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Proc-Type: 2001,MIC-CLEAR
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<SEC-DOCUMENT>0000898430-99-002596.txt : 19990625
<SEC-HEADER>0000898430-99-002596.hdr.sgml : 19990625
ACCESSION NUMBER: 0000898430-99-002596
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 10
CONFORMED PERIOD OF REPORT: 19990331
FILED AS OF DATE: 19990624
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-K
SEC ACT:
SEC FILE NUMBER: 000-23193
FILM NUMBER: 99651209
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
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-23193
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
6290 Sequence Drive
San Diego, California 92121
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (619) 450-9333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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 during the preceding 12 months (or for such shorter period than 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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $846,000,000 as of March 31, 1999, based upon the
closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 5% of more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 26,612,069 shares of the registrant's Common Stock issued and
outstanding as of March 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on August 3, 1999.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
Item 1. Business.
Applied Micro Circuits Corporation ("AMCC" or the "Company") 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 certain statements contained in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. See "Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Overview
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency 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. In these markets,
the Company provides physical layer products such as transceivers, crosspoint
switches and Clock Recovery and Synthesis Units, physical media dependent
products such as transimpedance amplifiers and laser drivers, and overhead
processor products such as framers and mappers. The Company currently supplies
products for the Sonet OC-3, OC-12 and OC-48 transmission standards, and is
currently developing an OC-192 chip set. The Company also leverages its
technology to provide solutions for the ATE, broadcast HDTV, high-speed
computing and military markets. Customers of the Company include 3Com,
Alcatel, Cisco Systems, Marconi Communications, Lucent, Nortel, Raytheon
Systems, Seimens and Teradyne.
Industry Background
The Communications Industry
Communications technology has evolved from simple analog voice signals
transmitted over networks of copper telephone lines to complex analog and
digital voice and data transmitted over hybrid networks of media such as
copper, coaxial and fiber optic cables. This evolution has been driven by
enormous increases in the number of users and the complexity of the data types
transmitted over networks. In addition, the substantial growth in the
Internet, the World Wide Web, cellular and facsimile communications; the
emergence of new applications such as video conferencing; and the increase in
demand for remote network access and higher speed, higher bandwidth
communication between local area networks and local and wide area networks
have increased network bandwidth requirements. This increase has made many
systems architectures inadequate.
In the wide area network ("WAN") market, service providers and equipment
suppliers in particular have been impacted by the inadequacy of systems
architectures caused by the current public network infrastructure. This
infrastructure was designed to optimize voice communications and is not well
suited for the high-throughput requirements of data transmission that is
transmitted in "bursts." The volume and complexity of this data has led to the
increasing deployment of fiber optic technology for use in wide area networks
("WANs"). This technology has substantially greater transmission capacity and
is less error prone and easier to maintain than copper networks. The
Synchronous Optical Network ("SONET") standard in North America and Japan, and
the Synchronous Digital Hierarchy ("SDH") standard in the rest of the world,
have emerged as the standards for the transmission of signals over optical
fiber. The SONET/SDH standards facilitate high data integrity and
1
<PAGE>
improved network reliability, while reducing maintenance and other operation
costs by standardizing interoperability among equipment from different
vendors. A transmission protocol complementary to SONET/SDH, Asynchronous
Transfer Mode ("ATM"), has emerged to optimize bandwidth utilization. ATM is a
network transmission protocol that packages data into fixed sized cells
enabling the support of not only data traffic, but delay-sensitive voice,
video and imaging applications.
In the local area network ("LAN") market, similar bandwidth issues have
arisen as the greater computational power of PCs have enabled powerful network
applications such as video conferencing and Web communications. However, these
new applications and the increasing number of computers on networks have
significantly increased the volume of data traffic and, as a result, the
network has now become the bottleneck in the delivery of integrated video,
audio and data. Ethernet is currently the most widespread LAN standard,
operating at 10 to 100 megabits per second. However, LAN backbones are rapidly
being upgraded to Gigabit Ethernet and ATM in order to increase available
bandwidth. These network protocols, which enable expanded bandwidth in excess
of one gigabit per second, are emerging as the new standards for LAN
backbones. In addition, the Fibre Channel standard, which also facilitates
data transmission at rates exceeding one gigabit per second, has emerged as a
practical, cost-effective and expandable method for achieving high-speed,
high-volume data transfer among workstations, mainframes, data storage devices
and other peripherals. Fibre Channel and Gigabit Ethernet are complementary
and compatible transmission standards, and the emergence of Gigabit Ethernet
has accelerated the growth of the Fibre Channel standard.
The Communications IC Opportunity
In order to address the growing requirements of communications networks,
equipment suppliers are having to develop and introduce increasingly
sophisticated systems at a rapid rate. To achieve the performance and
functionality required by such systems, these OEMs must utilize increasingly
complex integrated circuits ("ICs"), which now account for a larger portion of
the value-added proprietary content of such systems. As a result of the rapid
pace of new product introductions, the proliferation of standards to be
accommodated and the difficulty of designing and producing requisite ICs,
equipment suppliers increasingly outsource these ICs to semiconductor firms
with specialized expertise. These trends have created a significant
opportunity for IC suppliers that can design cost-effective solutions for the
transmission of high-frequency data. Dataquest estimates that the worldwide
SONET/SDH/ATM markets for ICs were approximately $670 million in 1998 and will
increase to approximately $1.7 billion in 2002. The Fibre Channel and Gigabit
Ethernet markets combined were approximately $70 million in 1998 and Dataquest
estimates that such combined markets will be approximately $190 million in
2002.
IC suppliers must utilize a variety of skills and technologies to satisfy
the requirements of communications equipment OEMs. These OEMs require IC
suppliers that possess system-level expertise and can quickly bring to market
high-performance, highly reliable, power-efficient ICs. Additionally, these
OEMs seek suppliers with both analog and digital expertise to provide a more
complete solution that enables faster integration into the system design and
higher performance. In particular, WAN OEMs require IC suppliers to provide
solutions that minimize jitter (a measure of the stability and noisiness of a
signal), which degrades transmission quality over distance. LAN products
typically have substantially shorter life cycles than WAN products, and the
rate of new product introductions is very high. Therefore, LAN OEMs
specifically require IC suppliers that can provide IC solutions that
accommodate these increased time-to-market demands. Furthermore, the LAN
market is highly cost driven and generally involves large volumes. Therefore,
OEMs in this market require IC suppliers that can provide increasingly lower
cost IC solutions that can quickly be ramped into high-volume production.
In the high-performance IC market, a number of process technologies are used
to produce ICs. Traditionally, designers have relied on silicon-based
manufacturing process technologies for the development of high-speed, mixed-
signal, analog and digital circuits with precision timing. In some cases, OEMs
utilize discrete components or IC solutions based on non-silicon processes
such as gallium arsenide ("GaAs") to meet the high-frequency requirements of
certain communications products. However, non-silicon processes tend to be
more expensive, less predictable with respect to yields and less able to ramp
to high-volume production than silicon processes.
2
<PAGE>
AMCC Strategy
AMCC's objective is to be the leading supplier of high-performance, high-
bandwidth connectivity IC solutions for the world's communications
infrastructure. To achieve this objective, the Company employs the following
strategies:
Focus on High-Growth Wide Area Network Markets
AMCC targets key high-growth WAN markets, including those for SONET/SDH and
ATM products. The Company has built substantial competencies focused on the
specific requirements of these markets in the areas of process technology and
mixed-signal design and substantial expertise in systems architecture and
applications support. The Company believes that the integration of these
capabilities enables it to optimize solutions addressing the high-bandwidth
connectivity requirements of WAN systems OEMs. Additionally, AMCC leverages
its design expertise, process technologies and systems capabilities in WAN
markets to address specific customer requirements in the fiber optic portion
of the LAN markets.
Provide Complete System Solutions to the Customer and Aggressively Integrate
Products
AMCC's strategy in the WAN market is two fold; 1) provide fiber to switch
silicon solutions and; 2) continue to optimize these solutions through
integration. To this end, in April 1998, AMCC acquired Ten Mountains Design
which develops analog designs for physical media dependent ("PMD") devices. In
March 1999, AMCC acquired Cimaron Communications Corporation providing the
Company with expertise in the development of overhead processor products
("OHP") and system level design. The Company believes that these acquisitions,
together with AMCC's established competence in the high-speed mixed-signal (or
physical layer) development, now allow AMCC to offer comprehensive solutions
for communications equipment OEMs from the fiber to the switch. This provides
our customers with guaranteed interoperability, pre-designed subsystems,
better-cost economics, and system level expertise. The result is faster time
to market, better performance and lower cost. To continue these customer
benefits in future generations of products, AMCC is pursuing an aggressive
integration strategy to provide greater functionality in fewer IC's.
Capitalize on Multiple Silicon-Process Technologies to Provide Optimized
Solutions
The Company is dedicated to utilizing the best silicon process technology
available to offer solutions optimized for specific applications and customer
requirements. The Company has successfully developed multiple generations of
its processes and believes that it will be able to continue the evolution of
its processes to deliver the performance required of future communications
ICs. AMCC believes its current and future bipolar and BiCMOS processes and
design expertise, complemented by advanced CMOS and silicon germanium ("SiGe")
BiCMOS processes from external foundries, provide the Company with the
flexibility to design and manufacture products that are tailored to its
customers' individual needs. Through this flexible approach, AMCC is better
able to transition products over time to new manufacturing processes as
product performance requirements and process technologies evolve.
Capitalize on Established Silicon-Process Technologies to Provide Cost-
Effective Solutions
The Company applies its systems expertise and its analog, mixed-signal and
digital design techniques to architect high-performance products based on
established silicon process technologies. The Company believes that these
silicon-based processes are proven, stable and predictable relative to non-
silicon processes and benefit from the extensive semiconductor industry
infrastructure devoted to the support of silicon processes.
Products and Customers
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company's current IC products primarily address the needs
3
<PAGE>
of the fiber optic based WAN and LAN markets. The Company's products for this
market are designed to respond to the growing demand for high-speed networking
applications for established WAN standards such as SONET/SDH and ATM and LAN
standards such as Gigabit Ethernet, ATM and Fibre Channel. The Company also
markets and sells IC products that address the needs of the ATE, broadcast
HDTV, high-speed computing and military markets. The Company utilizes its
high-performance design expertise and systems knowledge, together with its
internal bipolar and BiCMOS processes and CMOS and SiGe processes from outside
foundries, to design and manufacture products that are tailored to its
customers' individual needs.
The Company uses its design methodologies to develop a platform product and
leverage that product into multiple derivative products that are highly
optimized for specific applications. For example, the Company recently
developed the S3019, a SONET/SDH OC-12 transceiver, as a platform for 5
products in its S303X family. By reusing significant portions of the platform
design, the Company can reduce develop time, risk and costs. This is
especially important in analog intensive circuitry such as very low jitter
phase locked loops ("PLLs").
The following table summarizes the product types AMCC offers in the
communication markets:
<TABLE>
<CAPTION>
Product Category
---------------------------------------------
Market Digital Layer Mixed Signal Layer Analog Layer
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
WAN--SONET/SDH/ATM:
- --------------------------------------------------------------------------------
OC-3............................. X X
- --------------------------------------------------------------------------------
OC-12............................ X X
- --------------------------------------------------------------------------------
OC-48............................ X X X
- --------------------------------------------------------------------------------
OC-192........................... Z Z Z
- --------------------------------------------------------------------------------
LAN:
- --------------------------------------------------------------------------------
Fibre Channel.................... X X
- --------------------------------------------------------------------------------
Gigabit Ethernet................. X X
- --------------------------------------------------------------------------------
</TABLE>
- --------
X = AMCC currently produces or has sampled products in this market.
Z = AMCC is actively developing products in this market.
Analog Layer (or PMD): AMCC's analog layer products interface directly to
the lasers or photo diodes that provide the electrical to optical and optical
to electrical conversions. These products include various amplifiers that take
very weak electrical signals (e.g. a few millivolts) and amplify into more
traditional digital level signals (e.g. hundreds of millivolts). AMCC's
efforts in these areas are focused at the high end ranging from 1 to 10 Gbps.
Mixed Signal Layer (or physical layer): AMCC's mixed signal products
transmit and receive data from the PMD layer in a very high-speed serial
format (up to 10Gbps). They are one of the most key elements in the control of
overall system jitter, a measure of the "noisiness" of the signal. Low noise
enables transmission of data over greater distances with fewer errors. The
system clock is also generated or recovered in these devices. Data is
converted from a high-speed serial format to a lower-speed parallel interface
that can be handled by the digital layer. Data is also received on the lower-
speed parallel interface (digital layer) and serialized into a high-speed
format and handed to the PMD layer.
Digital Layer (or overhead processors ("OHP")): AMCC's digital layer
products receive and transmit data from the physical (or mixed signal) layer
in a parallel format. These products then perform a number of functions
including framing, terminating the overhead, performance monitoring, and
mapping the data payload to/from the transmission format. The data is then
available to be sent to a switch core or handed off for additional processing
(grooming, traffic shaping, policing, etc). AMCC's digital layer products are
found predominately in systems such as very high-speed add-drop multiplexers,
digital cross-connects, terabit routers and dense wave division multiplexers
("DWDM").
4
<PAGE>
WAN Products
WAN Analog Products: Over the past year AMCC introduced its first generation
of PMD products for the OC-48 (2.488 Gbps) market. The S3049 (laser driver)
and S3051 (post amplifier) were developed on AMCC's internal bipolar
technology. Additional OC-48 and OC-192 PMD products are currently under
development in a SiGe process.
WAN Mixed Signal Products: AMCC introduced its first generation of SONET OC-
12 (622 Mbps) products in 1993. The Company has since developed 3 additional
generations of these products, each integrating greater functionality on each
chip while improving jitter performance. For example, the Company's first
generation of these products consisted of transmitter/receiver pairs with dual
voltage. The second generation consisted of products that are compatible with
single +5 volt optical modules. The Company's third generation physical layer
product was a single chip transceiver operating at a single +3.3 volt power
supply. This product offers systems OEMs selectable reference frequencies, a 4
or 8-bit data path, a PECL or TTL level interface, a diagnostic mode and
special failure indicators. The Company's fourth generation, the S3038,
incorporated 4 transceivers and utilized 5 PLL's in a single device. The S3038
was the Company's first SONET/SDH physical layer device implemented in CMOS
from an external foundry.
Over the past year the Company completed a first generation of OC-48 (2.5
Gbps) mixed signal devices. The S3043 and S3044 chipset operating off a single
+3.3 volt supply offered the industry's lowest power solution for CSU, mux and
demux functions. Additionally the Company introduced the S3050, a multi-rate
CDR, which performs clock and data recovery on OC-3 (155Mbps), OC-12
(622Mbps), gigabit ethernet (1.25 Gbps) or OC-48 (2.488 Gbps) data rates. The
Company is currently developing its second generation of these products as
well as solutions for OC-192.
WAN Digital Layer Products: In the past year AMCC introduced its first
generation of digital layer products for the OC-48 market. The first of these
products, the S3045, performs the mux/demux functions for an OC-48 payload
into four OC-12 payloads. With the acquisition of Cimaron Communications in
March 1999, the Company has subsequently introduced 3 additional digital layer
products, the Congo with OC-12 packet-over-SONET, the Nile with integrated OC-
12 to DS-3 mapping, and the Amazon with fully functional packet-over-SONET for
OC-48. All of these devices can be utilized with the Company's mixed signal
and analog layer products providing a very comprehensive solution set. The
Company is currently developing second generations and OC-192 digital layer
products.
Serial Backplane Products. In addition to the WAN and LAN network equipment
and standards developed to address the issue of network bandwidth, network
equipment OEMs must also ensure that once high-frequency signals exit the
transmission network, they can be switched efficiently, while taking full
advantage of the available bandwidth. Backplanes (the boards that distribute
signals to various ports of a switching system) are currently emerging as a
serious constraint for systems OEMs because redesigning the traditional
architecture of parallel channels to accommodate higher frequency signals is
prohibitively expensive. Therefore, serial channels, which can accommodate
much higher frequencies, are being increasingly employed. The Company believes
that this transition has created a significant opportunity for suppliers that
can design IC solutions enabling the transmission of high-frequency data
through a serial backplane. In May 1998, the Company introduced the S2064, a
quad transceiver implemented in 0.35 micron CMOS. The S2064 is a platform
product that the company has used to develop and introduce 7 other products.
The Company is currently developing higher bandwidth serial backplane
products.
Current customers in the WAN market which the Company ships production
products and/or has commenced development programs with include 3Com, Alcatel,
Ciena, Cisco, ECI, Ericson, FORE, Fujitsu, Hitachi, Lucent, Marconi, Monterey,
NEC, Nokia, Nortel, Pirelli, Siemens, Sycamore, Tellabs, and Tellium. All of
the Company's communications devices are supported with evaluation boards and
design aids to facilitate easy integration into system architectures.
5
<PAGE>
LAN Products
LAN Analog Products: Over the past year AMCC introduced its first PMD
products for the gigabit ethernet and fibre channel standards. The S7011
vertical cavity surface emitting laser driver offers digital programmability
for laser trimming, which greatly reduces the number of external components
and system integration time.
LAN Mixed Signal Products: AMCC introduced its first physical layer products
in the gigabit ethernet and fibre channel markets in 1995. The Company has
since developed 3 generations of products that support both +5 and +3.3 volt
and today range from a single channel transceiver to quad channel
transceivers.
Current customers in the LAN market which the company ships production
products and/or has commenced development programs with include 3Com,
Cabletron Systems, Cisco, Compaq, Digital Equipment Corporation, FORE,
Fujikura, Fujitsu, Hewlett-Packard, IBM, Lucent, Newbridge Networks, Nortel,
Siemens, Sun Microsystems, Tellabs and Vixel.
ATE
AMCC introduced its current generation gate array Q20000 family of products
in 1991 and its Micropower-based standard cell products in 1993. Micropower,
one of the first products to offer +3.3V operation for high performance ASICs,
uses AMCC's proprietary bipolar process. The high-performance and low-power
characteristics of this family of products make it particularly suitable for
high performance semiconductor ATE applications that require approximately
4,000 equivalent gates, low jitter and precision circuits. Current customers
for the Company's products for the ATE market include Hewlett-Packard, LTX,
Schlumberger, Teradyne and Texas Instruments.
High-Speed Computing Products
AMCC offers a PCI product line that address the high-speed computing market.
The S5933 is a standard master/slave PCI controller chip. The S5920 is a
standard target-only PCI controller chip. These devices are supported with
comprehensive development kits and third-party driver software. The Company
sells these products to a very large and diverse customer base. Current
customers of the Company's products include Cisco Systems, Ericsson, IBM and
SAT. The Company's S5933 PCI controller chip is also used in reference designs
with C-Cube Microsystems for digital video disk products.
Military
The Company's Q20000 gate array family of ASIC products are well suited for
military applications and as replacements for ECLinPS(TM) logic from Motorola.
The Company sells ASICs to military customers such as Northrop Grumman,
Raytheon Systems Co. and Rockwell International.
Technology
The Company utilizes its technological and design expertise to solve the
unique problems of high-speed analog, digital and mixed-signal circuit designs
for the world's communications infrastructure. The Company's competencies
include the design and manufacture of high-performance digital and mixed
signal ICs, in-depth knowledge of the architecture and functioning of high-
bandwidth fiber optic communications systems, proven ASIC design methodologies
and libraries, and high-performance semiconductor manufacturing and packaging
expertise.
6
<PAGE>
Design of High-Performance Digital and Mixed-Signal ICs
AMCC has developed multiple generations of products that integrate both
analog and digital elements on the same chip, while balancing the difficult
trade-offs of speed, power and timing inherent in high-speed applications.
AMCC was one of the first companies to embed analog PLLs in bipolar chips with
digital logic for high-speed data transmission and receiver applications.
Since the introduction of AMCC's first on-chip clock recovery and clock
synthesis products in 1993 (the S3005/S3006 chip set), the Company has refined
these key circuits and has successfully integrated multiple analog functions
and multiple channels on the same chip. For example, the Company has developed
a quad transceiver with a PLL clock recovery and PLL clock multiplier. The
mixing of digital and analog signals poses difficult challenges for IC
designers, particularly at high frequencies. The Company has built significant
expertise in mixed-signal IC designs through the development of multiple
generations of products. Through the acquisition of Cimaron Communications,
the Company added VLSI digital design and systems expertise. AMCC will
continue to apply these competencies in the development of increasingly
complex digital layer products. AMCC believes it can leverage these skills
into the development of high gate count digital chips with integrated complex
analog and high frequency logic.
Systems and Architecture Expertise
AMCC believes that its systems architects, design engineers and technical
marketing and applications engineers have a thorough understanding of the
fiber optic communications systems for which the Company designs and builds
ASSPs. The Company substantially expanded this expertise into higher layers of
communication systems with the acquisition of Cimaron. Using this systems
expertise, AMCC develops semiconductor devices to meet OEMs' high-bandwidth
systems requirements. By understanding the systems into which its products are
designed, the Company believes that it is better able to anticipate and
develop optimal solutions for the various cost, power and performance trade-
offs faced by its customers. AMCC believes that its systems knowledge also
enables the Company to develop more comprehensive, interoperable solutions.
This allows AMCC to develop boards with multiple products that are a more
substantial part of the customers system, enabling faster time to integration
into their products.
Process Technology
AMCC utilizes its own internal wafer fabrication facility and has developed
and produced multiple generations of cost-effective, high-performance bipolar
and BiCMOS processes. The proven internal silicon-based process technologies
employed by the Company have not required the highly capital-intensive
facilities needed by certain advanced microprocessor, memory or CMOS ASIC
suppliers. Additionally, the Company has obtained access to advanced CMOS and
SiGe BiCMOS processes through foundry relationships. The Company believes that
through the use of internal and external process technologies, the Company is
able to provide an optimal mix of cost and performance for the targeted
application.
Packaging
AMCC has substantial experience in the development and use of plastic and
ceramic packages for high-performance applications. The selection of the
optimal package solution is a vital element of the delivery of high-
performance products, and involves balancing cost, size, thermal management
and technical performance. AMCC's products are designed to reduce power
dissipation and die size to enable the use of industry standard packages. AMCC
employs a wide variety of package types, and is currently designing products
using ball grid arrays, tape ball grid arrays and multi-chip modules with pin
counts in excess of 200 pins. The Company's experience with a variety of
packages is one of the factors that enables it to provide optimal high-
performance IC solutions to its customers.
7
<PAGE>
Research and Development
AMCC's research and development expertise and efforts are focused on the
development of high-performance analog, digital and mixed-signal ASSPs for
fiber optic communications applications. The Company also develops silicon
wafer fabrication processes and design methodologies that are optimized for
these applications.
Product Development
The Company's product development is focused on building high-performance
high gate count digital design expertise and analog-intensive design expertise
that is incorporated into well-documented blocks that can be reused for
multiple products. The Company has, and continues to make, significant
investments in advanced CAD tools to leverage its design engineering staff,
reduce design cycle time and increase first-time design correctness. The
Company's product development is driven by the imperatives of reducing design
cycle time, increasing first-time design correctness, adhering to disciplined,
well documented design processes and continuing to be responsive to customer
needs. The Company is also developing high-performance packages for its
products in collaboration with its packaging suppliers and its customers.
Process Development
The Company's process development is focused on enhancing its current
bipolar processes and developing new processes optimized for high-performance
digital and mixed-signal communications applications. AMCC's process engineers
are also involved with the selection and management of the Company's
relationships with outside foundries to provide the advanced CMOS and SiGe
BiCMOS processes required by certain of AMCC's products. A failure by the
Company to improve its existing process technologies or obtain access to new
process technologies from external foundries in a timely or affordable manner
could adversely affect the Company's business, financial condition and
operating results.
The Company's research and development expenses in fiscal years 1997, 1998,
1999 were $7.9, $13.3 and $22.5 million, respectively, which were 13.7%, 17.3%
and 21.4%, respectively, of revenues for such periods. The Company has 119
employees engaged in engineering and product development related activities.
Manufacturing
Wafer Fabrication
AMCC manufactures certain of its products at its four-inch wafer fabrication
facility in San Diego, California in an 8,200 square foot clean room. The
Company believes that its wafer fabrication facility has competitive yields,
cycle times and costs, produces large die at acceptable yields and operates on
a flexible basis of multiple products and variable lot sizes. However, there
can be no assurance that the Company will achieve or obtain acceptable
manufacturing yield levels in the future. The Company is currently running
several different bipolar and BiCMOS processes in this facility.
The Company is exploring alternatives for the expansion of its manufacturing
capacity which would likely occur after fiscal year 2000, including expanding
its current 49 wafer fabrication facility, building a new wafer fabrication
facility, purchasing a wafer fabrication facility and 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. There can be no assurance that any of the
alternatives for expansion of its manufacturing capacity will be available on
a timely basis, or that the Company will be able to manage its growth and
effectively integrate its proposed expansion into its current operations.
AMCC currently utilizes four outside foundries, AMI Semiconductor, IBM,
Kawasaki CSI Japan and Taiwan Semiconductor Manufacturing Corporation for the
production of products designed on CMOS processes.
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Additionally, AMCC is developing new products on IBM's SiGe BiCMOS processes.
The Company does not plan to fabricate its own CMOS wafers. The Company
generally does not have long-term wafer supply agreements with its other
outside foundries that guarantee wafer or product quantities, prices or
delivery lead times. There are certain risks associated with the Company's
dependence upon external foundries for certain of its products, including
reduced control over delivery schedules, quality assurance, manufacturing
yields and costs, the potential lack of adequate capacity during periods of
excess demand, limited warranties on wafers or products supplied to the
Company, increases in prices and potential misappropriation of the Company's
intellectual property.
Components and Raw Materials
AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic
Corporation. While most silicon wafers now being supplied to the semiconductor
industry are larger than four inches, AMCC believes that Wacker Siltronic will
continue to supply AMCC's needs for the foreseeable future. AMCC also carries
a significant inventory of raw wafers to cushion any interruption in supply.
AMCC purchases its ceramic packages from Kyocera America and NTK Ceramics and
its plastic packaging from Amkor and ASAT.
Assembly and Test
The Company assembles prototypes and modest production volumes of specific
products in its internal assembly facility in San Diego, California. Most of
the Company's production assembly, however, is performed by multiple assembly
subcontractors located in the Far East, Europe and the United States.
Following assembly, the packaged units are returned to the Company for burn-in
(in some cases), final testing and marking prior to shipment to customers.
From time to time, some testing is performed by subcontractors.
Sales and Marketing
The Company sells its products principally through a direct sales
organization consisting of a network of independent manufacturers'
representatives in specified territories that work under the direction of the
Company's direct sales force and distributors.
The Company has a total of 17 direct sales personnel and field applications
engineers. The direct sales force is technically trained and is supported by
applications engineers in the field as well as applications and design
engineers at the Company's headquarters. The Company believes that this
"engineering-intensive" relationship with its customers results in strong,
long-term customer relationships beneficial to both the Company and its
customers. The Company augments this strategic account sales approach with
domestic and foreign distributors, which service primarily smaller accounts
purchasing ASSPs.
In North America, the Company's direct sales effort is supported by 18
independent manufacturers' representatives and one distributor. The Company
sells its products through 11 distributors and 2 independent manufacturers'
representatives in Europe and 8 distributors throughout the rest of the world.
During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%,
respectively, of net revenues were from Nortel. In 1998 and 1999, Insight
Electronics, the Company's domestic distributor, accounted for 11% and 13% of
net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of
net revenues. No other customer accounted for more than 10% of revenues in any
period. In fiscal 1997, 1998 and 1999, approximately 21%, 23% and 24% of the
Company's revenues were derived from sales to customers located outside of
North America.
The Company's sales headquarters is located in San Diego, California. The
Company maintains sales offices in Burlington and Andover, Massachusetts;
Raleigh, North Carolina; Plano, Texas; San Jose, California; Munich, Germany;
Milan, Italy, Tokyo, Japan; and Cheshire, United Kingdom.
9
<PAGE>
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 non-recurring engineering services to be completed in the next
six months was $38.2 million on March 31, 1999, compared to $30.1 million on
March 31, 1998. Included in backlog at March 31, 1999 is the $9.3 million
balance of an order received from Raytheon Systems Co. related to an end-of-
life buy for integrated circuits used in its high speed radar systems.
Proprietary Rights
The Company relies in part on patents to protect its intellectual property.
The Company has been issued 14 patents in the United States and one patent in
Canada, which patents principally cover certain aspects of the design and
architecture of the Company's IC products and have expiration dates ranging
from 2004 to 2015. In addition, the Company has 19 patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third parties
or that if challenged, will be found to be valid or enforceable, or that the
patents of others will not have an adverse effect on the Company's ability to
do business. Furthermore, there can be no assurance that others will not
independently develop similar products or processes, duplicate the Company's
products or processes or design around any patents that may be issued to the
Company.
To protect its intellectual property, the Company also relies on a
combination of mask work protection under the Federal Semiconductor Chip
Protection Act of 1984, trademarks, copyrights, trade secret laws, employee
and third-party nondisclosure agreements and licensing arrangements. A mask
work refers to the intangible information content of the set of masks or mask
databases used to make a semiconductor chip product. Despite these efforts,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been and in the future may be notified
that it may be infringing the intellectual property rights of third parties.
The Company has certain indemnification obligations to customers with respect
to the infringement of third party intellectual property rights by its
products. There can be no assurance that infringement claims by third parties
or claims for indemnification by customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition or operating results. 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 26 companies, including AMCC, 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, the
Company was 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 the Company a license under
the Lemelson patents. Management is monitoring this matter and, although the
ultimate outcome of this matter is not currently determinable, The Company
believes, based in part on the licensing terms previously offered by the
Lemelson Partnership, that the resolution of this matter will not have a
material adverse effect on the financial position or liquidity; however, there
can be
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<PAGE>
no assurance that the ultimate resolution of this matter will not have a
material adverse effect on the results of operations for any quarter.
Furthermore, there can be no assurance that the Company would prevail in any
such litigation. In the event of any adverse ruling in any such matter, the
Company could be required to pay substantial damages, which could include
treble damages, cease the manufacturing, use and sale of infringing products,
discontinue the use of certain processes or obtain a license under the
intellectual property rights of the third-party claiming infringement. There
can be no assurance, however, that a license would be available on reasonable
terms or at all. Any limitations on the Company's ability to market its
products, any delays and costs associated with redesigning its products or
payments of license fees to third parties or any failure by the Company to
develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on the Company's business, financial
condition and operating results.
Competition
The semiconductor market, particularly the high-performance semiconductor
market, is highly competitive and subject to rapid technological change, price
erosion and heightened international competition. The communications, ATE and
high-speed computing industries are also becoming intensely competitive due in
part to deregulation and heightened international competition. The ability of
the Company to compete successfully in its markets depends on a number of
factors, including product performance, success in designing and
subcontracting the manufacture of new products that implement new
technologies, product quality, reliability, price, the efficiency of
production, design wins for its IC products, ramp up of production of the
Company's products for particular system manufacturers, end-user acceptance of
the system manufacturers' products, market acceptance of competitors' products
and general economic conditions. In addition, the Company's competitors may
offer enhancements to existing products, or offer new products based on new
technologies, industry standards or customer requirements, that are available
to customers on a more timely basis than comparable products from the Company
or that have the potential to replace or provide lower cost alternatives to
the Company's products. The introduction of such enhancements or new products
by the Company's competitors could render the Company's existing and future
products obsolete or unmarketable. Furthermore, once a customer has designed a
supplier's product into its system, the customer is extremely reluctant to
change its supply source due to the significant costs associated with
qualifying a new supplier. Finally, the Company expects that certain of its
competitors and other semiconductor companies may seek to develop and
introduce products that integrate the functions performed by the Company's IC
products on a single chip, thus eliminating the need for the Company's
products. Each of these factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
In the communications markets, the Company competes primarily against
companies such as Analog Devices, Conextant, Giga, Hewlett-Packard, Lucent,
Maxim, PMC-Sierra, Philips, Sony, Texas Instruments, TriQuint and Vitesse. In
certain circumstances, most notably with respect to ASICs supplied to Nortel,
AMCC's customers or potential customers have internal IC manufacturing
capability, and this internal source is an alternative available to the
customer. In the ATE market, the Company competes primarily against Vitesse
and silicon ECL and BiCMOS products offered principally by semiconductor
manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the
high-speed computing market, the Company competes primarily against companies
such as Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and
potential new competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. In addition, in lower-
frequency applications, the Company faces increasing competition from other
CMOS-based products, particularly as the performance of such products
continues to improve. There can be no assurance that the Company will be able
to develop new products to compete with new technologies on a timely basis or
in a cost-effective manner. Any failure by the Company to compete successfully
in its target markets, particularly in the communications markets, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
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Environmental Matters
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations with
respect to such funding efforts have not been material, and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results.
Employees
As of March 31, 1999, the Company had 361 full-time employees: 29 in
administration, 119 in engineering and product development, 155 in operations
and 58 in marketing and sales. The Company's ability to attract and retain
qualified personnel is essential to its continued success. None of the
Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. The Company believes its
employee relations are good. Loss of the services of, or failure to recruit,
key design engineers or other technical and management personnel could be
significantly detrimental to the Company's product and process development
programs or otherwise have a material adverse effect on the Company's
business, financial condition, and operating results.
Executive Officers of the Registrant
The executive officers of the Company, and their ages as of May 31, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
President, Chief Executive Officer
David M. Rickey..................... 43 and Director
Roger A. Smullen, Sr................ 63 Chairman of the Board of Directors
William E. Bendush.................. 50 Vice President, Finance and
Administration, and Chief Financial
Officer
Kenneth L. Clark.................... 51 Vice President, Operations
Joel O. Holliday.................... 60 Vice President
Brent E. Little..................... 35 Vice President, Marketing
Gary Martin......................... 48 Vice President and Chief Technical
Officer, Cimaron Communications
Vice President, Cimaron
Ram Sudireddy....................... 32 Communications
Thomas L. Tullie.................... 34 Vice President, Sales
</TABLE>
David M. Rickey has served as President, Chief Executive Officer and
Director since February 1996. From August 1993 to May 1995, Mr. Rickey served
as the Company's Vice President of Operations. From May 1995 to February 1996,
Mr. Rickey served as Vice President of Operations at NexGen, a semiconductor
company. Previously, Mr. Rickey spent more than eight years with Nortel, a
telecommunications manufacturer, where he
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<PAGE>
led the wafer fab engineering and manufacturing operations in both Ottawa,
Canada and San Diego, California. Mr. Rickey also worked in various
engineering positions with IBM from 1981 to 1985. Mr. Rickey has earned B.S.
degrees from both Marietta College (summa cum laude) and Columbia University.
In addition, Mr. Rickey received an M.S. in Materials Science and Engineering
from Stanford University.
Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of
Directors since October 1982. From April 1983 until April 1987, Mr. Smullen
served as the Company's Chief Executive Officer. Previously, he was senior
vice president of operations of Intersil, Inc.'s semiconductor division. In
1967, Mr. Smullen co-founded National Semiconductor. Prior to that, he was
director of integrated circuits at Fairchild Semiconductor. Mr. Smullen is
currently a director of Micro Linear Corporation, a manufacturer of integrated
circuits. He holds a B.S. in Mechanical Engineering from the University of
Minnesota.
William E. Bendush joined the company in April 1999 as Vice President,
Finance and Administration, Treasurer, Chief Financial Officer and Secretary
replacing Mr. Holliday who resigned these posts in April 1999. With more than
28 years of leadership experience in financial management and financing, Mr.
Bendush came to AMCC from Silicon Systems Inc., where the past 14 years he
served as Senior Vice President and Chief Financial Officer. Prior to joining
Silicon Systems Inc., Mr. Bendush held various financial management positions
at Setac Inc., AM International, Gulf + Western Industries and Gould Inc. Mr.
Bendush is a Certified Public Accountant and holds a bachelor's degree from
Northern Illinois University. In addition, Mr. Bendush currently serves as a
member of the board of directors and Chairman of the Audit committee of
Smartflex Systems Inc.
Kenneth L. Clark has served as Vice President, Operations since November
1997. Prior to joining the Company, Mr. Clark worked at Integrated Device
Technologies, Inc., a semiconductor company, from February 1995 to October
1997, where he served as Director, Fab Operations. From 1990 to 1995, Mr.
Clark served in various senior management positions including Director, Fab
Operations at Silicon Systems, Inc., a semiconductor company. From 1987 to
1990, Mr. Clark served as Director, Fab Operations at National Semiconductor
Corp. Mr. Clark has also held manufacturing and engineering management
positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and
American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the
University of Washington.
Joel O. Holliday served as the Vice President, Finance and Administration,
Treasurer, Chief Financial Officer and Secretary of the Company from November
1981 to April 1999. Mr. Holliday currently serves as a Vice President of AMCC.
He has previously served as the Director of Finance during the reorganization
of Westgate-California Corporation and as Vice President, Finance of Spin
Physics, Inc., an electronics company. Mr. Holliday received a B.A. from
Claremont McKenna College and an M.B.A. from Harvard Business School.
Brent E. Little joined the Company in 1991. Prior to his current position as
Vice President of Marketing, he held several marketing management positions
with AMCC as the Director or Strategic Marketing, and Director of Marketing
for ASIC products. Prior to joining the Company, Mr. Little worked as Business
Development Manager for Analysis and Technology, Inc, and worked with the U.S.
Navy as a Project Engineer. Mr. Little earned his B.S in Electrical
Engineering from University of California, Santa Barbara.
Gary Martin joined the Company on March 17, 1999 with the acquisition of
Cimaron Communications Corporation, as Vice President and Chief Technical
Officer, Cimaron Communications. Prior to joining the Company, Dr. Martin, co-
founded Cimaron Communications Corporation, and served as its Chief Technical
Officer since its inception on January 2, 1998. From 1995 to 1997, he served
as Vice President of Engineering and Chief Technical Officer at ATI. From 1978
to 1995, Dr. Martin held various management and technical positions at AT&T
Bell Laboratories. Dr. Martin holds a master's degree and doctorate in
Electrical Engineering from Stanford University and a B.S. and M.S. in
Mechanical Engineering from Oklahoma State University.
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<PAGE>
Ram Sudireddy joined the Company on March 17, 1999, with the acquisition of
Cimaron Communications Corporation, as Vice President, Cimaron Communications.
Prior to joining the Company, Mr. Sudireddy co-founded Cimaron Communications
Corporation, and served as its President and CEO from its inception in January
1998. From 1996 to 1997, he founded Siltek Corporation, an ATM and Sonet
design company, and served as its Vice President of Research and Development.
From 1991 to 1996, Mr. Sudireddy was a member of technical staff at AT&T Bell
Laboratories, where he held positions as chief architect and lead designer for
a number of highly complex ASICs. Mr. Sudireddy has a master's degree in
Computer Engineering from the University of Massachusetts at Lowell, and a
bachelor's degree in Electrical Engineering from Nagarjuna University in
Guntur, India.
Thomas L. Tullie has served as Vice President, Sales since August 1996.
Prior to joining the Company, from 1989 to 1996 Mr. Tullie held several
strategic sales management positions, most recently as Director of East Coast
Sales, at S-MOS Systems, a semiconductor company. Prior to joining S-MOS
Systems, Mr. Tullie was a designer in the workstations group of Digital
Equipment Corporation. Mr. Tullie earned a B.S. from the University of
Massachusetts and an M.B.A. from Clark University.
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;
. 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 required expansion of our manufacturing capacity;
. costs associated with compliance with applicable environmental
regulations or remediation;
. costs associated with future litigation, if any, including without
limitation, litigation or settlements relating to the use or ownership
of intellectual property;
. general semiconductor industry conditions; and
. general economic conditions.
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
14
<PAGE>
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 producers 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 customer's 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 in future periods. If we
are unable to plan inventory and production levels effectively, our 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 the company's 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 our manufacturing yields, which
may not meet expectations.
AMCC Fabrication
We manufacture most of our semiconductors at our San Diego 49 wafer
fabrication facility. Our yields can 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 over which we have
little or no control, including minute levels of contaminants in the
manufacturing environment, design issues, defects in masks used to print
circuits on a wafer and difficulties in the fabrication process.
Unfortunately, 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,
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
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.
15
<PAGE>
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 our proposed new
manufacturing facility or the transfer of our operations to this 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 the 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 WAN and 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 short and long term business will suffer. In the short term, we
may experience reduced revenues. In the long term, 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.
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 telecommunications or data communications markets, or if we experience a
delay as short as a few months in bringing a new product to market, or if our
telecommunications or data communications customers fail to achieve market
acceptance of their products, our revenues could be significantly reduced for
a substantial period.
16
<PAGE>
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, and Synchronous Digital Hierarchy, or
SDH, transmission standards and the Asynchronous Transfer Mode, or ATM,
transmission standard. 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 the 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 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.
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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 our future revenues.
However, we have a limited operating history in selling ASSPs, particularly to
customers in the communications markets. In addition, 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, if at all. 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 depend on the automated test equipment market, and that market
has recently experienced declines in demand.
We have historically derived significant revenues from product sales to
customers in the Automated Test Equipment, or ATE, market and currently
anticipate that we will continue to derive revenues from sales to customers in
this market in the near term. During the past year, customers in the ATE
market have experienced decreased demand due primarily to slower growth in the
semiconductor industry and economic turmoil in Asia. Accordingly, our net
revenues in the ATE market has declined for four consecutive quarters as of
March 31, 1999, and it is possible that our revenue from the ATE market may
decline further.
We depend on the high-speed computing market, but we believe that the average
selling prices of our IC products for the high-speed computing market will
decline in future periods and that our gross margin on sales of such products
may also decline in future periods.
The market for 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 high-speed computing market may not purchase these
products.
Furthermore, we expect that certain competitors may seek to develop and
introduce products that integrate the functions performed by our high-speed
computing IC products on a single chip. 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 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;
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. 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' 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. 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 may offer enhancements to existing products or
offer new products based on new technologies, industry standards or customer
requirements that are available to customers on a more timely basis than
comparable products from us or that have the potential to replace or provide
lower-cost 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.
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In the communications markets, we compete primarily against Giga, Hewlett-
Packard, Lucent, Maxim, Philips, Sony, Texas Instruments, Conexant, 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.
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 four-inch
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 fiscal 2001, although this date may vary depending on, among other
things, our rate of growth. However, 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 make
wafers to meet demand. We will be required to hire, train and manage
additional production personnel in order to increase production capacity as
scheduled.
The Company is exploring alternatives for the expansion of its manufacturing
capacity which would likely occur after fiscal year 2000, including expanding
its current 4" wafer fabrication facility, building a new wafer fabrication
facility, purchasing a wafer fabrication facility and 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. There can be no assurance that any of the
alternatives for expansion of its manufacturing capacity will be available on
a timely basis, the Company will be able to manage its growth or effectively
integrate its proposed expansion into its current operations.
The cost of any investment the Company may have to make in expanding its
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 expansion of our
manufacturing capacity. Our existing wafer fabrication facility is, and the
potential new wafer fabrication facility may be, located in California and
these facilities may be subject to natural disasters such as earthquakes or
floods. 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 the new facility or the expansion of the
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
20
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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
expansion or new facility will depend upon the availability, timely delivery
and successful installation and testing of the necessary process equipment. As
a result of the foregoing and other factors, the expansion 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 expansion or new facility in a timely manner,
and our revenues may not increase commensurate with the anticipated increase
in manufacturing capacity associated with the expansion 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.
The successful operation of a potential new 6" wafer fabrication facility,
if completed, as well as our overall production operations, will also be
subject to numerous risks. We have no prior experience with the operation of
the equipment or the processes involved in producing finished six-inch wafers,
which differ significantly from those involved in the production of four-inch
wafers. We will be required to hire, train and manage production personnel in
order to effectively operate the new facility. We do not have sufficient
excess production capacity at our existing San Diego facility to fully offset
any failure of the proposed new wafer fabrication facility to meet planned
production goals. We may transfer current San Diego manufacturing operations
into the proposed new wafer fabrication facility subsequent to its completion.
Should this transfer occur, we may experience delays in completing product
testing and documentation required by customers to qualify or requalify our
products from this facility. We will also have to effectively coordinate and
manage two manufacturing facilities to successfully meet overall production
goals. We have no experience in coordinating and managing production
facilities that are located at different sites or in the transfer of
manufacturing operations from one facility to another. As a result of these
and other factors, our failure to successfully operate the proposed new wafer
fabrication facility, to successfully coordinate and manage the two sites or
to transfer our manufacturing operations could adversely affect our overall
production.
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 goods 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
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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 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, and sales to Nortel
accounted for approximately 20%, 21%, and 20% of our revenues in each of these
periods. 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
22
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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 our planned 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 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.
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 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 acquisition of property for our proposed new wafer fabrication facility,
the construction of the proposed new wafer fabrication facility and the
purchase of equipment for the proposed new wafer fabrication facility.
23
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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 26
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. We are monitoring this
matter and, although the ultimate outcome of this matter is not currently
determinable, we believe, 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 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 in fiscal 1997, fiscal 1998 and fiscal 1999, 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;
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. 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.
Although less than seven percent of our revenues were attributable to sales
in Asia during the year ended March 31, 1999, the recent economic instability
in certain Asian countries could adversely affect our business, financial
condition and operating results, particularly to the extent that this
instability impacts the sales of products manufactured by our customers. We
are also 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.
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 our
planned 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.
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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 addition, the market price of the common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in:
. 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 the Company's performance by securities
analysts;
. announcements of merger or acquisition transactions; and
. other events or factors.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, and that have
often been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may affect adversely the market price of our common stock.
If we are not adequately prepared for the transition to Year 2000, our
business, operating results and financial condition could suffer.
As a semiconductor manufacturer with our own wafer fabrication facility, we
are dependent on computer systems and manufacturing equipment with embedded
hardware or software to conduct our business. 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. The plan covers five stages including:
(i) inventory;
(ii) assessment;
(iii) remediation;
(iv) testing; and
(v) contingency planning.
The inventory and assessment stages were completed in March 1999. The
remediation, testing and contingency planning stages are targeted to be
completed in October 1999. We will primarily utilize internal resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications.
We have initiated communications with our critical external suppliers to
determine the extent to which we may be vulnerable to their failure to resolve
their own Year 2000 issues. Where practicable, we will assess and
26
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attempt to mitigate our risks with respect to the failure of these entities to
be Year 2000 ready. The effect, if any, on our results of operations from the
failure of such parties to be Year 2000 ready, is not reasonably estimable.
As of March 31, 1999, we have incurred and expensed approximately $200,000
related to the Year 2000 project and expect to incur an additional $700,000 on
completing the Year 2000 project. Approximately one-half the costs associated
with the Year 2000 project will be internal resources that have been
reallocated from other projects, with the balance of costs reflecting
incremental spending for equipment and software upgrades. The costs of the
Year 2000 Project will be funded through operating cash flows, with the cost
of internal resources expensed as incurred and the cost of equipment and
software upgrades capitalized or expensed in accordance with our policy on
property and equipment.
The costs of the project and the date on which we plan 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.
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 2. Properties.
The Company's executive offices, marketing and engineering functions are
located in San Diego, California in a 90,000 square foot building that is
leased by the Company under a lease that expires in 2007. In addition, the
Company occupies a 21,000 square foot building in San Diego, which houses the
Company's manufacturing facilities under a lease that expires in 2003, but
provides the Company with an option to extend the lease for one additional
five year period.
In July 1998 the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for a potential new wafer fabrication
facility. This parcel of land is located approximately one quarter mile from
the Company's headquarters in San Diego, California. The Company has made
payments of $1.0 million related to this transaction. In December 1998, the
Company exercised this right to acquire the land and made additional payments
of approximately $3.7 million in May 1999 to acquire the land.
The Company leases additional space for sales offices and design centers in
Burlington and Andover, Massachusetts; Raleigh, North Carolina; Plano, Texas;
San Jose, California; Edina, Minnesota; Munich, Germany and Milan, Italy.
27
<PAGE>
Item 3. 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 Annual Report on Form 10-K, 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.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended March 31, 1999.
28
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "AMCC" since the Company's initial public offering on
November 25, 1997. The following table sets forth the high and low sales
prices of the Company's Common Stock as reported by the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended March 31, 1998 High Low
-------------------------------- ------ ------
<S> <C> <C>
Third Quarter............................................... $13.50 $ 8.00
Fourth Quarter.............................................. $24.38 $12.25
<CAPTION>
Fiscal year ended March 31, 1999 High Low
-------------------------------- ------ ------
<S> <C> <C>
First Quarter............................................... $30.00 $17.63
Second Quarter.............................................. $30.00 $12.88
Third Quarter............................................... $40.63 $12.25
Fourth Quarter.............................................. $46.75 $32.94
</TABLE>
At March 31, 1999, there were approximately 394 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock and presently
intends to continue this policy.
(b) Recent Sales of Unregistered Securities
(1) From December 31, 1997 until March 2, 1998, 26,997 shares of Common
Stock were issued upon exercise of options with an average exercise price
of $.45 per share, all of which were paid in cash, and 56,645 shares of
Common Stock were issuable upon exercise of outstanding options with an
average exercise price of $.46 per share pursuant to grants to certain
employees and Directors of the Company under the Company's 1982 Incentive
Stock Option Plan (the "1982 Plan"). On March 2, 1998, the Company filed a
Registration Statement on Form S-8 to cover the shares of Common Stock
issuable upon exercise of options under the 1992 Plan.
(2) From December 31, 1997 until March 2, 1998, 120,719 shares of Common
Stock were issued upon exercise of options with an average exercise price
of $.53 per share, all of which were paid in cash, and 1,978,922 shares of
Common Stock were issuable upon exercise of outstanding options with an
average exercise price of $1.87 per share pursuant to grants to certain
employees and Directors of the Company under the Company's 1992 Incentive
Stock Option Plan (the "1992 Plan"). On March 2, 1998, the Company filed a
Registration Statement on Form S-8 to cover the shares of Common Stock
issuable upon exercise of options under the 1982 Plan.
(3) On March 17, 1999, AMCC acquired all the outstanding stock of Cimaron
Communications, pursuant to a merger of AMCC and Cimaron Communications
Corporation ("Cimaron"). Under the terms of the related merger agreement,
all of the outstanding stock and stock equivalents of Cimaron were
exchanged for approximately three million shares of the Company's Common
Stock. At the time of the transaction, the shares of the Company's Common
Stock issued to the former Cimaron stockholders were not registered under
the Securities Act because the transaction involved a non-public offering
exempt from registration under Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. On April 13, 1999, the Company filed a
registration statement on Form S-3 to cover the shares of Common Stock
issued pursuant to the merger agreement.
There were no underwritten offerings in connection with any of the
transactions set forth in Items 5(b)(1) through 5(b)(3) above. The issuances
described in Items 5(b)(1) and 5(b)(2) above were deemed to be exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
thereunder in that they were
29
<PAGE>
offered and sold pursuant to a written compensation plan. In addition, such
issuances were deemed to be exempt from registration under the Securities Act
under Section 4(2) of the Securities Act as transactions not involving any
public offering. The recipients of securities in each of the transactions
described in Items 5(b)(1) and 5(b)(2) above represented their intentions to
acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
(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 (IPO) 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 5,553,000 shares of Common Stock and the price to the
public was $8.00 per share. Of such shares, 3,538,448 were sold by The Company
(which includes the underwriter's over-allotment of 832,950 shares) and
2,847,502 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 $25,110,866.
The Company has invested the net offering proceeds of $25,110,866 in short-
term investments consisting of United States Treasury Notes, obligations of
United States government agencies and corporate bonds with maturities ranging
from April 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 3,530,000 shares of the Common Stock and the price
to the public was $19.375 per share. Of such shares, 1,500,000 shares were
sold by the Company, and 2,559,500 shares were sold by certain stockholders of
the Company (which includes the underwriter's overallotment of 529,500
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 April 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.
30
<PAGE>
Item 6. Selected Financial Data.
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues...................... $46,950 $50,264 $57,468 $ 76,618 $105,000
Cost of revenues.................. 27,513 34,169 30,057 34,321 37,937
------- ------- ------- -------- --------
Gross profit...................... 19,437 16,095 27,411 42,297 67,063
Operating Expenses:
Research and development........ 10,108 8,283 7,870 13,268 22,472
Selling, general and
administrative................. 10,112 11,232 12,537 14,278 18,325
Merger-related costs............ -- -- -- -- 2,350
------- ------- ------- -------- --------
Total operating expenses...... 20,220 19,515 20,407 27,546 43,147
------- ------- ------- -------- --------
Operating income (loss)........... (783) (3,420) 7,004 14,751 23,916
Interest income (expense), net.... 358) (242) (29) 871 3,450
------- ------- ------- -------- --------
Income (loss) before income taxes. (1,141) (3,662) 6,975 15,622 27,366
Provision (benefit) for income
taxes............................ (70) 32 659 406 10,233
------- ------- ------- -------- --------
Net income (loss)................. (1,071) $(3,694) $ 6,316 $ 15,216 $ 17,133
======= ======= ======= ======== ========
Basic earnings (loss) per share:
Earnings (loss) per share....... $ (0.25) $ (0.81) $ 1.26 $ 1.44 $ 0.70
======= ======= ======= ======== ========
Shares used in calculating basic
earnings (loss) per share...... 4,365 4,566 5,006 10,594 24,514
======= ======= ======= ======== ========
Diluted earnings (loss) per share:
Earnings (loss) per share....... $ (0.06) $ (0.21) $ 0.35 $ 0.75 $ 0.62
======= ======= ======= ======== ========
Shares used in calculating
diluted earnings (loss) per
share.......................... 17,194 17,394 17,907 20,294 27,430
======= ======= ======= ======== ========
Consolidated Balance Sheet Data:
Working capital................... $16,753 $13,977 $19,364 $ 77,417 $103,617
Total assets...................... 40,180 37,836 41,814 112,834 150,655
Long-term debt and capital lease
obligations...................... 10,458 8,091 5,854 6,711 10,495
Total stockholders' equity........ 24,805 21,512 27,743 91,634 121,694
</TABLE>
31
<PAGE>
Quarterly Comparisons
The following table sets forth consolidated statements of operations for
each of the Company's last eight quarters. This quarterly information is
unaudited and has been prepared on the same basis as the annual consolidated
financial statements. In management's opinion, this quarterly information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTERLY FINANCIAL INFORMATION FOR FISCAL 1999 AND FISCAL 1998
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999*
------------------------------- -------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $17,053 $18,155 $19,666 $21,744 $23,814 $25,472 $26,972 $28,742
Cost of revenues........ 8,156 8,378 8,836 8,951 9,399 9,347 9,669 9,522
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,897 9,777 10,830 12,793 14,415 16,125 17,303 19,220
Operating expenses:
Research and
development.......... 2,525 3,477 3,337 3,929 4,893 5,454 5,847 6,278
Selling, general and
administrative....... 3,339 3,391 3,530 4,018 4,164 4,296 4,573 5,292
Merger-related costs.. -- -- -- -- -- -- -- 2,350
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 5,864 6,868 6,867 7,947 9,057 9,750 10,420 13,920
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 3,033 2,909 3,963 4,846 5,358 6,375 6,883 5,300
Interest income, net.... 66 85 143 577 853 877 883 837
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 3,099 2,994 4,106 5,423 6,211 7,252 7,766 6,137
Provision for income
taxes.................. 81 78 103 144 2,227 2,584 2,646 2,776
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,018 $ 2,916 $ 4,003 $ 5,279 $ 3,984 $ 4,668 $ 5,120 $ 3,361
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
(diluted).............. $ 0.16 $ 0.16 $ 0.20 $ 0.23 $ 0.15 $ 0.17 $ 0.19 $ 0.12
======= ======= ======= ======= ======= ======= ======= =======
Shares used in
calculating diluted
earnings per share..... 18,941 18,594 20,383 23,257 26,665 27,296 27,619 28,140
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
* The quarterly information for the fiscal year ended March 31, 1999 has been
restated from the information presented in the Company's Quarterly 10-Q
filings for the quarters ended June 30, 1998, September 30, 1998 and
December 31, 1998 to reflect the acquisition of Cimaron Communications
Corporation completed on March 17, 1999 as if the companies had been
combined for the full year.
32
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in the Company's
Annual Report on Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Factors That May Affect Future Results" in the
Company's Form 10-K. 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 statements.
Overview
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by using a
combination of high-frequency analog, mixed-signal and digital design
expertise coupled with system-level knowledge and multiple silicon process
technologies. AMCC believes that its internal bipolar and BiCMOS processes,
complemented by advanced CMOS and silicon germanium processes from external
foundries, enable the Company to offer high-performance, high- speed solutions
optimized for specific applications and customer requirements. The Company
further believes that its products provide significant cost, power,
performance and reliability advantages for system OEMs in addition to
accelerating time-to-market. The Company also leverages its technology to
provide products for the automated test equipment (ATE), high-speed computing
and military markets.
On March 17, 1999, the Company acquired Cimaron Communications Corporation
("Cimaron") in a business combination accounted for as a pooling-of-interests.
Cimaron, which also designs and develops high-bandwidth silicon solutions for
communications equipment manufacturers, became a wholly owned subsidiary of
the Company through the exchange of approximately three million shares of the
Company's Common Stock for all the outstanding stock and options of Cimaron.
The financial statements for fiscal 1999 have been prepared as if the
companies had been combined for the full year and the prior year financial
statements did not require restatement as a result of this business
combination.
33
<PAGE>
Results of Operations
The following table sets forth certain selected consolidated statements of
Income data in dollars and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------
1997 1998 1999
-------------- ------------- --------------
(in thousands, except per share data)
$ % $ % $ %
------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $57,468 100.0% $76,618 100.0% $105,000 100.0%
Cost of revenues................ 30,057 52.3 34,321 44.8 37,937 36.1
------- ----- ------- ----- -------- -----
Gross profit.................... 27,411 47.7 42,297 55.2 67,063 63.9
Operating expenses:
Research and development...... 7,870 13.7 13,268 17.3 22,472 21.4
Selling, general and
administrative............... 12,537 21.8 14,278 18.6 18,325 17.5
Merger-related costs.......... -- -- -- -- 2,350 2.2
------- ----- ------- ----- -------- -----
Total operating expenses.... 20,407 35.5 27,546 35.9 43,147 41.1
------- ----- ------- ----- -------- -----
Operating income................ 7,004 12.2 14,751 19.3 23,916 22.8
Net interest income (expense)... (29) (0.1) 871 1.1 3,450 3.3
------- ----- ------- ----- -------- -----
Income before provision for
income taxes................... 6,975 12.1 15,622 20.4 27,366 26.1
Provision for income taxes...... 659 1.1 406 0.5 10,233 9.8
------- ----- ------- ----- -------- -----
Net income...................... $ 6,316 11.0% $15,216 19.9% $ 17,133 16.3%
======= ===== ======= ===== ======== =====
Diluted earnings per share:
Earnings per share............ $ 0.35 $ 0.75 $ 0.62
======= ======= ========
Shares used in calculating
diluted earnings per share... 17,907 20,294 27,430
======= ======= ========
</TABLE>
Comparison of the Year Ended March 31, 1999 to the Year Ended March 31, 1998
Net Revenues. Net revenues for the year ended March 31, 1999 were
approximately $105.0 million, representing an increase of 37% over net
revenues of approximately $76.6 million for the year ended March 31, 1998.
Revenues from sales of communications products increased 56% in the year ended
March 31, 1999 from $36.6 million or 48% of net revenues for the year ended
March 31, 1998 to $57.3 million or 55% of net revenues for the year ended
March 31, 1999, reflecting unit growth in shipments of existing products, as
well as the introduction of new products for these markets. Revenues from
sales of products to other markets, consisting of the ATE, high-speed
computing and military markets, decreased from 52% of net revenues for the
year ended March 31, 1998, to 45% of net revenues for the year ended March 31,
1999, although revenues from sales to these other markets increased in
absolute dollars. The increase in absolute dollars in revenues attributed to
these other markets was primarily due to $10.0 million of shipments in the
year ended March 31, 1999, relating to the partial fulfillment of an end-of-
life order from Raytheon Systems Co. Total sales to Raytheon Systems Co.
accounted for 16% of net revenues in the year ended March 31, 1999 and were
less than 10% of net revenues in the year ended March 31, 1998. Sales to
Nortel accounted for 20% and 21% of net revenues for the years ended March 31,
1999 and 1998, respectively. In the years ended March 31, 1999 and 1998,
Insight Electronics, Inc., the Company's domestic distributor, accounted for
13% and 11% of net revenues, respectively. Sales outside of North America
accounted for 24% and 23% of net revenues for the years ended March 31, 1999
and 1998, respectively. Although less than seven percent of the Company's
revenues were attributable to sales in Asia for the year ended March 31, 1999,
the recent economic instability in certain Asian countries could adversely
affect the Company's business, financial condition and operating results,
particularly to the extent that this instability impacts the sales of products
manufactured by the Company's customers.
34
<PAGE>
Gross Margin. Gross margin was 63.9% for the year ended March 31, 1999, as
compared to 55.2% for the year ended March 31, 1998. 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, manufacturing 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 rate reflected above, its strategy is to maximize
factory utilization whenever possible, maintain or improve its manufacturing
yields, and focus on the development and sales of high-performance products
that can have higher gross margins. There can be no assurance, however, that
the Company will be successful in achieving these objectives. In addition,
these factors can vary significantly from quarter to quarter, which would
likely result in fluctuations in quarterly gross margin and net income.
Research and Development. Research and development ("R&D") expenses
increased 69% to approximately $22.5 million, or 21.4% of revenues, for the
year ended March 31, 1999, from approximately $13.3 million, or 17.3% of net
revenues, for the year ended March 31, 1998. The substantial increase in R&D
expenses was due to the Company's acquisition of Cimaron, which incurred
approximately $2.5 million of R&D expenses during its fiscal year, and
accelerated new product and process development efforts, including a
$3.2 million increase in compensation costs, and a $3.9 million increase in
prototyping and outside contractor costs. 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 and possibly as a percentage of net
revenues in the future. Currently, R&D expenses are focused on the development
of products and processes for the communications markets, and the Company
expects to continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $18.3 million, or 17.5% of revenues, for
the year ended March 31, 1999, as compared to approximately $14.3 million, or
18.6% of net revenues, for the year ended March 31, 1998. The increase in SG&A
expenses for the year ended March 31, 1999 was primarily due to a $2.1 million
increase in personnel costs, a $500,000 increase in commissions earned by
third-party sales representatives, a $500,000 increase in product promotion
expenses and, a $400,000 increase in legal and accounting costs. A portion of
such increases was due to the Company's acquisition of Cimaron. The decrease
in SG&A expenses as a percentage of net revenues for the year ended March 31,
1999 was a result of net revenues increasing more rapidly than SG&A expenses.
The Company expects SG&A expenses to increase in the future due principally to
additional staffing in the Company's sales and marketing departments, as well
as increased spending on information technology, and increased product
promotion expenses.
Merger-related costs. In March 1999, the Company acquired all of the
outstanding common stock and common stock equivalents of Cimaron
Communications Corporation ("Cimaron") in exchange for approximately three
million shares of the Company's common stock. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Costs
associated with this merger of $2.3 million or $0.08 per diluted share were
expensed in the quarter ended March 31, 1999.
Operating Margin. The Company's operating margin increased to 22.8% of net
revenues for the year ended March 31, 1999, compared to 19.3% for the year
ended March 31, 1998, principally as a result of the increase in gross margin
and decrease in SG&A expenses as a percentage of net revenues, partially
offset by the increase in R&D expenses as a percentage of net revenues.
Net Interest Income. Net interest income increased to $3.5 million for the
year ended March 31, 1999 compared to $871,000 for the year ended March 31,
1998. This increase was due principally to higher interest income from larger
cash and short-term investment balances generated from operations and the
proceeds from the Company's public offerings completed during the second half
of the year ended March 31, 1998.
Income Taxes. The Company's annual effective tax rate for the year ended
March 31, 1999, which approximated statutory rates, was 37.4%, compared to an
effective tax rate of 2.6% for the year ended March 31,
35
<PAGE>
1998. The effective tax rate for the year ended March 31, 1998 was decreased
from statutory rates due to the reduction of a valuation allowance recorded
against deferred tax assets for net operating loss carryforwards and credits.
The Company expects the tax rate for fiscal 2000 to approximate statutory
rates.
Diluted Earnings per share. Diluted earnings per share decreased 17% to
$0.62 in the year ended March 31, 1999, compared to $0.75 for the year ended
March 31, 1998. The decrease reflects the merger related costs of 2.3 million,
the increase in the effective tax rate, and the greater number of shares
outstanding due in part to the Cimaron acquisition, offset in part by the
increase in operating income in fiscal 1999.
Deferred Compensation. In connection with the grant of certain stock options
to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the deemed fair value of the Common Stock at the date of
grant for 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 years ended March 31, 1998 and 1999 were $127,000 and
$860,000, respectively. The Company currently expects to record amortization
of deferred compensation with respect to these option grants of approximately
$658,000, $543,000, $414,000, $330,000 and $178,000 during the fiscal years
ended 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 non-recurring engineering services to be completed
in the next six months was $38.2 million on March 31, 1999, compared to
$30.1 million on March 31, 1998. Included in backlog at March 31, 1999 is the
$9.3 million balance of an order received from Raytheon Systems Co. related to
an end-of-life buy for integrated circuits used in its high speed radar
systems.
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, computer and manufacturing
equipment and facilities Year 2000 ready. The plan covers five stages
including (i) inventory, (ii) assessment, (iii) remediation, (iv) testing, and
(v) contingency planning. The Company has completed the inventory and
assessment stages. The remediation, testing and contingency planning stages
are targeted to be completed by October 1999. The Company will primarily
utilize internal resources to reprogram, or replace where necessary, and test
the software for Year 2000 modifications.
The Company is in the process of communicating with its critical external
suppliers to determine the extent to which the Company may be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where
practicable, the Company will assess and attempt to mitigate its risks with
respect to the failure of these entities to be Year 2000 ready. The effect, if
any, on the Company's results of operations from the failure of such parties
to be Year 2000 ready cannot reasonably be estimated.
The Company has developed contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds, and adjusting staffing
strategies.
The Company has incurred and expensed approximately $200,000 related to the
Year 2000 project and expects to incur an additional $700,000 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
36
<PAGE>
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.
Comparison of the Year Ended March 31, 1998 to the Year Ended March 31, 1997
Net Revenues. Net revenues for the year ended March 31, 1998 were
approximately $76.6 million, representing an increase of 33% over net revenues
of approximately $57.5 million for the year ended March 31, 1997. Revenues
from sales of communications products increased from 44% of net revenues for
the year ended March 31, 1997 to 48% of net revenues for the year ended March
31, 1998, reflecting unit growth in shipments of existing products, as well as
the introduction of new products for these markets. Revenues from sales of
products to other markets, consisting of the ATE, high-speed computing and
military markets, decreased from 56% of net revenues for the year ended March
31, 1997, to 52% of net revenues for the year ended March 31, 1998, although
revenues from sales to these other markets increased in absolute dollars. The
increase in absolute dollars in revenues attributed to these other markets was
primarily due to an increase in shipments of PCI bus products for high-speed
computing applications and to increased shipments of products to the ATE
market. Sales to Nortel accounted for 21% and 20% of net revenues for the
years ended March 31, 1998 and 1997, respectively. In the year ended March
31,1998, one other customer, Insight Electronics, Inc., the Company's domestic
distributor, accounted for 11% of net revenues. Sales outside of North America
accounted for 23% and 21% of net revenues for the years ended March 31, 1998
and 1997, respectively.
Gross Margin. Gross margin was 55.2% for the year ended March 31, 1998, as
compared to 47.7% for the year ended March 31, 1997. The significant increase
in gross margin primarily resulted from increased utilization of the Company's
wafer fabrication facility, as well as a $1.1 million improvement in
manufacturing yields.
Research and Development. Research and development ("R&D") expenses
increased 69% to approximately $13.3 million, or 17.3% of net revenues, for
the year ended March 31, 1998, from approximately $7.9 million, or 13.7% of
net revenues, for the year ended March 31, 1997. The substantial increase in
R&D expenses was due to accelerated new product and process development
efforts including a $3.4 million increase in compensation costs, and a $1.6
million increase in prototyping and outside contractor costs.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $14.3 million, or 18.6% of net revenues,
for the year ended March 31, 1998, as compared to approximately $12.5 million,
or 21.8% of net revenues, for the year ended March 31, 1997. The increase in
SG&A expenses for the year ended March 31, 1998 was primarily due to a
$700,000 increase in compensation costs and a $600,000 increase in commissions
earned by third-party sales representatives. The decrease in SG&A expenses as
a percentage of net revenues for the year ended March 31, 1998 was a result of
net revenues increasing more rapidly than SG&A expenses.
Operating Margin. The Company's operating margin increased to 19.3% of net
revenues for the year ended March 31, 1998, compared to 12.2% for the year
ended March 31, 1997, principally as a result of the increase in gross margin
and decrease in SG&A expenses as a percentage of net revenues, partially
offset by the increase in R&D expenses as a percentage of net revenues.
37
<PAGE>
Net Interest Income. Net interest income increased to $871,000 for the year
ended March 31, 1998 from a net interest expense of $29,000 for the year ended
March 31, 1997. This increase was due principally to a $600,000 increase in
interest income resulting from larger cash and short-term investment balances
generated by the proceeds from the Company's public offerings completed during
the year ended March 31, 1998, as well as a $300,000 decrease in interest
expense associated with outstanding capital lease and debt obligations.
Income Taxes. The Company's annual effective tax rate for the year ended
March 31, 1998 was 2.6%. This was due primarily to the reduction of a
valuation allowance recorded against deferred tax assets for net operating
loss carryforwards and credits in the prior two years. This reduction results
from sufficient levels of income for fiscal 1998, which made the realization
of these deferred tax assets more likely than not. The effective tax rate of
9.5% for the year ended March 31, 1997 was attributable primarily to
alternative minimum taxes ("AMT").
Diluted Earnings per share. Diluted earnings per share increased 114% to
$0.75 in the year ended March 31, 1998, compared to $0.35 for the year ended
March 31, 1997.
Liquidity and Capital Resources
The Company's principal source of liquidity as of March 31, 1999 consisted
of $86.5 million in cash, cash equivalents and short-term investments. Working
capital as of March 31, 1999 was $103.6 million, compared to $77.4 million as
of March 31, 1998. This increase in working capital was primarily due to cash
provided by operating activities and the proceeds from the sale of common
stock, offset by the purchase of property, equipment and other assets.
For the years ended March 31, 1999, 1998 and 1997, net cash provided by
operating activities was $22.0 million, $16.9 million and $11.7 million,
respectively. Net cash provided by operating activities in fiscal 1999
primarily reflected net income before depreciation and amortization expense
plus increased accrued liabilities less increases in accounts receivable and
inventories. Net cash provided by operating activities in fiscal 1998
primarily reflected net income before depreciation and amortization expense
plus increases in accounts payable and accrued liabilities less increases in
accounts receivable and deferred income taxes. Net cash provided by operating
activities in fiscal 1997 primarily reflected net income before depreciation
and amortization expense.
Capital expenditures and the purchase of other assets totaled $16.5 million,
$11.6 million and $4.1 million for the years ended March 31, 1999, 1998 and
1997, respectively, of which $6.7 million, $3.6 million and $1.2 million for
the years ended March 31, 1999, 1998 and 1997, respectively, were financed
using debt or capital leases. In fiscal year 2000, the Company expects to
incur approximately $14.0 million in capital expenditures for manufacturing
and test equipment, computer hardware and software and the acquisition of land
as a site for a potential new wafer fabrication facility. The Company is
exploring alternatives for the expansion of its manufacturing capacity which
would likely occur after fiscal year 2000, including expanding its current 4"
wafer fabrication facility, building a new wafer fabrication facility,
purchasing a wafer fabrication facility and 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 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 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
38
<PAGE>
assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all.
Factors That May Affect Future Results
The Company's results of operations have varied significantly in the past
and may continue to do so in the future. These variations have been, and may
in the future be, due to a number of factors, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. These factors include, but are not limited to: the
rescheduling or cancellation of orders by customers; fluctuations in the
timing and amount of customer requests for product shipments; fluctuations in
manufacturing yields and inventory levels; changes in product mix; the
Company's ability to introduce new products and technologies on a timely
basis; the introduction of products and technologies by the Company's
competitors; the availability of external foundry capacity, purchased parts
and raw materials; competitive pressures on selling prices; the timing of
investments in research and development; market acceptance of the Company's
and its customers' products; the integration of operations and personnel as
the result of the Company's recent acquisition of Cimaron; the timing of
depreciation and other expenses to be incurred by the Company in connection
with the increase of capacity for its existing manufacturing facility and in
connection with its proposed new manufacturing facility; the timing and amount
of recruiting and relocation expenses, prototyping costs and product
promotional expenses; costs associated with future litigation, if any,
including without limitation, litigation relating to the use or ownership of
intellectual property; costs associated with compliance with applicable
environmental regulations; general semiconductor industry conditions; and
general economic conditions. Historically, average selling prices in the
semiconductor industry have decreased over the life of a product, and as a
result, the average selling prices of the Company's products may be subject to
significant pricing pressures in the future. Because the Company is continuing
to increase its operating expenses for personnel and new product development,
and because the Company is limited in its availability to reduce expenses
quickly in response to any revenue short falls, the Company's business,
financial condition and operating results would be adversely affected if
increased sales are not achieved. In addition, the Company's operating results
may be below the expectations of public market analysts or investors, which
could have a material adverse effect on the market price of the Common Stock.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 1999, the Company's investment portfolio includes fixed-income
securities of $73 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 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
Item 8. Financial Statements and Supplementary Data.
Refer to the Index on Page F-l of the Financial Report included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
39
<PAGE>
PART III
Certain information required by Part III is omitted from this report because
the Company will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for
its Annual Meeting of Stockholders to be held August 3, 1999, and the
information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant.
(a) Executive Officers--See the section entitled "Executive Officers of the
Registrant" in Part I, Item 1 hereof.
(b) Directors--the information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Registrant's
Proxy Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and the stock benefit
plan proposals in the Registrant's Proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
sections entitled "Common Stock Ownership of Certain Beneficial Owners and
Management" of the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
section entitled "Transactions with Management" in the Registrant's Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<C> <S> <C>
(1) Financial Statements
The financial statements of the Company are included herein as
required under Item 8 of this Annual Report on Form 10-K. See
Index on page F-l.
(2) Financial Statement Schedules:
The financial statement schedules of the Company are included in
Part IV of this report:
For the three fiscal years ended March 31, 1999 -- II Valuation
and Qualifying Accounts
(3) Exhibits (numbered in accordance with Item 601 of Regulated S-K)
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
The following exhibits are filed or incorporated by reference into this
report.
(a) Exhibits
<TABLE>
<C> <S>
2.1(8) Agreement and Plan of Merger dated as of March 3, 1999 among Applied
Micro Circuits Corporation, Wiley Acquisition Corporation and Cimaron
Communications Corporation.
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
4.1(3) Specimen Stock Certificate.
10.1(3) Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of
Option Agreement.
10.3(3) 1992 Stock Option Plan, as amended, and form of Option Agreement.
</TABLE>
40
<PAGE>
<TABLE>
<C> <S>
10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement.
10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement.
10.6(3) 401(k) Plan, effective April 1, 1985, and form of Enrollment
Agreement.
10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase
Agreement, dated December 8, 1983.
10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated
September 16, 1987.
10.9(3) Industrial Real Estate Lease, dated October 29, 1996, between the
Registrant and ADI Mesa Partners AMCC, L.P. (the Sequence Drive
Lease).
10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the
Registrant and Mira Mesa Business Park (the Oberlin Drive Lease).
10.11(3) Security Agreements, dated January 30, 1992 by and between the
Registrant and Roger Smullen.
10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between
the Registrant and Roger Smullen.
10.13(3) Loan Agreement, dated May 1, 1996, and Exercise Notice and Restricted
Stock Purchase Agreements, dated July 23, 1997 by and between
Registrant and David Rickey.
10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997
and July 23, 1997 by and between the Registrant and David Rickey.
10.15(3) Patent License Agreement, dated January 1, 1998, as amended by and
between Registrant and Motorola, Inc.
10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and
between Registrant and International Business Machines Corporation.
10.17(3) Patent License Agreement, dated June 1, 1997 by and between
Registrant and International Business Machines Corporation.
10.18(3) Letter Agreement, dated January 30, 1996 by and between the
Registrant and David Rickey.
10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and
between Registrant and Alcatel Network Systems, Inc.
10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2
Purchase Agreement, dated September 16, 1987 and Convertible
Preferred Stock, Series 3 Purchase Agreement, dated September 16,
1987.
10.21(4) Loan Agreement Secured by Property, dated February 19, 1998 by and
between Registrant and Laszlo Gal and Agnes Gal.
10.22(4) Note Secured by Deed of Trust, dated February 19, 1998 by and between
Registrant and Laszlo Gal and Agnes Gal.
10.23(4) Loan and Pledge Agreement, dated February 19, 1998 by and between
Registrant and Anil Bedi.
10.24(6) 1998 Employee Stock Purchase Plan and form of Subscription Agreement
10.25(7) Agreements related to the Company's right to acquire land:
a) Ground Lease, by and between Applied Micro Circuits Corporation
and Kilroy Realty L.P.
b) Agreement for Consulting Services
10.26 1998 Stock Incentive Plan of Cimaron Communications Corporation
adopted by Registrant in merger transaction, effective March 17,
1999.
10.27 Employment Agreement by and between Registrant and Gary Martin.
10.28 Employment Agreement by and between Registrant and Ramakrishna
Sudireddy.
10.29 Agreement to Sell and Purchase and Escrow Instructions to Acquire
Land by and between Kilroy Realty, L.P. and Registrant dated January
8, 1999.
10.30 Lease of Engineering Building by and between Kilroy Realty, L.P. and
Registrant dated February 17, 1999.
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
10.31 *Custom Sales Agreement by and between Registrant and International
Business Machines
11.1(5) Computation of Per Share Data under SFAS No. 128.
21.1 Subsidiary of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 42).
27.1 Financial Data Schedules.
</TABLE>
- --------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated by reference to Exhibit 3.2 filed with the Company's
Registration Statement (No. 333-37609) filed October 10, 1997, or with any
Amendments thereto, which registration statement became effective November
24, 1997.
(2) Incorporated by reference to Exhibit 3.4 filed with the Company's
Registration Statement (No. 333-37609) filed October 10, 1997, or with any
Amendments thereto, which registration statement became effective November
24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-37609) filed October 10, 1997,
or with any Amendments thereto, which registration statement became
effective November 24, 1997.
(4) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-46071) filed February 11, 1998,
or with any Amendments thereto, which registration statement became
effective March 12, 1998.
(5) The Computation of Per Share Data under SFAS No. 128 is included on page
F-10 of this report.
(6) Incorporated by reference to Appendix I filed with the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders filed on June 15,
1998.
(7) Incorporated by reference to identically numbered exhibits filed with the
Company's Quarterly Report, Form 10-Q filed November 16, 1998.
(8) Incorporated by reference to identically numbered exhibit filed with the
Company's Registration Statement on Form S-3 (No. 333-76185) filed April
13, 1998.
The following exhibits are filed or incorporated by reference into this
report.
(b) Current reports on Form 8-K. The Registrant filed the following current
reports on Form 8-K with the Commission during the fourth quarter of the
fiscal year ended March 31, 1999:
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
APPLIED MICRO CIRCUITS CORPORATION
/s/ David M. Rickey
By:__________________________________
David M. Rickey
President and Chief Executive
Officer
Date: June 21, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David M. Rickey and William E. Bendush, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
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 in the capacities and on the dates indicated.
Signature Title Date
/s/ David M. Rickey President and Chief June 21, 1999
- ----------------------------------- Executive Officer
David M. Rickey
/s/ William E. Bendush Chief Financial June 21, 1999
- ----------------------------------- Officer
William E. Bendush
/s/ Roger A. Smullen, Sr. Director and June 21, 1999
- ----------------------------------- Chairman of the
Roger A. Smullen, Sr. Board of Directors
/s/ William K. Bowes, Jr. Director June 21, 1999
- -----------------------------------
Williams K. Bowes, Jr.
/s/ R. Clive Ghest Director June 21, 1999
- -----------------------------------
R. Clive Ghest
/s/ Franklin P. Johnson, Jr. Director June 21, 1999
- -----------------------------------
Franklin P. Johnson, Jr.
/s/ Arthur B. Stabenow Director June 21, 1999
- -----------------------------------
Arthur B. Stabenow
/s/ Harvey P. White Director June 21, 1999
- -----------------------------------
Harvey P. White
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999............. F-3
Consolidated Statements of Income for the fiscal years ended March 31,
1997, 1998 and 1999.................................................. F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended March 31, 1997, 1998 and 1999.................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended March
31, 1997, 1998 and 1999.............................................. F-6
Notes to Consolidated Financial Statements............................ F-7-F-18
</TABLE>
F-1
<PAGE>
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, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Micro Circuits Corporation at March 31, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Diego, California
April 21, 1999
F-2
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 6,460 $ 13,530
Short-term investments--available-for-sale............... 61,436 73,010
Accounts receivable, net of allowance for doubtful
accounts of $350 and $177 at March 31, 1998 and 1999,
respectively............................................ 12,179 19,275
Inventories.............................................. 8,185 9,813
Deferred income taxes.................................... 3,882 4,573
Notes receivable from officer and employees.............. 87 815
Other current assets..................................... 2,297 4,004
-------- --------
Total current assets................................... 94,526 125,020
Property and equipment, net................................ 17,218 23,128
Other assets............................................... 1,090 2,507
-------- --------
Total assets............................................. $112,834 $150,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 5,215 $ 5,131
Accrued payroll and related expenses..................... 5,057 4,689
Other accrued liabilities................................ 2,344 7,207
Deferred revenue......................................... 1,873 1,439
Current portion of long-term debt........................ 567 1,862
Current portion of capital lease obligations............. 2,053 1,075
-------- --------
Total current liabilities.............................. 17,109 21,403
Long-term debt, less current portion....................... 2,736 4,995
Long-term capital lease obligations, less current portion.. 1,355 2,563
Commitments and contingencies (Notes 7 and 11).............
Stockholders' equity:
Preferred Stock, $0.01 par value:
Authorized shares--2,000, none issued and outstanding... -- --
Common Stock, $0.01 par value:
Authorized shares--60,000 at March 31, 1998 and 1999,
respectively...........................................
Issued and outstanding shares--22,536 and 26,612 at
March 31, 1998 and 1999, respectively.................. 225 266
Additional paid-in capital............................... 86,660 102,525
Deferred compensation, net............................... (472) (2,123)
Accumulated other comprehensive income (loss)............ -- (33)
Retained earnings........................................ 5,722 21,514
Notes receivable from stockholders....................... (501) (455)
-------- --------
Total stockholders' equity............................. 91,634 121,694
-------- --------
Total liabilities and stockholders' equity............... $112,834 $150,655
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year ended March
31,
-------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues......................................... $57,468 $76,618 $105,000
Cost of revenues..................................... 30,057 34,321 37,937
------- ------- --------
Gross profit......................................... 27,411 42,297 67,063
Operating expenses:
Research and development........................... 7,870 13,268 22,472
Selling, general and administrative................ 12,537 14,278 18,325
Merger-related costs............................... -- -- 2,350
------- ------- --------
Total operating expenses......................... 20,407 27,546 43,147
------- ------- --------
Operating income..................................... 7,004 14,751 23,916
Interest income (expense), net....................... (29) 871 3,450
------- ------- --------
Income before income taxes........................... 6,975 15,622 27,366
Provision for income taxes........................... 659 406 10,233
------- ------- --------
Net income........................................... $ 6,316 $15,216 $ 17,133
======= ======= ========
Basic earnings per share:
Earnings per share................................. $ 1.26 $ 1.44 $ 0.70
======= ======= ========
Shares used in calculating basic earnings per
share............................................. 5,006 10,594 24,514
======= ======= ========
Diluted earnings per share:
Earnings per share................................. $ 0.35 $ 0.75 $ 0.62
======= ======= ========
Shares used in calculating diluted earnings per
share............................................. 17,907 20,294 27,430
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated Notes
Stock Common Stock Additional Other Retained Receivable Total
-------------- -------------- Paid-In Deferred Comprehensive Earnings From Stockholders'
Shares Amount Shares Amount Capital Compensation Income (Loss) (Deficit) Stockholders Equity
------ ------ ------ ------ ---------- ------------ ------------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996.............. 1,223 $ 12 4,968 $ 49 $ 36,971 $ -- $ -- $(15,444) $ (76) $ 21,512
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 93 1 41 -- -- -- -- 42
Repurchase of
common stock..... -- -- (36) -- (38) -- -- (107) -- (145)
Payments on
notes............ -- -- -- -- -- -- -- -- 18 18
Net income....... -- -- -- -- -- -- -- 6,316 -- 6,316
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1997.............. 1,223 12 5,025 50 36,974 -- -- (9,235) (58) 27,743
Issuance of
Common Stock, net
of issuance
costs............ -- -- 5,039 51 51,942 -- -- -- -- 51,993
Conversion of
convertible
preferred stock
to common Stock.. (1,051) (11) 10,717 107 (96) -- -- -- -- --
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 1,702 17 858 -- -- -- (455) 420
Net exercise of
warrants......... -- -- 53 -- -- -- -- -- -- --
Payments on
notes............ -- -- -- -- -- -- -- -- 12 12
Repurchase of
convertible
preferred stock.. (172) (1) -- -- (3,617) -- -- (259) -- (3,877)
Deferred
compensation
related to stock
options.......... -- -- -- -- 599 (599) -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 127 -- -- -- 127
Net Income....... -- -- -- -- -- -- -- 15,216 -- 15,216
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1998.............. -- -- 22,536 225 86,660 (472) -- 5,722 (501) 91,634
Issuance of stock
upon formation of
Cimaron.......... -- -- 2,344 24 4,640 (230) -- -- -- 4,434
Issuance of
common stock
under employee
stock purchase
plans............ -- -- 417 4 3,175 -- -- -- -- 3,179
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 1,315 13 2,524 (964) -- -- -- 1,573
Tax Benefit of
disqualifying
dispositions..... -- -- -- -- 4,209 -- -- -- -- 4,209
Payment on notes. -- -- -- -- -- -- -- -- 46 46
Deferred
compensation
related to stock
options and
restricted stock. -- -- -- -- 1,317 (1,317) -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 860 -- -- -- 860
Adjustment for
change in Cimaron
Communications
Corporation's
year end......... -- -- -- -- -- -- -- (1,341) -- (1,341)
Comprehensive
Income:
Net income...... -- -- -- -- -- -- -- 17,133 -- 17,133
Unrealized loss
on short-term
investments, net
of tax benefit.. -- -- -- -- -- -- (33) -- -- (33)
--------
Total
comprehensive
income........... -- -- -- -- -- -- -- -- -- 17,100
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1999.............. -- $ -- 26,612 $266 $102,525 $(2,123) $(33) $ 21,514 $(455) $121,694
====== ==== ====== ==== ======== ======= ==== ======== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income................................... $ 6,316 $ 15,216 $ 17,133
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 5,185 5,174 7,045
Write-offs of inventories.................... 452 600 180
Amortization of deferred compensation........ -- 127 860
Loss on disposals of property................ -- -- 221
Adjustment for change in Cimaron year end.... -- -- (1,341)
Changes in operating assets and liabilities:
Accounts receivables........................ 1,058 (3,761) (7,096)
Inventories................................. (1,146) (1,255) (1,808)
Other current assets........................ (116) (1,607) (678)
Accounts payable............................ (1,553) 2,787 (84)
Accrued payroll and other accrued
liabilities................................ 1,562 2,418 8,704
Deferred income taxes....................... -- (3,882) (691)
Deferred revenue............................ (25) 1,067 (434)
-------- --------- ---------
Net cash provided by operating activities.. 11,733 16,884 22,011
Investing Activities
Proceeds from sales and maturities of short-
term investments............................ 7,944 66,547 187,787
Purchase of short-term investments........... (11,512) (119,874) (199,394)
Repayments and (advances) on notes receivable
from officers and employees................. (608) (366) 262
Purchase of property, equipment and other
assets...................................... (2,855) (11,342) (16,490)
-------- --------- ---------
Net cash used for investing activities..... (7,031) (65,035) (27,835)
Financing Activities
Proceeds from issuance of common stock, net.. 42 52,413 9,062
Repurchase of common stock................... (145) -- --
Repurchase of convertible preferred stock.... -- (3,877) --
Payments on notes receivable from
stockholders................................ 18 12 46
Payments on capital lease obligations........ (2,824) (2,691) (2,110)
Payments on long-term debt................... (582) (37) (792)
Proceeds from equipment financed under
capital leases.............................. -- -- 2,342
Issuance of long-term debt................... -- 3,303 4,346
-------- --------- ---------
Net cash provided by (used for) financing
activities................................ (3,491) 49,123 12,894
-------- --------- ---------
Net increase in cash and cash equivalents.. 1,211 972 7,070
Cash and cash equivalents at beginning of year. 4,277 5,488 6,460
-------- --------- ---------
Cash and cash equivalents at end of year....... $ 5,488 $ 6,460 $ 13,530
======== ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest..................................... $ 656 $ 380 $ 542
======== ========= =========
Income taxes................................. $ 770 $ 3,251 $ 4,274
======== ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of approximately $1.2 million and $282,000 were
incurred during fiscal years 1997 and 1998, respectively. During the fiscal
year 1998, notes were received for the exercise of stock options totaling
$455,000.
See accompanying notes.
F-6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
The Company designs, develops, manufactures and markets high-performance,
high-bandwidth silicon solutions for the world's communications
infrastructure.
Basis of Presentation
The consolidated financial statements include all the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. On March 17,
1999, the Company acquired Cimaron Communications Corporation ("Cimaron") in a
business combination accounted for as a pooling-of-interests. Cimaron, which
also designs and develops high-bandwidth silicon solutions for communications
equipment manufacturers, became a wholly owned subsidiary of the Company
through the exchange of approximately three million shares of the Company's
common stock for all the outstanding stock and stock options of Cimaron. The
accompanying financial statements for fiscal 1999 have been prepared as if the
companies had been combined for the full year, and as more fully discussed in
Note 2, the prior year financial statements did not require restatement as a
result of this business combination.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of money market type funds and highly
liquid debt instruments with original maturities of three months or less at
the date of acquisition. Short-term investments consist of United States
Treasury notes, obligations of U.S. government agencies and corporate bonds.
The Company maintains its excess cash in financial institutions with strong
credit ratings and has not experienced any significant losses on its
investments.
The Company classifies its short-term investments as "Available-for-Sale"
and records such assets at the estimated fair value with unrealized gains and
losses excluded from earnings and reported, net of tax, in comprehensive
income. The basis for computing realized gains or losses is by specific
identification.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Estimated
Cost Gains Losses Fair Value
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
At March 31, 1999:
U.S. treasury securities and
obligations of U.S. government
agencies........................ $21,740 $ 22 $ 72 $21,690
U.S. corporate debt securities... 51,321 16 17 51,320
------- -------- -------- -------
$73,061 $ 38 $ 89 $73,010
======= ======== ======== =======
At March 31, 1998:
U.S. treasury securities and
obligations of U.S. government
agencies........................ $15,908
U.S. corporate debt securities... 45,528
-------
$61,436
=======
</TABLE>
The estimated fair value of the short term investments was equal to the
amortized cost at March 31, 1998.
F-7
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Due in one year or less.......................................... $48,918
Due after one year through two years............................. 16,775
Greater than two years........................................... 7,317
-------
$73,010
=======
</TABLE>
Fair Value of Financial Instruments
The carrying value of cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities and long term debt
approximates fair value.
Concentration of Credit Risk
The Company believes that the concentration of credit risk in its trade
receivables is mitigated by the Company's credit evaluation process,
relatively short collection terms and dispersion of its customer base. The
Company generally does not require collateral and has not experienced
significant losses on trade receivables from any particular customer or
geographic region for any period presented.
The Company invests its excess cash in debt instruments of the U.S.
Treasury, governmental agencies and corporations with strong credit ratings.
The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant losses on its
cash equivalents or short-term investments.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. These
estimates include assessing the collectability of accounts receivable, the use
and recoverability of inventory, estimates to complete engineering contracts,
costs of future product returns under warranty and provisions for
contingencies expected to be incurred. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. The Company's inventory valuation process is done
on a part-by-part basis. Lower of cost or market adjustments, specifically
identified on a part-by-part basis, reduce the carrying value of the related
inventory and take into consideration reductions in sales prices, excess
inventory levels and obsolete inventory. Once established, these adjustments
are considered permanent and are not reversed until the related inventory is
sold or disposed.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (3 to 7 years) using the straight line method.
Leasehold improvements are stated at cost and amortized over the useful life
of the asset. Property and equipment under capital leases are recorded at the
net present value of the minimum lease payments and are amortized over the
useful life of the assets. Leased assets purchased at the expiration of the
lease term are capitalized at acquisition cost.
F-8
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of", the Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Through March 31,
1999, the Company has not experienced any such impairments.
Advertising Cost
Advertising costs are expensed as incurred.
Revenues
Revenues related to product sales are generally recognized when the products
are shipped to the customer. Recognition of revenues and the related cost of
revenues on shipments to distributors that are subject to terms of sale
allowing for price protection and right of return on products unsold by the
distributor are deferred until the distributor's ability to return the
products or its' rights to price protection lapse or have been limited.
Revenues on engineering design contracts are recognized using the percentage-
of-completion method based on actual cost incurred to date compared to total
estimated costs of the project. Deferred revenue represents both the margin on
shipments of products to distributors that will be recognized when the
distributors ship the products to their customers or the right of return has
lapsed and billings in excess and estimated earnings on uncompleted
engineering design contracts.
Warranty Reserves
Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual
experience.
Research and Development
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to new product development,
designing significant improvements to existing products and new process
development.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee and director stock options
because the alternative fair value accounting provided for under SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), requires the use of
option valuation models that were not developed for use in valuing employee
and director stock options. Under SFAS 123 compensation cost is determined
using the fair value of stock-based compensation determined as of the grant
date, and is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to continue using the
current implicit value accounting method specified in APB 25 to account for
stock-based compensation and disclose in the footnotes to the financial
statements the pro forma effect of using the fair value method for its stock
based compensation.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
F-9
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Earnings per share are computed in accordance with SFAS No. 128 "Earnings
Per Share." Basic earnings per share are computed using the weighted average
number of common shares outstanding during each period. Diluted earnings per
share includes the dilutive effect of common shares potentially issuable upon
the exercise of stock options.
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Shares used in basic earnings per share computations--
weighted average common shares outstanding........... 5,006 10,594 24,514
Effect of assumed conversion of Preferred Stock from
date of issuance..................................... 12,828 7,434 --
Net effect of dilutive common share equivalents based
on treasury stock method............................. 73 2,266 2,916
------ ------ ------
Shares used in diluted earnings per share
computations......................................... 17,907 20,294 27,430
====== ====== ======
</TABLE>
New Accounting Standards
Effective April 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131. "Segment Information". SFAS No. 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including unrealized gains
and losses on investments is reported, net of their related tax effect, to
arrive at comprehensive income. SFAS No. 131 amends the requirements for
public enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment.
2. ACQUISITIONS
On March 17, 1999, AMCC acquired all of the outstanding Common Stock and
Common Stock equivalents of Cimaron in exchange for approximately three
million shares of the Company's Common Stock. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Prior to
the combination, Cimaron, which was incorporated on January 2, 1998, had a
fiscal year end of December 31, 1998. In recording the business combination,
Cimaron's results of operations for the fiscal year ended December 31, 1998
were combined with AMCC's for the fiscal year ended March 31, 1999. Cimaron's
net sales and net loss for the three month period ended March 31, 1999 were
$110,000 and $(1,341,000), respectively. In accordance with Accounting
Principles Board Opinion No. 16 ("APB No. 16"), Cimaron's results of
operations and cash flows for the three month period ended March 31, 1999 have
been added directly to the retained earnings and cash flows of AMCC and
excluded from reported fiscal 1999 results of operations.
The combined Company realized a charge in the fourth quarter of fiscal 1999
of approximately $3.1 million related to the estimated costs of the merger.
Approximately $700,000 of these total merger costs were incurred
F-10
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by Cimaron and are not reflected in the Company's results of operations for
the fourth quarter of fiscal 1999 because they are included in Cimaron's
results of operations which are reflected as a charge directly to retained
earnings.
In April 1998, the Company acquired Ten Mountains Design which designs and
develops high bandwidth analog devices for communications equipment suppliers
and optical module manufacturers. The purchase price was approximately
$330,000 and resulted in recording intangible assets of approximately $280,000
which will be amortized over three years. The financial statements include the
results of operation for Ten Mountains Design from the date of acquisition.
3. CERTAIN FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Inventories (in thousands):
Finished goods......................................... $ 1,817 $ 975
Work in process........................................ 5,161 7,688
Raw materials.......................................... 1,207 1,150
-------- --------
$ 8,185 $ 9,813
======== ========
Property and equipment (in thousands):
Machinery and equipment................................ $ 25,983 $ 34,413
Leasehold improvements................................. 7,476 7,641
Computers, office furniture and equipment.............. 13,219 16,654
-------- --------
46,678 58,708
Less accumulated depreciation and amortization........... (29,460) (35,580)
-------- --------
$ 17,218 $ 23,128
======== ========
Other accrued liabilities (in thousands):
Income taxes payable................................... $ 888 $ 3,329
Accrued merger-related costs........................... -- 1,893
Other.................................................. 1,456 1,985
-------- --------
$ 2,344 $ 7,207
======== ========
</TABLE>
The cost and accumulated amortization of machinery and equipment under
capital leases at March 31, 1999 were approximately $10.5 million and $8.5
million, respectively ($10.0 million and $7.2 million, at March 31, 1998,
respectively). Amortization of assets held under capital leases is included
with depreciation expense.
During the years ended March 31, 1997, 1998 and 1999, the Company earned
interest income of $627,000, $1,252,000 and $3,992,000, respectively, and
incurred interest expense of $656,000, $381,000 and $542,000, respectively.
4. LONG-TERM DEBT
During Fiscal 1999, the Company had an equipment line of credit with a bank
which expired on March 31, 1999. Borrowings of $7.1 million under the line of
credit were converted into term notes, with payments totaling $141,000,
payable over 53 to 60 months, and interest rates between 6.44% to 7.42%. At
March 31, 1999, $6.3 million was outstanding on the notes.
F-11
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 31, 1998, the Company entered into an equipment line of credit with
a bank. The line of credit provided for borrowings of up to $1,000,000 at the
bank's prime rate plus .5% (8.25% at March 31, 1999). The Company paid off the
outstanding balance of $565,000 including accrued interest on April 1, 1999.
Principal maturities of the notes payable at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending March 31, (in thousands):
<S> <C>
2000............................................................. $1,862
2001............................................................. 1,394
2002............................................................. 1,495
2003............................................................. 1,603
2004 ............................................................ 503
------
$6,857
======
</TABLE>
5. STOCKHOLDERS' EQUITY
Stock Offerings
In December 1997, the Company completed an initial public offering of its
Common Stock. The offering raised net proceeds to the Company of approximately
$25.1 million. In March 1998, the Company completed a secondary public
offering of Common Stock in which the Company raised net proceeds of
approximately $26.9 million.
Convertible Preferred Stock
On April 24, 1997 the Board authorized the Company to repurchase up to $4.0
million of Convertible Preferred Stock, with priority given to the holders of
Convertible Preferred Stock that submitted bids for the sale of their shares
of Convertible Preferred Stock at the lowest price per share. On June 20,
1997, the Company repurchased an aggregate of 172,300 shares of Convertible
Preferred Stock for approximately $3.9 million at prices between $1.20 and
$2.61 per share on an as converted to common stock basis. In connection with
the initial public offering, all then outstanding shares of Convertible
Preferred Stock immediately converted into 10,717,317 shares of Common Stock.
Preferred Stock
In November 1997, the Certificate of Incorporation was amended to allow the
issuance of up to 2,000,000 shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restriction thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series of the designation of such series, without
further vote or action by the stockholders.
Stock Options and Other Stock Awards
The Company's 1992 Stock Option Plan ("1992 Plan") provides for the granting
of incentive and nonqualified stock options to employees. Generally, options
are granted at prices at least equal to fair value of the Company's Common
Stock on the date of grant. In addition, certain officers, employees and
directors have been granted nonqualified stock options. The Company's 1982
Employee Incentive Stock Option Plan expired in 1992.
In connection with the Company's acquisition of Cimaron, the Company assumed
options and other stock awards granted under Cimaron's 1998 Stock Incentive
Plan ("The Incentive Plan") covering 657,153 shares of
F-12
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock at a weighted average exercise price of $.23 per share. The terms
of the plan provides for the granting of options, restricted stock, or other
stock based awards ("stock awards") to employees, officers, directors,
consultants and advisors. Generally, the stock awards are granted at prices at
least equal to the fair value of the Company's Common Stock on the date of
grant. A total of 1,016,365 shares of Common Stock were authorized for
issuance under the Incentive Plan. At March 31, 1999, 564,358 restricted
shares had been issued under the Incentive Plan.
Options and other stock awards under the plans expire not more than ten
years from the date of grant and are either immediately exercisable after the
date of grant but are subject to certain repurchase rights by the Company, at
the Company's option, until such ownership rights have vested or exercisable
upon vesting. Vesting generally occurs over four to five years. At March 31,
1998 and 1999, 651,842 and 869,626 shares of Common Stock were subject to
repurchase, respectively.
Pursuant to an employment agreement entered into during January 1996,
between the Company and an executive, the Company granted an option to
purchase 800,000 shares of the Company's Common Stock at $0.53 per share under
the 1992 Stock Option Plan. The option vests ratably over four years. In the
event the Company is acquired, the agreement stipulates that under certain
circumstances the executive is eligible for certain additional compensation.
These options as well as 66,667 additional options issued in April 1997 were
exercised in July 1997. The exercise was paid for with various notes, which
aggregated $455,000 and bear interest at rates between 5.98% and 6.54%, and
are due at the earlier of February 12, 2000 ($420,000) and April 9, 2001
($35,000) or the termination of employment.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value of the options was estimated at the date of grant
using the minimum value method for grants prior to the initial public offering
and the Black Scholes method for grants after the initial public offering
using the following weighted average assumptions for fiscal year 1997 and
1998; risk free interest rate of 6%; an expected option life of four years; no
annual dividends, and an expected volatility of .92 (used only for the options
valued using the Black Scholes method.). For options granted in fiscal year
1999, the fair value of the options was estimated at the date of the grant
using the following assumptions; risk free interest rate of 6%; an expected
life of four to five years; no annual dividends and an expected volatility of
.89.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized ratably to expenses over the vesting period of such
options. The effects of applying SFAS No. 123 for pro forma disclosure
purposes are not likely to be representative of the effects on pro forma net
income in future years because they do not take into consideration pro forma
compensation expenses related to grants made prior to 1996.
The Company's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Net income:
As reported......................................... $6,316 $15,216 $17,133
Pro forma........................................... $6,225 $14,856 $13,202
Earnings per share:
As reported:
Basic............................................. $ 1.26 $ 1.44 $ 0.70
Diluted........................................... $ 0.35 $ 0.75 $ 0.62
Pro forma:
Basic............................................. $ 1.24 $ 1.40 $ 0.54
</TABLE>
F-13
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended March
31,
------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Diluted.............................................. $0.35 $0.73 $ 0.48
Weighted fair value of options granted during the year... $0.15 $6.84 $21.07
</TABLE>
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information are as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------
1997 1998 1999
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,690,160 $0.51 2,842,293 $0.51 2,682,451 $ 6.87
Granted............... 1,457,285 0.53 1,798,873 10.00 1,520,141 18.46
Exercised............. (92,680) 0.45 (1,701,620) 0.51 (1,314,581) 1.19
Forfeited............. (212,472) 0.53 (257,095) 0.64 (214,667) 8.32
--------- ----- ---------- ----- ---------- ------
Outstanding at end of
year................... 2,842,293 $0.51 2,682,451 $6.87 2,673,344 $16.13
========= ===== ========== ===== ========== ======
Vested at end of year... 851,764 $0.51 635,050 $0.60 678,615 $ 7.25
========= ===== ========== ===== ========== ======
</TABLE>
The following is a further breakdown of the options outstanding at March 31,
1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 0.13--$ 0.98 1,043,660 7.60 $ 0.52
$ 3.90--$ 8.25 201,926 8.51 $ 7.69
$ 8.19--$23.63 665,774 9.03 $22.57
$23.88--$43.63 761,984 9.60 $34.10
-------------- --------- ---- ------
$ 0.13--$43.63 2,673,344 8.60 $16.13
============== ========= ==== ======
</TABLE>
From April 1, 1997 through September 30, 1997, the Company recorded deferred
compensation expense for the difference between the exercise price and the
fair value for financial statement presentation purposes of the Company's
Common Stock, as determined by the Board of Directors, for all options granted
in the period. This deferred compensation aggregates to $599,000, which is
being amortized ratably over the four year vesting period of the related
options. Additionally, during the year ended March 31, 1999, the Company
recorded deferred compensation related to restricted stock and stock options
granted to founders and employees of Cimaron of $2.5 million. Such amount is
being amortized over the related vesting period, generally five years.
Amortization of deferred compensation during fiscal years 1998 and 1999 was
$127,000 and $860,000, respectively.
Employee Stock Purchase Plans
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 400,000 shares of Common Stock are
reserved for issuance under the 1997 Purchase Plan. At March 31, 1999, 393,874
shares had been issued under the 1997 Purchase Plan.
F-14
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was approved by the stockholders on August 4, 1998. A total of 400,000 shares
are authorized for issuance under the 1998 Purchase Plan. At March 31, 1999,
23,308 shares had been issued under the 1998 Purchase Plan.
Under the terms of the plans, purchases are made semiannually on January 31
and July 31 and the purchase price of the Common Stock is equal to 85% of the
fair market value of the Common Stock on the first or last day of the offering
period, whichever is lower.
1997 Directors' Stock Option Plan
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 200,000 shares of Common Stock are
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of non-statutory options to nonemployee directors of the
Company. At March 31, 1999, no shares had been issued under the Directors'
Plan.
Common Shares Reserved for Future Issuance
At March 31, 1999, the Company has the following shares of Common Stock
reserved for issuance upon the exercise of equity instruments:
<TABLE>
<S> <C>
Stock Options:
Issued and outstanding........................................... 2,673,344
Authorized for future grants..................................... 1,724,785
Stock purchase plans............................................... 382,818
---------
4,780,947
=========
</TABLE>
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
1997 1998 1999
---- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $380 $ 3,606 $ 9,860
State............................................... 279 682 1,064
---- ------- -------
Total current..................................... 659 4,288 10,924
Deferred:
Federal............................................. -- (3,558) (362)
State............................................... -- (324) (329)
---- ------- -------
Total deferred.................................... -- (3,882) (691)
---- ------- -------
$659 $ 406 $10,233
==== ======= =======
</TABLE>
The provision for income taxes reconciles to the amount computed by applying
the federal statutory rate (35%) to income before income taxes as follows (in
thousands):
F-15
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
$ % $ % $ %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory rate......... $ 2,441 35% $ 5,468 35% $ 9,578 35%
Increase (decrease) in valuation
allowance of deferred tax assets..... (2,343) (34) (5,094) (32) -- --
Foreign sales corporation............. -- -- (309) (2) (387) (1)
Federal alternative minimum tax....... 380 5 -- -- -- --
State taxes, net of federal benefit... 181 3 233 1 478 1
Federal tax credits................... -- -- (281) (2) (1,216) (5)
Merger costs and deferred
compensation......................... -- -- -- -- 763 3
Other................................. -- -- 389 3 1,017 4
------- --- ------- --- ------- ---
$ 659 9% $ 406 3% $10,233 37%
======= === ======= === ======= ===
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 1998 and 1999 are as shown
below. At March 31, 1998, the effective tax rate is computed based on a full
reduction of the valuation allowance and realization of the deferred tax
asset.
<TABLE>
<CAPTION>
March 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets (in thousands):
Inventory write-downs and other reserves....................... $1,814 $1,850
Net operating loss carryforwards............................... -- 1,719
Capitalization of inventory and research and development costs. 242 313
Research and development credit carryforwards.................. 898 298
Depreciation and amortization.................................. 242 --
State income taxes............................................. 239 47
Other credit carryforwards..................................... 447 447
------ ------
Total deferred tax assets...................................... 3,882 4,674
Deferred tax liabilities:
Depreciation and amortization.................................. -- 101
------ ------
Net deferred tax assets.......................................... $3,882 $4,573
====== ======
</TABLE>
At March 31, 1999, the Company has federal alternative minimum tax and
federal and state research and development tax credit carryforwards of
approximately $447,000, $195,000 and $103,000, respectively, which will begin
to expire in 2007 unless previously utilized. The Company also has federal and
state net operating loss carryforwards of approximately $4,043,000 which will
expire in 2018 and 2003, respectively, unless previously utilized. These net
operating loss carryforwards are the result of the operating losses generated
by the Company's subsidiary, Cimaron, prior to the acquisition. Under Internal
Revenue Code Section 382 and 383, the Company's use of its tax loss
carryforwards and tax credit carryforwards could be limited in the event of
certain cumulative changes in the Company's stock ownership.
7. COMMITMENTS
In July 1998, the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for a potential new wafer fabrication
facility. This parcel of land is located approximately one quarter mile from
the Company's headquarters in San Diego, California. The Company has made
payments of $1.0 million
F-16
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
related to this transaction. In December 1998, the Company exercised its right
to acquire the land which commits the Company to take title to the land by May
31, 1999 upon payment of an additional $3.7 million.
The Company leases certain of its facilities under long-term operating
leases which expire at various dates through 2011. The lease agreements
frequently include renewal provisions, which require the Company to pay taxes,
insurance and maintenance costs and contain escalation clauses based upon
increases in the Consumer Price Index or defined rent increases. The Company
also leases certain software under noncancellable operating leases expiring
through 2002.
Annual future minimum lease payments, including machinery and equipment
under capital leases as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending March 31, Leases Leases
- --------------------- --------- -------
<S> <C> <C>
2000....................................................... $ 3,473 $1,332
2001....................................................... 3,713 907
2002....................................................... 4,581 765
2003....................................................... 4,052 478
2004....................................................... 1,998 835
Thereafter................................................. 6,155 --
------- ------
Total minimum lease payments............................. $23,972 4,317
=======
Less amount representing interest............................ 679
------
Present value of remaining minimum capital lease payments
(including current portion of $1,075)....................... $3,638
======
</TABLE>
Rent expense (including short-term leases and net of sublease income) for
the years ended March 31, 1997, 1998, and 1999 was $1.2 million, $1.2 million,
and $1.4 million, respectively. Sublease income was $208,000, $119,000 and $0
for the years ended March 31, 1997, 1998 and 1999, respectively.
8. RELATED PARTY TRANSACTIONS
At March 31, 1998 and 1999, the Company had outstanding notes receivables
from officer(s) of $1,065,000, and $915,000, respectively. These notes bear
interest at the rates of 4.62% to 5.76%, and are due at the earlier of one to
three years from the date of the note or termination of employment with the
Company.
9. EMPLOYEE RETIREMENT PLAN
Effective January 1, 1986, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all full-time
employees with greater than three months of service. The Retirement Plan
provides for voluntary employee contributions from 1% to 20% of annual
compensation, subject to a maximum limit allowed by Internal Revenue Service
guidelines. The Company may contribute such amounts as determined by the Board
of Directors. Employer contributions vest to participants at a rate of 20% per
year of service, provided that after five years of service all past and
subsequent employer contributions are 100% vested. The contributions charged
to operations totaled $318,000, $412,000 and $573,000 for the years ended
March 31, 1997, 1998 and 1999, respectively.
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%,
respectively, of net revenues were from Nortel. In 1998 and 1999, Insight
Electronics, the Company's domestic distributor, accounted for 11% and 13% of
net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of
net revenues. No other customer accounted for more than 10% of revenues in any
period.
F-17
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues:
United States........................................ $34,424 $44,448 $ 61,760
Canada............................................... 10,943 14,204 18,011
Europe and Israel.................................... 8,216 13,773 18,136
Asia................................................. 3,885 4,193 7,093
------- ------- --------
$57,468 $76,618 $105,000
======= ======= ========
</TABLE>
11. CONTINGENCIES
The Company is party to various claims and legal actions arising in the
normal course of business, including notification of possible infringement on
the intellectual property rights of third parties. In addition, since 1993 the
Company has been named as a potentially responsible party ("PRP") along with a
large number of other companies that used Omega Chemical Corporation ("Omega")
in Whittier, California to handle and dispose of certain hazardous waste
material. The Company is a member of a large group of PRPs that has agreed to
fund certain remediation efforts at the Omega site for which the Company has
accrued approximately $50,000. Although the ultimate outcome of these matters
is not presently determinable, management believes that the resolution of all
such pending matters, net of amounts accrued, will not have a material adverse
affect on the Company's financial position or liquidity; however, there can be
no assurance that the ultimate resolution of these matters will not have a
material impact on the Company's results of 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 26 companies, including the
Company, 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. The Company is monitoring this matter and, although the ultimate
outcome of this matter is not currently determinable, the Company believes,
based in part on the licensing terms previously offered by the Lemelson
Partnership, that the resolution of this matter will not have a material
adverse effect on the Company's financial position or liquidity; however,
there can be no assurance that the ultimate resolution of this matter will not
have a material adverse effect on the Company's results of operations in any
period.
F-18
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
------------------
Charged Charged
Balance at to Costs to Other Balance
Beginning and Accounts- at End
Description of Period Expenses Describe Deductions of Period
----------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Allowance for doubtful
accounts.................. $350 $ 50 $-- $223 $177
Year ended March 31, 1998:
Allowance for doubtful
accounts.................. $200 $157 $-- $ 7 $350
Year ended March 31, 1997:
Allowance for doubtful
accounts.................. $ 90 $198 $88 $ -- $200
</TABLE>
F-19
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.26
<SEQUENCE>2
<DESCRIPTION>1998 STOCK INCENTIVE PLAN
<TEXT>
<PAGE>
EXHIBIT B
EXHIBIT 10.26
Cimaron Communications Corporation
1998 Stock Incentive Plan
-------------------------
1. Purpose
-------
The purpose of this 1998 Stock Incentive Plan (the "Plan") of Cimaron
Communications Corporation, a Delaware corporation (the "Company"), is to
advance the interests of the Company's stockholders by enhancing the Company's
ability to attract, retain and motivate persons who make (or are expected to
make) important contributions to the Company by providing such persons with
equity ownership opportunities and performance-based incentives and thereby
better aligning the interests of such persons with those of the Company's
stockholders. Except where the context otherwise requires, the term "Company"
shall include any present or future subsidiary corporations of Cimaron
Communications Corporation as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (the
"Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been granted
an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered
------------------------------------
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
1
<PAGE>
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the common
stock, $.001 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean
the Board or a Committee of the Board or the executive officer referred to in
Section 3(b) to the extent that the Board's powers or authority under the Plan
have been delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 8, Awards may
----------------
be made under the Plan for up to 2,556,250 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan, subject however, in the case
of Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 500,000 per calendar year. The per-
participant limit described in this Section 4(b) shall be construed and applied
consistently with Section 162(m) of the Code.
2
<PAGE>
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each, an
-------
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereto which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(e) Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option Agreement,
(i) delivery of an irrevocable and unconditional undertaking by a creditworthy
broker to deliver promptly to the Company sufficient funds to pay the exercise
price, (ii) delivery by the Participant to the Company of a copy of irrevocable
and unconditional instructions to a creditworthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price or (iii)
delivery of shares of Common Stock owned by the Participant valued at their fair
market value as
3
<PAGE>
determined by the Board in good faith ("Fair Market Value"), which Common Stock
was owned by the Participant at least six months prior to such delivery;
(3) to the extent permitted by the Board and explicitly provided in an
Option Agreement (i) by delivery of a promissory note of the Participant to the
Company on terms determined by the Board, or (ii) by payment of such other
lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and any such
--------------------
Restricted Stock Award, including the conditions for repurchase (or forfeiture)
and the issue price, if any. Any stock certificates issued in respect of a
Restricted Stock Award shall be registered in the name of the Participant and,
unless otherwise determined by the Board, deposited by the Participant, together
with a stock power endorsed in blank, with the Company (or its designee). At the
expiration of the applicable restriction periods, the Company (or such designee)
shall deliver the certificates no longer subject to such restrictions to the
Participant or if the Participant has died, to the beneficiary designated, in a
manner determined by the Board, by a Participant to receive amounts due or
exercise rights of the Participant in the event of the Participant's death (the
"Designated Beneficiary"). In the absence of an effective designation by a
Participant, Designated Beneficiary shall mean the Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
4
<PAGE>
8. Changes in Capitalization: Acquisition Events
---------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of security available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per share
subject to each outstanding Restricted Stock Award, and (iv) the terms of each
other outstanding stock-based Award shall be appropriately adjusted by the
Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 8(a) applies and Section 8(b) also
applies to any event, Section 8(b) shall be applicable to such event, and this
Section 8(a) shall not be applicable.
(b) Acquisition Events
------------------
(1) Consequences of Acquisition Events. Upon the occurrence of an
----------------------------------
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that
outstanding Awards other than Restricted Stock Awards shall be assumed, or
equivalent awards shall be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof), provided that any Options substituted for
Incentive Stock Options shall satisfy, in the determination of the Board, the
requirements of Section 424(a) of the Code; provided, however, that if the
-------- -------
acquiring or succeeding corporation (or an affiliate thereof) does not agree to
assume, or substitute for, such Awards, then:
(i) with respect to outstanding Options, the Board shall (x) upon written
notice to the Participants, provide that all then unexercised Options will
become exercisable in full as of a specified time (the "Acceleration Time")
prior to the Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event except to the extent exercised by the
Participants before the consummation of such Acquisition Event and/or (y) in the
event of an Acquisition Event under the terms of which holders of Common Stock
will receive upon consummation thereof a cash payment for each share of Common
Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"),
provide that all outstanding Options shall terminate upon consummation of such
Acquisition Event and each Participant shall receive, in exchange therefor, a
cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options;
5
<PAGE>
(ii) with respect to outstanding Restricted Stock Awards, the repurchase
and other rights of the Company under such Award shall inure to the benefit of
the Company's successor and shall apply to the securities or other property
which the Common Stock was converted into or exchanged for pursuant to such
Acquisition Event in the same manner and to the same extent as they applied to
the Common Stock subject to such Award; and
(iii) with respect to other outstanding Awards, the Board shall specify the
effect of an Acquisition Event on any other Award granted under the Plan at the
time of the grant of such Award.
(2) Definition. An "Acquisition Event" shall mean: (a) any merger or
----------
consolidation of the Company with or into another entity, other than one in
which the Common Stock is not converted into or exchanged for the right to
receive cash, securities or other property, (b) any sale of all or substantially
all of the assets of the Company or (c) any exchange of shares of the Company
for cash, securities or other property pursuant to a statutory share exchange
transaction.
9. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise
-------------------------
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board need
not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
6
<PAGE>
(e) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may satisfy such tax obligations in whole or
in part in shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any
--------------------------------------
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
7
<PAGE>
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option is adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the close of
business on the record date for such stock dividend and the close of business on
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
-------------------------------
date on which it is adopted by the Board. No Awards shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on which
the Plan was adopted by the Board or (ii) the date the Plan was approved by the
Company's stockholders, but Awards previously granted may extend beyond that
date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time.
(e) Governing Law. The provisions of the Plan and all Awards made hereunder
-------------
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.
8
<PAGE>
Cimaron Communications Corporation
Restricted Stock Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
AGREEMENT made this ___ day of __________, 19__, between Cimaron
Communications Corporation, a Delaware corporation (the "Company"), and
________________________ (the "Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
-------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set
forth in this Agreement and in the Company's 1998 Stock Incentive Plan (the
"Plan")______ shares (the "Shares") of common stock, $.001 par value, of the
Company ("Common Stock"), at a purchase price of $._______ per share. The
aggregate purchase price for the Shares shall be paid by the Participant by
check payable to the order of the Company or such other method as may be
acceptable to the Company. Upon receipt by the Company of payment for the
Shares, the Company shall issue to the Participant one or more certificates
in the name of the Participant for that number of Shares purchased by the
Participant. The Participant agrees that the Shares shall be subject to the
Purchase Option set forth in Section 2 of this Agreement and the restrictions
on transfer set forth in Section 4 of this Agreement.
2. Purchase Option.
----------------
(a) In the event that the Participant ceases to be employed by the Company
for any reason or no reason, with or without cause, prior to ___________
[five years from employment
<PAGE>
or commencement], the Company shall have the right and option (the "Purchase
Option") to purchase from the Participant, for a sum of $______ per share
(the "Option Price"), some or all of the Unvested Shares. "Unvested Shares"
means the total number of Shares multiplied by the Applicable Percentage at
the time the Purchase Option becomes exercisable by the Company. The
"Applicable Percentage" shall begin as 100% and shall be reduced according to
the schedule on Exhibit A.
---------
(b) Notwithstanding the foregoing, in the event of an Acquisition of the
Company (as defined below), the Applicable Percentage shall, immediately
prior to the Closing of the Acquisition, be decreased by (i) 20% of the total
number of Shares, if the Participant has been employed by the Company for 12
or more months prior to the Acquisition, or (ii) 10% of the total number of
Shares, if the Participant has been employed by the Company for less than 12
months prior to the Acquisition. Thereafter, the Applicable Percentage shall
be reduced in accordance with the total schedule set forth in the immediately
preceding paragraph, except that such schedule shall be shortened by 12
months (in the case of an Applicable Percentage reduction under clause (i)
above) or six months (in the case of an Applicable Percentage reduction under
clause (ii) above).
(c) "Acquisition" shall mean (i) the consolidation or merger of the
Company (other than a merger to reincorporate the Corporation in a different
jurisdiction) into or with any other entity or entities in which the shares
of the Corporation outstanding immediately prior to the closing of such event
represent or are converted into shares of the surviving or resulting entity
that represent less than a majority of the total number of shares of the
surviving or resulting entity that are outstanding or are reserved for
issuance upon the exercise or conversion of outstanding securities
immediately after the closing of such event, or (ii) the sale or transfer of
fifty percent (50%) or more of the capital stock of the Corporation in a
single transaction or series of related transactions or (iii) the sale of all
or substantially all of the assets of the Company.
(d) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
<PAGE>
3. Exercise of Purchase Option and Closing.
----------------------------------------
(a) The Company may exercise the Purchase Option by
delivering or mailing to the Participant (or his estate), within
60 days after the termination of the employment of the
Participant with the Company, a written notice of exercise of the
Purchase Option. Such notice shall specify the number of Shares
to be purchased. If and to the extent the Purchase Option is not
so exercised by the giving of such a notice within such 60-day
period, the Purchase Option shall automatically expire and
terminate effective upon the expiration of such 60-day period.
(b) Within 10 days after his receipt of the Company's
notice of the exercise of the Purchase Option pursuant to
subsection (a) above, the Participant (or his estate) shall
tender to the Company at its principal offices the certificate or
certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this
Agreement, duly endorsed in blank or with duly endorsed stock
powers attached thereto, all in form suitable for the transfer of
such Shares to the Company. Promptly following its receipt of
such certificate or certificates, the Company shall deliver or
mail to the Participant a check in the amount of the aggregate
Option Price therefor.
(c) After the time at which any Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to
the Participant on account of such Shares or permit the
Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding
indebtedness of the Participant to the Company or in cash (by
check) or both.
(e) The Company shall not purchase any fraction of a Share
upon exercise of the Purchase Option, and any fraction of a Share
resulting from a computation made pursuant to Section 2 of
<PAGE>
this Agreement shall be rounded to the nearest whole Share (with
any one-half Share being rounded upward).
4. Restrictions on Transfer.
------------------------
(a) The Participant shall not sell, assign, transfer,
pledge, hypothecate or otherwise dispose of, by operation of law
or otherwise (collectively "transfer"):
(b) any Shares, or any interest therein, that are subject
to the Purchase Option, except that the Participant may transfer
such Shares to or for the benefit of any parent, spouse, child or
grandchild, or to a trust for their benefit, provided that such
--------
Shares shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in this Section
4, the Purchase Option and the right of first refusal set forth
in Section 5) and such permitted transferee shall, as a condition
to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement; or
(c) any Shares, or any interest therein, that are no longer
subject to the Purchase Option, except in accordance with Section
5 below.
5. Right of First Refusal.
----------------------
(a) If the Participant proposes to transfer any Shares that
are no longer subject to the Purchase Option (either because they
are no longer Unvested Shares or because the Purchase Option
expired unexercised), then the Participant shall first give
written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed
transferee and state the number of such Shares he proposes to
transfer the ("Offered Shares"), the price per share and all
other material terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer
Notice, the Company shall have the option to purchase all (but
not less than all) of the Offered Shares at the price and upon
the terms set forth in the Transfer Notice. In the event the
Company elects to
<PAGE>
purchase all of the Offered Shares, it shall give written notice
of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant
shall tender to the Company at its principal offices the
certificate or certificates representing the Offered Shares, duly
endorsed in blank by the Participant or with duly endorsed stock
powers attached thereto, all in form suitable for transfer of the
Offered Shares to the Company. Promptly following receipt of such
certificate or certificates, the Company shall deliver or mail to
the Participant a check in payment of the purchase price for the
Offered Shares; provided that if the terms of payment set forth
-------- ----
in the Transfer Notice were other than cash against delivery, the
Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the
Offered Shares, the Participant may, within the 30-day period
following the expiration of the option granted to the Company
under subsection (b) above, transfer the Offered Shares to the
proposed transferee, provided that such transfer shall not be on
-------- ----
terms and conditions more favorable to the transferee than those
contained in the Transfer Notice. Notwithstanding any of the
above, all Offered Shares transferred pursuant to this Section 5
shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in Section 4
and the right of first refusal set forth in this Section 5) and
such transferee shall, as a condition to such transfer, deliver
to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of
this Agreement.
(d) After the time at which the Offered Shares are required
to be delivered to the Company for transfer to the Company
pursuant to subsection (b) above, the Company shall not pay any
dividend to the Participant on account of such Offered Shares or
permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Shares, but shall,
in so far as permitted by law, treat the Company as the owner of
such Offered Shares.
(e) The following transactions shall be exempt from the
provisions of this Section 5:
<PAGE>
(i) a transfer of Shares to or for the benefit of any
parent, spouse, child or grandchild of the Participant, or
to a trust for their benefit;
(ii) any transfer pursuant to an effective registration
statement filed by the Company under the Securities Act of
1933, as amended (the "Securities Act"); and
(iii) any transfer of the shares pursuant to the sale of
all or substantially all of the business of the Company;
provided, however, that in the case of a transfer pursuant
-------- -------
to clause (1) above, such Shares shall remain subject to
this Agreement (including without limitation the
restrictions on transfer set forth in Section 4 and the
right of first refusal set forth in this Section 5) and such
transferee shall as a condition to such transfer, deliver to
the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions
of this Agreement.
(f) The Company may assign its rights to purchase Offered
Shares in any particular transaction under this Section 5 to one
or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon
the earlier of the following events:
(i) the closing of the sale of shares of Common Stock
in an underwritten public offering pursuant to an effective
registration statement filed by the Company under the
Securities Act at a price to the public of at least $5.00
per share (subject to appropriate adjustments for stock
splits, stock dividends, combinations and other similar
recapitalizations affecting such shares) resulting in gross
proceeds to the Company of at least $10,000,000; or
(ii) an Acquisition.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten
public offering of the Company's securities pursuant to a registration
statement under the Securities Act, (i) not to sell, make short sale
of, loan, grant any
<PAGE>
options for the purchase of, or otherwise dispose of any shares of
Common Stock held by the Participant (other than those shares included
in the offering) without the prior written consent of the Company or
the underwriters managing such initial underwritten public offering of
the Company's securities for a period of 180 days from the effective
date of such registration statement, and (ii) to execute any agreement
reflecting clause (i) above as may be requested by the Company or the
managing underwriters at the time of such initial public offering.
7. Effect of Prohibited Transfer.
------------------------------
The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
8. Escrow.
-------
The Participant shall, upon the execution of this Agreement, execute
Joint Escrow Instructions in the form attached to this Agreement as
Exhibit B. The Joint Escrow Instructions shall be delivered to the
- ---------
Secretary of the Company, as escrow agent thereunder. The Participant
shall deliver to such escrow agent a stock assignment duly endorsed in
blank and hereby instructs the Company to deliver to such escrow
agent, on behalf of the Participant, the certificate(s) evidencing the
Shares issued hereunder. Such materials shall be held by such escrow
agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
-------------------
All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other
legends that may be required under federal or state securities laws:
(i) "The shares of stock represented by this certificate
are subject to restrictions on transfer and an option to
purchase set forth in a certain Stock Restriction Agreement
between the corporation and the registered owner of these
shares (or his predecessor in interest), and such Agreement
is available for inspection without charge at the office of
the Secretary of the corporation."
<PAGE>
available for at least one year and even then will not be available unless
a public market then exists for the Common Stock, adequate information
concerning the Company is then available to the public, and other terms and
conditions of Rule 144 are complied with; and (iv) there is now no
registration statement on file with the Securities and Exchange Commission
with respect to any stock of the Company and the Company has no obligation
or current intention to register the Shares under the Securities Act.
12. Withholding Taxes; Section 83(b) Election.
------------------------------------------
(a) The Participant acknowledges and agrees that the Company has the
right to deduct from payments of any kind otherwise due to the Participant
any federal, state or local taxes of any kind required by law to be
withheld with respect to the purchase of the Shares by the Participant or
the lapse of the Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed
with the Internal Revenue Service within 30 days of the transfer of shares
to the Participant; and that the Participant is solely responsible for
making such election.
<PAGE>
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold, transferred or otherwise disposed of in the
absence of an effective registration statement under such
Act or an opinion of counsel satisfactory to the corporation
to the effect that such registration is not required."
10. Provisions of the Plan.
-----------------------
This Agreement is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this Agreement.
11. Investment Representations.
---------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with,
any distribution of the Shares in violation of the Securities Act, or any
rule or regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed
adequate to obtain from representatives of the Company such information as
is necessary to permit him to evaluate the merits and risks of his
investment in the Company.
(c) The Participant has sufficient experience in business, financial
and investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision with
respect to such purchase.
(d) The Participant can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within
the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be
sold, transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration is
then available; (iii) in any event, the exemption from registration under
Rule 144 will not be
<PAGE>
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
and each other provision of this Agreement shall be severable and enforceable to
the extent permitted by law.
14. Waiver.
-------
Any provision for the benefit of the Company contained in this Agreement may be
waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
---------------
This Agreement shall be binding upon and inure to the benefit of the Company and
the Participant and their respective heirs, executors, administrators, legal
representatives, successors and assigns, subject to the restrictions on transfer
set forth in Sections 4 and 5 of this Agreement.
16. Notice.
-------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
---------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
-----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
<PAGE>
19. Amendment.
----------
This Agreement may be amended or modified only by a written instrument executed
by both the Company and the Participant.
<PAGE>
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CIMARON COMMUNICATIONS
CORPORATION
By:____________________________
Title:_________________________
200 Brickstone Square
Andover, MA 01810
PARTICIPANT
_______________________________
Name: _________________________
Address:_______________________
_______________________________
<PAGE>
Exhibit A
---------
<TABLE>
<CAPTION>
If Cessation of Employment Occurs: Applicable Percentage:
- --------------------------------------------------------------------------------
<S> <C>
Before [1 year from commencement] 100%
On or after [1 year] but before [1.25 years] 80%
On or after [1.25 years] but before [1.50 years] 75%
On or after [1.50 years] but before [1.75 years] 70%
On or after [1.75 years] but before [2 years] 65%
On or after [2 years] but before [2.25 years] 60%
On or after [2.25 years] but before [2.50 years] 55%
On or after [2.50 years] but before [2.75 years] 50%
On or after [2.75 years] but before [3 years] 45%
On or after [3 years] but before [3.25 years] 40%
On or after [3.25 years] but before [3.50 years] 35%
On or after [3.50 years] but before [3.75 years] 30%
On or after [3.75 years] but before [4 years] 25%
On or after [4 years] but before [4.25 years] 20%
On or after [4.25 years] but before [4.50 years] 15%
On or after [4.50 years] but before [4.75 years] 10%
On or after [4.75 years] but before [5 years] 5%
On or after [5 years] -0-
</TABLE>
<PAGE>
Exhibit B
---------
CIMARON COMMUNICATIONS CORPORATION
Joint Escrow Instructions
-------------------------
________________, 199__
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
Dear Sir:
As Escrow Agent for Cimaron Communications Corporation, a Delaware
corporation (the "Company"), and the undersigned Participant ("Holder"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Agreement (the "Agreement") of
even date herewith, to which a copy of these Joint Escrow Instructions is
attached, in accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does
hereby irrevocably constitute and appoint you as his attorney-in-fact and
agent for the term of this escrow to execute with respect to such Shares all
documents necessary or appropriate to make such Shares negotiable and to
complete any transaction herein contemplated. Subject to the provisions of
this paragraph 1 and the terms of the Agreement, Holder shall exercise all
rights and privileges of a stockholder of the Company while the Shares are
held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice
specifying the purchase price for the Shares, as determined pursuant to the
Agreement, and the time for a closing hereunder (the "Closing") at the
principal office of the
<PAGE>
Company. Holder and the Company hereby irrevocably authorize and direct you to
close the transaction contemplated by such notice in accordance with the terms
of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any
Shares as to which the Purchase Option (as defined in the Agreement) has
terminated or expired.
5. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in
good faith and in the exercise of your own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be
conclusive evidence of such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any
court, you shall not be liable to any of the parties hereto or to any other
person, firm or Company by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
<PAGE>
9. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or
defend any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit
in the United States Post Office, by registered or certified mail with postage
and fees prepaid, addressed to each of the other parties thereunto entitled at
the following addresses, or at such other addresses as a party may designate
by ten days' advance written notice to each of the other parties hereto.
COMPANY: Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's signature below.
ESCROW AGENT:
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
<PAGE>
By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.
This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
CIMARON COMMUNICATIONS
CORPORATION
By: _____________________________
Title:_____________________________
200 Brickstone Square
Andover, MA 01810
HOLDER:
___________________________________
Name: _____________________________
ESCROW AGENT: Address: Address: __________________________
______________________
______________________
_____________________________ Date Signed: ______________________
<PAGE>
Cimaron Communications Corporation
Restricted Stock Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
AGREEMENT made this ___ day of___________, 199___, between
Cimaron Communications Corporation, a Delaware corporation (the
"Company"), and __________________________ (the "Participant").
For valuable consideration, receipt of which is acknowledged, the
parties hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the
Participant shall purchase from the Company, subject to the terms
and conditions set forth in this Agreement and in the Company's
1998 Stock Incentive Plan (the "Plan")______ shares (the
"Shares") of common stock, $.001 par value, of the Company
("Common Stock"), at a purchase price of $.___ per share. The
aggregate purchase price for the Shares shall be paid by the
Participant by check payable to the order of the Company or such
other method as may be acceptable to the Company. Upon receipt by
the Company of payment for the Shares, the Company shall issue to
the Participant one or more certificates in the name of the
Participant for that number of Shares purchased by the
Participant. The Participant agrees that the Shares shall be
subject to the Purchase Option set forth in Section 2 of this
Agreement and the restrictions on transfer set forth in Section 4
of this Agreement.
2. Purchase Option.
---------------
(a) In the event that the Participant ceases to be employed
by the Company for any reason or no reason, with or without
cause, prior to ___________ [five years from employment
<PAGE>
or commencement], the Company shall have the right and option
(the "Purchase Option") to purchase from the Participant, for a
sum of $___ per share (the "Option Price"), some or all of the
Unvested Shares. "Unvested Shares" means the total number of
Shares multiplied by the Applicable Percentage at the time the
Purchase Option becomes exercisable by the Company. The
"Applicable Percentage" shall begin as 100% and shall be reduced
according to the schedule on Exhibit A.
---------
(b) Notwithstanding the foregoing, in the event of an
Acquisition of the Company (as defined below), the Applicable
Percentage shall, immediately prior to the closing of the
Acquisition, be decreased by (i) 20% of the total number of
Shares, if the Participant has been employed by the Company for
12 or more months prior to the Acquisition, or (ii) 30% of the
total number of Shares, if the Participant has been employed by
the Company for less than 12 months prior to the Acquisition.
Thereafter, the Applicable Percentage shall be reduced in
accordance with the total schedule set forth in the immediately
preceding paragraph, except that such schedule shall be shortened
by 12 months (in the case of an Applicable Percentage reduction
under clause (i) above) or 18 months (in the case of an
Applicable Percentage reduction under clause (ii) above), and
further, if Participant's employment is terminated Without Cause
(as defined below) prior to the first anniversary of the date of
the Acquisition, 50% of such Participant's then remaining
Unvested Shares shall become vested as of such date of
termination.
For the purposes of this Section 2(b) "Without Cause" shall mean
(a) termination of the Participant's employment for any reason
other than (1) the breach by such Participant of either the
Noncompetition Agreement or the Nondisclosure and Developments
Agreement entered into by such Participant in favor of the
Company, (2) the commission by such Participant of an act of
fraud or embezzlement, (3) the deliberate disregard by such
Participant of the rules or policies of the Company, which
disregard is not remedied within 30 days after written notice
from the Company describing such disregard, or the commission by
the Participant of any other action with the intent to injure
materially the Company, (4) such Participant being found guilty
or entering a plea of nolo contendre in a criminal court of a
felony; or (5) such Participant's willful breach of duty or
habitual neglect of duty, or refusal to comply with any
reasonable or proper direction given by or on behalf of the Board
of Directors which breach, neglect or refusal is not remedied
within 30 days after written notice from the Company describing
such breach, neglect or refusal, and (b) a material reduction of
such Participant's
<PAGE>
responsibility or a reduction in such Participant's cash
compensation without a correlating increase in other compensation
or benefits or the required relocation of the Participant's
principal place of employment to a new location more than sixty
(60) miles distant from the immediately preceding principal place
of employment.
(c) "Acquisition" shall mean (i) the consolidation or merger of
the Company (other than a merger to reincorporate the Corporation
in a different jurisdiction) into or with any other entity or
entities in which the shares of the Corporation outstanding
immediately prior to the closing of such event represent or are
converted into shares of the surviving or resulting entity that
represent less than a majority of the total number of shares of
the surviving or resulting entity that are outstanding or are
reserved for issuance upon the exercise or conversion of
outstanding securities immediately after the closing of such
event, or (ii) the sale or transfer of fifty percent (50%) or
more of the capital stock of the Corporation in a single
transaction or series of related transactions or (iii) the sale
of all or substantially all of the assets of the Company.
(d) For purposes of this Agreement, employment with the Company
shall include employment with a parent or subsidiary of the
Company.
3. Exercise of Purchase Option and Closing.
----------------------------------------
(a) The Company may exercise the Purchase Option by delivering
or mailing to the Participant (or his estate), within 60 days
after the termination of the employment of the Participant with
the Company, a written notice of exercise of the Purchase Option.
Such notice shall specify the number of Shares to be purchased.
If and to the extent the Purchase Option is not so exercised by
the giving of such a notice within such 60-day period, the
Purchase Option shall automatically expire and terminate
effective upon the expiration of such 60-day period.
(b) Within 10 days after his receipt of the Company's notice of
the exercise of the Purchase Option pursuant to subsection (a)
above, the Participant (or his estate) shall tender to the
Company at its principal offices the certificate or certificates
representing the Shares which the Company has elected to purchase
in accordance with the terms of this Agreement, duly
<PAGE>
endorsed in blank or with duly endorsed stock powers attached
thereto, all in form suitable for the transfer of such Shares to
the Company. Promptly following its receipt of such certificate
or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price
therefor.
(c) After the time at which any Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to
the Participant on account of such Shares or permit the
Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding
indebtedness of the Participant to the Company or in cash (by
check) or both.
(e) The Company shall not purchase any fraction of a Share upon
exercise of the Purchase Option, and any fraction of a Share
resulting from a computation made pursuant to Section 2 of this
Agreement shall be rounded to the nearest whole Share (with any
one-half Share being rounded upward).
4. Restrictions on Transfer.
-------------------------
(a) The Participant shall not sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or
otherwise (collectively "transfer"):
(b) any Shares, or any interest therein, that are subject to the
Purchase Option, except that the Participant may transfer such
Shares to or for the benefit of any parent, spouse, child or
grandchild, or to a trust for their benefit, provided that such
--------
Shares shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in this Section
4, the Purchase Option and the right of first refusal set forth
in Section 5) and such permitted transferee shall, as a condition
to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement; or
<PAGE>
(c) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.
5. Right of First Refusal.
-----------------------
(a) If the Participant proposes to transfer any Shares that are
no longer subject to the Purchase Option (either because they are
no longer Unvested Shares or because the Purchase Option expired
unexercised), then the Participant shall first give written
notice of the proposed transfer (the "Transfer Notice") to the
Company. The Transfer Notice shall name the proposed transferee
and state the number of such Shares he proposes to transfer the
("Offered Shares"), the price per share and all other material
terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer Notice,
the Company shall have the option to purchase all (but not less
than all) of the Offered Shares at the price and upon the terms
set forth in the Transfer Notice. In the event the Company elects
to purchase all of the Offered Shares, it shall give written
notice of such election to the Participant within such 30-day
period. Within 10 days after his receipt of such notice, the
Participant shall tender to the Company at its principal offices
the certificate or certificates representing the Offered Shares,
duly endorsed in blank by the Participant or with duly endorsed
stock powers attached thereto, all in form suitable for transfer
of the Offered Shares to the Company. Promptly following receipt
of such certificate or certificates, the Company shall deliver or
mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same
terms and conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered
Shares, the Participant may, within the 30-day period following
the expiration of the option granted to the Company under
subsection (b) above, transfer the Offered Shares to the proposed
transferee, provided that such transfer shall not be on
-------- ----
<PAGE>
terms and conditions more favorable to the transferee than
those contained in the Transfer Notice. Notwithstanding any of
the above, all Offered Shares transferred pursuant to this
Section 5 shall remain subject to this Agreement (including
without limitation the restrictions on transfer set forth in
Section 4 and the right of first refusal set forth in this
Section 5) and such transferee shall, as a condition to such
transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement.
(d) After the time at which the Offered Shares are required to
be delivered to the Company for transfer to the Company
pursuant to subsection (b) above, the Company shall not pay any
dividend to the Participant on account of such Offered Shares
or permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Shares, but shall,
in so far as permitted by law, treat the Company as the owner
of such Offered Shares.
(e) The following transactions shall be exempt from the
provisions of this Section 5:
(i) a transfer of Shares to or for the benefit of any
parent, spouse, child or grandchild of the Participant,
or to a trust for theft benefit;
(ii) any transfer pursuant to an effective registration
statement filed by the Company under the Securities Act
of 1933, as amended (the "Securities Act"); and
(iii) any transfer of the shares pursuant to the sale of
all or substantially all of the business of the Company;
provided, however, that in the case of a transfer
pursuant to clause (1) above, such Shares shall remain
subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and
the right of first refusal set forth in this Section 5)
and such transferee shall as a condition to such
transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of
the terms and conditions of this Agreement.
<PAGE>
(f) The Company may assign its rights to purchase Offered
Shares in any particular transaction under this Section 5 to
one or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon the
earlier of the following events:
(i) the closing of the sale of shares of Common Stock
in an underwritten public offering pursuant to an effective
registration statement filed by the Company under the
Securities Act at a price to the public of at least $5.00
per share (subject to appropriate adjustments for stock
splits, stock dividends, combinations and other similar
recapitalizations affecting such shares) resulting in gross
proceeds to the Company of at least $10,000,000; or
(ii) an Acquisition.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten
public offering of the Company's securities pursuant to a registration
statement under the Securities Act, (i) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock held by the Participant (other than
those shares included in the offering) without the prior written
consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period
of 180 days from the effective date of such registration statement,
and (ii) to execute any agreement reflecting clause (i) above as may
be requested by the Company or the managing underwriters at the time
of such initial public offering.
7. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
8. Escrow.
------
<PAGE>
The Participant shall, upon the execution of this Agreement, execute
Joint Escrow Instructions in the form attached to this Agreement as
Exhibit B. The Joint Escrow Instructions shall be delivered to the
- ---------
Secretary of the Company, as escrow agent thereunder. The Participant
shall deliver to such escrow agent a stock assignment duly endorsed in
blank and hereby instructs the Company to deliver to such escrow
agent, on behalf of the Participant, the certificate(s) evidencing the
Shares issued hereunder. Such materials shall be held by such escrow
agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other
legends that may be required under federal or state securities laws:
(i) "The shares of stock represented by this certificate are
subject to restrictions on transfer and an option to
purchase set forth in a certain Stock Restriction Agreement
between the corporation and the registered owner of these
shares (or his predecessor in interest), and such Agreement
is available for inspection without charge at the office of
the Secretary of the corporation."
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended,
and may not be sold, transferred or otherwise disposed of
in the absence of an effective registration statement under
such Act or an opinion of counsel satisfactory to the
corporation to the effect that such registration is not
required."
10. Provisions of the Plan.
----------------------
This Agreement is subject to the provisions of the Plan, a copy of
which is furnished to the Participant with this Agreement.
11. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own
account for investment only, and not with a view to, or for
sale in connection with, any
<PAGE>
distribution of the Shares in violation of the Securities Act, or any
rule or regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed
adequate to obtain from representatives of the Company such information
as is necessary to permit him to evaluate the merits and risks of his
investment in the Company.
(c) The Participant has sufficient experience in business, financial
and investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision with
respect to such purchase.
(d) The Participant can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for
an indefinite period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act, (ii) the Shares
cannot be sold, transferred or otherwise disposed of unless they are
subsequently registered under the Securities Act or an exemption from
registration is then available; (iii) in any event, the exemption from
registration under Rule 144 will not be available for at least one year
and even then will not be available unless a public market then exists
for the Common Stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are
complied with; and (iv) there is now no registration statement on file
with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to
register the Shares under the Securities Act.
12. Withholding Taxes; Section 83(b) Election.
------------------------------------------
(a) The Participant acknowledges and agrees that the Company has the
right to deduct from payments of any kind otherwise due to the
Participant any federal, state or local taxes of any kind required by law
to be withheld with respect to the purchase of the Shares by the
Participant or the lapse of the Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of
the Internal Revenue Code of 1986, as amended; that such election must be
filed
<PAGE>
with the Internal Revenue Service within 30 days of the transfer of
shares to the Participant; and that the Participant is solely responsible
for making such election.
<PAGE>
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
and each other provision of this Agreement shall be severable and enforceable to
the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement may be
waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the Company and
the Participant and their respective heirs, executors, administrators, legal
representatives, successors and assigns, subject to the restrictions on transfer
set forth in Sections 4 and 5 of this Agreement.
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
<PAGE>
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument executed
by both the Company and the Participant.
<PAGE>
20. Governing Law.
--------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CIMARON COMMUNICATIONS
CORPORATION
By:____________________________
Title:_________________________
200 Brickstone Square
Andover, MA 01810
PARTICIPANT
_______________________________
Name:__________________________
Address:_______________________
_______________________
<PAGE>
Exhibit A
---------
If Cessation of Employment Occurs: Applicable Percentage:
- --------------------------------------------------------------------------------
Before [1 year from commencement] 100%
On or after [1 year] but before [1.25 years] 80%
On or after [1.25 years] but before [1.50 years] 75%
On or after [1.50 years] but before [1.75 years] 70%
On or after [1.75 years] but before [2 years] 65%
On or after [2 years] but before [2.25 years] 60%
On or after [2.25 years] but before [2.50 years] 55%
On or after [2.50 years] but before [2.75 years] 50%
On or after [2.75 years] but before [3 years] 45%
On or after [3 years] but before [3.25 years] 40%
On or after [3.25 years] but before [3.50 years] 35%
On or after [3.50 years] but before [3.75 years] 30%
On or after [3.75 years] but before [4 years] 25%
On or after [4 years] but before [4.25 years] 20%
On or after [4.25 years] but before [4.50 years] 15%
On or after [4.50 years] but before [4.75 years] 10%
On or after [4.75 years] but before [5 years] 5%
On or after [5 years] -0-
<PAGE>
Exhibit B
---------
CIMARON COMMUNICATIONS CORPORATION
Joint Escrow Instructions
-------------------------
________________, 199__
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
Dear Sir:
As Escrow Agent for Cimaron Communications Corporation, a Delaware
corporation (the "Company"), and the undersigned Participant ("Holder"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Agreement (the "Agreement") of
even date herewith, to which a copy of these Joint Escrow Instructions is
attached, in accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by
you hereunder and any additions and substitutions to said Shares. Holder
does hereby irrevocably constitute and appoint you as his attorney-in-fact
and agent for the term of this escrow to execute with respect to such
Shares all documents necessary or appropriate to make such Shares
negotiable and to complete any transaction herein contemplated. Subject to
the provisions of this paragraph 1 and the terms of the Agreement, Holder
shall exercise all rights and privileges of a stockholder of the Company
while the Shares are held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice
specifying the purchase price for the Shares, as determined pursuant to the
Agreement, and the time for a closing hereunder (the "Closing") at the
principal office of the
<PAGE>
Company. Holder and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such
form or forms the number of Shares being transferred, and (c) to deliver
same, together with the certificate or certificates evidencing the Shares
to be transferred, to the Company against the simultaneous delivery to you
of the purchase price for the Shares being purchased pursuant to the
Agreement.
4. The Holder shall have the right to withdraw from this escrow any
Shares as to which the Purchase Option (as defined in the Agreement) has
terminated or expired.
5. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by
you to be genuine and to have been signed or presented by the proper party
or parties. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact of Holder while
acting in good faith and in the exercise of your own good judgment, and any
act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree
of any court, you shall not be liable to any of the parties hereto or to
any other person, firm or Company by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been
entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
<PAGE>
9. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the
Company shall appoint any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities
held by you hereunder, you are authorized and directed to retain in your
possession without liability to anyone all or any part of said securities
until such dispute shall have been settled either by mutual written
agreement of the parties concerned or by a final order, decree or judgment
of a court of competent jurisdiction after the time for appeal has expired
and no appeal has been perfected, but you shall be under no duty whatsoever
to institute or defend any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail
with postage and fees prepaid, addressed to each of the other parties
thereunto entitled at the following addresses, or at such other addresses
as a party may designate by ten days' advance written notice to each of the
other parties hereto.
COMPANY: Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's signature below.
ESCROW AGENT:
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
<PAGE>
By signing these Joint Escrow Instructions, you become a party hereto only
for the purpose of said Joint Escrow Instructions, and you do not become a party
to the Agreement.
This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
CIMARON COMMUNICATIONS
CORPORATION
By:_____________________________
Title:__________________________
200 Brickstone Square
Andover, MA 01810
HOLDER:
________________________________
Name:___________________________
ESCROW AGENT: Address:________________________
________________________
________________________ Date Signed: ___________________
<PAGE>
Cimaron Communications Corporation
Incentive Stock Option Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
1. Grant of Option.
---------------
This agreement evidences the grant by Cimaron Communications Corporation, a
Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME
(the "Participant"), an employee of the Company, of an option to purchase, in
whole or in part, on the terms provided herein and in the Company's 1998 Stock
Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the
"Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE
per Share. Unless earlier terminated, this option shall expire ten years from
the Grant Date (the "Final Exercise Date").
It is intended that the option evidenced by this agreement shall be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended and any regulations promulgated thereunder (the "Code"). Except as
otherwise indicated by the context, the term "Participant", as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. Vesting Schedule.
----------------
The date to be used for determining vesting of this option ("Vesting Effective
Date") shall be HIRE DATE. This option will become exercisable ("vest") as to
20% of the original number of Shares on the first anniversary of the Vesting
Effective Date and as to an additional 5% of the original number of Shares at
the end of each successive full three-month period following the first
anniversary of the Vesting Effective Date until the fifth anniversary of the
Vesting Effective Date. This option shall expire upon, and will not be
exercisable after, the Final Exercise Date.
The right of exercise shall be cumulative so that to the extent the option is
not exercised in any period to the maximum extent permissible it shall continue
to be exercisable, in whole or in part, with respect to all shares for which it
is vested until the earlier of the Final Exercise Date or the termination of
this option under Section 3 hereof or the Plan.
Notwithstanding the foregoing, in the event of an Acquisition of the Company (as
defined below), the number of Shares for which the option is vested shall,
immediately prior to the Closing of the Acquisition, be increased by (i) 20% of
the original number of Shares covered by this option, if the Participant has
been employed by the Company for 12 or more months prior to the Acquisition, or
(ii) 10% of the original number of Shares covered by this option, if the
Participant has been employed by the Company for less than 12 months prior to
the Acquisition. The remaining unvested shares shall vest in accordance with
their original vesting schedule, except that such schedule shall be shortened by
12 months (in the case of an acceleration under clause (i) above) or six months
(in the case of an acceleration under clause (ii) above).
"Acquisition" shall mean (i) the consolidation or merger of the Company (other
than a merger to reincorporate the Corporation in a different jurisdiction) into
or with any other entity or entities in which the shares of the Corporation
outstanding immediately prior to the closing of such event represent or are
converted into shares of
<PAGE>
the surviving or resulting entity that represent less than a majority of the
total number of shares of the surviving or resulting entity that are outstanding
or are reserved for issuance upon the exercise or conversion of outstanding
<PAGE>
securities immediately after the closing of such event, or (ii) the sale or
transfer of fifty percent (50%) or more of the capital stock of the Corporation
in a single transaction or series of related transactions or (iii) the sale of
all or substantially all of the assets of the Company.
3. Exercise of Option.
------------------
(a) Form of Exercise. Each election to exercise this option shall be in
----------------
writing, signed by the Participant, and received by the Company at its
principal office, accompanied by this agreement, and payment in full
in the manner provided in the Plan. The Participant may purchase less
than the number of shares covered hereby, provided that no partial
exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as otherwise
-------------------------------------------------
provided in this Section 3, this option may not be exercised unless
the Participant, at the time he or she exercises this option, is, and
has been at all times since the Grant Date, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (1) of the
Code (an "Eligible Participant").
(c) Termination of Relationship with the Company. If the Participant
--------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as
provided in paragraphs (d) and (e) below, the right to exercise this
option shall terminate three months after such cessation (but in no
event after the Final Exercise Date), provided that this option shall
-------- ----
be exercisable only to the extent that the Participant was entitled to
exercise this option on the date of such cessation. Notwithstanding
the foregoing, if the Participant, prior to the Final Exercise Date,
violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or
other agreement between the Participant and the Company, the right to
exercise this option shall terminate immediately upon written notice
to the Participant from the Company describing such violation.
(d) Exercise Period Upon Death or Disability. If the Participant dies or
----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code)
prior to the Final Exercise Date while he or she is an Eligible
Participant and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be
exercisable, within the period of one year following the date of death
or disability of the Participant by the Participant, provided that
-------- ----
this option shall be exercisable only to the extent that this option
was exercisable by the Participant on the date of his or her death or
disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) Discharge for Cause. If the Participant, prior to the Final Exercise
-------------------
Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the
effective date of such discharge. "Cause" shall mean willful
misconduct by the Participant or willful failure by the Participant to
perform his or her responsibilities to the Company (including, without
limitation, breach by the Participant of any provision of any
employment, consulting, advisory, nondisclosure, non-competition or
other similar agreement between the Participant and the Company), as
determined by the Company, which determination shall be conclusive.
The Participant
<PAGE>
shall be considered to have been discharged for "Cause" if the Company
determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
<PAGE>
4. Right of First Refusal.
----------------------
(a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this
option, then the Participant shall first give written notice of the
proposed transfer (the "Transfer Notice") to the Company. The Transfer
Notice shall name the proposed transferee and state the number of such
Shares the Participant proposes to transfer (the "Offered Shares"),
the price per share and all other material terms and conditions of the
transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the
Offered Shares at the price and upon the terms set forth in the
Transfer Notice. In the event the Company elects to purchase all of
the Offered Shares, it shall give written notice of such election to
the Participant within such 30-day period. Within 10 days after his
receipt of such notice, the Participant shall tender to the Company at
its principal offices the certificate or certificates representing the
Offered Shares, duly endorsed in blank by the Participant or with duly
endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company. Promptly following
receipt of such certificate or certificates, the Company shall deliver
or mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against delivery,
the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to the
Participant on account of such Shares or permit the Participant to
exercise any of the privileges or rights of a stockholder with respect
to such Offered Shares, but shall, in so far as permitted by law,
treat the Company as the owner of such Offered Shares.
(d) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration
of the option granted to the Company under subsection (b) above,
transfer the Offered Shares to the proposed transferee, provided that
-------- ----
such transfer shall not be on terms and conditions more favorable to
the transferee than those contained in the Transfer Notice.
Notwithstanding any of the above, all Offered Shares transferred
pursuant to this Section 4 shall remain subject to the right of first
refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written
instrument confirming that such transferee shall be bound by all of
the terms and conditions of this Section 4.
(e) The following transactions shall be exempt from the provisions of this
Section 4:
(1) any transfer of Shares to or for the benefit of any parent,
spouse, child or grandchild of the Participant, or to a trust for
their benefit;
(2) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"); and
<PAGE>
(3) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;
<PAGE>
provided, however, that in the case of a transfer pursuant to
--------- -------
clause (1) above, such Shares shall remain subject to the right
of first refusal set forth in this Section 4 and such transferee
shall, as a condition to such transfer, deliver to the Company a
written instrument confirming that such transferee shall be bound
by all of the terms and conditions of this Section 4.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or
entities.
(g) The provisions of this Section 4 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective
registration statement filed by the Company under the Securities
Act at a price to the public of at least $5.00 per share (subject
to appropriate adjustments for stock splits, stock dividends,
combinations and other similar recapitalizations affecting such
shares) resulting in gross proceeds to the Company of at least
$10,000,000; or
(2) an Acquisition.
(h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Section 4, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
5. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such offering.
6. Withholding.
-----------
No Shares will be issued pursuant to the exercise of this option unless and
until the Participant pays to the Company, or makes provision satisfactory to
the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option. The participant may
provide for the payment of withholding taxes with shares of Common Stock.
<PAGE>
7. Nontransferability of Option.
----------------------------
This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.
8. Disqualifying Disposition.
-------------------------
If the Participant disposes of Shares acquired upon exercise of this option
within two years from the Grant Date or one year after such Shares were acquired
pursuant to exercise of this option, the Participant shall notify the Company in
writing of such disposition.
9. Provisions of the Plan.
----------------------
This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.
IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer. This option shall take effect
as a sealed instrument.
CIMARON COMMUNICATIONS CORPORATION
Dated: ________________ By: _____________________
Name: Ram Sudireddy
Title: President & CEO
PARTICIPANTS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and
conditions thereof. The undersigned hereby acknowledges receipt of a copy of the
Company's 1998 Stock Incentive Plan.
PARTICIPANT: ______________________________
Address: ______________________________
______________________________
<PAGE>
Cimaron Communications Corporation
Incentive Stock Option Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
1. Grant of Option.
---------------
This agreement evidences the grant by Cimaron Communications Corporation, a
Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME
(the "Participant"), an employee of the Company, of an option to purchase, in
whole or in part, on the terms provided herein and in the Company's 1998 Stock
Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the
"Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE
per Share. Unless earlier terminated, this option shall expire ten years from
the Grant Date (the "Final Exercise Date").
It is intended that the option evidenced by this agreement shall be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended and any regulations promulgated thereunder (the "Code"). Except as
otherwise indicated by the context, the term "Participant", as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. Vesting Schedule.
----------------
The date to be used for determining vesting of this option ("Vesting Effective
Date") shall be HIRE DATE. This option will become exercisable ("vest") as to
20% of the original number of Shares on the first anniversary of the Vesting
Effective Date and as to an additional 5% of the original number of Shares at
the end of each successive full three-month period following the first
anniversary of the Vesting Effective Date until the fifth anniversary of the
Vesting Effective Date. This option shall expire upon, and will not be
exercisable after, the Final Exercise Date.
The right of exercise shall be cumulative so that to the extent the option is
not exercised in any period to the maximum extent permissible it shall continue
to be exercisable, in whole or in part, with respect to all shares for which it
is vested until the earlier of the Final Exercise Date or the termination of
this option under Section 3 hereof or the Plan.
(a) Notwithstanding the foregoing, in the event of an Acquisition of the
Company (as defined below), the number of Shares for which the option
is vested shall, immediately prior to the Closing of the Acquisition,
be increased by (i) 20% of the original number of Shares covered by
this option, if the Participant has been employed by the Company for
12 or more months prior to the Acquisition, or (ii) 30% of the
original number of Shares covered by this option, if the Participant
has been employed by the Company for less than 12 months prior to the
Acquisition. The remaining unvested shares shall vest in accordance
with their original vesting schedule, except that such schedule shall
be shortened by 12 months (in the case of an acceleration under clause
(i) above) or 18 months (in the case of an acceleration under clause
(ii) above), and further, if Participant's employment is terminated
Without Cause (as defined below) prior to the first anniversary of the
date of the Acquisition, 50% of such Participant's then remaining
Unvested Shares shall become vested as of such date of termination.
<PAGE>
(b) "Acquisition" shall mean (i) the consolidation or merger of the
Company (other than a merger to reincorporate the Corporation in a
different jurisdiction) into or with any other entity or entities in
which the shares of the Corporation outstanding immediately prior to
the closing of such event represent or are converted into shares of
the surviving or resulting entity that represent less than a majority
of the total number of shares of the surviving or resulting entity
that are outstanding or are reserved for issuance upon the exercise or
conversion of outstanding securities immediately after the closing of
such event, or (ii) the sale or transfer of fifty percent (50%) or
more of the capital stock of the Corporation in a single transaction
or series of related transactions or (iii) the sale of all or
substantially all of the assets of the Company.
3. Exercise of Option.
------------------
(a) Form of Exercise. Each election to exercise this option shall be in
----------------
writing, signed by the Participant, and received by the Company at its
principal office, accompanied by this agreement, and payment in full
in the manner provided in the Plan. The Participant may purchase less
than the number of shares covered hereby, provided that no partial
exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as otherwise
-------------------------------------------------
provided in this Section 3, this option may not be exercised unless
the Participant, at the time he or she exercises this option, is, and
has been at all times since the Grant Date, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (f) of the
Code (an "Eligible Participant").
(c) Termination of Relationship with the Company. If the Participant
--------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as
provided in paragraphs (d) and (e) below, the right to exercise this
option shall terminate three months after such cessation (but in no
event after the Final Exercise Date), provided that this option shall
-------- ----
be exercisable only to the extent that the Participant was entitled to
exercise this option on the date of such cessation. Notwithstanding
the foregoing, if the Participant, prior to the Final Exercise Date,
violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or
other agreement between the Participant and the Company, the right to
exercise this option shall terminate immediately upon written notice
to the Participant from the Company describing such violation.
(d) Exercise Period Upon Death or Disability. If the Participant dies or
----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code)
prior to the Final Exercise Date while he or she is an Eligible
Participant and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be
exercisable, within the period of one year following the date of death
or disability of the Participant by the Participant, provided that
-------- ----
this option shall be exercisable only to the extent that this option
was exercisable by the Participant on the date of his or her death or
disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) Discharge for Cause. If the Participant, prior to the Final Exercise
-------------------
Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the
effective date of such discharge. "Cause" shall mean willful
misconduct by the Participant or
<PAGE>
willful failure by the Participant to perform his or her
responsibilities to the Company (including, without limitation, breach
by the Participant of any provision of any employment, consulting,
advisory, nondisclosure, non-competition or other similar agreement
between the Participant and the Company), as determined by the
Company, which determination shall be conclusive. The Participant
shall be considered to have been discharged for "Cause" if the Company
determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
4. Right of First Refusal.
----------------------
(a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this
option, then the Participant shall first give written notice of the
proposed transfer (the "Transfer Notice") to the Company. The Transfer
Notice shall name the proposed transferee and state the number of such
Shares the Participant proposes to transfer (the "Offered Shares"),
the price per share and all other material terms and conditions of the
transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the
Offered Shares at the price and upon the terms set forth in the
Transfer Notice. In the event the Company elects to purchase all of
the Offered Shares, it shall give written notice of such election to
the Participant within such 30-day period. Within 10 days after his
receipt of such notice, the Participant shall tender to the Company at
its principal offices the certificate or certificates representing the
Offered Shares, duly endorsed in blank by the Participant or with duly
endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company. Promptly following
receipt of such certificate or certificates, the Company shall deliver
or mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against delivery,
the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to the
Participant on account of such Shares or permit the Participant to
exercise any of the privileges or rights of a stockholder with respect
to such Offered Shares, but shall, in so far as permitted by law,
treat the Company as the owner of such Offered Shares.
(d) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration
of the option granted to the Company under subsection (b) above,
transfer the Offered Shares to the proposed transferee, provided that
-------- ----
such transfer shall not be on terms and conditions more favorable to
the transferee than those contained in the Transfer Notice.
Notwithstanding any of the above, all Offered Shares transferred
pursuant to this Section 4 shall remain subject to the right of first
refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written
instrument confirming that such transferee shall be bound by all of
the terms and conditions of this Section 4.
(e) The following transactions shall be exempt from the provisions of this
Section 4:
<PAGE>
(1) any transfer of Shares to or for the benefit of any parent, spouse,
child or grandchild of the Participant, or to a trust for their
benefit;
(2) any transfer pursuant to an effective registration statement filed by
the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(3) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;
provided, however, that in the case of a transfer pursuant to clause (1)
--------- -------
above, such Shares shall remain subject to the right of first refusal set
forth in this Section 4 and such transferee shall, as a condition to such
transfer, deliver to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of this
Section 4.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or
entities.
(g) The provisions of this Section 4 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective
registration statement filed by the Company under the Securities
Act at a price to the public of at least $5.00 per share (subject
to appropriate adjustments for stock splits, stock dividends,
combinations and other similar recapitalizations affecting such
shares) resulting in gross proceeds to the Company of at least
$10,000,000; or
(2) an Acquisition.
(h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Section 4, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
5. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such offering.
<PAGE>
6. Withholding.
-----------
No Shares will be issued pursuant to the exercise of this option unless and
until the Participant pays to the Company, or makes provision satisfactory to
the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option. The participant may
provide for the payment of withholding taxes with shares of Common Stock.
7. Nontransferability of Option.
----------------------------
This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.
8. Disqualifying Disposition.
-------------------------
If the Participant disposes of Shares acquired upon exercise of this option
within two years from the Grant Date or one year after such Shares were acquired
pursuant to exercise of this option, the Participant shall notify the Company in
writing of such disposition.
9. Provisions of the Plan.
----------------------
This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer. This option shall take effect
as a sealed instrument.
CIMARON COMMUNICATIONS CORPORATION
Dated: ________________ By: _____________________
Name: Ram Sudireddy
Title: President & CEO
PARTICIPANTS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and
conditions thereof. The undersigned hereby acknowledges receipt of a copy of the
Company's 1998 Stock Incentive Plan.
PARTICIPANT: ______________________________
Address: ______________________________
______________________________
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>3
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.27
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective
---------
Date indicated below by and between, Applied Micro Circuits Corporation, a
Delaware corporation ("Acquiror"), and Gary Martin ("Employee").
-------- --------
BACKGROUND
This Agreement is entered into in connection with and is ancillary to an
Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999
----------------
among Acquiror, Cimaron Communications Corporation, a Delaware corporation
("Target") and Wiley Acquisition Corporation, a Delaware corporation and a
------
wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge
---
with and into Acquiror (the "Merger"). The date on which the Merger becomes
------
effective will be the effective date of this Agreement (the "Effective Date").
----------------
Employee is a founder, principal stockholder and Chief Technical Officer of
Target. Acquiror intends to continue the business of Target after the Merger and
integrate such business into Acquiror's ongoing business. To preserve and
protect the assets of Target, including Target's goodwill, customers and trade
secrets of which Employee has and will have knowledge in Employee's role as an
employee of Acquiror and to preserve and protect Acquiror's goodwill and
business interests going forward, and in consideration for Acquiror's entering
into and performing under the Merger Agreement, Employee has agreed to enter
into this Agreement.
In addition, as required by Section 7 below, Employee is concurrently
herewith entering into an Inventions, Confidentiality and Trade Secrets
Agreement in favor of Acquiror designed to protect Acquiror's proprietary
rights.
NOW, THEREFORE. in consideration of the foregoing and the mutual agreements
of the parties contained herein, Acquiror and Employee hereby agree as follows:
1. Employment. Acquiror will employ Employee, and Employee accepts
----------
employment with Acquiror, for a period of one year from the Effective Date (the
"Initial Period"), unless Employee's employment is sooner terminated in
--------------
accordance with this Agreement. Employee's employment may continue after this
Initial Period but will then be terminable by either party at will, with or
without cause.
2. Duties. Employee will be employed as a full-time employee of Acquiror
------
and initially will serve as Vice President and Chief Technical Officer,
reporting to Dave Rickey. Employee agrees that, to the best of Employee's
ability and experience, Employee will at all times conscientiously perform all
of the duties and obligations assigned to Employee under this Agreement.
Acquiror agrees that it will not relocate Employee outside of a twenty-five mile
radius of Andover. Massachusetts, without Employee's consent.
3. Full-time Employment. Employee's employment will be on a full-time
--------------------
basis, in accordance with standard employee policies for Acquiror. Employee will
not engage in any other business or render any commercial or professional
services, directly or indirectly, to any other person or organization, whether
for compensation or otherwise, provided that Employee may (i)
<PAGE>
provide incidental assistance to family members on matters of family business;
and (ii) sit on the boards of charitable and nonprofit organizations which do
not, at the time of Employee's appointment or election, to Employee's knowledge,
compete with Acquiror; provided in each case that such activities do not
conflict with or interfere with Employee's obligations to Acquiror.
4. Compensation
------------
(a) Salary. Employee's initial salary for the term of this Agreement
------
will be no less than $160,000 per year, payable on Acquiror's regular payroll
dates, less required withholdings.
(b) Bonus. Employee will be eligible for an Executive bonus of up to
-----
30 percent of Employee's initial salary, based on targets to be established by
the Company's Board of Directors.
(c) Stock Options. Employee will be granted stock options, under
-------------
Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares
of Acquiror's Common Stock at a price equal to the per share market value of
such Common Stock on the last trading day prior to the closing date of the
Merger, as quoted on the Nasdaq National Market and as reported in the Wall
Street Journal. The stock options will be granted as nonqualified stock options.
If and when the Employee sells any shares issued upon exercise of any stock
options, the Employee will promptly notify Acquiror of such sale in writing. The
stock options will vest 25% on the first anniversary of the Effective Date and
the remainder will vest as to 1/48th of the option grant per month thereafter,
so that they will be fully vested on the fourth anniversary of the Effective
Date. The stock options will have a term of ten years and will be subject to the
terms and conditions set forth on the form of Stock Option Grant attached hereto
as Attachment A (to be completed at the closing of the Merger). Employee will
------------
also be eligible to participate in the Company's "refresh" stock option grant
programs consistent with other employees of similar responsibility and
compensation levels.
5. Employee Benefits. Employee will be entitled to insurance, vacation
-----------------
and other benefits commensurate with Employee's position in accordance with
Acquiror's standard employee policies in effect from time to time. For purposes
of satisfying the terms and conditions of such benefit plans, Acquiror shall
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with Target prior to the Effective Date.
Employee has received a summary of Acquiror's standard employee benefits
policies in effect as of the date hereof. Employee shall receive credit for a
maximum of 105 vacation hours accrued at Target through the Effective Date, in
accordance with Acquiror's standard employee policies. This credit shall be
adjusted for any vacation hours used during the period commencing on January 1,
1999 and ending on the Effective Date.
6. Reimbursement of Business Expenses. Acquiror will, in accordance with
-----------------------------------
Acquiror's policies in effect from time to time, reimburse Employee for all
reasonable business expenses incurred by Employee in connection with the
performance of Employee's duties under this Agreement including, without
limitation, reasonable expenditures for office space, supplies,
-2-
<PAGE>
equipment and expenses and for business entertainment and travel, upon
submission of the required documentation required pursuant to Acquiror's
standard policies and record keeping procedures.
7. Confidentiality. Simultaneously with the execution of this Agreement.
---------------
Employee is executing and delivering and hereby adopts and agrees to be bound by
Acquiror's standard Proprietary Information and Inventions Agreement, a copy of
which is attached to this Agreement as Attachment B (the "Inventions,
------------ -----------
Confidentiality and Trade Secrets Agreement").
- ---------------------------------------------
8. Termination.
-----------
(a) Acquiror may terminate Employee's employment at will, at any time
with or without Cause (as defined in Section 8(e) below) upon written notice to
Employee.
(b) Employee may terminate Employee's employment upon written notice
to Acquiror in the event that Acquiror is in material breach of this Agreement,
provided that such termination will become effective only upon the expiration of
30 days following such notice and then only if the alleged breach remains
uncured (provided that Acquiror shall not have more than one opportunity to cure
such breach). Such termination shall be deemed a termination by Acquiror of
Employee's employment under Section 8(a) for which Employee shall have the
remedy set forth in Section 8(c).
(c) Upon termination of Employee's employment pursuant to Section 8(a)
or (b) for any reason other than Cause: (1) Acquiror will pay to Employee an
amount equal to the product of employee's monthly salary (at the monthly rate
paid to Employee immediately prior to such termination) and the number of months
(including fractions thereof) that remain from the date of employee's
termination through the end of the Initial Period plus the target bonus
specified in Section 4(b) (the "Termination Payment") immediately upon such
-------------------
termination and (ii) the vesting of any options to purchase Acquiror Common
Stock granted to Employee subsequent to the consummation of the Merger shall be
accelerated by the number of months (including fractions thereof) that remain
from the date of employee's termination through the end of the Initial Period.
Acquiror's obligation to make the Termination Payment and accelerate vesting of
stock options pursuant to this Section 8(c) is in lieu of any damages or any
other payment or benefits, including without limitation stock benefits (except
that with regard to the vesting and termination of stock options, such stock
options will vest and terminate according to the terms of specific stock option
grant agreements), which Acquiror might otherwise be obligated to pay Employee
as a result of Employee's termination of employment. Acquiror and Employee agree
that, in view of the nature of the issues likely to arise in the event of such a
termination, it would be impracticable or extremely difficult to fix the actual
damages resulting from such termination and proving actual damages, causation
and foreseeability in the case of such termination would be costly, inconvenient
and difficult. In requiring Acquiror to make the Termination Payment and to
accelerate the vesting of stock options as set forth herein, it is the intent of
the parties to provide, as of the date of this Agreement, for a liquidated
amount of damages to be paid by Acquiror to Employee. Such liquidated amount
shall be deemed full and adequate damages for such termination and is not
intended by either party to be a penalty.
-3-
<PAGE>
(d) Upon Death. If Employee dies during the term of this Agreement,
-----------
Acquiror will pay Employee's estate an amount equal to all salary, bonuses and
benefits accrued as of the date of Employee's death.
(e) Definition of Cause. For purposes of this Agreement, "Cause" for
------------------- -----
Employee's termination will exist at any time after the happening of one or more
of the following events:
(i) an act of personal dishonesty constituting willful and
material misconduct.
(ii) a violation of employment obligations (including
confidentiality or noncompetition obligations) which is demonstrably willful and
material misconduct which has not been cured within 30 days after written notice
of such violation has been given to Employee.
(iii) the willful engaging in illegal conduct that is materially
and demonstrably injurious to the Company,
(iv) Employee's continued failure to substantially perform his
or her duties for a period of 90 days after written notice thereof setting forth
in reasonable detail the respects in which the Company believes Employee has so
failed, or
(v) Employee being convicted of a felony or misappropriating
property of the Company.
(f) Survival. Employee's and Acquiror's obligations under Sections 5,
--------
6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's
employment by Acquiror.
9. Miscellaneous.
-------------
(a) Notices. Any and all notices permitted or required to be given
--------
under this Agreement must be in writing. Notices will be deemed given (i) when
personally received or when sent by facsimile transmission (to the receiving
party's facsimile number), (ii) on the first business day after having been sent
by commercial overnight courier with written verification of receipt, or (iii)
on the third business day after having been sent by registered or certified mail
from a location on the United States mainland, return receipt requested, postage
prepaid, whichever occurs first, at the address set forth below or at any new
address, notice of which will have been given in accordance with this Section
9(a):
If to Acquiror. Applied Micro Circuits Corporation
Attn: President
6290 Sequence Drive
San Diego, CA 92121
-4-
<PAGE>
with a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Mark A. Medearis
If to Employee: Gary Martin
15 Kittredge Road
No. Andover, MA 01845
with a copy to: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Patrick Rondeau
(b) Amendments. This Agreement, including the Exhibits hereto,
----------
contains the entire agreement and supersedes and replaces all prior agreements
between Acquiror and Employee or Target and Employee concerning Employee's
employment. This Agreement may not be changed or modified in whole or in part
except by a writing signed by the party against whom enforcement of the change
or modification is sought.
(c) Successors and Assigns. This Agreement will not be assignable by
----------------------
either Employee or Acquiror, except that the rights and obligations of Acquiror
under this Agreement may be assigned to a corporation which becomes the
successor to Acquiror as the result of a merger or other corporate
reorganization and which continues the business of Acquiror, or any other
subsidiary of Acquiror, provided that Acquiror guarantees the performance by
such assignee of Acquiror's obligations hereunder.
(d) Governing Law. This Agreement will be governed by and interpreted
-------------
according to the substantive laws of the Commonwealth of Massachusetts without
regard to such state's conflicts law.
(e) No Waiver. The failure of either party to insist on strict
---------
compliance with any of the terms of this Agreement in any instance or instances
will not be deemed to be a waiver of any term of this Agreement or of that
party's right to require strict compliance with the terms of this Agreement in
any other instance.
(f) Severability. Employee and Acquiror recognize that the limitations
------------
contained herein are reasonably and properly required for the adequate
protection of the interests of Acquiror. If for any reason a court of competent
jurisdiction or binding arbitration proceeding finds any provision of this
Agreement, or the application thereof, to be unenforceable, the remaining
provisions of this Agreement will be interpreted so as best to reasonably effect
the intent of the parties. The parties further agree that the court or
arbitrator shall replace any such invalid or unenforceable provisions with valid
and enforceable provisions designed to achieve, to the extent possible, the
business purposes and intent of such unenforceable provisions.
-5-
<PAGE>
(g) Counterparts. This Agreement may be executed in counterparts which
-------------
when taken together will constitute one instrument. Any copy of this Agreement
with the original signatures of all parties appended will constitute an
original.
(h) Expenses. The reasonable fees and expenses of either party which
--------
may be reasonably incurred by such party as the result of any claim or contest
by the Employee to enforce his or her rights under this Agreement shall be paid
promptly, to the full extent permitted by law, by the party prevailing in such
claim or contest.
(i) Dispute Resolution.
------------------
(i) Arbitration of Disputes. Any dispute under this Agreement
-----------------------
shall be resolved by arbitration in Boston, Massachusetts, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
---------
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve such dispute.
(ii) Compensation of Arbitrator. Any such arbitration will be
--------------------------
conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(iii) Selection of Arbitrator. The American Arbitration
----------------------
Association will have the authority to select an arbitrator from a list of
arbitrators who are partners in a nationally recognized firm of independent
certified public accountants from the management advisory services department
(or comparable department or group) of such firm: provided, however, that such
firm cannot be the firm of certified public accountants then auditing the books
and records of either party or providing management or advisory services for
either party, that each party will have the opportunity to make such reasonable
objection to any of the arbitrators listed as such party may wish and that the
American Arbitration Association will select the arbitrator from the list of
arbitrators as to whom neither party makes any such objection. In the event that
the foregoing procedure is not followed, each party will choose one person from
the list of arbitrators provided by the American Arbitration Association
(provided that such person does not have a conflict of interest), and the two
persons so selected will select from the list provided by the American
Arbitration Association the person who will act as the arbitrator.
(iv) Payment of Costs. Acquiror and Employee will bear the
------------------
expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses
-6-
<PAGE>
related to the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party.
(v) Burden of Proof. For any dispute submitted to
---------------
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
(vi) Award. Upon the conclusion of any arbitration proceedings
------
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to each party to this Agreement along
with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement.
(viii) Exclusive Remedy. Except as specifically otherwise
----------------
provided in this Agreement, arbitration will be the sole and exclusive remedy of
the parties for any dispute arising out of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement is made and effective as of the
Effective Date.
APPLIED MICRO CIRCUITS EMPLOYEE
CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin
----------------------------- --------------------------
Title: Pres./CEO Gary Martin
--------------------------
Signature Page to Employment Agreement
<PAGE>
List of Exhibits:
- ----------------
Attachment A Stock Option Grant
Attachment B Inventions, Confidentiality and Trade Secrets Agreement
<PAGE>
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
Gary D. Martin Option Number: 99030010
15 Kittredge Road Plan: 92
No. Andover, MA 01845 Id: 440-56-7412
Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy
10,239 Shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $399,960.94.
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
-------------------- ------------ --------- ----------
<S> <C> <C> <C>
1,462 On Vest Date 3/17/00 3/17/09
1,097 Monthly 12/17/00 3/17/09
2,560 Monthly 12/17/01 3/17/09
2,560 Monthly 12/17/02 3/17/09
2,560 Monthly 3/17/03 3/17/09
</TABLE>
- --------------------------------------------------------------------------------
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
- --------------------------------------------------------------------------------
/s/ [SIGNATURE ILLEGIBLE] 3/18/99
- ----------------------------------------- ------------------------------
Applied Micro Circuits Corporation Date
/s/ Gary D. Martin 3/24/99
- ----------------------------------------- ------------------------------
Gary D. Martin Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company
at a value equal to the exercise price of the Shares as to which the Option is
being exercised; or
(iv) delivery of a property 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. Restrictions on Exercise. This Option may not be exercised until such
-------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, the Optionee may, but only within
thirty (30) days after the date of such termination (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), exercise this Option to the extent exercisable at the date of such
termination. Optionee's employment shall be deemed terminated on such date, if
any, as Optionee becomes a part-time employee, as defined in the Company's then
current employment guidelines. To the extent this Option was not exercisable at
the date of such termination, or if the Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-2-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY 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 AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain related
information and represents that Optionee is familiar with the terms and
provisions of these documents, and hereby accepts this Option subject to all of
those terms and provisions. Optionee has reviewed the Plan and this Option in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: 3-24-99
--------------
/s/ Gary Martin
-----------------------------------
(Optionee) Gary Martin
Residence Address:
15 Kittredge Road
No. Andover, MA 01845
-4-
<PAGE>
EXHIBIT B
---------
NOTICE OF DISQUALIFYING DISPOSITION
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Disqualifying Disposition
-----------------------------------
This is official notice that the undersigned disposed of Shares of Applied
Micro Circuits Corporation Common Stock acquired by exercise of an incentive
stock option, under and pursuant to the Company's 1992 Stock Option Plan, as
follows:
<TABLE>
<CAPTION>
Option Market Total Shares
Option Date of Exercise Price (Per Transfer Value (Per Transferred/
Number Grant Date Share) Date Share) Sold
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
I understand that for Federal Income Tax Purposes, AMCC is required to
report on a Form W-2 the compensation of employees who dispose of Incentive
Stock Options shares within one year from the Date of Exercise, or within two
years from the date of grant.
Optionee's Signature:________________________________________
Print Name:__________________________________________________
Home Address:________________________________________________
City, State, Zip Code:_______________________________________
Daytime Phone:_______________________________________________
Social Security Number:______________________________________
You must use this form if you have disposed of ISO shares within two years of
the grant date or one year of the exercise date.
-6-
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2588591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Gary D. Martin Option Number: 99030010
15 Kittredge Road Plan: 92
No. Andover, MA 01845 ID: 440-56-7412
================================================================================
Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy
89,761 shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $3,506,289.06.
Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration
---------- ------------- ------------- ------------
23,539 On Vest Date 3/17/00 3/17/09
17,652 Monthly 12/17/00 3/17/09
22,440 Monthly 12/17/01 3/17/09
22,440 Monthly 12/17/02 3/17/09
3,690 Monthly 3/17/03 3/17/09
===============================================================================
By Your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ [SIGNATURE ILLEGIBLE] 3/18/79
- ---------------------------------- ---------------------------------------
Applied Micro Circuits Corporation Date
/s/ Gary D. Martin 3-24-99
- ---------------------------------- --------------------------------------
Gary D. Martin Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company or the Secretary's designee. The
Exercise Notice shall be accompanied by payment of the exercise price. This
Option shall be deemed to be exercised upon receipt by the company of such
Exercise Notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income Tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at
a value equal to the exercise price of the Shares as to which the Option is
being exercised; or
(iv) delivery of a property 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. Restrictions of Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee or Consultant. In the event of
--------------------------------------------------
termination of Optionee's Continuous Status as an Employee or Consultant, the
Optionee may, but only within thirty (30) days after the date of such
termination (but in no event later than the date of expiration of
2
<PAGE>
to be withheld by the Company as a result of any exercise of the Option from
amounts payable to such person, subject to the following limitations:
(i) such election shall be irrevocable;
(ii) such election shall be subject to the disapproval of the Board
at any time;
(iii) such election may not be made within six months of the grant
date of the Option (except that this limitation shall not apply in the event of
death or disability of such person occurring prior to the expiration of the six-
month period); and
(iv) such election must be made either (A) six months prior to the
date that the amount of tax to be withheld upon such exercise is determined or
(B) in any ten-day period beginning on the third business day following the date
of release by the Company for publication of quarterly or annual summary
statements of sales or earnings of the Company.
Any securities so withheld or tendered will be valued by the Company as of
the date of exercise.
APPLIED MICRO CIRCUITS CORPORATION
a Delaware corporation
By: /s/ Joel O. Holliday
---------------------
Joel O. Holliday
Title: Vice President
Finance & Administration
THIS SPACE INTENTIONALLY
LEFT BALNK - SIGNATURE OF
OPTIONEE ON FOLLOWING PAGE
4
<PAGE>
EXHIBIT A
---------
STOCK OPTION NOTICE OF EXERCISE
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase Shares of Applied Micro Circuits
Corporation Common Stock, all of which are vested, under and pursuant to the
Company's 1992 Stock option Plan, as follows:
<TABLE>
<CAPTION>
Type of Number of Option
Option Option Option Shares Being Price Tax Due * Total Amount
Number Date ISO/NSO Purchased, (Per Share) (if applicable) Due AMCC
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*AMCC is required to withhold taxes when employees exercise an NSO. Under
current tax law, U.S. income tax withholding is not required when exercising an
ISO.
I am paying the cost to exercise as specified below by method a, b or c
(circle one below)
a. Cash Payment: Enclosed is my check # ______ in the amount of _______.
b. Cashless Exercise and Same-Day Sale: I will call my stock broker (check
one below) to authorize them to issue a check payable to AMCC from my account #
__________.
_______ BancBoston Robertson Stephens - Corporate Services, Ron
Smolokoff, 555 California Street, Suite 2600, San Francisco, CA 94104,
TEL: (415)693-3510, FAX: (415)956-5265, E-MAIL: ron_smolokoff@rsco.com
_______ SG Cowen & Company - Private Client Group, Matthew O. Casey,
Four Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL:
(415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL: caseym@co
wen.com
c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been held
for at least six months.)
I certify that the stock purchased through the exercise of these options will
not be sold in a manner that would violate the Company's policy on Insider
Trading.
Optionee's Signature:_________________________________________
Print Name:___________________________________________________
Home Address:_________________________________________________
City, State, Zip Code:________________________________________
Daytime Phone:________________________________________________
Social Security Number:_______________________________________
6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
INVENTIONS,CONFIDENTIALITY AND TRADE SECRETS AGREEMENT
AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California
Corporation ("AMCC"), and ________________________________ ("Employee").
In consideration of the employment of the Employee by AMCC and the salary
or wages to be paid him/her during the period of employment it is agreed as
follows:
1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement,
device, design, apparatus, practice, process, method, concept, original work of
authorship, trade secret or product (each of which is called an "invention"),
whether patentable or not, made, developed, perfected, devised, conceived or
first reduced to practice by the Employee, either solely or in collaboration
with others, during the period of employment by AMCC, whether or not during
regular working hours, shall be the sole and exclusive property of AMCC except
as may otherwise be required as provided in paragraph 4 below. The Employee
shall hold each and every such invention in fiduciary capacity for the sole
benefit of AMCC and shall promptly disclose in writing full information
concerning each and every such invention to AMCC, which shall receive employee's
disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply
for any patent. If AMCC in its sole discretion chooses, it will seek patent
protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN
INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the
LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated
Sections 2871 and 2872 are attached to this Agreement. The provisions of this
paragraph 1 are subordinate to paragraph 4 of this Agreement.
2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments,
concepts, know-how, improvements or trade secrets which an Employee shall create
during employment that relate to AMCC's business, products or research or that
relate to any work performed by Employee for AMCC, including without limitation
all writings, programs and art produced by Employee, such works of authorship
shall constitute a "work for hire" pursuant to title 17, United States Code,
Sections 101 and 201 (b.), a copy of which is attached to this Agreement.
3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement
and from time to time thereafter during employment as necessary, Employee agrees
to notify AMCC, in advance, of his intent and/or plan to engage in research,
development and/or inventive work at any time not within regular working hours,
and from time to time to advise AMCC of the results thereof. Such notification
shall be in writing and shall identify the area(s) of activity contemplated.
4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of
AMCC at any time after submittal of the invention disclosure form pertaining to
an invention and without further compensation (except that the Employee shall be
reimbursed for expenses necessary and related to the invention not covered by
his salary) the Employee shall:
<PAGE>
(a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the
United States and all foreign countries applications for patents covering all
inventions, (b) execute, acknowledge and deliver any and all instruments deemed
necessary or proper by AMCC, its attorneys or nominees to make, file, or
prosecute all applications or in connection with their continuation, renewal or
reissuance or in the conduct of all proceedings or litigation regarding them,
(c) execute any and all documents deemed necessary or proper by AMCC, its
attorneys or nominees to transfer title in and to the applications or title in
and to all patents, copyrights, trademarks, maskwork rights, moral rights or
other intellectual property rights covering the inventions to AMCC or its
nominees, and (d) execute any other documents AMCC may request so it may
transfer or dispose of the invention. If AMCC is unable because of mental or
physical incapacity, unavailability or for any other reason, to secure
Employee's signature to apply for or to pursue any application for any United
States or foreign patents or copyright registrations covering inventions or
original works of authorship assigned to AMCC as above, then Employee hereby
irrevocably designates and appoints AMCC and its duly authorized officers and
agents as agent and attorney in fact, to act for and in Employee's behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal force and effect as if originally executed by Employee. The
Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of
any nature whatsoever, which Employee now or hereafter has for infringement of
any and all proprietary rights assigned to AMCC.
5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that
AMCC has entered into, or from time to time in the future may enter into,
agreements or arrangements with agencies of the United States Government and
that AMCC may be subject to laws and regulations which impose obligations,
restrictions and limitations on it wit respect to inventions and patents
acquired by it or conceived or developed by employees, consultants and other
agents rendering services to AMCC. The Employee shall be bound by all such
obligations, restrictions and limitations applicable to any invention conceived
or developed by the Employee during the period of employment and shall take any
obligations and to comply with the restrictions and limitations.
6. RECORDS. The Employee will keep complete, accurate and authentic
accounts, notes, data and records of all inventions in the manner and form
requested by AMCC. The Employee acknowledges That California Labor Code Section
2860 provides that everything that an employee acquires by virtue of his/her
employment belongs to the employer. Upon termination of Employee's employment,
Employee agrees to promptly surrender to the company documents and materials
Employee acquired, received or developed during his/her employment, including,
but not limited to, all correspondence, drawings, blueprints, manuals, letters,
notes, reports, flow charts, diagrams, programs, proposals, or any other
physical items or documents relating to the Company's Trade Secrets, and agrees
that he/she will not make or retain any unauthorized copies or other
reproductions of such materials. The Employee recognizes that the unauthorized
taking of any of the Company's Trade Secrets is a crime under California penal
Code Section 499(c) and is punishable by imprisonment for a period not exceeding
one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both.
The Employee further
-2-
<PAGE>
acknowledges that such unauthorized misappropriation of the company's Trade
Secrets could also result in civil liability under California Civil Code Section
3426, and that willful misappropriation may result in an award against employee
for double the amount of the Company's damages and the Company's fees in
collecting such damages.
7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended
substantial sums of money and devoted a great deal of time, labor and effort to
the development, creation and acquisition of a large body of confidential
information that is used by it in its business and is not generally known or
available to the public. Such confidential information gives the Company a
valuable advantage over its competitors and prospective competitors and is
proprietary to the Company. Such confidential and proprietary information
includes, but is not limited to, lists of actual or potential customers, clients
or candidates; techniques and formulas; marketing and sales plans; materials
relating to other employees; financial information; cost rate and pricing
information; business plans; diagrams; sources of supplies; drawings; plans;
processes; proposals; codes; notebooks; and the content of any contracts or
proposals involving the Company which are made, developed, perfected, devised,
conceived or first reduced to practice by Employee, the company or its
employees, agents, consultants, affiliates or assistants, either alone or
jointly with others (collectively "Secrets" Employee agrees that he/she will,
both during and after the period of employment, treat any information of the
company which is not readily publicly available as a Trade Secret of the Company
unless the company advises Employee otherwise in writing. Employee acknowledges
that Trade Secrets include not only technical information, but any business
information that the Company treats as confidential. Employee recognizes that
AMCC has received and in the future will receive confidential or proprietary
information from third parties subject to a duty on AMCC's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out work for
AMCC consistent with AMCC's agreement with such third party.
8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any,
identified in Exhibit A, attached, (a) Employee has no inventions previously
made or conceived by the Employee which the Employee wants to be excluded from
the scope of this Agreement and (b) the Employee releases AMCC from any and all
claims, known or unknown, by the Employee by reasons of any use by AMCC of any
innovation previously made or conceived by the Employee. If, in the course of
employment with AMCC, Employee incorporates into an AMCC product, process or
machine a pre-existing invention owned by the Employee or in which Employee has
an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free,
irrevocable, perpetual, worldwide license (with the rights to sublicense) to
make, have made, copy, modify, make derivative works of, use, sell and otherwise
distribute such pre-existing invention as part of or in connection with such
product, process or machine.
9. NO CONFLICTING AGREEMENT. The Employee represents that performance of
all terms of this Agreement as an Employee or consultant of AMCC has not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by the Employee in confidence or trust
prior or subsequent to the commencement of
-3-
<PAGE>
employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to
use, any inventions, confidential proprietary information or material belonging
to any previous employer or any other party.
10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with
an affiliated company of AMCC, then apart from this paragraph 10, whenever the
term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the
name of the affiliated company is to be substituted. Employee agrees that AMCC
may exercise any right conferred on, or perform any duty under this Agreement
for, the affiliated company. An affiliated company is an entity at least 50%
owned by AMCC.
11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work
closely with employees of AMCC in performing services for AMCC. Employee
expressly agrees that he/she will not, during his/her employment with AMCC and
for one year thereafter, solicit or take away or assist any other individual or
business in soliciting any employee of AMCC. In addition, all information about
such employees which becomes known to Employee during the course of his/her
employment with AMCC, and which is not otherwise known to the public, is a trade
secret of AMCC and shall not be used by Employee in soliciting or taking away
employees of AMCC at any time during or after termination of his/her employment
with AMCC.
12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that
his/her employment is not for a specified term and that his/her employment may
be terminated by AMCC at anytime, with or without cause and with or without
notice. Employee expressly acknowledges that this provision is included in the
employee handbook, was reviewed during new hire orientation, and is to be the
complete and final expression of AMCC's and employee's understanding regarding
the terms and conditions under which his/her employment may be terminated.
Employee further understands and agrees that no representations contrary to this
provision are valid, and that this provision may not be augmented, contradicted
or modified in any way, except by a writing signed by the employee and the
President of AMCC. This employment at-will relationship may not be modified by
any oral or implied agreement.
13. TERM. This Agreement shall become effective as of the date of the
commencement of the Employee's employment by AMCC, and except as provided in
paragraph 14, shall terminate as of the termination of employment.
14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves
the employ of AMCC, the Employee hereby consents to notification by AMCC to
his/her new employer about the Employee's rights and obligations under this
Agreement.
15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive
the termination of this Agreement and of the Employee's employment by AMCC.
16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of AMCC, but not assignable to
the heirs, executors and administrators of the Employee.
-4-
<PAGE>
17. AMENDMENT. This Agreement may be amended only by a written amendment
executed by the Employee and the President of AMCC acting on behalf of AMCC.
18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges
that violation of any of the provisions in this Agreement would cause
irreparable injury to AMCC, that the remedy at law for any violation or
threatened violation of this Agreement would be inadequate, and that AMCC shall
be entitled to temporary and permanent injunctive or other equitable relief
without the necessity of proving actual damages. In any proceeding by AMCC to
enforce any of the provisions contained in this Agreement, the prevailing party
shall be entitled to reimbursement of all costs and reasonable attorneys' fees
incurred in such litigation.
19. GOVERNING LAW. This Agreement shall be interpreted, construed,
governed and enforced in accordance with the laws of the State of California.
20. SEPARATE TERMS. Each term, condition, covenant or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue to be in
full force and effect.
21. WAIVER. A waiver by either party of a breach of provision or
provisions of this Agreement shall not constitute a general waiver, or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provision in this Agreement.
22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and
agrees that this Agreement and attached exhibits represent the entire agreement
with AMCC concerning the subject matter hereof, and supersedes any previous oral
or written communications, representations, understandings or agreements with
AMCC or any officer or agent thereof. Employee understands that no
representative of AMCC has been authorized to enter into any agreement or
commitment with employee that this inconsistent in any way with the terms of
this Agreement.
23. CONSTRUCTION. This Agreement shall not be construed against any party
on the grounds that such party drafted the Agreement or caused it to be drafted.
-5-
<PAGE>
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
EXECUTED by the parties hereto as of ___________________, 19 ___
APPLIED MICRO CIRCUITS CORPORATION
BY: /s/ [SIGNATURE ILLEGIBLE]
-------------------------------
Witness:
/s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin
- ------------------------------- -------------------------------
Employee's Signature
Gary Martin
-------------------------------
Employee'Name (Printed)
EXHIBIT A
RESERVED INVENTIONS MADE OR CONCEIVED PRIOR
TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF
4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.28
<SEQUENCE>4
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>
<PAGE>
Exhibit 10.28
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective
---------
Date indicated below by and between, Applied Micro Circuits Corporation, a
Delaware corporation ("Acquiror"), and Ramakrishna Sudireddy ("Employee").
-------- --------
BACKGROUND
This Agreement is entered into in connection with and is ancillary to an
Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999
----------------
among Acquiror, Cimaron Communications Corporation, a Delaware corporation
("Target") and Wiley Acquisition Corporation, a Delaware corporation and a
------
wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge
with and into Acquiror (the "Merger") The date on which the Merger becomes
------
effective will be the effective date of this Agreement (the "Effective Date").
--------------
Employee is a founder, principal stockholder and President and CEO of
Target. Acquiror intends to continue the business of Target after the Merger and
integrate such business into Acquiror's ongoing business. To preserve and
protect the assets of Target, including Target's goodwill, customers and trade
secrets of which Employee has and will have knowledge in Employee's role as an
employee of Acquiror and to preserve and protect Acquiror's goodwill and
business interests going forward, and in consideration for Acquiror's entering
into and performing under the Merger Agreement. Employee has agreed to enter
into this Agreement.
In addition, as required by Section 7 below, Employee is concurrently
herewith entering into an Inventions, Confidentiality and Trade Secrets
Agreement in favor of Acquiror designed to protect Acquiror's proprietary
rights.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
of the parties contained herein, Acquiror and Employee hereby agree as follows:
1. Employment. Acquiror will employ Employee, and Employee accepts
----------
employment with Acquiror, for a period of one year from the Effective Date (the
"Initial Period"), unless Employee's employment is sooner terminated in
accordance with this Agreement. Employee's employment may continue after this
Initial Period but will then be terminable by either party at will, with or
without cause.
2. Duties. Employee will be employed as a full-time employee of Acquiror
------
and initially will serve as Vice President Cimaron, reporting to Dave Rickey.
Employee agrees that, to the best of Employee's ability and experience. Employee
will at all times conscientiously perform all of the duties and obligations
assigned to Employee under this Agreement. Acquiror agrees that it will not
relocate Employee outside of a twenty-five mile radius of Andover.
Massachusetts, without Employee's consent.
3. Full-time Employment. Employee's employment will be on a full-time
--------------------
basis, in accordance with standard employee policies for Acquiror. Employee will
not engage in any other business or render any commercial or professional
services, directly or indirectly, to any other person or organization, whether
for compensation or otherwise, provided that Employee may (i)
<PAGE>
provide incidental assistance to family members on matters of family business;
and (ii) sit on the boards of charitable and nonprofit organizations which do
not, at the time of Employee's appointment or election, to Employee's knowledge,
compete with Acquiror; provided in each case that such activities do not
conflict with or interfere with Employee's obligations to Acquiror.
4. Compensation
------------
(a) Salary. Employee's initial salary for the term of this Agreement
------
will be no less than S 160,000 per year, payable on Acquiror's regular payroll
dates, less required withholdings.
(b) Bonus. Employee will be eligible for an Executive bonus of up to
-----
40 percent of Employee's initial salary, based on targets to be established by
the Company's Board of Directors.
(c) Stock Options. Employee will be granted stock options, under
-------------
Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares
of Acquiror's Common Stock at a price equal to the per share market value of
such Common Stock on the last trading day prior to the closing date of the
Merger, as quoted on the Nasdaq National Market and as reported in the Wall
Street Journal. The stock options will be granted as nonqualified stock options.
If and when the Employee sells any shares issued upon exercise of any stock
options, the Employee will promptly notify Acquiror of such sale in writing. The
stock options will vest 25% on the first anniversary of the Effective Date and
the remainder will vest as to 1/48th of the option grant per month thereafter,
so that they will be fully vested on the fourth anniversary of the Effective
Date. The stock options will have a term of ten years and will be subject to the
terms and conditions set forth on the form of Stock Option Grant attached hereto
as Attachment A (to be completed at the closing of the Merger). Employee will
------------
also be eligible to participate in the Company's "refresh" stock option grant
programs consistent with other employees of similar responsibility and
compensation levels.
5. Employee Benefits. Employee will be entitled to insurance, vacation
-----------------
and other benefits commensurate with Employee's position in accordance with
Acquiror's standard employee policies in effect from time to time. For purposes
of satisfying the terms and conditions of such benefit plans, Acquiror shall
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with Target prior to the Effective Date.
Employee has received a summary of Acquiror's standard employee benefits
policies in effect as of the date hereof. Employee shall receive credit for a
maximum of 105 vacation hours accrued at Target through the Effective Date, in
accordance with Acquiror's standard employee policies. This credit shall be
adjusted for any vacation hours used during the period commencing on January 1,
1999 and ending on the Effective Date.
6. Reimbursement of Business Expenses. Acquiror will, in accordance with
-----------------------------------
Acquiror's policies in effect from time to time, reimburse Employee for all
reasonable business expenses incurred by Employee in connection with the
performance of Employee's duties under this Agreement. including, without
limitation, reasonable expenditures for office space, supplies,
-2-
<PAGE>
equipment and expenses and for business entertainment and travel, upon
submission of the required documentation required pursuant to Acquiror's
standard policies and record keeping procedures.
7. Confidentiality. Simultaneously with the execution of this Agreement.
---------------
Employee is executing and delivering and hereby adopts and agrees to be bound by
Acquiror's standard Proprietary Information and Inventions Agreement, a copy of
which is attached to this Agreement as Attachment B (the "Inventions,
------------ ----------
Confidentiality and Trade Secrets Agreement").
- -------------------------------------------
8. Termination.
-----------
(a) Acquiror may terminate Employee's employment at will, at any time
with or without Cause (as defined in Section 8(e) below) upon written notice to
Employee.
(b) Employee may terminate Employee's employment upon written notice
to Acquiror in the event that Acquiror is in material breach of this Agreement,
provided that such termination will become effective only upon the expiration of
30 days following such notice and then only if the alleged breach remains
uncured (provided that Acquiror shall not have more than one opportunity to cure
such breach). Such termination shall be deemed a termination by Acquiror of
Employee's employment under Section 8(a) for which Employee shall have the
remedy set forth in Section 8(c).
(c) Upon termination of Employee's employment pursuant to Section
8(a) or (b) for any reason other than Cause: (1) Acquiror will pay to Employee
an amount equal to the product of employee's monthly Salary (at the monthly rate
paid to Employee immediately prior to such termination) and the number of months
(including fractions thereof) that remain from the date of employee's
termination through the end of the Initial Period plus the target bonus
specified in Section 4(b) (the "Termination Payment") immediately upon such
-------------------
termination and (ii) the vesting of any options to purchase Acquiror Common
Stock granted to Employee subsequent to the consummation of the Merger shall be
accelerated by the number of months (including fractions thereof) that remain
from the date of employee's termination through the end of the Initial Period.
Acquiror's obligation to make the Termination Payment and accelerate vesting of
stock options pursuant to this Section 8(c) is in lieu of any damages or any
other payment or benefits, including without limitation stock benefits (except
that with regard to the vesting and termination of stock options. such stock
options will vest and terminate according to the terms of specific stock option
grant agreements), which Acquiror might otherwise be obligated to pay Employee
as a result of Employee's termination of employment. Acquiror and Employee agree
that, in view of the nature of the issues likely to arise in the event of such a
termination, it would be impracticable or extremely difficult to fix the actual
damages resulting from such termination and proving actual damages. causation
and foreseeability in the case of such termination would be costly, inconvenient
and difficult. In requiring Acquiror to make the Termination Payment and to
accelerate the vesting of stock options as set forth herein, it is the intent of
the parties to provide, as of the date of this Agreement. for a liquidated
amount of damages to be paid by Acquiror to Employee. Such liquidated amount
shall be deemed full and adequate damages for such termination and is not
intended by either party to be a penalty.
-3-
<PAGE>
(d) Upon Death. If Employee dies during the term of this Agreement,
----------
Acquiror will pay Employee's estate an amount equal to all salary, bonuses and
benefits accrued as of the date of Employee's death.
(e) Definition of Cause. For purposes of this Agreement. "Cause" for
------------------- -----
Employee's termination will exist at any time after the happening of one or more
of the following events:
(i) an act of personal dishonesty constituting willful and
material misconduct,
(ii) a violation of employment obligations (including
confidentiality or noncompetition obligations) which is demonstrably willful and
material misconduct which has not been cured within 30 days after written notice
of such violation has been given to Employee,
(iii) the willful engaging in illegal conduct that is materially
and demonstrably injurious to the Company,
(iv) Employee's continued failure to substantially perform his
or her duties for a period of 90 days after written notice thereof setting forth
in reasonable detail the respects in which the Company believes Employee has so
failed, or
(v) Employee being convicted of a felony or misappropriating
property of the Company.
(f) Survival. Employee's and Acquiror's obligations under Sections 5,
--------
6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's
employment by Acquiror.
9. Miscellaneous.
-------------
(a) Notices. Any and all notices permitted or required to be given
--------
under this Agreement must be in writing. Notices will be deemed given (i) when
personally received or when sent by facsimile transmission (to the receiving
party's facsimile number), (ii) on the first business day after having been sent
by commercial overnight courier with written verification of receipt, or (iii)
on the third business day after having been sent by registered or certified mail
from a location on the United States mainland, return receipt requested, postage
prepaid, whichever occurs first, at the address set forth below or at any new
address, notice of which will have been given in accordance with this Section
9(a):
If to Acquiror: Applied Micro Circuits Corporation
Attn: President
6290 Sequence Drive
San Diego, CA 92121
-4-
<PAGE>
with a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Mark A. Medearis
If to Employee: Ramakrishna Sudireddy
15 Messinia Drive
Andover, MA 01810
with a copy to: Hale and Dorr LLP
60 State Street
Boston. MA 02109
Attention: Patrick Rondeau
(b) Amendments. This Agreement, including the Exhibits hereto,
----------
contains the entire agreement and supersedes and replaces all prior agreements
between Acquiror and Employee or Target and Employee concerning Employee's
employment. This Agreement may not be changed or modified in whole or in part
except by a writing signed by the party against whom enforcement of the change
or modification is sought.
(c) Successors and Assigns. This Agreement will not be assignable by
----------------------
either Employee or Acquiror, except that the rights and obligations of Acquiror
under this Agreement may be assigned to a corporation which becomes the
successor to Acquiror as the result of a merger or other corporate
reorganization and which continues the business of Acquiror, or any other
subsidiary of Acquiror, provided that Acquiror guarantees the performance by
such assignee of Acquiror's obligations hereunder.
(d) Governing Law. This Agreement will be governed by and interpreted
-------------
according to the substantive laws of the Commonwealth of Massachusetts without
regard to such state's conflicts law.
(e) No Waiver. The failure of either party to insist on strict
---------
compliance with any of the terms of this Agreement in any instance or instances
will not be deemed to be a waiver of any term of this Agreement or of that
party's right to require strict compliance with the terms of this Agreement in
any other instance.
(f) Severability. Employee and Acquiror recognize that the
------------
limitations contained herein are reasonably and properly required for the
adequate protection of the interests of Acquiror. If for any reason a court of
competent jurisdiction or binding arbitration proceeding finds any provision of
this Agreement, or the application thereof, to be unenforceable, the remaining
provisions of this Agreement will be interpreted so as best to reasonably effect
the intent of the parties. The parties further agree that the court or
arbitrator shall replace any such invalid or unenforceable provisions with valid
and enforceable provisions designed to achieve, to the extent possible, the
business purposes and intent of such unenforceable provisions.
-5-
<PAGE>
(g) Counterparts. This Agreement may be executed in counterparts
------------
which when taken together will constitute one instrument. Any copy of this
Agreement with the original signatures of all parties appended will constitute
an original.
(h) Expenses. The reasonable fees and expenses of either party which
--------
may be reasonably incurred by such party as the result of any claim or contest
by the Employee to enforce his or her rights under this Agreement shall be paid
promptly, to the full extent permitted by law, by the party prevailing in such
claim or contest.
(i) Dispute Resolution.
------------------
(i) Arbitration of Disputes. Any dispute under this Agreement
-----------------------
shall be resolved by arbitration in Boston, Massachusetts, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
---------
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve such dispute.
(ii) Compensation of Arbitrator. Any such arbitration will be
--------------------------
conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(iii) Selection of Arbitrator. The American Arbitration
-----------------------
Association will have the authority to select an arbitrator from a list of
arbitrators who are partners in a nationally recognized firm of independent
certified public accountants from the management advisory services department
(or comparable department or group) of such firm; provided, however, that such
firm cannot be the firm of certified public accountants then auditing the books
and records of either party or providing management or advisory services for
either party, that each patty will have the opportunity to make such reasonable
objection to any of the arbitrators listed as such party may wish and that the
American Arbitration Association will select the arbitrator from the list of
arbitrators as to whom neither party makes any such objection. In the event that
the foregoing procedure is not followed, each party will choose one person from
the list of arbitrators provided by the American Arbitration Association
(provided that such person does not have a conflict of interest), and the two
persons so selected will select from the list provided by the American
Arbitration Association the person who will act as the arbitrator.
(iv) Payment of Costs. Acquiror and Employee will bear the
----------------
expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses
-6-
<PAGE>
related to the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party.
(v) Burden of Proof. For any dispute submitted to arbitration,
---------------
the burden of proof will be as it would be if the claim were litigated in a
judicial proceeding.
(vi) Award. Upon the conclusion of any arbitration proceedings
-----
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to each party to this Agreement along
with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement.
(viii) Exclusive Remedy. Except as specifically otherwise
----------------
provided in this Agreement, arbitration will be the sole and exclusive remedy of
the parties for any dispute arising out of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement is made and effective as of the
Effective Date.
APPLIED MICRO CIRCUITS EMPLOYEE
CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE] /s/ Ram Sudireddy
----------------------------- ------------------------
Title: PRES/CEO RAM SUDIREDDY
--------------------------
Signature page to Employment Agreement
<PAGE>
List of Exhibits:
- ----------------
Attachment A Stock Option Grant
Attachment B Inventions, Confidentiality and Trade Secrets Agreement
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Ramakrishna R. Sudireddy Option Number: 99030015
15 Messinia Drive Plan: 92
Andover, MA 01810 ID: 018-72-5013
================================================================================
Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy
10,239 shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $399,960.94.
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
-------- ------------ --------- ----------
<S> <C> <C> <C>
1,462 On Vest Date 3/17/00 3/17/09
1,097 Monthly 12/17/00 3/17/09
2,560 Monthly 12/17/01 3/17/09
2,560 Monthly 12/17/02 3/17/09
2,560 Monthly 3/17/03 3/17/09
</TABLE>
================================================================================
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ [SIGNATURE ILLEGIBLE] 3/18/99
- -------------------------------------- ----------------------------
Applied Micro Circuits Corporation Date
/s/ R. R. Sudireddy 3/18/99
- -------------------------------------- ----------------------------
Ramakrishna R. Sudireddy Date
<PAGE>
No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at a
value equal to the exercise price of the Shares as to which the Option is being
exercised; or
(iv) delivery of a property 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. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, the Optionee may, but only within
thirty (30) days after the date of such termination (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), exercise this Option to the extent exercisable at the date of such
termination. Optionee's employment shall be deemed terminated on such date, if
any, as Optionee becomes a part-time employee, as defined in the Company's then
current employment guidelines. To the extent this Option was not exercisable at
the date of such termination, or if the Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-2-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY 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 AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain related
information and represents that Optionee is familiar with the terms and
provisions of these documents, and hereby accepts this Option subject to all of
those terms and provisions. Optionee has reviewed the Plan and this Option in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: 3/18/99
-----------------
/s/ R. R. Sudireddy
---------------------------------------------
(Optionee) Ramakrishna Sudireddy
Residence Address:
15 Messinia Drive
Andover, MA 01810
-4-
<PAGE>
EXHIBIT B
---------
NOTICE OF DISQUALIFYING DISPOSITION
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Disqualifying Disposition
-----------------------------------
This is official notice that the undersigned disposed of Shares of Applied
Micro Circuits Corporation Common Stock acquired by exercise of an incentive
stock option, under and pursuant to the Company's 1992 Stock Option Plan, as
follows:
<TABLE>
<CAPTION>
Option Market Total Shares
Option Date of Exercise Price (Per Transfer Value (Per Transferred/
Number Grant Date Share) Date Share) Sold
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
I understand that for Federal Income Tax Purposes, AMCC is required to
report on a Form W-2 the compensation of employees who dispose of Incentive
Stock Options shares within one year from the Date of Exercise, or within two
years from the date of grant.
Optionee's Signature: /s/ R. R. Sudireddy
--------------------------------
Print Name:___________________________________________
Home Address:_________________________________________
City, State, Zip Code:________________________________
Daytime Phone:________________________________________
Social Security Number:_______________________________
You must use this form if you have disposed of ISO shares within two years of
the grant date or one year of the exercise date.
-6-
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94.2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Ramakrishna R. Sudireddy Option Number: 99030016
15 Messinia Drive Plan: 92
Andover, MA 01810 ID: 018-72-5013
================================================================================
Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy
89,761 shares of Applied Micro Circuits Corporation (the Company) stock at
$39,06250 per share.
The total option price of the shares granted is $3,506,289.06
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
--------------- ------------- --------- ----------
<S> <C> <C> <C>
23,539 On Vest Date 3/17/00 3/17/09
17,652 Monthly 12/17/00 3/17/09
22,440 Monthly 12/17/01 3/17/09
22,440 Monthly 12/17/02 3/17/09
3,690 Monthly 3/17/03 3/17/09
</TABLE>
================================================================================
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ Joel O. Holliday 3/18/99
- ---------------------------------------- ------------------------
Applied Micro Circuits Corporation Date
/s/ R. R. Sudireddy 3/18/99
- ---------------------------------------- ------------------------
Ramakrishna R. Sudireddy Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company or the Secretary's designee. The
Exercise Notice shall be accompanied by payment of the exercise price. This
Option shall be deemed to be exercised upon receipt by the Company of such
Exercise Notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at a
value equal to the exercise price of the Shares as to which the Option is being
exercised; or
(iv) delivery of a property 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. Restrictions of Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee or Consultant. In the event of
--------------------------------------------------
termination of Optionee's Continuous Status as an Employee or Consultant, the
Optionee may, but only within thirty (30) days after the date of such
termination (but in no event later than the date of expiration of
2
<PAGE>
to be withheld by the Company as a result of any exercise of the Option from
amounts payable to such person, subject to the following limitations:
(i) such election shall be irrevocable;
(ii) such election shall be subject to the disapproval of the Board
at any time;
(iii) such election may not be made within six months of the grant
date of the Option (except that this limitation shall not apply
in the event of death or disability of such person occurring
prior to the expiration of the six-month period); and
(iv) such election must be made either (A) six months prior to the
date that the amount of tax to be withheld upon such exercise is
determined or (B) in any ten-day period beginning on the third
business day following the date of release by the Company for
publication of quarterly or annual summary statements of sales
or earnings of the Company.
Any securities so withheld or tendered will be valued by the Company as of
the date of exercise.
APPLIED MICRO CIRCUITS CORPORATION
a Delaware corporation
By: /s/ Joel O. Holliday
--------------------
Joel 0. Holliday
Title: Vice President
Finance & Administration
THIS SPACE INTENTIONALLY
LEFT BALNK-SIGNATURE OF
OPTIONEE ON FOLLOWING PAGE
4
<PAGE>
EXHIBIT A
---------
STOCK OPTION NOTICE OF EXERCISE
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase Shares of Applied Micro Circuits
Corporation Common Stock, all of which are vested, under and pursuant to the
Company's 1992 Stock Option Plan, as follows:
<TABLE>
<CAPTION>
Type of Number of Option Total
Option Option Option Shares Being Price Tax Due* Amount
Number Date ISO/NSO Purchased (Per Share) (if applicable) Due AMCC
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
* AMCC is required to withhold taxes when employees exercise an NSO. Under
current tax law, U.S. income tax withholding is not required when exercising
an ISO.
I am paying the cost to exercise as specified below by method a, b or c
(circle one below)
a. Cash Payment: Enclosed is my check # _______________ in the amount of
___________________.
b. Cashless Exercise and Same-Day Sale: I will call my stock broker
(check one below) to authorize them to issue a check payable to AMCC from my
account # _____________________.
_____ BancBoston Robertson Stephens-Corporate Services, Pon Smolokoff,
555 California Street, Suite 2600, San Francisco, CA 94104, TEL: (415)
693-3510, FAX: (415) 956-5265, E-MAIL: ron_smolokoff@rsco.com
_____ SG Cowen & Company-Private Client Group, Matthew O. Casey, Four
Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL:
(415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL:
caseym@cowen.com
c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been
held for at least six months.)
I certify that the stock purchased through the exercise of these options will
not be sold in a manner that would violate the Company's policy on Insider
Trading.
Optionee's Signature: /s/ R. R. Sudireddy
--------------------------------
Print Name:___________________________________________
Home Address:_________________________________________
City, State, Zip Code:________________________________
Daytime Phone:________________________________________
Social Security Number:_______________________________
6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION INVENTIONS,
CONFIDENTIALITY AND TRADE SECRETS AGREEMENT
AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California
Corporation ("AMCC"), and ________________________________ ("Employee").
In consideration of the employment of the Employee by AMCC and the salary
or wages to be paid him/her during the period of employment it is agreed as
follows:
1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement,
device, design, apparatus, practice, process, method, concept, original work of
authorship, trade secret or product (each of which is called an "invention"),
whether patentable or not, made, developed, perfected, devised, conceived or
first reduced to practice by the Employee, either solely or in collaboration
with others, during the period of employment by AMCC, whether or not during
regular working hours, shall be the sole and exclusive property of AMCC except
as may otherwise be required as provided in paragraph 4 below. The Employee
shall hold each and every such invention in fiduciary capacity for the sole
benefit of AMCC and shall promptly disclose in writing full information
concerning each and every such invention to AMCC, which shall receive employee's
disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply
for any patent. If AMCC in its sole discretion chooses, it will seek patent
protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN
INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the
LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated
Sections 2871 and 2872 are attached to this Agreement. The provisions of this
paragraph 1 are subordinate to paragraph 4 of this Agreement.
2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments,
concepts, know-how, improvements or trade secrets which an Employee shall create
during employment that relate to AMCC's business, products or research or that
relate to any work performed by Employee for AMCC, including without limitation
all writings, programs and art produced by Employee, such works of authorship
shall constitute a "work for hire" pursuant to title 17, United States Code,
Sections 101 and 201 (b.), a copy of which is attached to this Agreement.
3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement
and from time to time thereafter during employment as necessary, Employee agrees
to notify AMCC, in advance, of his intent and/or plan to engage in research,
development and/or inventive work at any time not within regular working hours,
and from time to time to advise AMCC of the results thereof. Such notification
shall be in writing and shall identify the area(s) of activity contemplated.
4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of
AMCC at any time after submittal of the invention disclosure form pertaining to
an invention and without further compensation (except that the Employee shall be
reimbursed for expenses necessary and related to the invention not covered by
his salary) the Employee shall:
<PAGE>
(a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the
United States and all foreign countries applications for patents covering all
inventions, (b) execute, acknowledge and deliver any and all instruments deemed
necessary or proper by AMCC, its attorneys or nominees to make, file, or
prosecute all applications or in connection with their continuation, renewal or
reissuance or in the conduct of all proceedings or litigation regarding them,
(c) execute any and all documents deemed necessary or proper by AMCC, its
attorneys or nominees to transfer title in and to the applications or title in
and to all patents, copyrights, trademarks, maskwork rights, moral rights or
other intellectual property rights covering the inventions to AMCC or its
nominees, and (d) execute any other documents AMCC may request so it may
transfer or dispose of the invention. If AMCC is unable because of mental or
physical incapacity, unavailability or for any other reason, to secure
Employee's signature to apply for or to pursue any application for any United
States or foreign patents or copyright registrations covering inventions or
original works of authorship assigned to AMCC as above, then Employee hereby
irrevocably designates and appoints AMCC and its duly authorized officers and
agents as agent and attorney in fact, to act for and in Employee's behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal force and effect as if originally executed by Employee. The
Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of
any nature whatsoever, which Employee now or hereafter has for infringement of
any and all proprietary rights assigned to AMCC.
5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that
AMCC has entered into, or from time to time in the future may enter into,
agreements or arrangements with agencies of the United States Government and
that AMCC may be subject to laws and regulations which impose obligations,
restrictions and limitations on it with respect to inventions and patents
acquired by it or conceived or developed by employees, consultants and other
agents rendering services to AMCC. The Employee shall be bound by all such
obligations, restrictions and limitations applicable to any invention conceived
or developed by the Employee during the period of employment and shall take any
obligations and to comply with the restrictions and limitations.
6. RECORDS. The Employee will keep complete, accurate and authentic
accounts, notes, data and records of all inventions in the manner and form
requested by AMCC. The Employee acknowledges that California Labor Code Section
2860 provides that everything that an employee acquires by virtue of his/her
employment belongs to the employer. Upon termination of Employee's employment,
Employee agrees to promptly surrender to the company documents and materials
Employee acquired, received or developed during his/her employment, including,
but not limited to, all correspondence, drawings, blueprints, manuals, letters,
notes, reports, flow charts, diagrams, programs, proposals, or any other
physical items or documents relating to the Company's Trade Secrets, and agrees
that he/she will not make or retain any unauthorized copies or other
reproductions of such materials. The Employee recognizes that the unauthorized
taking of any of the Company's Trade Secrets is a crime under California penal
Code Section 499(c) and is punishable by imprisonment for a period not exceeding
one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both.
The Employee further
-2-
<PAGE>
acknowledges that such unauthorized misappropriation of the company's Trade
Secrets could also result in civil liability under California Civil Code Section
3426. and that willful misappropriation may result in an award against employee
for double the amount of the Company's damages and the Company's fees in
collecting such damages.
7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended
substantial sums of money and devoted a great deal of time, labor and effort to
the development, creation and acquisition of a large body of confidential
information that is used by it in its business and is not generally known or
available to the public. Such confidential information gives the Company a
valuable advantage over its competitors and prospective competitors and is
proprietary to the Company. Such confidential and proprietary information
includes, but is not limited to, lists of actual or potential customers, clients
or candidates; techniques and formulas; marketing and sales plans; materials
relating to other employees; financial information; cost rate and pricing
information; business plans; diagrams; sources of supplies; drawings; plans;
processes; proposals; codes; notebooks; and the content of any contracts or
proposals involving the Company which are made, developed, perfected, devised,
conceived or first reduced to practice by Employee, the company or its
employees, agents, consultants, affiliates or assistants, either alone or
jointly with others (collectively "Trade Secrets"). Employee agrees that he/she
will, both during and after the period of employment, treat any information of
the company which is not readily publicly available as a Trade Secret of the
Company unless the company advises Employee otherwise in writing. Employee
acknowledges that Trade Secrets include not only technical information, but any
business information that the Company treats as confidential. Employee
recognizes that AMCC has received and in the future will receive confidential or
proprietary information from third parties subject to a duty on AMCC's part to
maintain the confidentiality of such information and to use it only for certain
limited purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out work for
AMCC consistent with AMCC's agreement with such third party.
8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any,
identified in Exhibit A, attached, (a) Employee has no inventions previously
made or conceived by the Employee which the Employee wants to be excluded from
the scope of this Agreement and (b) the Employee releases AMCC from any and all
claims, known or unknown, by the Employee by reasons of any use by AMCC of any
innovation previously made or conceived by the Employee. If, in the course of
employment with AMCC, Employee incorporates into an AMCC product, process or
machine a pre-existing invention owned by the Employee or in which Employee has
an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free,
irrevocable, perpetual, worldwide license (with the rights to sublicense) to
make, have made, copy, modify, make derivative works of, use, sell and otherwise
distribute such pre-existing invention as part of or in connection with such
product, process or machine.
9. NO CONFLICTING AGREEMENT. The Employee represents that performance of
all terms of this Agreement as an Employee or consultant of AMCC has not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by the Employee in confidence or trust
prior or subsequent to the commencement of
-3-
<PAGE>
employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to
use, any inventions, confidential proprietary information or material belonging
to any previous employer or any other party.
10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with
an affiliated company of AMCC, then apart from this paragraph 10, whenever the
term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the
name of the affiliated company is to be substituted. Employee agrees that AMCC
may exercise any right conferred on, or perform any duty under this Agreement
for, the affiliated company. An affiliated company is an entity at least 50%
owned by AMCC.
11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work
closely with employees of AMCC in performing services for AMCC. Employee
expressly agrees that he/she will not, during his/her employment with AMCC and
for one year thereafter, solicit or take away or assist any other individual or
business in soliciting any employee of AMCC. In addition, all information about
such employees which becomes known to Employee during the course of his/her
employment with AMCC, and which is not otherwise known to the public, is a trade
secret of AMCC and shall not be used by Employee in soliciting or taking away
employees of AMCC at any time during or after termination of his/her employment
with AMCC.
12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that
his/her employment is not for a specified term and that his/her employment may
be terminated by AMCC at anytime, with or without cause and with or without
notice. Employee expressly acknowledges that this provision is included in the
employee handbook, was reviewed during new hire orientation, and is to be the
complete and final expression of AMCC's and employee's understanding regarding
the terms and conditions under which his/her employment may be terminated.
Employee further understands and agrees that no representations contrary to this
provision are valid, and that this provision may not be augmented, contradicted
or modified in any way, except by a writing signed by the employee and the
President of AMCC. This employment at-will relationship may not be modified by
any oral or implied agreement.
13. TERM. This Agreement shall become effective as of the date of the
commencement of the Employee's employment by AMCC, and except as provided in
paragraph 14, shall terminate as of the termination of employment.
14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves
the employ of AMCC, the Employee hereby consents to notification by AMCC to
his/her new employer about the Employee's rights and obligations under this
Agreement.
15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive
the termination of this Agreement and of the Employee's employment by AMCC.
16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of AMCC, but not assignable to
the heirs, executors and administrators of the Employee.
-4-
<PAGE>
17. AMENDMENT. This Agreement may be amended only by a written amendment
executed by the Employee and the President of AMCC acting on behalf of AMCC.
18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges
that violation of any of the provisions in this Agreement would cause
irreparable injury to AMCC, that the remedy at law for any violation or
threatened violation of this Agreement would be inadequate, and that AMCC shall
be entitled to temporary and permanent injunctive or other equitable relief
without the necessity of proving actual damages. In any proceeding by AMCC to
enforce any of the provisions contained in this Agreement, the prevailing party
shall be entitled to reimbursement of all costs and reasonable attorneys' fees
incurred in such litigation.
19. GOVERNING LAW. This Agreement shall be interpreted, construed,
governed and enforced in accordance with the laws of the State of California.
20. SEPARATE TERMS. Each term, condition, covenant or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue to be in
full force and effect.
21. WAIVER. A waiver by either party of a breach of provision or
provisions of this Agreement shall not constitute a general waiver, or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provision in this Agreement.
22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and
agrees that this Agreement and attached exhibits represent the entire agreement
with AMCC concerning the subject matter hereof, and supersedes any previous oral
or written communications, representations, understandings or agreements with
AMCC or any officer or agent thereof. Employee understands that no
representative of AMCC has been authorized to enter into any agreement or
commitment with employee that this inconsistent in any way with the terms of
this Agreement.
23. CONSTRUCTION. This Agreement shall not be construed against any party
on the grounds that such party drafted the Agreement or caused it to be drafted.
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
-5-
<PAGE>
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
EXECUTED by the parties hereto as of__________________, 19____.
APPLIED MICRO CIRCUITS CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------
Witness:
/s/ [SIGNATURE ILLEGIBLE] /s/ R. R.Sudireddy
- ----------------------------- ------------------------------
Employee's Signature
/s/ RAM SUDIREDDY
------------------------------
Employee's Name (Printed)
EXHIBIT A
RESERVED INVENTIONS MADE OR CONCEIVED PRIOR
TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF
4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>5
<DESCRIPTION>AGREEMENT TO SELL
<TEXT>
<PAGE>
Exhibit 10.29
AGREEMENT TO SELL
AND PURCHASE
AND ESCROW INSTRUCTIONS
Between
KILROY REALTY, L.P.
as
"Seller"
and
APPLIED MICRO CIRCUITS CORPORATION
as
"Purchaser"
<PAGE>
AGREEMENT TO SELL AND PURCHASE
AND ESCROW INSTRUCTIONS
-----------------------
THIS AGREEMENT TO SELL AND PURCHASE AND ESCROW INSTRUCTIONS (this
"Agreement") is dated as of January 8, 1999 (the "Effective Date") and entered
into by and between KILROY REALTY, L.P., a Delaware limited partnership
("Seller"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation
("Purchaser"), with reference to the following facts and intentions:
R E C I T A L S:
- - - - - - - -
A. Seller, as Landlord, and Purchaser, as Tenant, are parties to that
certain Ground Lease effective as of January 1, 1998 (the "Ground Lease").
Capitalized terms used herein and not separately defined shall have the meanings
ascribed to them in the Ground Lease.
B. The parties have caused this Agreement to be executed and
delivered pursuant to the exercise of the Purchase Option by Purchaser as
provided under the Ground Lease.
NOW, THEREFORE, for the consideration hereafter set forth, and other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, Seller and Purchaser hereby agree as follows:
1. Agreement of Purchase and Sale.
------------------------------
Seller shall convey, and Purchaser shall purchase and acquire in
accordance with the terms set forth herein:
A. That certain real property located in the City of San
Diego., County of San Diego, State of California, more particularly described in
Exhibit A attached hereto and incorporated herein by this reference (the "Land")
B. All of Seller's right, title and interest in and to any
improvements, if any, affixed to the Land (collectively the "Improvements").
C. All of Seller's rights, privileges, entitlements, easements,
approvals, licenses, permits and appurtenances pertaining to the Land and the
Improvements, including any right, title and interest of Seller (but without
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warranty whether statutory, express or implied) in and to adjacent streets,
alleys or rights-of-way.
D. All of Seller's right, title and interest in and to any
intangible warranties, guaranties, contract rights and/or other claims, to the
extent assignable, relating to the Land and/or the Improvements.
The items described in Sections 1(A) through 1(C) above are
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hereinafter called the "Real Property;" the items described in Section 1(D) are
called the "Intangible Property;" and the Real Property and the Intangible
Property are collectively referred to as the "Property."
2. Purchase Price.
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The purchase price ("Purchase Price") for the Property shall be
$3,636,036.
3. Payment of Purchase Price.
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The Purchase Price shall be paid as follows:
A. As part of the Opening of Escrow (as defined below),
Purchaser shall deliver to Chicago Title Company ("Escrow Holder" and "Title
Company") a deposit of One Thousand Dollars ($1,000.00) (the "Deposit"). The
Deposit shall be in the form of wire transfer, cash or a certified or bank
cashier's check for immediately available funds. Escrow Holder shall place the
Deposit in an interest-bearing account acceptable to Purchaser and Seller. All
interest earned on the Deposit shall be included within the meaning of the term
"Deposit" in this Agreement such that Purchaser shall receive the benefit of any
interest earned thereon through a credit at the Close of Escrow.
B. Upon the Close of Escrow, Purchaser shall deposit or cause
to be deposited with Escrow Holder, in cash, by a certified or bank cashier's
check made payable to Escrow Holder or by a confirmed wire transfer of funds,
the balance of the Purchase Price plus closing costs and other charges payable
by Purchaser pursuant to this Agreement.
4. Escrow Instructions.
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A. Opening of Escrow. As soon as reasonably practicable following
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the mutual execution of this Agreement, but in no event later than two (2)
business days thereafter, the parties shall open an escrow ("Escrow") with the
Escrow Holder in order to consummate the purchase and sale of the Property in
accordance with the terms and provisions hereof by depositing the
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Deposit and a signed original of this Agreement in the Escrow. The provisions
hereof shall constitute joint primary escrow instructions to the Escrow Holder;
provided, however, that the parties shall execute such additional instructions
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as requested by the Escrow Holder not inconsistent with the provisions hereof
unless such additional instructions state that these instructions are being
modified, state the modification in full and are signed by both parties. The
date as of which the Escrow Holder shall receive (i) the Deposit and (ii) an
original of this Agreement executed on behalf of both Seller and Purchaser
(which execution may be effected in multiple counterparts) shall constitute the
"opening of Escrow." Escrow Holder shall deliver written confirmation of the
date of the Opening of Escrow to the parties in the manner set forth in Section
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14 of this Agreement.
B. Documents and Funds Delivered to or by Escrow. The following
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shall be delivered into the Escrow or by Escrow in connection with the transfer
of the Property:
(1) Delivery by Seller into Escrow. At least two (2) business
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days prior to the Closing Date (as defined below), Seller shall deposit into
Escrow:
(a) a grant deed (the "Grant Deed") to the Property in
recordable form, duly executed and acknowledged by Seller in substantially the
same form as set forth in Exhibit "B" attached hereto;
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(b) two (2) originals of an assignment and assumption of
intangible property (the "Assignment of Intangible Property"), duly executed by
Seller in substantially the same form as set forth in Exhibit "C" attached
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hereto;
(c) two (2) originals of an affidavit from Seller which
satisfies the requirements of Section 1445 of the Internal Revenue Code, as
amended (the "Section 1445 Affidavit") in substantially the same form as set
forth in Exhibit "D" attached hereto;
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(d) two (2) originals of a Withholding Exemption
Certificate, California Form 590 (the "Certificate"), in substantially the same
form as set forth in Exhibit "E" attached hereto;
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(e) two (2) originals of the Termination of Ground Lease and
Termination of Memorandum of Ground Lease in substantially the same forms as set
forth in Exhibits "F-1" and "F-2" attached hereto (the "Termination of Ground
Lease");
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(f) a duly executed certificate of Seller ("Seller's
Bringdown Certificate") in the form of Exhibit "G" and
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(g) such other instruments and documents as may be
reasonably requested by Escrow Holder relating to Seller, to the Property and/or
as otherwise required to transfer the Property to Purchaser.
(2) Delivery of Documents by Purchaser into Escrow. Prior to the
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Closing Date, Purchaser shall deposit into Escrow executed counterparts of the
documents referred under Subsections B(l) (b), (e) and (g) above.
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(3) Delivery by Escrow. At least two (2) business days prior to
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the Close of Escrow, Escrow Holder shall deliver to Purchaser and Seller a pro
forma closing statement which sets forth, in a manner satisfactory to Purchaser
and Seller, the prorations and other credits and debits contemplated by this
Agreement.
C. Conditions to Close. Escrow shall not close unless and until the
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following conditions precedent and contingencies have been satisfied or waived
in writing by the party for whose benefit the conditions have been included:
(1) All funds and instruments described in this Section 4 have
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been delivered to the Escrow Holder.
(2) The Title Company is in a position and is unconditionally
committed to issue to Purchaser the Title Policy described in Section 6 below.
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(3) All representations and warranties made by Seller in Section
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8 below and Purchaser in Section 9 below shall be true and correct in all
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material respects as of the Closing Date.
(4) Except as expressly provided in this Section 4(c) (4),
Seller and Purchaser shall each have performed, observed and complied with all
of their respective covenants, agreements and conditions required by this
Agreement to be performed, observed and/or complied with by Seller and
Purchaser, as the case may be, prior to, or as of, the Closing. If Seller fails
to deposit into Escrow the Section 1445 Affidavit or the Certificate as required
by this Agreement, Purchaser may at its option either (i) delay Close of Escrow
until such time as Seller has complied with the conditions set forth herein
(which adjournment shall not place Purchaser in default of its obligations
hereunder) or (ii) withhold from the Purchase Price and remit to the Internal
Revenue Service, a sum equal to ten
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percent (10%) of the gross selling price of the Property and such other sum as
shall be required in accordance with the withholding obligations imposed upon
Purchaser pursuant to Section 1445 of the Internal Revenue Code, as amended, and
the laws of the State of California. Such withholding shall not place Purchaser
in default under this Agreement, and Seller shall not be entitled to claim that
such withholding shall excuse Seller's performance under this Agreement.
If Closing shall have occurred with the consent of both parties, any
non-material condition not otherwise satisfied or waived as of the Closing
shall be deemed fully satisfied or waived by the party for whose benefit the
condition had been included.
D. Recordation and Transfer. Upon satisfaction of the
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conditions set forth in Section 4(C) above, Escrow Holder shall transfer the
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Property as follows:
(1) Cause the Termination of Memorandum of Ground Lease and
Grant Deed to be recorded in the Official Records of San Diego County,
California and deliver conformed copies thereof to each of Seller and Purchaser;
(2) Deliver to Purchaser one (1) fully executed original of
the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of
Intangible Property, the Seller's Bringdown Certificate, and the Certificate;
(3) Deliver to Seller one (l) fully executed original of
the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of
Intangible Property, the Seller's Bringdown Certificate, and the Certificate;
(4) Deliver to the parties entitled thereto any other
closing documents, including, without limitation, the final closing statement
for the Escrow (the "Final Statement"), which shall contain no material
differences from the pro forma closing statement, previously delivered to, and
approved by, each party;
(5) Disburse all funds deposited with Escrow Holder by
Purchaser pursuant to Section 3 as follows:
(a) deliver to Seller the Purchase Price less amounts
chargeable to Seller pursuant to instructions to be delivered by Seller to
Escrow Holder; and
(b) disburse any remaining balance of the funds
deposited by Purchaser to Purchaser upon the Close of
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Escrow pursuant to instructions to be delivered by Purchaser to Escrow Holder
less amounts chargeable to Purchaser.
E. Close of Escrow. Escrow shall close upon the recordation of
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the Grant Deed in accordance with the terms and conditions hereof ("Close of
Escrow" or "Closing Date" or "Closing") . The Close of Escrow shall be May 31,
1999.
5. Condition of Title. It shall be a condition to the Close of Escrow
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for Purchaser's benefit that title to the Real Property be conveyed to Purchaser
by Seller subject only to the following approved condition of title ("Approved
Condition of Title"):
(a) The matters referred to in Part 1, Schedule B of the Title
Policy;
(b) Non-delinquent general