3Ware 2003 Annual Report Download

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ANNUAL REPORT FISCAL 2003
EMPOWERING INTELLIGENT
WIDE AREA NETWORKS
EMPOWERING INTELLIGENT
WIDE AREA NETWORKS

Table of contents

  • Page 1
    A N N U A L REPORT FI SCA L 2003 EM P OW ERI N G I N T ELLI G EN T W I D E A REA N ET W ORKS

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  • Page 3
    ... led to continued w eakness in our end markets, w hich w as certainly evident in our results, as our revenues continued their decline in fiscal 2003. In the face of w eak demand, w e streamlined our operations and reduced expenses w hile maintaining our leadership in the w ide area netw ork market...

  • Page 4
    ... 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, 2003 OR ' TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT...

  • Page 5
    ... of Certain Beneficial Owners and Management ...Certain Relationships and Related Transactions ...Controls and Procedures ...PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ... 43 43 43 44 44 45 47 49 F-1 Signatures ...Certifications ...Financial Statements ...

  • Page 6
    ...in any forward-looking statement. Readers should not place undue reliance on any forward-looking statement. PART I Item 1. Business. In this annual report on Form 10-K, "Applied Micro Circuits Corporation", "AMCC", the "Company", "we", "us" and "our" refer to Applied Micro Circuits Corporation and...

  • Page 7
    the acronym ADMs, multi-service provisioning platforms, known by the acronym MSPPs, multi-service switches, known by the acronym MSSs, and digital subscriber line access multiplexers, known by the acronym DSLAMs. We provide our customers with complete silicon IC solutions, including physical layer ...

  • Page 8
    ...a sharp increase in order cancellations during fiscal 2002. In fiscal 2003, the contraction of carrier capital spending on networking equipment continued, ... Communications IC Opportunity Despite the industry downturn, industry analysts report that network traffic continues to grow at a rapid pace...

  • Page 9
    ... signals received from the network processing and switching layers for transmission to the physical layer on their return to the optical network. During fiscal 2003, we introduced several framing layer products for the OC-12, OC-48 and OC-192 markets. These devices include the Evros device, which is...

  • Page 10
    ..., Teradyne and Texas Instruments. The majority of these products were manufactured in our internal wafer manufacturing facility, which closed in March 2003. We are currently filling last-time-buy orders for these products. Our high-speed computing products were not manufactured in our internal...

  • Page 11
    ... portion of our IC products, which utilized bipolar and BiCMOS process technologies, at our internal wafer fabrication facility in San Diego. In March 2003, we discontinued manufacturing products in this facility and are in the final stages of closing the facility entirely. Going forward, we will be...

  • Page 12
    needs in the future and so we are involved in the early stages of our customers plans to design new equipment. We sell our products both directly and through a network of independent manufacturers' representatives and distributors. Our direct sales force is technically trained. Expert technical ...

  • Page 13
    As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. In the past we have been, and in the future may be, notified that we may be infringing on the intellectual property rights of third parties. We have ...

  • Page 14
    ... Santa Barbara. Stephen M. Smith joined us in October 1999. Mr. Smith was promoted to Senior Vice President and Chief Financial Officer in April 2003. Prior to this time, Mr. Smith held various positions with us, including Vice President, Business Development and Vice President, Controller. From May...

  • Page 15
    Americas. From May 1997 to May 1998, Mr. Smith served as Vice President, Finance for Vixel Corporation, a Fibre Channel company. Mr. Smith also spent eight years with Northern Telecom, Inc., where he held a number of financial management positions. Mr. Smith holds a B.S. degree from Arizona State ...

  • Page 16
    ...Properties. Our corporate headquarters are located in San Diego, California. Below is a summary of material properties leased on March 31, 2003 (net of subleases): Location Lease Expiration Square Footage Use San Diego, California ...San Diego, California ...Total San Diego, California ...Andover...

  • Page 17
    ... denying defendants' motion. We expect oral argument regarding the court's tentative ruling to take place in June 2003. Limited discovery relating to the special litigation committee and its report has taken place. We believe that the allegations in these lawsuits are without merit and intend to...

  • Page 18
    ... 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...Low First Quarter ...Second Quarter ...Third Quarter ...Fourth Quarter ...Fiscal year ended March 31, 2003 $33.10 $19.69 $16.32 $13.68 High $11.25 $ 6.23...

  • Page 19
    ... Condition and Results of Operations", contained elsewhere in this report. 1999 Consolidated Statements of Operations Data: Net revenues ...Cost... - 3,721,420 (3,719,504) (14,592) 47,477 (3,686,619) (80,929) (3,605,690) - 2003 $105,000 37,937 67,063 22,250 17,705 223 619 - - - - - 2,350 43,147 23...

  • Page 20
    ... on the same basis as the annual consolidated financial statements. In our opinion... Operations", contained elsewhere in this report. Q1 Net revenues ...$ Cost ...change ...Cumulative effect of accounting change ...Net loss ...Fiscal 2002 Fiscal 2003 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (in thousands, except per share...

  • Page 21
    ... statements made by us throughout MD&A and elsewhere in this report are based on management's present expectations about future events and... of operations for each of the three fiscal years ended March 31, 2003. A brief description is provided of transactions and events that impact the comparability...

  • Page 22
    ... for bad debt. The methods, estimates and judgments we use in applying these most critical accounting policies have a significant impact on the results we report in our financial statements. Inventory Valuation Our policy is to value inventories at the lower of cost or market on a part-by-part basis...

  • Page 23
    process of determining goodwill impairment, we obtain an appraisal from an independent valuation firm. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projection and timing of ...

  • Page 24
    ... 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. 19

  • Page 25
    ... of revenues for the periods indicated: Fiscal Years Ended March 31, 2002 (in thousands, except per share data) 2001 2003 Net revenues ...Cost of revenues (1) ...Gross profit ...Operating expenses: Research and development ...Selling, general and administrative ...Stock-based compensation...

  • Page 26
    ...to $65.6 million, or 65% of net revenues, for the year ended March 31, 2003 from $128.3 million, or 84% of net revenues, for the year ended March 31,... will decrease by approximately $3.0 million per quarter. At March 31, 2003, the balance of purchased intangible assets expected to be charged to cost...

  • Page 27
    ...approximately $59.6 million, or 59% of net revenues, for the year ended March 31, 2003, as compared to approximately $75.7 million, or 50% of net revenues, for the year... Such charges may cause fluctuations in our interim or annual operating results. Amortization of Goodwill and Purchased Intangibles....

  • Page 28
    ...Long-Lived Assets" and recorded non-cash charges in the year ended March 31, 2003 of $187.9 million for the impairment of developed technology and $16.3 million ... operating loss. In the fourth quarter of fiscal 2003, we performed our annual goodwill impairment review and recorded an additional $186.4...

  • Page 29
    ... in the year ended March 31, 2002. The difference between our effective tax rate and the federal statutory rate for the year ended March 31, 2003 resulted from the fact that we established valuation allowances for our deferred tax assets generated during the fiscal year, as it is more likely than...

  • Page 30
    ... between 20% and 90% complete. Two projects accounted for approximately 51% of the value assigned to IPR&D and were completed in fiscal 2003 substantially on budget. The remaining projects, which accounted for 49% of the charge were generally completed in fiscal 2002. SiLUTIA-SiLUTIA specialized in...

  • Page 31
    ... in the consolidated statements of operations (in thousands, except per share amounts): Fiscal Years Ended March 31, 2001 2002 2003 Net loss-as reported ...$(436,215) $(3,605,690) $(745,541) Adjustments: Cumulative effect of accounting change ...- - 102,229 Amortization of goodwill ...304,544...

  • Page 32
    ...activities compared to using $9.9 million and generating $67.0 million in fiscal 2002 and 2001, respectively. The major financing source of cash in fiscal 2003 was from the sale of common stock through the exercise of employee stock options and purchases through the employee stock purchase plan. The...

  • Page 33
    ... of the risks and uncertainties facing us in our periodic reports filed with the SEC in which we report our financial condition and results for the quarter and fiscal ...could decline. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are ...

  • Page 34
    costs associated with acquisitions and the integration of acquired companies; the impact on interest income of a significant use of our cash for an acquisition, stock repurchase or other; costs associated with compliance with applicable environmental regulations or remediation; the effects of ...

  • Page 35
    advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render our products less marketable. Accordingly, our financial condition and operating results could be materially...

  • Page 36
    a customer's product line using our products may rapidly decline or be phased out; our agreements with customers typically do not require them to purchase a minimum amount of our products; many of our customers have pre-existing relationships with current or potential competitors that may cause them...

  • Page 37
    use internally developed ASIC components and general-purpose products. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our network equipment vendor customers fail to accept our products as an ...

  • Page 38
    ...classified as available-for-sale and, consequently, are recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. Our investment portfolio is exposed to market risks related...

  • Page 39
    may ultimately prove unsuccessful. If we are not successful in introducing such advances, we will be unable to timely bring to market new products and our revenues will suffer. Products for communications applications are based on industry standards that are continually evolving. Our ability to ...

  • Page 40
    ... last-time-buy program, our revenues from sales of our non-communications products increased to 35% of net revenues for the year ended March 31, 2003 from 16% of net revenues for the year ended March 31, 2002. We expect that revenues from our non-communications products will decline materially as...

  • Page 41
    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. The risks associated with our dependence upon third parties which manufacture, ...

  • Page 42
    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 at a new manufacturing facility. We may experience difficulties in transitioning to smaller geometry process ...

  • Page 43
    • loss of credibility with our current and prospective customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. Our future success depends in part on the continued service of our key design engineering, sales, marketing, ...

  • Page 44
    ... capitalization, we have been required to record various significant impairment charges against these assets as noted in our financial statements. At March 31, 2003, we have $88.2 million of goodwill and purchased intangible assets. There can be no assurance that we will not be required to take...

  • Page 45
    We have been named as a defendant in securities class action litigation that could result in substantial costs including, but not limited to, attorney and expert fees, and divert management's attention and resources. We are aware of several lawsuits in which we, our chief executive officer, chief ...

  • Page 46
    From time to time, we may be involved in litigation relating to other claims arising out of our operations in the normal course of business. We cannot assure you that the ultimate outcome of any such matters will not have a material, adverse effect on our business, financial condition or operating ...

  • Page 47
    ...balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income....to changes in the market value of our investments. At March 31, 2003, our investment portfolio included fixed-income securities classified as available-for-sale ...

  • Page 48
    PART III Certain information required 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 for our 2003 annual meeting of stockholders, and the information included in the proxy statement...

  • Page 49
    ... and consultants and our affiliates under this plan. At March 31, 2003, 28.9 million shares were outstanding and 33.0 million shares were available...be disclosed in the reports that we file under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time ...

  • Page 50
    ...financial statements of the Company are included herein as required under Item 8 of this report. See Index on page F-l. (2) Financial Statement Schedules For the three fiscal years ended March 31, 2003-Schedule II Valuation and Qualifying Accounts Schedules not listed above have been omitted because...

  • Page 51
    ...Annual Report...Report...Annual Report, Form 10-K for the year ended March 31, 2001. (6) Incorporated by reference to identically numbered exhibits filed with the Company's Annual Report...Report...Quarterly Report, ...report. (11) Incorporated by reference to Exhibit 99.1 filed with the Company's Current Report...

  • Page 52
    ... of the Board of Directors and Chief Executive Officer Date: June 3, 2003 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person ... for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other ...

  • Page 53
    Signature Title Date /S/ ARTHUR B. STABENOW Arthur B. Stabenow Director June 3, 2003 /S/ HARVEY P. WHITE Harvey P. White Director June 3, 2003 48

  • Page 54
    ...date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures...weaknesses. /S/ DAVID RICKEY David Rickey, Chief Executive Officer Dated: June 3, 2003 49

  • Page 55
    ...date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures.... /S/ STEPHEN M. SMITH Stephen M. Smith, Chief Financial Officer Dated: June 3, 2003 50

  • Page 56
    INDEX TO FINANCIAL STATEMENTS Page Report of Ernst & Young LLP, Independent Auditors ...Consolidated Balance Sheets as of March 31, 2002 and 2003 ...Consolidated Statements of Operations for the fiscal years ended March 31, 2001, 2002 and 2003 ...Consolidated Statements of Stockholders' Equity for ...

  • Page 57
    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, 2002 and 2003... at March 31, 2002 and 2003, and the consolidated results of ...

  • Page 58
    APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except par value) March 31, 2002 2003 Assets Current assets: Cash and cash equivalents ...Short-term investments-available-for-sale ...Accounts receivable ...Inventories ...Other current assets ...Total current assets ......

  • Page 59
    ... CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) Fiscal Years Ended March 31, 2001 2002 2003 Net revenues ...Cost of revenues (1) ...Gross profit ...Operating expenses: Research and development ...Selling, general and administrative ...Stock-based...

  • Page 60
    ... notes ...- Comprehensive income (loss): Net loss ...- Foreign currency translation gain ...- Unrealized gain on short-term investments, net of tax ...- Total comprehensive loss ... Balance, March 31, 2003 ...303,751 See accompanying notes

  • Page 61
    APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Years Ended March 31, 2001 2002 2003 Operating Activities Net loss ...Adjustment to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization ...Write-off ...

  • Page 62
    ... 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 the valuation...

  • Page 63
    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. The Company's policy ...

  • Page 64
    ... and future acquired goodwill will be subject to impairment tests annually, or earlier if indicators of potential impairment exist. All other... except per share data): Fiscal Years Ended March 31, 2001 2002 2003 Net loss-as reported ...$(436,215) $(3,605,690) $(745,541) Adjustments: Cumulative effect...

  • Page 65
    ...option plans and rights granted in connection with the employee stock purchase plans reported below has been estimated at the date of grant with the following ... Ended March 31, 2001 2002 2003 Employee Stock Purchase Plans Fiscal Years Ended March 31, 2001 2002 2003 Expected life (years) ...Risk-...

  • Page 66
    ... under SFAS 123 and SFAS 148 is as follows: Fiscal Years Ended March 31, 2001 2002 2003 (In thousands, except per share amounts) Net loss-as reported ...$(436,215) $(3,605,690) $ (745,541) Plus: Reported stock-based compensation ...79,848 147,065 131,886 Less: Fair value stock-based compensation...

  • Page 67
    ... amounts for the facility closure will be paid through the end of the related lease term in fiscal 2004. In April 2003, the Company announced its third restructuring program, consisting of a workforce reduction, further consolidation of excess facilities and additional fixed asset writeoffs. In June...

  • Page 68
    ... with unrealized gains and losses excluded from earnings and reported, net of tax, in comprehensive income (loss). The...Available-for-sale securities by contractual maturity are as follows (in thousands): March 31, 2003 Due in one year or less ...Due after one year through two years ...Greater than...

  • Page 69
    ...17,280 147,566 (85,531) $ 62,035 The cost and accumulated amortization of machinery and equipment under capital leases at March 31, 2003 were approximately $831,000 and $664,000, respectively ($2.5 million and $1.8 million, at March 31, 2002, respectively). Amortization of assets held under capital...

  • Page 70
    ...cumulative effect of an accounting change in the accompanying consolidated statements of operations. In the fourth quarter of fiscal 2003, the Company performed its annual impairment test and determined there was additional impairment to goodwill, resulting in a charge of $186.4 million. This charge...

  • Page 71
    ... shares used to calculate basic and diluted loss per share consists of the following (in thousands): Fiscal Years Ended March 31, 2001 2002 2003 Net loss (numerator): Net loss before cumulative effect of accounting change ...Cumulative effect of accounting change ...Net loss ...Shares used in basic...

  • Page 72
    APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) YuniNetworks, Inc.-On June 8, 2000, the Company completed the acquisition of YuniNetworks, a developer of scalable switch fabric ICs. Under the terms of the merger agreement, in exchange for all YuniNetworks' ...

  • Page 73
    ... by the Company until such ownership rights have vested, or exercisable upon vesting. Vesting generally occurs over four years. At March 31, 2002 and 2003, 979,000 and 305,000 shares of common stock were subject to repurchase, respectively. Options are granted at prices at least equal to fair value...

  • Page 74
    ...514) 1.78 (5,910) 9.92 60,987 40,467 $ 8.39 $ 9.18 The following is a further breakdown of the options outstanding at March 31, 2003 (options in thousands): Weighted Average Remaining Contractual Life Weighted Average Exercise Price Weighted Average Exercise Price Range of Exercise Prices Options...

  • Page 75
    ...-(Continued) Common Shares Reserved for Future Issuance At March 31, 2003, the Company has the following shares of common stock reserved for... Company. Such program may be discontinued at any time. As of March 31, 2003, the Company had not made any purchases under the program. Under a similar program...

  • Page 76
    ...$ 196,314 74,905 31,952 22,192 257 1,955 327,575 - (17,911) (17,911) 309,664 (309,664) $ - $ (92,443) $ At March 31, 2003, the Company has federal and state research and development tax credit carryforwards of approximately $56.7 million and $28.1 million, respectively, which will begin to expire...

  • Page 77
    ... interest, payable over 60 months, at interest rates between 6.5% and 7.35%. At March 31, 2003, approximately $502,000 was outstanding on the notes. Annual future minimum payments as of March 31, 2003, are as follows (in thousands): Operating Leases Notes Payable and Capital Leases Fiscal Years...

  • Page 78
    ...the three years ended March 31, were as follows: 2001 2002 2003 Harris Corporation ...Nortel Networks Corporation ...Cisco Systems ...Net revenues by...9% 1% 12% 13% 18% 14% 6% Fiscal Years Ended March 31, 2001 2002 2003 North America ...Europe and Israel ...Asia ... $337,644 56,807 41,092 $435,...

  • Page 79
    ...' motion. The Company expects oral argument regarding the court's tentative ruling to take place in June 2003. Limited discovery relating to the special litigation committee and its report has taken place. The Company believes that the allegations in these lawsuits are without merit and intends...

  • Page 80
    ... of Period Charged to Costs and Expenses Charged to Other Accounts Balance At End Of Period Description Deductions Year ended March 31, 2003: Allowance for doubtful accounts ...Year ended March 31, 2002: Allowance for doubtful accounts ...Reserve for excess and obsolete inventory ...Year ended...

  • Page 81
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  • Page 82
    ... its stockholders and other interested investors. For additional copies of this report, the Form 10-K or other information, please contact: AM CC...artin Dr. Kenneth Y. Yun The AM CC annual meeting of stockholders w ill be held at 10:00 a.m. on Wednesday, August 27, 2003, at AM CC's fac ility loc ated...

  • Page 83
    Applied M icro Circuits Corporation 6290 Sequence Drive San Diego California 92121-4358 T: 858.450.9333 w w w .a mc c .c om