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ANNUAL REPORT FISCAL2002
Empowering Intelligent Wide Area Networks

Table of contents

  • Page 1
    ANNUAL REPORT FISCAL 2002 Empowering Intelligent Wide Area Networks

  • Page 2
    ... Juniper Networks, Lucent Technologies, Nortel Networks, Marconi, Siemens/Unisphere and Tellabs. This Annual Report, including the annual report on Form 10-K for the year ended March 31, 2002 included herewith, contains forward-looking statements. These statements include statements concerning AMCC...

  • Page 3
    To our stockholders and friends The past year has been a challenging period for AMCC and the markets we serve. Despite the overall market downturn, we realized a number of significant accomplishments in both our technological advances and our corporate initiatives. We also made great strides in ...

  • Page 4
    Product Development We are dedicated to offering our customers pre-integrated solutions that reduce their development costs, time-to-market and risks. Our comprehensive product portfolio provides our customers with fiber-through-switch ICs that can be designed into their systems and brought to ...

  • Page 5
    ... SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 2002 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT...

  • Page 6
    ...was incorporated and commenced operations in California in 1979. AMCC was reincorporated in Delaware in 1987. Certain statements in this Annual Report on Form 10-K, including statements contained in the sections entitled "Business" and "Management's Discussion and Analysis of Financial Condition and...

  • Page 7
    ... first experienced an increase in order cancellations and then a decline in customer orders, which resulted in a sudden drop in sales of our products. As fiscal 2002 progressed, the impact of the downturn was prolonged by the inventory levels that existed at our OEM Customers. 2

  • Page 8
    The Communications IC Opportunity Despite the industry downturn, industry analysts report that network traffic continues to grow. The continuing adoption of broadband technology and next-generation wireless devices is expected to drive additional data traffic through ...

  • Page 9
    Products and Customers Transition from ASICs to ASSPs Application specific integrated circuits ("ASICs") are custom products that are designed for only one customer and can be sold only to that one customer. Application specific standard products ("ASSPs") are standardized products that are designed...

  • Page 10
    ... manufacture and sell ASIC products to customers such as Agilent, IBM, LTX, Northrop Grumman, Raytheon, Schlumberger, Teradyne and Texas Instruments. During fiscal 2002, we initiated a plan to phase out supplying ICs for these markets. We are currently receiving and filling last-time buy orders and...

  • Page 11
    for the various cost, power and performance trade-offs faced by our customers. We believe that our systems knowledge also enables us to develop more comprehensive, interoperable solutions. This allows us to develop boards with products that fulfill customers' system needs from fiber-through-switch, ...

  • Page 12
    Manufacturing Wafer Fabrication We have a majority of our IC products manufactured at outside foundries, such as IBM, Taiwan Semiconductor Manufacturing Corporation ("TSMC") and United Microelectronics Corporation ("UMC"). We rely on these foundries for the manufacture of nearly all of our products ...

  • Page 13
    Representatives do not maintain a product inventory; instead, their customers place orders directly with us or through distributors. Our sales headquarters is located in San Diego, California. We maintain sales offices throughout the world. Backlog Our sales are made primarily pursuant to standard ...

  • Page 14
    proven to be true, will not materially adversely affect our business, financial condition or operating results. In the event of any adverse ruling in any such matter, we could be required to pay substantial damages, which could include treble damages, cease the manufacturing, use and sale of ...

  • Page 15
    EMPLOYEES As of March 31, 2002, we had 1,129 full-time employees: 97 in administration, 601 in ... very good. Executive Officers of the Registrant Our executive officers and their ages as of May 1, 2002, are as follows: Name Age Position David M. Rickey ...Roger A. Smullen, Sr...Douglas C. Spreng...

  • Page 16
    began his career with Hewlett Packard Company, where he held various marketing, manufacturing and general management positions for more than 23 years. Mr. Spreng is a director of Silicon Image, Inc. He holds a B.S.E.E. degree from the Massachusetts Institute of Technology and an M.B.A. from the ...

  • Page 17
    Timothy M. Heenan joined the Company in October 2000 as Vice President of MMC Networks when the Company acquired MMC Networks. Mr. Heenan was promoted to Vice President of Operations of the Company in August 2001. Prior to joining MMC Networks, Mr. Heenan was the Director of Test Operations at ...

  • Page 18
    ... to the other information contained in this report and in our other filings with the SEC, including our reports on Forms 10-Q and 8-K. The risks... stock could decline. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are the reduction,...

  • Page 19
    • • • the ability of our customers to obtain components from their other suppliers; the effects of war or acts of terrorism, such as disruptions in general economic activity, changes in logistics and security arrangements, and reduced customer demand for our products and services; and general...

  • Page 20
    and as a result, the financial condition of many telecom companies has significantly declined. This downturn has severely affected the demand for our products, and in turn our revenues and profitability. We cannot predict how long this downturn will last. In addition, our need to continue investment...

  • Page 21
    Any significant order cancellations or deferrals could adversely affect our operating results. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty. Any significant cancellations or deferrals in ...

  • Page 22
    Our operating results are subject to fluctuations because we rely heavily on international sales. International sales account for a significant part of our revenues and may account for an increasing portion of our future revenues. As a result, an increasing portion of our revenues may be subject to ...

  • Page 23
    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 ...

  • Page 24
    ... key design engineers or other technical and management personnel could be significantly detrimental to our product and process development programs. In May 2002, we completed a stock option exchange program. The sole purpose of the program was to improve our ability to retain and motivate employees...

  • Page 25
    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 depend upon third parties to manufacture, assemble or package a majority of our ...

  • Page 26
    contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Design iterations and process changes by our suppliers can cause a risk of contamination. Many of these problems are difficult to diagnose, ...

  • Page 27
    The complexity of our products may lead to errors, defects and bugs when they are first introduced, which could negatively impact our reputation with customers. Products as complex as ours may contain errors, defects and bugs when first introduced or as new versions are released. Our products have ...

  • Page 28
    September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the U.S. economy and other economies around the world. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause ...

  • Page 29
    transactions. Beginning in the first quarter of fiscal 2003, goodwill will no longer be amortized, but will be subject to annual impairment tests in accordance with Statement of Financial Accounting Standard No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible ...

  • Page 30
    Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such ...

  • Page 31
    ... 2. PROPERTIES. Our corporate headquarters are located in San Diego, California. Below is a summary of material properties leased on March 31, 2002 (net of subleases): Location Lease Expiration Square Footage Use San Diego, California ...San Diego, California ...San Diego, California ...Total San...

  • Page 32
    ... independent legal counsel. The San Diego Superior Court has stayed discovery against the Company until July 2002 when the special litigation committee is currently scheduled to deliver its report to the court. Limited discovery against the individual defendants in this lawsuit and third parties has...

  • Page 33
    ...forth the high and low sales prices of our Common Stock as reported by the Nasdaq National Market for the periods indicated. Fiscal year ended...16.32 13.68 $11.25 $ 6.23 $ 6.01 $ 7.50 On May 30, 2002, there were approximately 789 holders of record of our Common Stock. We have not paid cash dividends...

  • Page 34
    ... Statements and related Notes contained in this Report, as well as the section of this Report entitled "Management's Discussion and Analysis of ... 308,835 - - 202,100 - 765,122 (492,745) 113 55,336 (437,296) (1,081) $ 2002 $ 76,618 34,321 42,297 13,268 14,278 27,546 14,751 (1) 872 15,622 406 $ ...

  • Page 35
    ...and has been prepared on the same basis as the annual consolidated financial statements. In our opinion, this quarterly ... this Report entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." Quarterly Financial Information for Fiscal 2001 and Fiscal 2002 (in...

  • Page 36
    ... of our operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially...

  • Page 37
    ...of this policy adversely affected our gross margin in fiscal 2002. Goodwill and Intangible Asset Valuation The identification of intangible ...with definite lives and recorded less goodwill in our acquisitions, our future reported results would have been lower. The value of our intangible assets, ...

  • Page 38
    ... of the industry. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and impact our reported results. 33

  • Page 39
    ... of revenues for the periods indicated: Fiscal Year Ended March 31, 2000 2001 (in thousands, except per share data) 2002 Net revenues ...Cost of revenues(1) ...Gross profit ...Operating expenses: Research and development(1) ...Selling, general and administrative(1) ...Stock-based compensation...

  • Page 40
    ... of these non-cash accounting charges and the special inventory charge, gross margin was 55.6% and 74.6% for the years ended March 31, 2002 and 2001, respectively. This decrease in gross margin, exclusive of non-cash purchase accounting charges and the special inventory charge, reflects the under...

  • Page 41
    ... and purchased intangible assets was $239.6 million for the year ended March 31, 2002, compared to $308.8 million for the year ended March 31, 2001. As ..., including amounts charged to cost of revenues, to be $63.5 million annually through the fiscal year ended March 31, 2005 and $35.9 million for...

  • Page 42
    ... 95% and 60% complete, respectively. The remaining projects, which accounted for 49% of the charge were between 60% and 100% complete at March 31, 2002. SiLUTIA-SiLUTIA specializes in digital and mixed signal IC designs. 95% of the IPR&D charge related to one project which was 60% complete at the...

  • Page 43
    ...interim and annual operating results. Net Interest Income. Net interest income decreased 14.2% to $47.5 million for the year ended March 31, 2002, compared ...(Expense). Other income (expense) for the year ended March 31, 2002, includes a gain on our strategic equity investments of $1.2 million, offset...

  • Page 44
    ... and $65.3 million of cash from our operations in fiscal 2001 and 2000, respectively. Although we had a net loss of $3.6 billion in fiscal 2002, $3.5 billion of such amount was related to non-cash amortization and impairments of purchased intangibles. The remaining change in operating cash flows for...

  • Page 45
    ...to continue repurchasing our shares. Offsetting this use of cash in fiscal 2002, we generated $20.8 million of cash from the issuance of our...to changes in the market value of our investments. At March 31, 2002, our investment portfolio includes fixed-income securities classified as available-for-sale...

  • Page 46
    ...FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Refer to the Index to Financial Statements on Page F-l and the Quarterly Financial Information included in Item 6 of this Annual Report on Form 10-K. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 41

  • Page 47
    ... by Part III is omitted from this report because we will file a definitive proxy statement within 120 days after the end of our fiscal year pursuant to Regulation 14A (the "Proxy Statement") for our Annual Meeting of Stockholders to be held on August 28, 2002, and the information included in the...

  • Page 48
    ...directors and consultants of the Company and its affiliates. At March 31, 2002, 6.1 million shares were outstanding and 30.7 million shares were available for... this Annual Report on Form 10-K. See Index on page F-l. (2) Financial Statement Schedules For the three fiscal years ended March 31, 2002-II ...

  • Page 49
    ... has been granted with respect to certain portions of this exhibit. (1) Incorporated by reference to identically numbered exhibits filed with the Company's Annual Report, Form 10-K for the year ended March 31, 2000 and to Exhibit 3.2 filed with The Company's Registration Statement (No. 333-37609...

  • Page 50
    ...Annual Report, Form 10-K for the year ended March 31, 2001. (5) Incorporated by reference to identically numbered exhibits filed with the Company's Annual Report... with the Company's Quarterly Report, Form 10-Q for the...report. (b) The Company did not file any current reports on Form 8-K with ...

  • Page 51
    ... Period Charged to Costs and Expenses Charged to Other Accounts (1) Balance At End Of Period Description Deductions Year ended March 31, 2002: Allowance for doubtful accounts ...Reserve for excess and obsolete inventory ...Restructuring costs liability ...Year ended March 31, 2001: Allowance for...

  • Page 52
    ... the Board of Directors and Chief Executive Officer Date: June 3, 2002 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each .... Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and...

  • Page 53
    ...KEVIN N. KALKHOVEN Kevin N. Kalkhoven Director June 3, 2002 /s/ L. WAYNE PRICE L. Wayne Price Director June 3, 2002 /s/ S. ATIQ RAZA S. Atiq Raza Director June 3, 2002 /s/ ARTHUR B. STABENOW Arthur B. Stabenow Director June 3, 2002 /s/ HARVEY P. WHITE Harvey P. White Director June...

  • Page 54
    INDEX TO FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Auditors ...Consolidated Balance Sheets as of March 31, 2001 and 2002 ...Consolidated Statements of Operations for the fiscal years ended March 31, 2000, 2001 and 2002 ...Consolidated Statements of Stockholders' Equity for ...

  • Page 55
    REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Applied Micro Circuits Corporation We have audited the accompanying consolidated balance sheets of Applied Micro Circuits Corporation as of March 31, 2001 and 2002... at March 31, 2001 and 2002, and the consolidated results of ...

  • Page 56
    ...available-for-sale ...Accounts receivable, net of allowance for doubtful accounts of $4,575 and $5,357 at March 31, 2001 and 2002, respectively ...Inventories ...Deferred income taxes ...Other current assets ...Total current assets ...Property and equipment, net ...Goodwill and purchased intangibles...

  • Page 57
    ... CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Fiscal Years Ended March 31, 2000 2001 2002 Net revenues ...Cost of revenues(1)(2) ...Gross profit ...Operating expenses: Research and development(1) ...Selling, general and administrative(1) ...Stock-based...

  • Page 58
    ... to terminations ...Comprehensive income: Net loss ...Foreign currency translation loss ...Unrealized gain on short-term investments, net of tax ... Total comprehensive loss ... Balance, March 31, 2002 ...

  • Page 59
    APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Years Ended March 31, 2000 2001 2002 Operating Activities Net income (loss) ...$ 48,625 $ (436,215) $(3,605,690) Adjustment to reconcile net income (loss) to net cash provided by (used for) operating ...

  • Page 60
    ... with accounting principles generally accepted in the United States 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...

  • Page 61
    APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) Strategic Equity Investments The Company enters into certain equity investments for the promotion of business and strategic objectives. These investments are valued at historical cost. In addition, the Company...

  • Page 62
    ... assets' carrying amounts. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. In fiscal 2002, the Company recorded a goodwill impairment charge of $3.1 billion to write down the value of goodwill associated with purchase transactions and recognized...

  • Page 63
    ...report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports... expects to adopt SFAS 144 as of April 1, 2002 and has not yet determined the effect, if any...

  • Page 64
    ... either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of this standard in fiscal 2002 did not have an impact on the Company's consolidated financial statements. Reclassification Certain prior period amounts have been reclassified to conform to...

  • Page 65
    APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) 3. Acquisitions The Company completed a number of acquisitions in fiscal 2001 using the purchase method of accounting. The accompanying consolidated financial statements include the results of operations of ...

  • Page 66
    .... Net goodwill and other acquisition-related intangibles at fiscal years ending March 31, were as follows (in thousands): Life in Years 2001 2002 Goodwill ...Developed core technology ...Assembled workforce ...Trademarks ... 1-6 5 3 5 $3,708,191 $358,014 268,836 209,956 10,498 6,304 20,915 16,336...

  • Page 67
    ... value with unrealized gains and losses excluded from earnings and reported, net of tax, in comprehensive income (loss). The basis... securities by contractual maturity are as follows (in thousands): $1,073,896 March 31, 2002 Due in one year or less ...Due after one year through two years ...Greater...

  • Page 68
    ...in process ...Raw materials ... $16,363 $ 3,356 14,560 12,485 1,817 767 $32,740 $16,608 March 31, 2001 2002 Property and equipment (in thousands): Machinery and equipment ...Leasehold improvements ...Computers, office furniture and equipment ...Land ...Less accumulated depreciation and amortization...

  • Page 69
    ... 267,363 298,502 22,664 - - 238,304 267,363 298,502 Because the Company incurred a loss in the years ended March 31, 2001 and 2002, the effect of dilutive securities totaling 22,260 and 9,541 equivalent shares, respectively, have been excluded from the loss per share computation as their impact...

  • Page 70
    ...the options was estimated at the date of grant using the Black Scholes method. The fair value of options granted in 2000, 2001 and 2002 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions. Fiscal Year Ended...

  • Page 71
    ...,492) 51.55 25,807 14,998 $12.33 $10.57 The following is a further breakdown of the options outstanding at March 31, 2002 (shares in thousands): Weighted Average Remaining Contractual Life Weighted Average Exercise Price Weighted Average Exercise Price Range of Exercise Prices Number Outstanding...

  • Page 72
    ... million shares of Company stock for exchange pursuant to this program and expects to issue approximately the same number of replacement options on May 28, 2002 with an exercise price equal to the closing price of the Company's stock on that date. Stock Repurchase On September 17, 2001, the Company...

  • Page 73
    ...,466) (267,013) (92,443) - 6,257 - 1,551 261,057 (53) (163,027) (163,080) 97,977 (97,977) - $4,148 $ (92,443) $ At March 31, 2002, the Company has federal and state research and development tax credit carryforwards of approximately $45.5 million and $21.8 million, respectively, which will begin to...

  • Page 74
    ... fiscal 2005. Annual future minimum lease payments, including machinery and equipment under capital leases as of March 31, 2002, are as ... Plan provides for voluntary employee contributions from 1% to 20% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines...

  • Page 75
    ...March 31, 2001 to inflate the value of the Company's stock. Defendants brought a motion to dismiss the consolidated federal complaint in March 2002. On May 9, 2002, the court granted the motion dismissing the complaint but giving plaintiffs 45 days to file an amended complaint. No discovery has been...

  • Page 76
    ... retained independent legal counsel. The San Diego Superior Court has stayed discovery against the Company until July 2002 when the special litigation committee will deliver its report to the court. Limited discovery against the individual defendants in this lawsuit and third parties has commenced...

  • Page 77
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  • Page 78
    ... stockholders and other interested investors. For additional copies of this report, the Form 10-K or other information, please contact: AMCC... Committee EXECUTIVE OFFICERS The AMCC annual meeting of stockholders will be held at 10:00 a.m. on Wednesday, August 28, 2002, at AMCC's facility located ...

  • Page 79
    Applied Micro Circuits Corporation 6290 Sequence Drive San Diego California 92121-4358 T: 858.450.9333 www.amcc.com