8rAxYKNg== 0001072993-99-000288.txt : 19991117 0001072993-99-000288.hdr.sgml : 19991117 ACCESSION NUMBER: 0001072993-99-000288 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23193 FILM NUMBER: 99751748 BUSINESS ADDRESS: STREET 1: 6290 SEQUENCE DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194509333 MAIL ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 FORM 10-Q DATED SEPTEMBER 30, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ___________ FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1999, OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO. COMMISSION FILE NUMBER: 000-23193 ___________ APPLIED MICRO CIRCUITS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2586591 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6290 SEQUENCE DRIVE SAN DIEGO, CA 92121 (Address of principal executive offices) Registrant's telephone number, including area code: (619) 450-9333 ___________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [x] NO ___ As of October 31, 1999, 53,951,411 shares of the Registrant's Common Stock were issued and outstanding. APPLIED MICRO CIRCUITS CORPORATION INDEX
PAGE ---- Part I. FINANCIAL INFORMATION: Item 1. a) Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited) and March 31, 1999...................................................... 3 b) Condensed Consolidated Statements of Income (unaudited) for the three months ended and six months ended September 30, 1999 and 1998.............................. 4 c) Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended September 30, 1999 and 1998................................ 5 d) Notes to Condensed Consolidated Financial Statements (unaudited).................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 24 Part II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................... 24 Item 2. Changes in Securities and Use of Proceeds............................................... 25 Item 3 Defaults upon Senior Securities......................................................... 25 Item 4. Submission of Matters to a Vote of Security Holders..................................... 26 Item 5. Other Information,...................................................................... 27 Item 6. Exhibits and Reports on Form 8-K........................................................ 27 Signatures ........................................................................................ 27
================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
SEPTEMBER 30, MARCH 31, 1999 1999 -------------------------------- (UNAUDITED) ASSETS ------ Current assets: Cash and cash equivalents........................................................... $ 26,836 $ 13,530 Short-term investments - available-for-sale......................................... 78,235 73,010 Accounts receivable, net of allowance for doubtful accounts of $324 and $177 at September 30, 1999 (unaudited) and March 31, 1999, respectively................ 18,861 19,275 Inventories......................................................................... 10,475 9,813 Deferred income taxes............................................................... 4,273 4,573 Notes receivable from officers and employees........................................ 75 815 Other current assets................................................................ 3,335 4,004 -------- -------- Total current assets...................................................... 142,090 125,020 Property and equipment, net.............................................................. 27,270 23,128 Other assets............................................................................. 2,168 2,507 -------- -------- Total assets........................................................................... $171,528 $150,655 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable.................................................................... $ 6,820 $ 5,131 Accrued payroll and related expenses................................................ 4,938 4,689 Other accrued liabilities........................................................... 5,252 7,207 Deferred revenue.................................................................... 2,174 1,439 Current portion of long-term debt................................................... 1,346 1,862 Current portion of capital lease obligations........................................ 872 1,075 -------- -------- Total current liabilities................................................. 21,402 21,403 Long-term debt, less current portion..................................................... 4,309 4,995 Long-term capital lease obligations, less current portion................................ 2,188 2,563 Stockholders' equity: Preferred Stock, $0.01 par value: 2,000 shares authorized, none issued and outstanding............................... - - Common Stock, $0.01 par value: Authorized shares - 180,000 Issued and outstanding shares - 53,898 at September 30, 1999 (unaudited) and 53,224 at March 31, 1999............................................ 539 532 Additional paid-in capital........................................................... 108,170 102,259 Deferred compensation, net........................................................... (1,815) (2,123) Accumulated other comprehensive loss................................................. (207) (33) Retained earnings.................................................................... 37,397 21,514 Notes receivable from stockholders................................................... (455) (455) -------- -------- Total stockholders' equity.............................................. 143,629 121,694 -------- -------- Total liabilities and stockholders' equity...................................... $171,528 $150,655 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share data)
THREE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------------------- 1999 1998 1999 1998 ---------------------------------------- Net revenues.................................................... $37,898 $25,472 $69,541 $49,286 Cost of revenues................................................ 11,326 9,347 21,609 18,746 ------- ------- ------- ------- Gross profit.................................................... 26,572 16,125 47,932 30,540 Operating expenses: Research and development..................................... 7,194 5,454 13,548 10,347 Selling, general and administrative.......................... 6,548 4,296 12,117 8,460 ------- ------- ------- ------- Total operating expenses................................... 13,742 9,750 25,665 18,807 ------- ------- ------- ------- Operating income................................................ 12,830 6,375 22,267 11,733 Interest income, net............................................ 1,005 877 1,889 1,730 ------- ------- ------- ------- Income before income taxes...................................... 13,835 7,252 24,156 13,463 Provision for income taxes...................................... 4,738 2,584 8,273 4,811 ------- ------- ------- ------- Net income...................................................... $ 9,097 $ 4,668 $15,883 $ 8,652 ======= ======= ======= ======= Basic earnings per share: Earnings per share........................................... $ 0.17 $ 0.10 $ 0.31 $ 0.18 ======= ======= ======= ======= Shares used in calculating basic earnings per share.......... 52,543 48,820 51,987 48,050 ======= ======= ======= ======= Diluted earnings per share: Earnings per share........................................... $ 0.16 $ 0.09 $ 0.28 $ 0.16 ======= ======= ======= ======= Shares used in calculating diluted earnings per share........ 57,932 54,592 57,494 53,963 ======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements. 4 APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
SIX MONTHS ENDED SEPTEMBER 30, ------------------- 1999 1998 ------------------- Operating Activities Net income........................................................................................ $ 15,883 $ 8,652 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................................... 3,820 3,371 Amortization of deferred compensation....................................................... 308 121 Changes in assets and liabilities: Accounts receivable..................................................................... 414 (5,578) Inventories............................................................................. (662) (1,265) Other assets............................................................................ 908 126 Accounts payable........................................................................ 1,689 (535) Accrued payroll and other accrued liabilities........................................... 422 2,320 Deferred income taxes................................................................... 300 383 Deferred revenue........................................................................ 735 (654) -------- -------- Net cash provided by operating activities................................................... 23,817 6,941 Investing Activities Proceeds from sales and maturities of short-term investments....................................... 68,976 93,046 Purchase of short-term investments................................................................. (74,375) (91,940) Notes receivable from officers and employees....................................................... 840 235 Purchase of property and equipment................................................................. (7,962) (9,882) -------- -------- Net cash used for investing activities...................................................... (12,521) (8,541) Financing Activities Proceeds from issuance of common stock, net........................................................ 3,800 6,201 Repurchase of restricted stock..................................................................... (10) - Payments on capital lease obligations.............................................................. (578) (1,172) Proceeds from long-term debt....................................................................... - 533 Payments on stockholders notes..................................................................... - 46 Payments on long-term debt......................................................................... (1,202) (465) -------- -------- Net cash provided by financing activities................................................... 2,010 5,143 -------- -------- Net increase in cash and cash equivalents................................................... 13,306 3,543 Cash and cash equivalents at beginning of period.......................................................... 13,530 6,460 -------- -------- Cash and cash equivalents at end of period................................................................ $ 26,836 $ 10,003 ======== ======== Supplemental disclosure of cash flow information: Cash paid for: Interest....................................................................................... $ 396 $ 251 ======== ======== Income taxes................................................................................... $ 5,583 $ 4,838 ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION INTERIM FINANCIAL INFORMATION (UNAUDITED) The accompanying unaudited interim condensed financial statements of Applied Micro Circuits Corporation (the "Company" or "AMCC") have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in sales, expenses and net income or losses will continue. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include assessing the collectability of accounts receivable, the use and recoverability of inventory, estimates to complete engineering contracts, costs of future product returns under warranty and provisions for contingencies expected to be incurred. Actual results could differ from those estimates. On September 1, 1999, the Company's stockholders approved an increase in the authorized number of shares of common stock authorized to 180,000,000. On September 9, 1999, the Company effected a two-for-one stock split (in the form of a stock 100% dividend); accordingly, all prior share and per share amounts in this Form 10-Q have been restated to reflect the stock split. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 1999. 2. EARNINGS PER SHARE The reconciliation of shares used to calculate basic and diluted earnings per share consists of the following (in thousands):
THREE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------------------- Shares used in basic earnings per share computations-weighted average common shares outstanding 52,543 48,820 51,987 48,050 Net effect of dilutive common share equivalents based on the treasury stock method 5,389 5,772 5,507 5,913 ------ ------ ------ ------ Shares used in diluted earnings per share computations 57,932 54,592 57,494 53,963 ====== ====== ====== ======
6 3. CERTAIN FINANCIAL STATEMENT INFORMATION
SEPTEMBER 30, MARCH 31, 1999 1999 ------------------------------------- Inventories (in thousands): Finished goods $ 2,472 $ 975 Work in process 6,805 7,688 Raw materials 1,198 1,150 ------- ------ $10,475 $9,813 ======= ====== SEPTEMBER 30, MARCH 31, 1999 1999 ------------------------------------- Property and equipment (in thousands): Machinery and equipment $ 34,915 $ 33,280 Leasehold improvements 7,708 7,641 Computers, furniture and office equipment 18,177 16,654 Land 4,808 1,133 -------- -------- 65,608 58,708 Less accumulated depreciation and amortization (38,338) (35,580) -------- -------- $ 27,270 $ 23,128 ======== ========
4. COMPREHENSIVE INCOME The components of comprehensive income, net of tax, are as follows (in thousands):
THREE MONTHS SIX MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------- 1999 1998 1999 1998 ------------------------------------------------------- Net income $9,097 $4,668 $15,883 $8,652 Change in net unrealized loss on available-for-sale investments - - (174) - ------ ------ ------- ------ Comprehensive income $9,097 $4,668 $15,709 $8,652 ====== ====== ======= ======
Accumulated other comprehensive loss presented in the accompanying consolidated condensed balance sheets consists of the accumulated net unrealized loss on available-for-sale investments. 7 5. CONTINGENCIES The Company is party to various claims and legal actions arising in the ordinary course of business, including notification of possible infringement on the intellectual property rights of third parties. In addition, 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 group of PRPs that has agreed to fund certain remediation efforts at the Omega site. The Company has accrued approximately $50,000 for its contributions to such efforts. 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 effect 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 averse effect on the Company's results of operations in any period. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership (the "Lemelson Partnership") filed a lawsuit in the U.S. District Court for the District of Arizona against a number of companies, including AMCC, engaged in the manufacture and/or sale of IC products. On November 25, 1998, the Company was served a summons pursuant to this lawsuit. The complaint alleges infringement by the defendants of certain U.S. patents (the "Lemelson Patents") held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered the Company a license under the Lemelson Patents. Although the ultimate outcome of this matter is not currently determinable, the Company believes, based in part on the licensing terms previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations in any period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations that are included in the Annual Report on Form 10-K for the year ended March 31, 1999 for Applied Micro Circuit Corporation. This Quarterly Report on Form 10-Q, and in particular this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or the future financial performance of the Company that involve certain risks and uncertainties including, but not limited to, those set forth in "The Factors That May Affect Future Results" discussed below. Actual events or the actual future results of the Company may differ materially from any forward- looking statements due to such risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking assumptions. OVERVIEW AMCC designs, develops, manufactures and markets high-performance, high- bandwidth integrated circuit silicon solutions for the world's optical networks. The Company utilizes a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies to offer IC products for the wide area network markets that address the SONET/SDH and ATM transmission standards and for the fiber optic based portions of the local area network markets that address the Gigabit Ethernet and Fibre Channel transmission standards. The Company also leverages its technology to provide IC products for the automated test equipment (ATE), broadcast HDTV, high-speed computing and military markets. 8 RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------ ------------------------------ SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, 1999 1998 1999 1998 -------------- -------------- -------------- -------------- Net revenues................................................ 100.0% 100.0% 100.0% 100.0% Cost of revenues............................................ 29.9% 36.7% 31.1% 38.0% ----- ----- ----- ----- Gross profit................................................ 70.1% 63.3% 68.9% 62.0% Operating expenses: Research and development.................................. 19.0% 21.4% 19.5% 21.0% Selling, general and administrative....................... 17.3% 16.9% 17.4% 17.2% ----- ----- ----- ----- Total operating expenses............................... 36.3% 38.3% 36.9% 38.2% ----- ----- ----- ----- Operating income............................................ 33.9% 25.0% 32.0% 23.8% Interest income, net........................................ 2.6% 3.5% 2.7% 3.5% ----- ----- ----- ----- Income before income taxes.................................. 36.5% 28.5% 34.7% 27.3% Provision for income taxes.................................. 12.5% 10.2% 11.9% 9.7% ----- ----- ----- ----- Net income.................................................. 24.0% 18.3% 22.8% 17.6% ===== ===== ===== =====
Net Revenues. Net revenues for the three months and six months ended September 30, 1999 were $37.9 million and $69.5 million representing increases of 49% and 41%, respectively, over net revenues of $25.5 million and $49.3 million for the three months and six months ended September 30, 1998, respectively. Revenues from sales of communications products increased to 81% and 76% of net revenues for the three months and six months ended September 30, 1999, respectively, from 52% and 51% of net revenues for the three months and six months ended September 30, 1998, respectively. This increase reflects both unit growth in shipments of existing products, as well as the introduction of new products for these markets. Revenues from sales of non-communications products, consisting of the ATE, high-speed computing and military products, decreased to 19% and 24% of net revenues during the three months and six months ended September 30, 1999, respectively, from 48% and 49% of net revenues for the three months and six months ended September 30, 1998, respectively. Sales to Nortel, the Company's largest customer, accounted for 36% and 33% of net revenues for the three months and six months ended September 30, 1999,respectively, as compared to 16% and 17% for the three months and six months ended September 30, 1998, respectively. Sales to Insight Electronics, Inc., the Company's domestic distributor, accounted for 15% of net revenues for both the three months and six months ended September 30, 1999 compared to 13% and 11% in the three months and six months ended September 30, 1998, respectively. Sales to Raytheon Systems Co. (including shipments of $0.5 million and $3.8 million for the three months and six months ended September 30, 1999 relating to the partial fulfillment of an end-of-life order) accounted for 2% and 6% of net revenues for the three months and six months ended September 30, 1999, respectively, compared to 18% and 12% for the three months and six months ended September 30, 1998. Sales outside of North America accounted for 21% and 23% of net revenues for the three months and six months ended September 30, 1999, respectively, as compared to 26% and 27% for the three months and six months ended September 30, 1998, respectively. Gross Margin. Gross margin was 70.1% and 68.9% for the three months and six months ended September 30, 1999, respectively, as compared to 63.3% and 62.0% for the three months and six months ended September 30, 1998, respectively. The increase in gross margin resulted from increased utilization of the Company's wafer fabrication facility. The Company's gross margin is primarily impacted by factory utilization, wafer yields, product mix and the Company's timing of depreciation expense and other costs associated with expanding its manufacturing capacity. Although AMCC does not expect its gross margin to continue to increase at the rates reflected above, its strategy is to maximize factory utilization whenever possible, maintain or improve its manufacturing yields, and focus on the development and sale of high-performance products that can have higher gross margins. There can be no assurance, however, that the Company will be successful in achieving these objectives or that the trend of increasing gross margins will continue. In addition, these factors can vary significantly from quarter to quarter, which would likely result in fluctuations in quarterly gross margin and net income. Research and Development. Research and development ("R&D") expenses increased to $7.2 million, or 19.0% of net revenues, for the three months ended September 30, 1999, from $5.5 million, or 21.4% of net revenues, for the three months ended September 30, 1998, and increased to $13.5 9 million, or 19.5% of net revenues, for the six months ended September 30, 1999 from $10.3 million, or 21.0% of net revenues for the six months ended September 30, 1998. The increase in R&D expenses was due to accelerated new product and process development efforts and an increase in personnel costs as a result of additional R&D personnel. The Company believes that a continued commitment to R&D is vital to maintain a leadership position with innovative communications products. Accordingly, the Company expects R&D expenses to increase in absolute dollars in the future. Currently, R&D expenses are primarily focused on the development of products and processes for the communications market, and the Company expects to continue this focus Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were $6.5 million (17.3% of net revenues) and $12.1 million (17.4% of net revenues), for the three months and six months ended September 30, 1999, compared to $4.3 million (16.9% of net revenues) and $8.5 million (17.2% of net revenues), for the three months and six months ended September 30, 1998. The increase in SG&A expenses in absolute dollars for the three months and six months ended September 30, 1999, primarily reflected increased compensation and travel costs related to additional sales and administrative personnel, increases in legal and accounting costs and increases in product promotion expenses. Operating Margin. The Company's operating margin increased to 33.9% and 32.0% of net revenues for the three months and six months ended September 30, 1999, respectively, compared to 25.0% and 23.8% for the three months and six months ended September 30, 1998, respectively, principally as a result of the increase in gross margin. Interest Income, net. Interest income,net increased to $1.0 million for the three months ended September 30, 1999 from $877,000 for the three months ended September 30, 1998 and increased to $1.9 million for the six months ended September 30, 1999 from $1.7 million for the six months ended September 30, 1998. This increase was due principally to higher interest income from larger cash and short-term investment balances. Income Taxes. The Company's estimated annual effective tax rate used for the six months ended September 30, 1999 was 34.3%, compared to an effective tax rate of 35.7% for the six months ended September 30, 1998. This decrease in the Company's estimated effective tax rate is a result of a decrease in the Company's estimated effective state tax rate and the utilization of certain tax credits. Deferred Compensation. In connection with the grant of certain stock options to employees during the six months ended September 30, 1997, the Company recorded aggregate deferred compensation of $599,000, representing the difference between the deemed fair value of the Common Stock at the date of grant for accounting purposes and the option exercise price of such options. Additionally, during the year ended March 31, 1999, the Company recorded deferred compensation of $2.5 million related to restricted stock and options granted to founders and employees of Cimaron. Such amounts are presented as a reduction of stockholders' equity and amortized ratably over the vesting period of the applicable options. Amortization of deferred compensation recorded for the three months and six months ended September 30, 1999 was $154,000 and $308,000; respectively compared to $62,000 and $121,000 for the three months and six months ended September 30, 1998. The Company currently expects to record amortization of deferred compensation with respect to these restricted stock and option grants of approximately $658,000, $543,000, $414,000, $330,000 and $178,000 during the fiscal years ending March 31, 2000, 2001, 2002, 2003 and 2004, respectively. Backlog. The Company's sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of the Company's products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs, and customer orders can be canceled or rescheduled without significant penalty to the customer. For these reasons, the Company's backlog as of any particular date is not representative of actual sales for any succeeding period, and the Company therefore believes that backlog is not a good indicator of future revenue. The Company's backlog for products requested to be shipped and nonrecurring engineering services to be completed in the next six months was $45.8 million on September 30, 1999, compared to $40.0 million on September 30, 1998. Included in backlog at September 30, 1999 is $5.4 million remaining on the Raytheon Systems Co. end-of-life buy for integrated circuits used in its high- speed radar systems. 10 Year 2000 Compliance. As a semiconductor manufacturer with its own wafer fabrication facility, the Company is dependent on computer systems and manufacturing equipment with embedded hardware or software to conduct its business. The Company has developed and is currently executing a plan designed to make its computer systems, applications and manufacturing equipment and facilities Year 2000 ready. The plan covers five stages including (i) inventory, (ii) assessment, (iii) remediation, (iv) testing, and (v) contingency planning. The Company has completed the inventory and assessment stages and has completed remediation and testing on critical applications. The final remediation, testing and contingency planning stages are targeted to be completed by the end of November 1999. The Company is also actively working with suppliers of its raw materials and services to determine the extent to which the suppliers' operations and the products and services they provide are Year 2000 capable, and to monitor their progress toward Year 2000 capability. Highest priority is being placed on working with critical suppliers whose failure would shut down manufacturing or other critical operations within a short period of time. The Company has made inquiries of its major suppliers and has received responses to its initial inquiries from 100% of critical suppliers. Follow-up activities seek to determine whether the supplier is taking all appropriate steps to fix Year 2000 problems and to be prepared to continue functioning effectively as a supplier in accordance with the Company's requirements. Plans are being developed to address issues related to suppliers that are not considered to be making sufficient progress in becoming Year 2000 capable. The Company believes that its most reasonably likely worst-case Year 2000 scenarios would relate to problems with the systems of third parties rather than with the Company's internal systems or its products. Because the Company has less control over assessing and correcting the Year 2000 problems of third parties, the Company believes the risks are greatest with critical suppliers of materials and services, telecommunications, transportation supply channels and infrastructure such as electricity supply, water and sewer service. A worst-case scenario involving the failure of one or more of the Company's critical third party suppliers or failure of the Company to execute its compliance plan would be the partial or complete inability to provide customers with products or services on a timely basis. The Company is not in the position to identify or to avoid all possible scenarios; however, the Company is currently assessing scenarios and taking steps to mitigate the impacts of various scenarios if they were to occur. Preliminary contingency plans for critical business operations are in place and these plans involve, among other actions, adjusting inventory levels, manual workarounds, and adjusting staffing strategies. The Company has incurred and expensed approximately $650,000 related to the Year 2000 project and expects to incur an additional $250,000 on completing the Year 2000 project. Approximately one-half of the costs associated with the Year 2000 project are expected to relate to internal resources that have been reallocated from other projects, with the balance of costs reflecting incremental spending for equipment and software upgrades. The costs of the Year 2000 project are expected to be funded through operating cash flows, with the cost of internal resources expensed as incurred and the cost of equipment and software upgrades capitalized or expensed in accordance with the Company's policy on property and equipment. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and the ability to identify and correct equipment with embedded hardware or software and similar uncertainties. 11 Liquidity and Capital Resources The Company's principal source of liquidity as of September 30, 1999 consisted of $105.1 million in cash, cash equivalents and short-term investments. Working capital as of September 30, 1999 was $120.7 million, compared to $103.6 million as of March 31, 1999. This increase in working capital was primarily due to net cash provided by operating activities, partially offset by the purchase of property and equipment. For the six months ended September 30, 1999 and 1998, net cash provided by operating activities was $23.8 million and $6.9 million, respectively. Net cash provided by operating activities for the six months ended September 30, 1999 primarily reflected net income before depreciation and amortization expense, a decrease in accounts receivable and other assets and an increase in accounts payable, other accrued liabilities and deferred revenue. Net cash provided by operating activities for the six months ended September 30, 1998 primarily reflected net income before depreciation and amortization expense, offset by increases in accounts receivable and inventory. Capital expenditures totaled $8.0 million for the six months ended September 30, 1999 and included the payment of $3.7 million to complete the purchase of land under a contract entered into in June 1998, compared to capital expenditures of $9.9 million for the six months ended September 30, 1998. The Company intends to increase its capital expenditures for manufacturing equipment, test equipment and computer hardware and software. The Company is exploring alternatives for the expansion of its manufacturing capacity which would likely occur after fiscal year 2000, including further expansion of its current 4" wafer fabrication facility, building a new wafer fabrication facility, purchasing a wafer fabrication facility and/or entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by the Company including an investment in excess of $80.0 million if the Company chose to or was required to build a new wafer fabrication facility. The Company would anticipate financing any such investment through a combination of available cash, cash equivalents and short term investments, cash from operations and additional equity, debt and lease financing. Although the Company believes that it will be able to obtain financing for a significant portion of the planned capital expenditures at competitive rates and terms from its existing and new financing sources, there can be no assurance that the Company will be successful in these efforts. Furthermore, there can be no assurance that any of the alternatives for expansion of its manufacturing capacity will be available on a timely basis or at all. The Company believes that its available cash, cash equivalents and short- term investments, and cash generated from operations, will be sufficient to meet the Company's capital requirements for at least 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. Factors That May Affect Future Results Our operating results may fluctuate because of many factors, many of which are beyond our control If our operating results are below the expectations of public market analysts or investors, then the market price of our common stock could be materially and adversely affected. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are: . the rescheduling or cancellation of orders by customers; . fluctuations in the timing and amount of customer requests for product shipments; . fluctuations in manufacturing output, yields and inventory levels; . changes in the mix of products that our customers buy; . our ability to introduce new products and technologies on a timely basis; . the announcement or introduction of products and technologies by our competitors; . the availability of external foundry capacity, purchased parts and raw materials; . competitive pressures on selling prices; . the amounts and timing of costs associated with warranties and product returns; 12 . the amounts and timing of investments in research and development; . market acceptance of our products and of our customers' products; . the timing of depreciation and other expenses that we expect to incur in connection with any expansion of our manufacturing capacity; . costs associated with compliance with applicable environmental regulations or remediation; . costs associated with litigation, including without limitation, litigation or settlements relating to the use or ownership of intellectual property; . the ability of our customers to obtain components from their other suppliers; . general semiconductor industry conditions; and . general economic conditions. Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. We are continuing to increase our operating expenses for personnel and new product development. However, we have a limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our business, financial condition and operating results would be adversely affected if we do not achieve increased revenues. We can have revenue shortfalls for a variety of reasons, including: . significant pricing pressures that occur because of declines in average selling prices over the life of a product; . sudden shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to customers with resources greater than us and, in turn, interrupt our ability to meet our production obligations; . fabrication, test or assembly capacity constraints for internally manufactured devices which interrupt our ability to meet our production obligations; and . the rescheduling or cancellation of customer orders. In addition, our business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In addition, from time to time, in response to anticipated long lead times to obtain inventory and materials from our outside foundries, we may order materials in advance of anticipated customer demand, which might result in excess inventory levels or unanticipated inventory write- downs if expected orders fail to materialize, or other factors render the customers' products less marketable. Furthermore, we currently anticipate that an increasing portion of our revenues in future periods will be derived from sales of application-specific standard products ("ASSPs"), as compared to application-specific integrated circuits ("ASICs"). Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which may make it increasingly difficult for us to predict revenues and inventory levels and adjust production appropriately. If we are unable to plan inventory and production levels effectively, our business, financial condition and operating results could be materially adversely affected. One example of the volatility of our results is that we experienced revenue fluctuations and incurred net losses in fiscal 1995 and 1996. These revenue fluctuations and net losses were caused by the termination of a relationship with a strategic foundry partner, decreased orders from two major customers, charges associated with a reduction in our workforce and charges for excess inventory. Accordingly, we believe that period-to-period comparisons of operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. Our operating results depend substantially on manufacturing output and yields, which may not meet expectations. AMCC Fabrication We manufacture most of our semiconductors at our San Diego 4" wafer fabrication facility. The manufacturing of semiconductors requires the use of manufacturing tools which are unique to each product being produced. If one of these unique manufacturing tools was damaged or destroyed our ability to manufacture the related product would be impaired and our revenue would decline and our business would suffer until the tool were repaired or replaced. Our yields decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors, including minute levels of contaminants in the 13 manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. The ongoing expansion of the manufacturing capacity of our existing wafer fabrication facility could increase the risk of contaminants in the facility. In addition, many of these problems are difficult to diagnose, and are time consuming and expensive to remedy and can result in shipment delays. Because the majority of our costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to our results of operations. Yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. In the past we have experienced yield problems in connection with the manufacture of our products. We estimate yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. We have in the past, and may in the future from time to time, take inventory write-downs as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production in a new or expanded manufacturing facility. Fabrication by Third Parties Semiconductor manufacturing yields are a function both of product design and process technology. When our products are manufactured by an outside foundry, the process technology is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between ourselves and our manufacturer. In some cases this risk could be compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. If we develop relationships with additional outside foundries, yields could be adversely affected due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of these new foundries. Because of our limited access to wafer fabrication capacity from outside foundries for certain products, any decrease in manufacturing yields of such products could result in an increase in our per unit costs for such products and force us to allocate available product supply among customers, which could potentially adversely impact customer relationships as well as revenues and gross margin. Our outside foundries may not achieve or maintain acceptable manufacturing yields in the future. Furthermore, we also face the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. Our business strategy is based on increasing dependence on the Wide Area Network (WAN) and Local Area Network (LAN) communications markets. An important part of our strategy is to continue our focus on the WAN market and to leverage our technology and expertise to penetrate further the LAN market for high-speed ICs. If we are unable to penetrate these markets further, our revenues could stop growing and may decline. We anticipate that sales to our other traditional markets will grow more slowly or not at all and, in some instances, as in the case of military markets, may decrease over time. The communications markets are characterized by: . extreme price competition; . rapid technological change; . industry standards that are continually evolving; and . in many cases, short product life cycles. 14 These markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, we would be likely to lose business from an existing or potential customer and, moreover, would not have the opportunity to compete for new design wins until the next product transition occurs. If we fail to develop products with required features or performance standards for the WAN or LAN markets, or if we experience a delay as short as a few months in bringing a new product to market, or if our WAN or WAN customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period. A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on the Synchronous Optical Network, or SONET, the Synchronous Digital Hierarchy, or SDH and the Asynchronous Transfer Mode, or ATM, transmission standards. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance. Although we have developed products for the Gigabit Ethernet and Fibre Channel communications standards, volume sales of these products are modest, and we may not be successful in addressing the market opportunities for products based on these standards. Our business could be adversely affected if we do not adequately address the risks associated with our recent acquisition of Cimaron Communications Corporation. In March 1999, we completed the acquisition of Cimaron Communications Corporation. This transaction is accompanied by a number of risks, including: . the difficulty of assimilating the operations and personnel of Cimaron; . the potential disruption of AMCC's and Cimaron's ongoing business and distraction of management; . possible unanticipated expenses related to technology integration; . the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; and . potential unknown liabilities associated with acquired businesses. We may not be successful in addressing these risks or any other problems encountered in connection with the Cimaron acquisition. In addition, the market price of our common stock could decline as a result of the merger if: . the integration of AMCC and Cimaron is unsuccessful; . the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial analysts; . the effect of the merger on the combined company financial results is not consistent with the expectations of financial analysts; or . the Company is unsuccessful in the management of Cimaron employees who are geographically distant from our headquarters, but engaged in developing technology and products that are vital for future revenues. We have accounted for the merger under the pooling-of-interests accounting method and financial reporting rules. To qualify the merger as a pooling-of- interests for accounting purposes, AMCC and Cimaron and their respective affiliates must meet the criteria for pooling-of-interests accounting established in opinions published by the Accounting Principles Board and interpreted by the Financial Accounting Standards Board and the Securities and Exchange Commission. These opinions are complex, and the interpretation of them is subject to change. However, the availability of pooling-of-interests accounting treatment for the merger depends in part, upon circumstances and events occurring after the effective time. For example, there must be no significant changes in the business of the combined company, including significant dispositions of assets, for a period of two years following the effective time. The failure of the merger to qualify for pooling-of-interests accounting treatment for financial reporting purposes for any reason would materially and adversely affect our reported earnings and likely, the price of our common stock. 15 Our business strategy is also based on increasing dependence on application- specific standard products. We have under development a number of ASSPs for the communications markets, from which we expect to derive an increasing portion of our future revenues. Our relationships with certain customers in these markets have only been established recently. Our future success in selling ASSPs, and in particular, selling ASSPs to customers in the telecommunications and data communications markets, will depend in large part on whether our ASSPs are developed on a timely basis and whether such products achieve market acceptance among new and existing customers, and on the timing of the commencement of volume production of products incorporating our ASSPs. We have in the past encountered difficulties in introducing new products in accordance with customers' delivery schedules and initial expectations. We may encounter similar difficulties in the future, and we may not be able to develop and introduce ASSPs in a timely manner so as to meet customer demands. We currently derive revenues from non-communications markets including the automated test equipment market, the high-speed computing market and the military market but we believe that revenues from these markets will decline in future periods and that our gross margin on sales of products for these markets may also decline in future periods. We have historically derived significant revenues from product sales to customers in the Automated Test Equipment, or ATE, high-speed computing and military markets and currently anticipate that we will continue to derive revenues from sales to customers in these markets in the near term. However, we are not currently funding product development efforts in these markets and as a result we expect that revenues from products in these markets will decline in future periods. In addition, the market for ATE and high-speed computing IC products is subject to extreme price competition, and we may not be able to reduce the costs of manufacturing high-speed computing IC products in response to declining average selling prices. Even if we successfully utilize new processes or technologies to reduce the manufacturing costs of our high-speed computing products in a timely manner, our customers in the ATE and high-speed computing markets may not purchase these products. Furthermore, we expect that certain competitors will seek to develop and introduce products that integrate the functions performed by our ATE and high- speed computing IC products on single chips. In addition, one or more of our customers may choose to utilize discrete components to perform the functions served by our high-speed computing IC products or may use their own design and fabrication facilities to create a similar product. In either case, the need for ATE and high-speed computing customers to purchase our IC products could be eliminated. Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products. The markets for our products are characterized by: . rapidly changing technologies; . evolving and competing industry standards; . short product life cycles; . changing customer needs; . emerging competition; . frequent new product introductions and enhancements; . increased integration with other functions; and . rapid product obsolescence. To develop new products for the communications markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to develop technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products, particularly ASSPs, that meet customers' 16 changing needs. We also must respond to changing industry standards, trends towards increased integration and other technological changes on a timely and cost-effective basis. Furthermore, if we fail to achieve design wins with key customers our business will be significantly hurt because once a customer has designed a supplier's product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier. Products for communications applications, as well as for high-speed computing applications, are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. In addition, we may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. The markets in which we compete are highly competitive and subject to rapid technological change, price erosion and heightened international competition. The communications, ATE and high-speed computing industries are intensely competitive. We believe that the principal factors of competition in our markets are price, product performance, product quality and time-to-market. Our ability to compete successfully in our markets depends on a number of factors, including: . success in designing and subcontracting the manufacture of new products that implement new technologies; . product quality; . reliability; . price; . the efficiency of production; . design wins for our IC products; . expansion of production of our products for particular systems manufacturers; . end-user acceptance of the systems manufacturers' products; . market acceptance of competitors' products; and . general economic conditions. In addition, our competitors or customers may offer enhancements to our existing products or offer new products based on new technologies, industry standards or customer requirements including, but not limited to, all optical networking systems that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower-cost or higher performance alternatives to our products. The introduction of enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. In addition, we expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. In the communications markets, we compete primarily against Conexant, Giga, Hewlett-Packard, Lucent Technologies, Maxim, Philips, Sony, Texas Instruments, TriQuint and Vitesse. Some of these companies use gallium arsenide ("GaAs") process technologies for certain products. In certain circumstances, most notably with respect to ASICs supplied to Nortel, our customers or potential customers have internal IC manufacturing capabilities. In the ATE market, our products compete primarily against GaAs based products offered by Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, we compete primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. 17 If we are not successful in expanding our manufacturing capacity, on time, we may face serious capacity constraints. We currently manufacture a majority of our IC products at our 4" wafer fabrication facility located in San Diego, California. We believe that we will be able to satisfy our production needs from this fabrication facility through the end of fiscal 2000, although this date may vary depending on, among other things, our rate of growth. We will be required to hire, train and manage additional production personnel in order to increase production capacity as scheduled. To expand our capacity beyond our existing wafer fabrication facility, we are in the process of negotiating a foundry agreement with a third party wafer fabrication facility. We will have to install our fabrication processes at this foundry, qualify our processes at this foundry and then ramp production volumes at this foundry. If we cannot expand our capacity on a timely basis, we could experience significant capacity constraints that could render us unable to meet customer demand or force us to spend more to meet demand. We are exploring alternatives for the further expansion of our manufacturing capacity which would likely occur after fiscal year 2001, including expanding our current 4" wafer fabrication facility, building a new wafer fabrication facility, purchasing a wafer fabrication facility and/or entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by the Company including an investment in excess of $80.0 million if we chose to or were required to build a new wafer fabrication facility. There can be no assurance that any of the alternatives for expansion of our manufacturing capacity will be available on a timely basis or that, we will be able to manage our growth and effectively integrate our expansion into our current operations. The cost of any investment the Company may have to make in expanding our manufacturing capacity is expected to be funded through a combination of available cash, cash equivalents and short-term investments, cash from operations and additional debt, lease or equity financing. We may not be able to obtain the additional financing necessary to fund the construction and completion of the new manufacturing facility. Our existing wafer fabrication facility is, and the potential new wafer fabrication facility may be, located in Southern California and these facilities may be subject to natural disasters such as earthquakes or floods. A significant natural disaster, such as an earthquake or flood, could have a material adverse impact on our business, financial condition and operating results. In addition, the depreciation and other expenses that we will incur in connection with the expansion of our manufacturing capacity may adversely affect our gross margin in any future fiscal period. Expanding our current 4" wafer fabrication facility, building a new wafer fabrication facility or purchasing a wafer fabrication facility entails significant risks, including: . shortages of materials and skilled labor; . unforeseen environmental or engineering problems; . work stoppages; . weather interferences; and . unanticipated cost increases. Any one of these risks could have a material adverse effect on the building, equipping and production start-up of a new facility or the expansion of our existing facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the expansion or new facility and could reduce our anticipated revenues. Also, the timing of commencement of operation of our expanded or new facility will depend upon the availability, timely delivery, successful installation and testing of the necessary process equipment. As a result of the foregoing and other factors, our expanded or new facility may not be completed and in volume production within its current budget or within the period currently scheduled. Furthermore, we may be unable to achieve adequate manufacturing yields in our expanded or new facility in a timely manner, and our revenues may not increase commensurate with the anticipated increase in manufacturing capacity associated with the expanded or new facility. In addition, in the future, we may be required for competitive reasons to make capital investments in the existing wafer fabrication facility or to accelerate the timing of the construction of a new wafer fabrication facility in order to expedite the manufacture of products based on more advanced manufacturing processes. 18 The markets for our products are characterized by rapid changes in manufacturing process technologies; therefore, to provide competitive products to our target markets, we must develop or otherwise gain access to improved process technologies. Our future success will depend, in large part, upon our ability to continue to improve existing process technologies, to develop new process technologies including silicon germanium, or SiGe, processes, and to adapt our process technologies to emerging industry standards. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs and/or improve product performance. We may not be able to improve our process technologies and develop or otherwise gain access to new process technologies, including, but not limited to SiGe process technologies, in a timely or affordable manner. In addition, products based on these technologies may not achieve market acceptance. Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of materials will be higher than expected. We rely on outside foundries for the manufacture of certain products, including all of our products designed on CMOS processes and all products that we anticipate will be designed on silicon germanium processes. We generally do not have long-term wafer supply agreements with our outside foundries that guarantee wafer or product quantities, prices or delivery lead times. Instead, our products that are manufactured by outside foundries are manufactured on a purchase order basis. We expect that, for the foreseeable future, certain products will be manufactured by a single outside foundry. Because establishing relationships with new outside foundries takes several months, there is no readily available alternative source of supply for these products. A manufacturing disruption experienced by one or more of our outside foundries would impact the production of certain of our products for a substantial period of time. Furthermore, the transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed. There are additional risks associated with our dependence upon third-party manufacturers for certain products. These include, but are not limited to: . reduced control over delivery schedules and quality; . risks of inadequate manufacturing yields and excessive costs; . the potential lack of adequate capacity during periods of excess demand; . limited warranties on wafers or products supplied to us; . potential increases in prices; and . potential misappropriation of our intellectual property. With respect to certain of our products, we depend upon external foundries to produce wafers and, in some cases finished products of acceptable quality, to deliver those wafers and products to us on a timely basis and to allocate to us a portion of their manufacturing capacity sufficient to meet our needs. On occasion, we have experienced difficulties with our suppliers failing to produce goods of sufficient quality or quantity or failing to meet delivery deadlines. Our wafer and product requirements typically represent a very small portion of the total production of these external foundries. As a result, we are subject to the risk that a producer will cease production on an older or lower-volume process that is used to produce our parts. Additionally, we cannot be certain our external foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Certain of our products are assembled and packaged by third-party subcontractors. We do not have long-term agreements with any of these subcontractors. Assembly and packaging is conducted on a purchase order basis. As a result, we cannot directly control product delivery schedules. This could lead to product shortages or quality assurance problems that could increase the costs of manufacturing, assembly or packaging of our products. In addition, we may, from time to time, be required to accept price increases for assembly or packaging services. Due to the amount of time normally required to qualify assembly and packaging subcontractors, product shipments could be delayed significantly if we are required to find alternative subcontractors. In the future, we may contract with third 19 parties for the testing of our products. Any problems associated with the delivery, quality or cost of the assembly, testing or packaging of our products could have a material adverse effect on our business. Due to an industry transition to six-inch and eight-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers that we use to build products in our existing manufacturing facility, and we rely on a single supplier for these wafers. Although we believe that we will have sufficient access to four-inch wafers to support production in our existing fabrication facility for the foreseeable future, we cannot be certain that our current supplier will continue to supply us with four-inch wafers on a long-term basis. Additionally, the availability of manufacturing equipment needed for a four-inch process is limited, and certain new equipment required for more advanced processes may not be available for a four-inch process. Our customers are concentrated, so the loss of one or more key customers could significantly reduce our revenues and profits. Historically, a relatively small number of customers has accounted for a significant portion of our revenues in any particular period. For example, our five largest customers accounted for approximately 44%, 46% and 59% of our revenues in fiscal 1997, 1998 and 1999, respectively, accounted for 60% and 71% for the three months ended September 30, 1998 and 1999, respectively and accounted for 54% and 68% for the six months ended September 30, 1998 and 1999, respectively. Sales to Nortel accounted for approximately 20%, 21% and 20% of our revenues in fiscal 1997, 1998 and 1999, respectively, accounted for 16% and 36% for the three months ended September 30, 1998 and 1999, respectively and accounted for 17% and 33% for the six months ended September 30, 1998 and 1999, respectively. However, we have no long-term volume purchase commitments from any of our major customers. We anticipate that sales of products to relatively few customers will continue to account for a significant portion of our revenues. A reduction, delay or cancellation of orders from one or more significant customers or the loss of one or more key customers could significantly reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers. Our strategy is based on growth, and periods of rapid growth and expansion have placed, and could continue to place, a significant strain on our limited personnel and other resources To manage expanded operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate and manage our employees. In addition, the integration of past and future potential acquisitions, the expansion of our manufacturing capacity will require significant management, technical and administrative resources. We cannot be certain that we will be able to manage our growth or effectively integrate a new or expanded wafer fabrication facility into our current operations. Our future success depends in part on the continued service of our key design engineering, sales, marketing and executive personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and we may not be able to continue to attract and train engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. Our anticipated growth is expected to place increased demands on our resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Although we have entered into an "at-will" employment agreement with David M. Rickey, the President and Chief Executive Officer, we have not entered into fixed term employment agreements with any of our other executive officers except for one-year employment agreements with Ram Sudireddy, Vice President, Cimaron, and Gary Martin, Vice President and Chief Technical Officer, Cimaron. In addition, we have not obtained key-person life insurance on any of our executive officers or key employees. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product and process development programs. 20 We anticipate that we will need to raise additional capital in the future, and we cannot be certain that additional debt, lease or equity financing will be available on commercially reasonable terms or at all. We require substantial working capital to fund our business, particularly to finance inventories and accounts receivable and for capital expenditures. We believe that our available cash, cash equivalents and short-term investments and cash generated from operations, will be sufficient to meet our capital requirements through the next 12 months, although we could be required, or could elect, to seek to raise additional financing during this period. Our future capital requirements will depend on many factors, including: . the costs associated with the expansion of manufacturing operations; . the rate of revenue growth; . the timing and extent of spending to support research and development programs and expansion of sales and marketing; . the timing of introductions of new products and enhancements to existing products; and . market acceptance of our products. Additionally, we may elect to acquire other businesses, which would entail the issuance of stock and/or the payment of cash. We may elect to raise additional cash to finance such transactions. We may need to raise additional debt or equity financing in the future, primarily for purposes of financing the expansion of our manufacturing capacity. We may not be able to protect our intellectual property adequately. We rely in part on patents to protect our intellectual property. There can be no assurance that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us. To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our business, operating results and financial condition could be materially adversely affected by litigation involving patents and proprietary rights. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have, in the past and may, in the future, be notified that we may be infringing the intellectual property rights of third parties. We have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. We cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership filed a lawsuit in the U.S. District Court for the District of Arizona against a number of companies, including us, engaged in the manufacture and/or sale of IC products. The complaint alleges infringement by the defendants of certain U.S. patents held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. On November 25, 1998, we were served a summons pursuant to this lawsuit. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered us a license under the Lemelson patents. Although the ultimate outcome of this matter is not currently determinable, we believe, based in part on the licensing terms 21 previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on our financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations for any quarter. Furthermore, there can be no assurance that we would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including the Lemelson Patents, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all. Our operating results are subject to fluctuations because we rely substantially on foreign customers. International sales (including sales to Canada) accounted for 40%, 42% and 41% of revenues for the years ended March 31, 1997, 1998 and 1999, respectively and 39% and 54% for the three months ended September 30, 1998 and 1999, respectively. For the six months ended September 30, 1998 and 1999, international sales (including sales to Canada) accounted for 41% and 53% of revenues, respectively. International sales may increase in future periods and may account for an increasing portion of our revenues. As a result, an increasing portion of our revenues may be subject to certain risks, including: . changes in regulatory requirements; . tariffs and other barriers; . timing and availability of export licenses; . political and economic instability; . difficulties in accounts receivable collections; . natural disasters; . difficulties in staffing and managing foreign subsidiary and branch operations; . difficulties in managing distributors; . difficulties in obtaining governmental approvals for communications and other products; . foreign currency exchange fluctuations; . the burden of complying with a wide variety of complex foreign laws and treaties; and . potentially adverse tax consequences. We are subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, we may be limited in our ability to enforce our rights under such agreements and to collect damages, if awarded. 22 We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials. We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. In addition, these regulations could restrict our ability to expand our facilities at the present location or construct or operate a new wafer fabrication facility or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993, we have been named as a potentially responsible party, or PRP, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, our payment obligations with respect to these funding efforts have not been material, and we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results. Although we believe that we are currently in material compliance with applicable environmental laws and regulations, we cannot assure you that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on our business. Our ability to manufacture sufficient wafers to meet demand could be severely hampered by a shortage of water. We use significant amounts of water throughout our manufacturing process. Previous droughts in California have resulted in restrictions being placed on water use by manufacturers and residents in California. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's different users. We cannot be certain that near term reductions in water allocations to manufacturers will not occur. Our stock price is volatile. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in: . our anticipated or actual operating results; . announcements or introductions of new products; . technological innovations or setbacks by us or our competitors; . conditions in the semiconductor, telecommunications, data communications, ATE, high-speed computing or military markets; . the commencement of litigation; . changes in estimates of our performance by securities analysts; . announcements of merger or acquisition transactions; . other events or factors; and. . general economic and market conditions. 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 adversely affect the market price of our common stock. If we are not adequately prepared for the transition to Year 2000, our business, operating results and financial condition could suffer. 23 As discussed earlier, we have developed and are currently executing a plan designed to make our computer systems, applications, computer and manufacturing equipment and facilities Year 2000 ready. However, there can be no guarantee that these plans will be successfully implemented, and actual results could differ materially from those plans. Among the factors that might cause such material differences are: . the availability and cost of personnel trained in this area; . the ability to locate and correct all relevant computer codes; and . the ability to identify and correct equipment with embedded hardware or software and similar uncertainties. The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control of AMCC, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on stockholders of AMCC. Section 203 of the Delaware General Corporation Law, to which we are subject, restricts certain business combinations with any "interested stockholder" as defined by this statute. The statute may also delay, alter or prevent a change of control. ITEM 3. QUANTITATIVE AND QUALTITATIVE DISCLOSURE ABOUT MARKET RISK At September 30, 1999, the Company's investment portfolio includes fixed- income securities of $78.2 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of the Company's investment portfolio, an immediate 100 basis point increase in interest rates would have no material impact on the Company's financial condition or results of operations. The Company generally conducts business, including sales to foreign customers, in U.S. dollars and as a result, has limited foreign currency exchange rate risk. The effect of an immediate 10% change in foreign exchange rates would not have a material impact on the Company's financial condition or results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation relating to claims arising out of its operations on the normal course of business. As of the date of this Quarterly Report on Form 10-Q, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or operating results. 24 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (c) Use of Proceeds (1) Initial Public Offering The Company filed a Registration Statement on Form S-1 (the "Registration Statement"), File No. 333-37609, which was declared effective by the Securities and Exchange Commission on November 24, 1997, relating to the initial public offering of the Company's Common Stock. The managing underwriters of the offering were BankAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, and Cowen & Company. The Registration Statement registered an aggregate 11,106,000 shares of Common Stock and the price to the public was $4.00 per share. Of such shares, 7,076,896 were sold by the Company (which includes the underwriter's over-allotment of 1,665,900 shares) and 5,695,004 were sold by certain shareholders of the Company. The Company incurred $3,196,718 of total expenses in connection with the IPO consisting of $1,981,531 in underwriting discounts and commissions and $1,215,187 in other expenses. All such expenses were direct or indirect payments to others. The net offering proceeds to the Company after deducting the $3,196,718 of total expenses were approximately $25,111,000. As of September 30, 1999, the Company has expended approximately $4,808,000 for the purchase of land for future capacity expansion and invested the remaining proceeds of $20,303,000 in short-term investments consisting of United States Treasury Notes, obligations of United States government agencies and corporate bonds with maturities ranging from October 1, 1999 to March 31, 2001. The use of proceeds described herein does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. (2) Secondary Public Offering The Company filed a Registration Statement on Form S-1, File No. 333-46071 (the "Secondary Registration Statement"), which was declared effective by the Securities and Exchange Commission on March 12, 1998, relating to the secondary public offering of the Company's Common Stock. The managing underwriters for the Offering were BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, and Cowen & Company. The Registration Statement registered an aggregate of 7,060,000 shares of the Common Stock and the price to the public was $9.6875 per share. Of such shares, 3,000,000 shares were sold by the Company, and 5,119,000 shares were sold by certain stockholders of the Company (which includes the underwriter's overallotment of 1,059,000 shares). The expenses incurred by the Company in connection with the Offering were approximately $2,181,000, of which $1,515,000 constituted underwriting discounts and commissions and approximately $666,000 constituted other expenses including registration and filing fees, printing, accounting and legal expenses. No direct or indirect payments were made to any directors, officers, owners of ten percent or more of any class of the Company's equity securities, or other affiliates of the Company other than for reimbursement of expense incurred on the road show. Net offering proceeds to the Company after deducting these expenses were approximately, $26,882,000. The Company has invested the net offering proceeds in short-term investments consisting of United States Treasury Notes, obligations of United States government agencies and corporate bonds with maturities ranging from October 1, 1999 to March 31, 2001. The use of proceeds described herein does not represent a material change in the use of proceeds described in the prospectus of the Secondary Registration Statement. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 25 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (1) The Company held its Annual Meeting of Stockholders (the "Annual Meeting") on August 3, 1999. Of the 53,483,896 shares of Common Stock which could be voted at the Annual Meeting, 46,609,362 shares of Common Stock, representing 87%, were represented at the Annual Meeting in person or by proxy, which constituted a quorum. Voting results were as follows: (a) Election of the following persons to the Company's Board of Directors, to hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified: For Withheld ---------- -------- William K. Bowes, Jr. 46,571,876 37,486 R. Clive Ghest 46,573,876 35,486 Franklin P. Johnson, Jr. 46,571,876 37,486 David M. Rickey 46,572,764 36,589 Roger A. Smullen, Sr. 46,569,932 39,430 Arthur B. Stabenow 46,453,962 155,400 Harvey P. White 46,573,876 35,486 (b) Approval of the amendment to the Company's 1992 Stock Option increasing the number of shares authorized for future grant by 7,600,000 to an aggregate of 19,654,608 shares: For Against Abstain Broker non-vote -------- ---------- ------- --------------- 28,136,984 14,896,727 50,260 3,525,394 (c) Ratification of the appointment of Ernst & Young LLP as the independent auditors of the Company for the fiscal year ending March 31, 2000: For Against Abstain ---------- ------- ------- 46,283,542 265,612 60,208 (2) The Company also held a Special Meeting of Stockholders (the "Special Meeting") on September 1, 1999. Of the 53,744,924 shares of Common Stock which could be voted at the Special Meeting, 32,138,982 shares of Common Stock, representing 60%, were represented in person or by proxy, which constituted a quorum. Voting results were as follows: a) Approval of the amendment to the Company's Amended and Restated Certificate of Incorporation to increase the Company's authorized shares of Common Stock from 60,000,000 shares to 180,000,000 shares: For Against Abstain ---------- ------- ------- 31,208,926 915,536 14,520 26 ITEM 5 OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.3 1992 Stock Option Plan, as amended 10.26 1998 Stock Incentive Plan of Cimaron Communications Corporation, as amended, adopted by the registrant in merger transaction, effective March 17, 1999 27.1 Financial Data Schedule (B) The Registrant filed the following current reports on Form 8-K with the Commission during the during the quarter ended September 30, 1999: 1) On September 1, 1999, the Company filed a current report on form 8-K to announce the stockholder approval of the amendment to the Company's Amended and Restated Certificate of Incorporation to increase the Company's authorized shares of Common Stock from 60,000,000 shares to 180,000,000 shares and the Board approval of a two-for one stock split implemented through a 100% stock dividend. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: November 12, 1999 Applied Micro Circuits Corporation By: /s/ William Bendush ------------------- William Bendush Vice President, Finance and Administration And Chief Financial Officer (Duly Authorized Signatory and Principal Financial and Accounting Officer) 27 EX-10.3 2 AMENDED 1992 STOCK OPTION PLAN EXHIBIT 10.3 APPLIED MICRO CIRCUITS CORPORATION 1992 STOCK OPTION PLAN Share numbers adjusted to reflect three-for-two stock split effected on November 19, 1997 and two-for-one stock split implemented through a 100% stock dividend on September 2, 1999. 1. PURPOSES OF THE PLAN. The purposes of this 1992 Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated there-under. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees appointed pursuant to Section 4 of the Plan. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan. (e) "COMMON STOCK" means the Common Stock of the Company. (f) "COMPANY" means Applied Micro Circuits Corporation, a Delaware corporation. (g) "CONSULTANT" means any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services, and any director of the Company whether compensated for such services or not. (h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the absence of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or its successor. 1. (i) "EMPLOYEE" means any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (k) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported), as quoted on such system or exchange, or the exchange with the greatest volume of trading in Common Stock, for the last market trading day prior to the time of determination as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (A) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. (l) "NAMED EXECUTIVE" means any individual who, on the last day of the Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four highest compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (m) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (n) "OPTION" means a stock option granted pursuant to the Plan. (o) "OPTIONED STOCK" means the Common Stock subject to an Option. (p) "OPTIONEE" means an Employee or Consultant who receives an Option. (q) "PARENT" means a "parent corporation", whether now or hereafter existing, as defined in Section 424(e) of the Code. (r) "PLAN" means this 1992 Stock Option Plan. 2. (s) "SHARE" means a share of the Common Stock, as adjusted in accordance with Section 13 of the Plan. (t) "SUBSIDIARY" means a "subsidiary corporation", whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14 of the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is Nineteen Million Six Hundred Fifty-Four Thousand Six Hundred Eight (19,654,608) shares of Common Stock (on a post-split basis). The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. ADMINISTRATION OF THE PLAN. (i) ADMINISTRATION WITH RESPECT TO DIRECTORS AND OFFICERS. With respect to grants of Options to Employees or Consultants who are also officers or directors of the Company, grants under the Plan shall be made by (A) the Board if the Board may make grants under the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") and Section 162(m) of the Code as it applies so as to qualify grants or Options to Named Executives as performance-based compensation, or (B) a Committee designated by the Board to make grants under the Plan, which Committee shall be constituted in such a manner as to permit grants under the Plan to comply with Rule 16b-3, to qualify grants of options to Named Executives as performance- based compensation under Section 162(m) of the Code and otherwise so as to satisfy legal requirements relating to the administration of incentive stock option plans, if any, of California corporate and securities laws and of the Code (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 and to the extent required under Section 162(m) of the Code to qualify grants of Options to Named Executives as performance-based compensation. (ii) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule 16b- 3, the Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers. (iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER EMPLOYEES. With respect to grants of Options to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may 3. increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; (ii) to select the Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; and (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder. (c) REPRICINGS. The Administrator shall not have the authority to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted. (d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options. 5. ELIGIBILITY. (a) Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if such Optionee is otherwise eligible, be granted an additional Option or Options. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. 4. (c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be deter-mined as of the time the Option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such Optionee's right or the Company's right to terminate such Optionee's employment or consulting relationship at any time, with or without cause. 6. TERM OF PLAN. The Plan shall become effective upon the earlier to occur of its adoption by the Board of Directors or its approval by the stockholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 15 of the Plan. 7. TERM OF OPTION. The term of each Option shall be the term stated in the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. LIMITATION ON GRANTS TO EMPLOYEES. Subject to adjustment as provided in this Plan, the maximum number of Shares which may be subject to options granted to any one Employee under this Plan for any fiscal year of the Company shall be 2,000,000. This Section 8 shall not apply prior to the date upon which the Company becomes subject to the Exchange Act and following such date, shall not apply until the (i) earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 3); (B) the issuance of all of the shares of common stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of any equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 9. OPTION EXERCISE PRICE AND CONSIDERATION. (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. 5. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option, the per Share exercise price shall be no less than 100% of the Fair Market Value on the date of grant. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price (6) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (7) any combination of the foregoing methods of payment, (8) or such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. EXERCISE OF OPTION. (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be avail-able, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF EMPLOYMENT. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant with the Company (as the case may be), such Optionee may, but only within thirty (30) days (or such other period of time as is 6. determined by the Board, which, in the case of an Incentive Stock Option shall not exceed three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise such Optionee's Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 9(b) above, in the event of termination of an Optionee's or Continuous Status as an Employee or Consultant as a result of such Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee, the Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. NON-TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (i) by cash payment, or (ii) out of Optionee's current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of 7. surrender equal to or less than the applicable withholding taxes, (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). If the Optionee is subject to Section 16 of the Exchange Act (an "Insider"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"). All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; and (c) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 13. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. (a) CHANGES IN CAPITALIZATION. Subject to any required action by the stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. 8. (b) CORPORATE TRANSACTIONS. In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, in which the Company is not the surviving corporation the Option shall vest and become immediately exercisable for the number of Shares that would otherwise be vested and exercisable under the terms of the Option one (1) year after the date of the Corporate Transaction. Thereafter, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Option shall vest and the Optionee shall have the right to exercise the Option as to some or all of the Optioned Stock, including Shares as to which the Option would not otherwise be vested and exercisable. If the Administrator makes an Option vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 14. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 15. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without such Optionee's consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Sections 162(m) and 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 Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 16. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of 9. such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 17. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. AGREEMENTS. Options shall be evidenced by written agreements in such form as the Board shall approve from time to time. 19. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law. 20. INFORMATION TO OPTIONEES. The Company shall provide to each Optionee, during the period such Optionee has one or more Options outstanding, and to each individual who acquired shares pursuant to the exercise of an option, with copies of all annual reports and other information which are provided to all stockholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. 10. EX-10.26 3 1998 STOCK INCENTIVE PLAN EXHIBIT 10.26 CIMARON COMMUNICATIONS CORPORATION (as amended by Applied Micro Circuits Corporation on June 18, 1999 and August 3, 1999) 1998 STOCK INCENTIVE PLAN Share numbers adjusted to reflect two-for-one stock split implemented through a 100% stock dividend on September 2, 1999. 1. Purposes of the Plan. The purposes of this 1998 Stock Incentive Plan -------------------- are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan shall be nonstatutory stock options. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees appointed ------------- pursuant to Section 4 of the Plan. (b) "Board" means the Board of Directors of the Company. ----- (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" means the Committee appointed by the Board of --------- Directors in accordance with paragraph (a) of Section 4 of the Plan. (e) "Common Stock" means the Common Stock of the Company. ------------ (f) "Company" means Applied Micro Circuits Corporation, a Delaware ------- corporation. (g) "Consultant" means any person, including an advisor, who is ---------- engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services. (h) "Continuous Status as an Employee or Consultant" means the absence ---------------------------------------------- of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or its successor. (i) "Employee" means any person employed by the Company or any Parent -------- or Subsidiary of the Company. The term "Employee" shall not include officers of -------- the Company 1. unless an award granted under the Plan is an essential inducement to such person's first entering into an employment relationship with the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (k) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange, or the exchange with the greatest volume of trading in Common Stock, for the last market trading day prior to the time of determination) as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (1) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an incentive stock option under Section 422 of the Code. (m) "Option" means a stock option granted pursuant to the Plan. ------ (n) "Optioned Stock" means the Common Stock subject to an Option. -------------- (o) "Optionee" means an Employee or Consultant who receives an Option. -------- (p) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (q) "Plan" means this 1992 Stock Option Plan. ---- (r) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. (s) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of ------------------------- the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is 2. 2,032,730 shares of Common Stock. The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Administration With Respect to Directors and Officers. With ----------------------------------------------------- respect to grants of Options to Employees who are also officers of the Company, grants under the Plan shall be made by (A) the Board if the Board may make grants under the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3"), or (B) a Committee designated by the Board to make grants under the Plan, which Committee shall be constituted in such a manner as to permit grants under the Plan to comply with Rule 16b-3 and otherwise so as to satisfy legal requirements relating to the administration of stock option plans, if any, of state corporate and state and federal securities laws and of the Code (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3. (ii) Multiple Administrative Bodies. If permitted by Rule 16b-3, ------------------------------ the Plan may be administered by different bodies with respect to directors, non- director officers and Employees who are neither directors nor officers. (iii) Administration With Respect to Consultants and Other ---------------------------------------------------- Employees. With respect to grants of Options to Employees or Consultants who - --------- are not officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; 3. (ii) to select the Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted. (c) Effect of Administrator's Decision. All decisions, determinations ---------------------------------- and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options 5. Eligibility. ----------- (a) Nonstatutory Stock Options may be granted to Employees and Consultants. An Employee or Consultant who has been granted an Option may, if such Optionee is otherwise eligible, be granted an additional Option or Options. (b) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with the Company, nor shall it interfere in any way with such Optionee's right or the Company's right to terminate such Optionee's employment or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the its adoption by ------------ the Board of Directors of Cimaron Communications Corporation (a corporation to which the Company is a successor) and shall continue in effect for a term of ten (10) years from such date unless sooner terminated under Section 15 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in -------------- the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. 8. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board. 4. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly executed exercise notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price (6) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (7) any combination of the foregoing methods of payment, (8) or such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 9. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment. In the event of termination of an ------------------------- Optionee's Continuous Status as an Employee or Consultant with the Company (as the case may be), such Optionee may, but only within thirty (30) days (or such other period of time as is determined by the Board, but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise such Optionee's Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. 5. (c) Disability of Optionee. Notwithstanding the provisions of Section ---------------------- 9(b) above, in the event of termination of an Optionee's or Continuous Status as an Employee or Consultant as a result of such Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee, the ----------------- Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) ---------- of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 10. Non-Transferability of Options. Options may not be sold, pledged, ------------------------------ assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 11. Stock Withholding to Satisfy Withholding Tax Obligations. At the -------------------------------------------------------- discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (i) by cash payment, or (ii) out of Optionee's current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or less than the applicable withholding taxes, (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). If the Optionee is subject to Section 16 of the Exchange Act (an "Insider"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this 6. Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"). All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; and (c) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 12. Adjustments Upon Changes in Capitalization; Corporate Transactions. ------------------------------------------------------------------ (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Corporate Transactions. In the event of the proposed dissolution ---------------------- or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, in which the 7. Company is not the surviving corporation the Option shall vest and become immediately exercisable for the number of Shares that would otherwise be vested and exercisable under the terms of the Option one (1) year after the date of the Corporate Transaction. Thereafter, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Option shall vest and the Optionee shall have the right to exercise the Option as to some or all of the Optioned Stock, including Shares as to which the Option would not otherwise be vested and exercisable. If the Administrator makes an Option vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 13. Time of Granting Options. The date of grant of an Option shall, for ------------------------ all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 14. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without such Optionee's consent. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 15. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 8. 16. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 17. Agreements. Options shall be evidenced by written agreements in such ---------- form as the Board shall approve from time to time. 9. EX-27.1 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS MAR-31-2000 JUL-01-1999 SEP-30-1999 26,836 78,235 19,185 324 10,475 142,090 65,608 38,338 171,528 21,402 6,497 0 0 539 143,629 171,528 37,898 37,898 11,326 11,326 13,742 0 174 13,835 4,738 9,097 0 0 0 9,097 0.17 0.16
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