UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2015
OR 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number: 000-23193
 
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of registrant as specified in its charter) 
Delaware
 
94-2586591
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
215 Moffett Park Drive, Sunnyvale, CA
 
94089
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(408) 542-8600

Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value
 
The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No   þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
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 that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
o   
  
Accelerated filer
 
þ
 
 
 
 
 
 
 
Non-accelerated filer
 
o    (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).    Yes  ¨    No  þ
The aggregate market value of the voting common stock held by non-affiliates of the registrant, based upon the closing sale price of the registrant’s common stock on September 30, 2014 (the last day of the registrant’s second quarter of fiscal 2015) as reported on the Nasdaq Global Select Market, was approximately $461,530,000. Shares of common stock held by each officer and director and by each person who then owned 10% or 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. The registrant has no non-voting common stock.
There were 80,970,513 shares of the registrant’s common stock issued and outstanding as of May 14, 2015.
Documents Incorporated by Reference
The following document is incorporated by reference in Part III (Items 10, 11, 12, 13 and 14) of this Annual Report on Form 10-K: portions of registrant’s definitive proxy statement for its annual meeting of stockholders to be held on August 11, 2015 which will be filed with the Securities and Exchange Commission within 120 days of March 31, 2015.
 



APPLIED MICRO CIRCUITS CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
March 31, 2015
TABLE OF CONTENTS
 
 
Page
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
 


i


CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
All statements included or incorporated by reference in this report, other than statements or characterizations of historical fact, are forward-looking statements. These forward-looking statements are made as of the date of this Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (this “Annual Report”). Any statement that refers to an expectation, projection or other characterization of future events or circumstances, including the underlying assumptions, is a forward-looking statement. We use certain words and their derivatives such as “anticipate”, “believe”, “plan”, “expect”, “estimate”, “predict”, “intend”, “may”, “will”, “should”, “could”, “future”, “potential” and similar expressions in many of the forward-looking statements.
These forward-looking statements include, but are not limited to, statements regarding: anticipated trends and challenges in our business and the markets in which we operate; expectations regarding the growth of next-generation cloud infrastructure and global data center traffic, energy consumption and total cost of ownership; anticipated market penetration by ARM®-based data center servers and other market and technological trends; our plans and predictions regarding the development, production, performance, sales volumes and general market acceptance of our X-Gene® Server on a Chip® product family and development platform, our X-Weave® connectivity product family, our HeliX® family of embedded processor products, and other new products; the timing and scope of customer testing and adoption of such products and their total addressable market and total cost of ownership; product development cycles and schedules; design-win pipeline; our strategy, including our focus on the development roadmap of our X-Gene, X-Weave and HeliX product families and our current connectivity investments in high-growth 10, 40, 100 and 240 Gbps (gigabit per second) solutions; the timing and extent of customers’ transition away from older connectivity solutions and toward higher performance solutions; our assumptions and forecasts regarding competitors’ product offerings, pricing and strategies, and our products’ ability to compete; the anticipated amount, form and timing of consideration to be paid in connection with our acquisition of Veloce, and related impact on our share dilution, research and development ("R&D") expense and operating results; our sales and marketing strategy; our expectations regarding adequacy of leased facilities and the future relocation of headquarters facilities; the impact of seasonal fluctuations and economic conditions on our business; our intellectual property; our expectations as to expenses, expense reductions, liquidity and capital resources, including without limitation our expected sources and uses of cash and adequacy of cash reserves; our gross margin and efforts to offset reductions in gross margin; our estimates regarding eventual actual costs compared to amounts accrued in our financial statements; factors affecting demand for our products; our ability to attract and retain qualified personnel; our restructuring activities and related expense and anticipated expense savings; and the impact of accounting pronouncements and our critical accounting policies, judgments, estimates and assumptions on our financial results.
The forward-looking statements are based on our current expectations, estimates and projections about our industry and our business, management's beliefs, and other assumptions made by us. In addition, some of the forward-looking statements included in the "Industry Background" section of Part I, Item 1 below are based upon statements made by industry experts, analysts, and other third party sources. All forward-looking statements in this Annual Report and the expectations, estimates, projections, beliefs and other assumptions on which they are based are subject to many risks and uncertainties and are inherently subject to change. We describe many of the risks and uncertainties that we face in Part I, Item 1A, “Risk Factors,” and elsewhere in this Annual Report. Our actual results and actual events could differ materially from those anticipated in any forward-looking statement. Readers should not place undue reliance on any forward-looking statement. All forward-looking statements in this report speak only as of the filing date of this report, and except as required by law, we undertake no obligation to update or revise any forward-looking statements to reflect events or circumstances after such date.
In this Annual Report, “Applied Micro Circuits Corporation”, "AppliedMicro", the “Company”, “we”, “us” or “our” refer to Applied Micro Circuits Corporation and all of our consolidated subsidiaries.

PART I

Item 1.
Business.
Applied Micro Circuits Corporation was incorporated and commenced operations in California in 1979 and was reincorporated in Delaware in 1987. Our principal executive offices are located at 215 Moffett Park Drive, Sunnyvale, California 94089 and our phone number is 408-542-8600. Our sales and engineering offices are located throughout the world. Our common stock trades on the Nasdaq Global Select Market under the symbol “AMCC”.
Overview
Applied Micro Circuits Corporation is a global leader in silicon solutions for next-generation cloud infrastructure and data centers, as well as connectivity products for edge, metro and long haul communications equipment. Our products include the X-Gene® ARM® 64-bit Server on a Chip® solution, or X-Gene. The X-Gene family of products targets existing and

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emerging hyperscale cloud data center, scientific and high-performance computing and enterprise applications. X-Gene began shipping production units during the summer of 2014. We believe that X-Gene is the first ARM 64-bit server solution in production to date. In addition to having a time-to-market advantage, we believe X-Gene will lead the next generation cloud data center silicon market by addressing the need for high performance, lower power, and lower total cost of ownership (“TCO”).
As part of our current business, we offer a line of embedded computing products based on Power Architecture, sometimes referred to as PowerPC products. Our HeliX family of embedded products is based on the ARM Instruction Set Architecture (“ISA”), and we expect that our future embedded processor products will also be based on the ARM ISA. Our embedded processor products are currently deployed in applications such as control- and data-plane management, wireless access points, residential gateways, wireless base stations, storage controllers, network attached storage, network switches and routing products, and multi-function printers.
The connectivity portion of our business provides high-speed, high-bandwidth, high-reliability communications products. In July 2013, we announced the X-Weave® family of products, designed to meet the needs of service providers and public cloud, private cloud, and enterprise data centers. The X-Weave family includes products spanning 100Gbps to 240Gbps of connectivity with unique multi-protocol features and high density.
Available Information
We maintain a web site, located at www.apm.com, to which we regularly post copies of our press releases as well as additional information about us. Our filings with the Securities and Exchange Commission (“SEC”), including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are posted on and available free of charge through the Investor Relations section of our web site and are accessible as soon as reasonably practicable after being electronically filed with or furnished to the SEC. Interested persons can subscribe on our web site to email alerts that are sent automatically when we issue press releases, file our reports with the SEC, or post certain other information to our web site. Information accessible through our web site does not constitute a part of this Annual Report.
Copies of this Annual Report are also available free of charge, upon request to our Investor Relations Department, 215 Moffett Park Drive, Sunnyvale, California 94089. In addition, our Board Guidelines, Code of Business Conduct and Ethics, other corporate policies and written charters for the various committees of our Board of Directors are accessible through the Corporate Governance tab in the Investor Relations section of our web site and are available in print free of charge to any shareholder who requests a copy.
You may read and copy materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549. Information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy statements and other information we file with the SEC. The address of the SEC’s web site is www.sec.gov.
Industry Background
Connectivity and Computing Silicon Solutions
Global data center traffic is expected to almost triple from 3.1 zettabytes per year in 2013 to 8.6 zettabytes per year in 2018. Data centers today are estimated to consume about 3% of the world's electricity production. In more mature markets, like the U.S. and Canada, data center owners and operators have faced increasing costs and in certain states the threat of energy consumption-related taxation. In 2013, data centers in the U.S. alone consumed about 91 billion kilowatt-hours of electricity, equivalent to the annual output of 34 large (500-megawatt) coal-fired power plants. Data center electricity consumption is projected to increase to roughly 140 billion kilowatt-hours annually by 2020, the equivalent annual output of 50 power plants, costing American businesses $13 billion annually in electricity bills.
Motivated by high operating costs, land use restrictions and environmental concerns, data center operators are keenly aware of the need to reduce power consumption while increasing hardware density and, at the same time, maintain or improve the user experience. We believe these trends create significant opportunities for high-performance, high-density, lower TCO cloud infrastructure and data center solutions.
Cloud industry experts believe that server solutions that can successfully combine ARM 64-bit processor hardware, high-speed input/output ("I/O") and software-defined networking capabilities onto a single chip will provide significant benefits over existing solutions. By combining the ARM ISA with on-chip networking capabilities, these next generation server solutions are expected to deliver significantly lower TCO for typical cloud workloads.

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Cloud infrastructure growth also creates opportunities for new connectivity approaches within the data center. Emerging technologies include high-speed switch fabrics, 100Gbps Ethernet and RoCE (Remote Direct Memory Access over Converged Ethernet). These new technologies will allow for faster data transfer between processor nodes, semiconductor components, blades, racks and appliances, substantially lowering TCO and allowing more efficient use of physical space.
Communications technology between the user and the data center has also evolved considerably. Consumers demand ubiquitous access to content such as information, photographs and streaming high-definition media through a proliferation of smart mobile and at-home devices. As a result, carrier networks face increasing challenges to support the rapid and cost-effective delivery of voice, data and media to meet this demand.
In wireline communications, the edge, metro and core networks have shifted towards packet-based services that are fundamentally less expensive than the transitional synchronous optical network (“SONET”) and the synchronous data hierarchy (“SDH”) networks, but provide the same level of quality and guarantee of content delivery. OTN technology has emerged as a compelling layer-one protocol and has substantially replaced SONET/SDH in the metro and core. Combined with Wavelength-Division Multiplexing ("WDM") and Dense Wavelength-Division Multiplexing ("DWDM"), OTN allows service providers to support the vast increases in bandwidth requirements at a lower cost per bit and with easier configurability.
Wireless networks are also moving to Long Term Evolution (“LTE”) infrastructure in order to support a wide range of high-speed wireless devices from smartphones to tablets. Further, carrying all the data traffic from the base station requires higher bandwidth and packet-based wireline connectivity for supporting Ethernet and Internet Protocol.
As the pace of these transitions increases, original equipment manufacturers ("OEMs") are partnering with merchant silicon solution providers to help address the need for more complex, higher performance devices that feature lower power consumption and operating costs. We believe these trends have created a significant opportunity for silicon suppliers that can design cost-effective solutions for the processing and transport of data.

AppliedMicro Strategy
ARM-based Server on a Chip Solutions
Our strategy is to leverage our existing core competencies in creating high performance multi-GHz enterprise class processors and high-speed analog/mixed-signal designs to create disruptive new technologies that will define and lead the market for silicon solutions addressing cloud data center, high-performance computing and enterprise applications.
We believe our early and substantial investments in X-Gene development have given us a unique market position while creating substantial barriers to entry for potential competitors. We commenced our investment in the X-Gene program in 2010, and thereafter actively supported the program's research and development ("R&D") until we were ready to publicly announce our development of the disruptive X-Gene technology in late 2011. During and after this development period, our financial reporting reflected abnormally high R&D expenses relative to ongoing revenue levels. We believe our investment in X-Gene has yielded substantial value for the Company on all fronts. We believe it has given us a unique, differentiated, and sustainable first-mover advantage in the ARM server market. X-Gene also provides growth opportunities in coming years to offset the structural decline in our embedded Power Architecture business, which is the result of an industry-wide transition away from Power Architecture.
We believe that X-Gene is the first ARM 64-bit server solution in production to date. X-Gene provides enterprise class ARM 64-bit high-performance processor cores, memory subsystem, on-chip switch fabric and high-speed networking capabilities that we believe will deliver substantially lower power consumption and significant TCO savings.
As of May 2015, there is a robust hardware and software ecosystem available and in development for X-Gene. The ecosystem includes various software, hardware, systems and services companies that are engaged in the development, adoption or promotion of technology that supports ARM 64-bit server technology.
The ARM 64-bit server software ecosystem is substantially ready and includes operating system, middleware and application layer components. This is exemplified by Red Hat announcing its Partner Early Access Program focused on ARM 64-bit designs, Canonical announcing production versions of Ubuntu operating system and Oracle announcing early Beta of Java Development Kit.
Embedded Computing
New embedded processor products will be based on the ARM ISA, leveraging intellectual property and experience derived from our development of X-Gene. We have secured Tier 1 design wins for embedded products based on ARM 64-bit technology.

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As customers migrate away from Power Architecture, we have strategically reallocated development resources towards other market opportunities. As such, we expect our Power Architecture related sales to continue to decline over time. We intend to leverage our existing intellectual property and address embedded opportunities with ARM-based offerings, which we expect will help to eventually offset the expected roll-off of Power Architecture sales.
Connectivity
Our X-Weave family of connectivity products, announced in July 2013, leverages our technology heritage to create products optimized to address challenges in next-generation data centers as well as evolving service provider market requirements.
Data center and enterprise networks continue to deploy computing and storage assets. To address the rapidly increasing volume of information, data center network infrastructures are migrating from 1Gbps Ethernet to 10, 25, 40, 100 and 240Gbps Ethernet. Ethernet is increasingly used for connectivity between processor nodes, semiconductor components, blades, racks and appliances. Our data center connectivity technology portfolio, consisting of optical, backplane and short reach copper solutions, is specifically targeted to provide high-speed connectivity with increased port density, at lower power and operating cost points, to enable greater penetration into the present and future data center infrastructure markets.
In the service provider market segment, emerging metro Ethernet and OTN deployments are driving substantial investments in optical infrastructure. These new deployments are increasingly based on OTN with highly integrated framing, mapping, and multiplexing functions. High-speed physical layer capabilities in combination with our Forward Error Correction (“FEC”) experience play a critical role in providing cost and power-optimized solutions for the leading edge platforms in the Wide Area Network ("WAN").
Products and Customers
We develop products for computing and high-speed connectivity. These products are used in a wide variety of communications and other networking applications such as the infrastructure for data centers, wide area networks, carrier access networks, and enterprise networks.
Most of our products can be grouped into the functional categories listed below.
Server on a Chip Products: X-Gene is the world's first ARM 64-bit Server on a Chip platform in production, featuring eight high-performance cores operating at up to 2.4GHz, coupled with network and storage offload engines and integrated Ethernet. X-Gene represents a new, grounds-up server silicon solution tailored for the rapid growth of structured and unstructured compute requirements in next generation data centers.
Embedded Computing Products: Our embedded processors are deployed in a variety of critical applications in target markets such as wireless LAN, residential, data centers, and enterprise. In networking equipment such as edge, core and enterprise routers, our embedded processors handle overall system maintenance and management functions. Our processors are also targeted at large opportunities in RAID storage processing, multi-function printers and a variety of other embedded applications. Our HeliX® family of products is based on the ARM ISA and represents the future of our new embedded processor offerings.
Connectivity Products: The connectivity portion of our business includes a broad array of physical layer (“PHY”), framer and mapper solutions that are high-speed, high-bandwidth, high-reliability communications products. Our highly integrated framer-PHY silicon solutions transmit and receive signals and are used in high-speed optical network infrastructure equipment. For Optical Transport Network (“OTN”) applications, our framer products incorporate our industry-leading forward error correction ("FEC") technology to significantly improve reach. In July 2013, we announced the X-Weave family of connectivity products, designed to meet the needs of public cloud, private cloud and enterprise data centers. The X-Weave family includes products spanning 100Gbps to 240Gbps of throughput with unique multi-protocol features and high density.
Competition
The X-Gene product family targets existing and emerging hyperscale cloud, scientific and high performance computing, and enterprise applications. Existing data centers currently rely primarily on Xeon® server processors and related chipsets developed and marketed by Intel. As a result, in the cloud and enterprise server markets, we will compete primarily with Intel Xeon, in addition to low-power server silicon products from Intel and a number of ARM-based server silicon vendors with programs in various stages of development, including Advanced Micro Devices ("AMD"), Broadcom, Cavium and Qualcomm. We believe X-Gene is well-positioned to address the performance capabilities and enterprise features demanded by today's cloud infrastructure providers, offering high-speed networking, software-defined networking capabilities and enterprise-class

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security, along with significant projected TCO savings. We believe X-Gene is a compelling solution in both the existing and emerging cloud and enterprise infrastructure markets.
In the embedded computing silicon solutions market, we compete with technology companies such as Freescale Semiconductor, Cavium and Intel.
In the connectivity silicon solutions market segment, we compete primarily against companies such as Broadcom, Inphi and PMC-Sierra.
Many of our competitors have larger workforces, intellectual property portfolios and other resources than we do, and in some cases operate their own fabrication facilities. In addition, some of our customers and potential customers have internal integrated circuit designs or manufacturing capabilities with which we compete.
While design cycles in the communications market segment often last for years, the communications silicon solutions market is highly competitive and is subject to rapid technological change. We typically face competition at the design stage when customers are selecting components for their next-generation products.
We believe that the principal factors of competition for the markets we serve include product performance and capability, TCO, and time-to-market, as well as engineering expertise, reputation and prior customer satisfaction.
Our ability to successfully compete in these markets will depend on our ability to design and oversee the manufacture of new products that successfully implement new technologies and gain end-market acceptance in a timely and cost-effective manner.
Research and Development ("R&D")
As a high-technology company, the majority of our investment is devoted to R&D. Our R&D expertise and efforts are focused on the development and commercialization of the X-Gene ARM 64-bit Server on a Chip products, HeliX embedded computing products, and high-performance solutions for the communications market. We also develop libraries and design methodologies that are optimized for applications within the Connectivity and Computing markets. Our primary R&D facilities are located in Sunnyvale, California, and Andover, Massachusetts in the United States; Ottawa in Canada; Ho Chi Minh City in Vietnam; and Pune and Bangalore in India. During the fiscal years ended March 31, 2015, 2014 and 2013, we expensed $107.2 million, $146.6 million and $187.4 million, respectively, on R&D activities.
Manufacturing
Manufacturing of Integrated Circuits
The manufacturing of integrated circuits requires a combination of competencies in advanced silicon technologies, package design, high-speed test, and characterization. We have obtained access to advanced CMOS manufacturing technology through foundry relationships. Each of our integrated circuit products is generally only qualified for production at a single foundry. We have 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. We purchase our ceramic and plastic packages from several vendors including Advanced Semiconductor Engineering (“ASE”), Siliconware Precision Industries Co Ltd. (“SPIL”), IBM, Unimicron and Nanya.
Wafer Fabrication
We do not own or operate foundries for the production of silicon wafers from which our products are made. We use external foundries, primarily Taiwan Semiconductor Manufacturing Corporation (“TSMC”) and to a lesser extent, IBM, for our silicon wafer needs. In late 2014, IBM announced that it had agreed to sell its foundry business to GlobalFoundries, which we believe has contributed to the continuing decline in demand for our PowerPC products, which are based on IBM’s Power Architecture. Subcontracting our manufacturing requirements eliminates the high fixed cost of owning and operating a semiconductor wafer fabrication facility and enables us to focus our resources on designing silicon solutions and applications, where we believe we have greater core competencies and competitive advantages.
Assembly and Testing
Our wafer probe and other product testing are conducted at independent test subcontractors. After wafer testing is complete, the majority of our products are sent to multiple subcontractors for assembly, predominantly in Asia. Following

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assembly, the devices are tested at subcontractors and returned to us ready for shipment to our customers. Certain of these services are available from a limited number of sources and lead times are occasionally extended.
Sales and Marketing
Our sales and marketing strategy is to develop strong, engineering-intensive relationships with our customers’ design teams for the creation of market leading platforms. We maintain close working relationships with these customers to identify and define new products that will meet their requirements in the future. This allows us to often be involved in the early stages of our customers' plans to design new equipment. We sell our products both directly and through a network of independent manufacturers' representatives and distributors. Our direct sales force has strong technical skills. Expert technical support is critical to our customers' success and we provide such support through our field applications engineers, technical marketing team and engineering staff, as well as through our technical support web site.
We augment this strategic account sales approach with U.S. and non-U.S. distributors that service some of our accounts for purchase of standard silicon solutions. Typically, these distributors handle a wide variety of products, including those that compete with our products and fulfill orders for many customers. Most of our sales to distributors are made under agreements allowing for price protection and stock rotation of unsold merchandise. We use market development programs to accelerate the adoption of certain products. Our sales headquarters are located in Sunnyvale, California. We maintain sales offices throughout the world. Information regarding net revenues generated from each category of our products and from our most significant customers and a geographic breakdown of our net revenues is summarized in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Backlog
Our sales are made primarily pursuant to standard purchase orders for the delivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in customers’ needs. For these reasons, our backlog as of any particular date is not representative of actual sales for any succeeding period.
Intellectual Property
We rely in part on patents to protect our intellectual property (“IP”). We currently hold approximately 328 issued patents, which principally cover aspects of the design and architecture of our integrated circuit ("IC") and enterprise storage products. In addition, we have over 171 inventions in various stages of the patenting process in the United States and abroad. There can be no assurance that any of 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, such patents will be found to be valid and enforceable. There also can be no assurance that others will not independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us, or that patents issued to others will not have an adverse effect on our ability to do business.
To protect our IP, we also rely 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. In the United States, our trademarks and registered trademarks include AppliedMicro, AMCC, APM, X-Gene, X-Weave, HeliX, Server on a Chip, Cloud Server, Cloud Processor, OTNsec, Arming the Cloud, HardSilicon, and X-C1, among others. In addition to our IP, we also rely upon licensing certain third-party technologies for the development of our products.
As a general matter, the semiconductor and enterprise storage industries are characterized by substantial litigation regarding patent and other IP rights. In the past we have been, and in the future may be, notified that we may be infringing the IP rights of third parties. In some cases, the third parties have demanded that we pay significant patent license fees in order to avoid litigation asserting IP infringement. To date, we have refused to enter into any such patent license agreements. We have certain indemnification obligations to customers with respect to the infringement of third party IP rights by our products, and have been subject to related indemnification claims in the past. There can be no assurance 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 claims, if successful, will not have a material adverse effect on our business, financial condition, or operating results. In the event of any adverse ruling in any such matter, we could be required to pay substantial damages, which could include treble damages, cease the manufacture, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the IP rights of the third party claiming infringement. There can be no assurance that a license would be available on reasonable terms, or at all. Any limitations on our ability to market our products, delays and costs associated with redesigning our products, or payments of license fees or litigation judgments to third parties, or failures to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on our business, financial condition, and operating results.

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Environmental Matters
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 that are and were used in our manufacturing process, and the use of hazardous substances, such as lead, in our products. 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. Such regulations could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. We are also subject to regulatory developments, including recent SEC disclosure regulations relating to so-called “conflict minerals,” relating to ethically responsible sourcing of the components and materials used in our products. For more information, see our disclosures under the heading, “Customer requirements and new regulations related to conflict-free minerals may force us to incur additional expenses or cause us to lose business” in Part I, Item 1A, Risk Factors, below.
Since 1993, we have been named as a potentially responsible party (“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 Chemical Corporation site and the surrounding groundwater aquifers, which efforts are ongoing. For more information, see our disclosures under the heading, “We could incur substantial fines, litigation costs and remediation expenses associated with our storage, use and disposal of hazardous materials” in Part I, Item 1A, Risk Factors, below, and refer to footnote 11, “Legal Proceedings,” to the financial statements contained in this report.
Employees
As of March 31, 2015, we had 507 full-time employees: 52 in administration, 393 in R&D, 10 in operations and 52 in marketing and sales. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees is covered by a collective bargaining agreement, nor have we ever experienced any work stoppage.
Executive Officers of the Registrant
Our current executive officers and their ages as of March 31, 2015 are as follows:
 
Name
Age
 
Position(s)
Paramesh Gopi
46
 
President and Chief Executive Officer, Member of the Board of Directors
Douglas T. Ahrens
48
 
Vice President and Chief Financial Officer
L. William Caraccio
56
 
Vice President, General Counsel and Secretary, Chief Legal Officer
Michael Major
58
 
Vice President, Corporate Marketing and Human Resources
Dr. Paramesh Gopi joined us as Senior Vice President and Chief Operating Officer in June 2008 and was promoted to President and Chief Executive Officer in May 2009. On April 29, 2009, Dr. Gopi became a member of our Board of Directors. From September 2002 to June 2008, he was with Marvell Semiconductor, a provider of mixed-signal and digital signal processing integrated circuits to broadband digital data networking markets, where he most recently served as Vice President and General Manager of the Embedded and Emerging Business Unit. At Marvell, Dr. Gopi held several executive-level positions including Chief Technology Officer of Embedded and Emerging Business Unit and Director of Technology Strategy. Dr. Gopi holds a PhD in Electrical and Computing Engineering and a Masters and Bachelor of Science degree in Electrical Engineering from the University of California, Irvine.
Douglas T. Ahrens joined us in October 2013 as Vice President, Chief Financial Officer. From 2001 to 2013 he was with Maxim Integrated, a leading provider of high performance analog and mixed-signal products for a broad base of end markets and customers, where he held a number of executive positions. Most recently, he was Vice President of Finance, leading the entire finance organization. From 1995 to 2001, he held a number of positions of increasing responsibility at Intel Corporation, one of the largest semiconductor companies in the world. From 1990 to 1993, he was an environmental engineer at Chevron Corporation. Mr. Ahrens holds an MBA from Harvard Business School and a BS in Mechanical Engineering from the University of California, San Diego. He is a Certified Public Accountant (CPA) and a Registered Professional Civil Engineer.
L. William Caraccio joined us in June 2010 as Vice President, General Counsel and Secretary and is our Chief Legal Officer. In December 2002, he was a co-founder of RMI Corporation (formerly Raza Microelectronics, Inc.), a privately held fabless semiconductor company where he was most recently Senior Vice President, General Counsel and Secretary, and, following RMI Corporation’s acquisition by Netlogic Microsystems, Inc. in October 2009, he served a transition role at Netlogic as Senior Counsel until January 2010. From March 2000 to January 2003, he co-founded and was Vice President, General Counsel and Secretary of Foundry Holdings, Inc., an investment firm and incubator of high technology companies. From June 1992 to March 2000, he was at Pillsbury Madison & Sutro LLP (now Pillsbury Winthrop Shaw Pittman LLP), an

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international law firm where he was most recently a Partner and co-chair of the firm’s Corporate Securities and Technologies Group. Mr. Caraccio earned his Juris Doctor degree from the University of California, Berkeley and holds a Bachelor of Arts degree from the University of California, Irvine.
Michael Major oversees the corporate marketing team at AppliedMicro, and is responsible for the strategic direction and implementation of brand management; marketing communications; public relations and industry analyst relations. He joined AppliedMicro in 2006 and has also served as vice president of human resources, leading the company's talent, compensation and internal communications functions. He has more than 35 years of experience with human resources and communications-related activities. Previously, Mr. Major was with Silicon Image and Netscape Communications. Mr. Major's experience includes 20 years consulting to companies on matters relating to human resources and communications. He holds a bachelor's degree in economics from Stanford University and is a graduate of the University of Michigan's Advanced Human Resources Executive Program.





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Item 1A.
Risk Factors.

Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this Annual Report and in our other filings with the SEC. We update our descriptions of the risks and uncertainties facing us in our periodic reports filed with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.
Our liquidity may deteriorate based on our future uses of cash.

Our cash, cash equivalents and short-term investments balance as of March 31, 2015 was $75.4 million compared to $83.0 million as of December 31, 2014. During the fiscal year ended March 31, 2015, $9.2 million of cash was used for Veloce acquisition consideration payments. $9.6 million of the $178.5 million in total Veloce acquisition consideration remains to be paid, and our cash balance will likely decrease further depending upon how much of this remaining balance we decide to pay in cash instead of our common stock. Although we currently believe we have adequate liquidity to meet our capital requirements and fund our operations for at least the next twelve months, our cash balances could decrease significantly if our normal operations or unforeseen events require us to expend more cash than anticipated. If such were to occur, we may be faced with liquidity issues requiring us to pursue various options to raise additional capital or generate cash. In addition, we may elect to raise additional capital, including without limitation by issuing equity or debt securities, or otherwise attempt to generate additional cash in order to augment our cash reserves for purposes of enabling future business expansion and providing additional liquidity assurances to our current and prospective customers, suppliers and partners. There can be no assurance that any of the options that we might pursue to raise additional capital or generate cash will be available on commercially reasonable terms or at all.
During the fiscal year ended March 31, 2015, our cash used in operating activities was $27.0 million and during the fiscal years ended March 31, 2014 and 2013, our cash used in operating activities was $46.8 million and $34.5 million, respectively. Excluding the acquisition consideration for Veloce, our cash used for operating activities was $17.9 million for the fiscal year ended March 31, 2015. Excluding the acquisition consideration for Veloce, our cash provided by operating activities was $16.8 million for the fiscal year ended March 31, 2014 and our cash used in operating activities was $17.9 million for the fiscal year ended March 31, 2013.
If we are unable to timely develop, market or sell new products or new versions of products to replace our current products, our operating results and competitive position will be materially harmed.
Our industry is characterized by intense competition, rapidly evolving technology and continually changing customer requirements. These factors will over time render our existing products less competitive or obsolete. Some of our existing products have experienced weakening overall demand, and revenues from these products can be expected to continue to decline further in subsequent quarters. Accordingly, our future operating results and ability to compete will depend in large part on our ability to develop new products and new generations and versions of our existing products that achieve market acceptance on a timely and cost-effective basis, and to respond to changing requirements. If we are unable to do so, our business, operating results and financial condition will be negatively affected. In particular, our inability to productize and generate demand for our X-Gene® Server on a Chip® solutions, our X-Weave® connectivity products and our HeliX® embedded products, and related products, in a timely manner would have a material adverse effect on our operating results and financial condition.
The successful development and market acceptance of our products depend on a number of factors, including, but not limited to:

•
our customers’ willingness to incorporate products based on the ARM® architecture, on which most of our new products are based, into their own products and systems;
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our successful collaboration with our ecosystem and technology partners;
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availability, quality, price, performance, power consumption, size and total cost of ownership of our products relative to competing products and technologies;
•
our accurate prediction of changing customer requirements;
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timely development of new designs;
•
timely qualification and certification of our products for use in electronic systems;

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•
continued availability on commercially reasonable terms of the manufacturing services purchased from and the technology components and tools licensed from third party suppliers;
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commercial acceptance and production of the electronic systems into which our products are incorporated;
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our customer service and support capabilities and responsiveness;
•
successful development of relationships with existing and potential new customers;
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maintaining compliance and compatibility with new and changing industry standards and requirements;
•
maintaining close working relationships with key customers so that they will design our products into their future products;
•
our ability to develop, gain access to and use leading technologies in a cost-effective and timely manner; and
•
retention of key technical and design expertise, both internally and within third-party technology development partners.
We have in recent years devoted substantial engineering and financial resources to designing, developing and rolling out new products and technologies and introducing several new products. However, there can be no assurance that our product development efforts will be successful or that the products and technologies we have recently developed and which we are currently developing will achieve widespread market acceptance. If these products and technologies fail to achieve market acceptance, or if we are unable to continue developing new products and technologies that achieve market acceptance, our business, financial condition and operating results will be materially and adversely affected. In addition, for our X-Gene, X-Weave and HeliX product families, we are a licensee of the ARM 64-bit architecture and will depend upon our continuing license rights to that instruction set architecture, or ISA, including without limitation the timely delivery by ARM of various updates and other support under the license agreement. The success of our ARM-based products will depend, among other things, on customers’ willingness to incorporate products based on the ARM architecture into their products and systems. For many customers, this would represent a change from their existing technology, and therefore the time frame and magnitude of adoption of ARM-based products such as ours is inherently uncertain. Furthermore, the development and commercialization of new products incorporating ARM architecture could be delayed if the ecosystem partners that rely on this architecture are unable to successfully establish their own operations on a timely basis or if they are unable to work successfully with ARM in developing their products.
Our success depends in part on the continued service of our key senior management, design engineering, sales, marketing, and manufacturing personnel, our ability to identify, hire and retain additional qualified personnel, and successful succession planning.
Our success depends to a significant extent upon the continued service of our senior management and engineering personnel and successful succession planning. Among other things, our ability to continue our commercialization and next-generation product development efforts for X-Gene and other new products will depend upon the retention of key Veloce personnel. We acquired Veloce in June 2012 pursuant to a merger agreement that provided for payments based on post-closing product development milestones. Our ability to retain key Veloce personnel may be adversely impacted by factors such as the substantial completion of our payment obligations to them under the Veloce merger agreement, the effects of past or future restructuring activities in increasing or changing their workloads, and the impact of recent declines in our stock price on the value of their equity compensation packages. In addition, as our core business and technologies continue to evolve, including without limitation with respect to our growth and expansion into next-generation cloud infrastructure and data center markets, our success will depend on effectively transitioning to certain new management and engineering personnel who are most capable of supporting that evolution. There is intense competition for qualified personnel in the semiconductor industry, in particular design, product and test engineers. We may not be able to continue to identify, attract and retain engineers or other qualified personnel necessary for the development of our business, or to replace engineers or other qualified personnel who may leave our employment.
We also face the risks associated with our former employees assisting their new employers to recruit our key talent, in violation of their contractual non-solicitation and confidentiality covenants and other legal obligations to us. Our efforts to enforce these contractual covenants and legal obligations has required, and may in the future require, us to incur significant litigation expenses and devote significant management attention. Furthermore, while we encourage our employees to abide by all contractual and legal obligations owed to their former employers, there can be no assurance that we will not be the target of allegations made by other companies that we have, directly or indirectly, unlawfully solicited their employees to join us. There are significant costs associated with recruiting, hiring and retaining personnel, as well as significant actual and potential losses to our business arising from the delays in or cancellation of technology development, product completion and roll-out, customer design wins and product orders, and sales revenues caused by the departure of key engineering resources.
Periods of contraction in our business may also inhibit our ability to attract and retain our personnel. As we respond to declining revenues and/or implement additional cost improvement measures such as reductions in force, our remaining key employees may lose confidence in our future performance and decide to leave. Loss of the services of, or failure to recruit, key

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design engineers or other technical and management personnel could be significantly detrimental to our product development or other aspects of our business. To manage our operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate, manage and retain our employees.
If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders.
We have a significant number of authorized and unissued shares of our common stock available. These shares will provide us with the flexibility to issue our common stock for proper corporate purposes, which may include raising equity capital from strategic, institutional or other investors, making acquisitions (including, without limitation, discharging our remaining purchase price obligations in the Veloce acquisition) through the use of stock, and adopting additional equity incentive plans. Any issuance of our common stock will result in immediate dilution of our stockholders. In addition, the issuance of a significant amount of our common stock may result in additional regulatory requirements, such as stockholder approval. Currently, we have the ability to issue up to 2.2 million additional shares of our common stock as Veloce acquisition consideration without obtaining stockholder approval. In the event stockholder approval is required but not obtained, we likely will be forced to use a greater portion of our cash than currently anticipated in order to satisfy our Veloce payment obligations. The actual amount and timing of additional share issuances to be made in connection with Veloce acquisition payments will be based upon numerous factors including, without limitation, the total amount of acquisition consideration to be paid, the market price of our common stock as of each payment date, and our available cash balances and liquidity requirements as of such dates, some of which are not determinable at this time. In addition, it is likely during fiscal year 2016 that we will need to increase the size of the common stock share reserve available under the 2011 Equity Incentive Plan in order to enable sufficient future equity grants to attract and retain key employees and service providers, and we currently intend to request stockholder approval of such an increase at the 2015 Annual Meeting of Stockholders,.
The markets in which we compete are highly competitive, and we expect competition to increase in these markets in the future.
The markets in which we compete are highly competitive, and we expect that domestic and international competition will increase in these markets, due in part to rapid technological advances, price erosion, changing customer preferences, deregulation, and evolving industry standards.
Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share. Our ability to compete successfully in our markets depends on a number of factors, including:

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our ability to partner with OEM, ecosystem and channel partners who are successful in the market;
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success in designing and subcontracting the manufacture of new products that implement new technologies;
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product quality, interoperability, reliability, performance and certification;
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our ability to attract and retain key engineering, operations, sales and marketing employees and management;
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pricing decisions or other actions taken by competitors;
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customer support;
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time-to-market;
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price;
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production efficiency;
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design wins;
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expansion of production of our products for particular systems manufacturers;
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end-user acceptance of the systems manufacturers' products;
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market acceptance of competitors' products; and
•
general economic conditions.
We designed X-Gene for existing and emerging cloud and enterprise data centers. Existing data centers currently rely primarily on Xeon server processors and related chipsets developed and marketed by Intel. Intel also offers lower-performance products for lower-intensity data center applications. As a result, Intel is a significant competitor in the cloud and enterprise server infrastructure market. In addition to Intel, in the cloud and enterprise server market, we will compete with a number of ARM-based server silicon vendors, including AMD, Broadcom, Cavium and Qualcomm. In the embedded computing silicon solutions market, we compete with technology companies such as Freescale Semiconductor, Cavium and Intel. In addition, some of our customers and potential customers have internal integrated circuit design or manufacturing capabilities with which we compete. In the connectivity silicon solutions market segment, we compete primarily against companies such as Broadcom, Inphi and PMC-Sierra. Many of these companies have substantially greater financial, marketing and distribution resources than we have. We may also face competition from new entrants to our target markets, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to our detriment.

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Many of our competitors have longer operating histories and presences in key markets, greater name recognition, and larger customer bases, workforces and intellectual property portfolios, and in some cases operate their own fabrication facilities. Our competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements more quickly than comparable products from us or that could replace or provide lower cost alternatives to our products. Competitors’ introduction of enhancements, new products or new pricing structures could render our existing and future products obsolete or unmarketable. In addition, large competitors could use their existing market share and influence to discourage potential ecosystem partners and customers from supporting or purchasing our products. We and our customers also face intense price pressure and competition from companies in lower cost countries such as China. In response to these price pressures, our customers could require us to reduce prices which could adversely affect our financial results. Furthermore, our discrete legacy products are being and could continue to be integrated into ASICs or combined into single chip solutions that could cause our revenues from such products to decline at a faster rate.
As a result of each of these factors, we cannot assure you that we will be able to continue to compete successfully against current or new competitors. If we do not compete successfully, we may lose market share in our existing and target markets and our revenues may fail to increase or may decline, which could have a material adverse effect on our business, financial condition and results of operations.
Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of materials will be higher than expected.
We depend upon third parties to manufacture, assemble, package or test certain of our products. As a result, we are subject to risks associated with our dependence on third-party manufacturing and supply relationships, including:

•
pricing of foundry services and of other supply chain services such as packaging and testing, from vendors such as Taiwan Semiconductor Manufacturing Company Ltd. ("TSMC"), International Business Machines Corporation ("IBM"), Advanced Semiconductor Engineering, Inc. ("ASE") and Siliconware Precision Industries Co. Ltd. ("SPIL");
•
reduced control over the supply chain process, delivery schedules and quality;
•
potentially inadequate manufacturing yields and excessive costs;
•
the risks associated with transitioning our manufacturing supply from one foundry or other supplier to another, which may be extremely difficult to accomplish, particularly on short notice and when cutting-edge process technologies are involved;
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our ability to retain key personnel with specialized knowledge of our products and processes;
•
difficulties selecting and integrating new subcontractors;
•
the potential lack of adequate capacity at the foundry during periods of high demand, resulting in significant increases in lead time requirements and production delays, which can be expected to cause difficulties with our customers, including reduced revenues and higher expenses;
•
increased risk of excess and obsolete inventory charges due to the higher level of inventories in response to the increased lead times;
•
limited warranties on products supplied to us, which may not match the warranties that our customers require from us;
•
potential instability and business disruption in countries where third-party manufacturers or distributors are located;
•
potential misappropriation of our intellectual property; and
•
potential foundry shortages when we commence volume manufacturing of new products, especially those with 28nm or anticipated smaller geometry technologies or using more complicated manufacturing process technologies, which could delay the supply of products to our customers.
Our outside foundries and manufacturing, packaging and test service providers generally operate on a purchase order basis, and we have few long-term supply arrangements with these suppliers. We have less control over delivery schedules, manufacturing yields and costs than our competitors that use their own fabrication facilities or provide larger volumes of business to their outside foundries. A manufacturing disruption or capacity constraint experienced by one or more of our outside foundries or service providers or a disruption of our relationship with an outside foundry or service provider, including discontinuance of our products by that foundry or service provider, would negatively impact the production and cost structure of certain of our products for a substantial period of time.
As our third-party manufacturing suppliers extend their lead time requirements, we will likely need to also extend our lead time requirements to our customers. This could cause our customers to lower their competitive assessment of us as a supplier and, as a result, we may not be considered for future design awards.

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Each of our integrated circuit, or IC, products is generally only qualified for production at a single foundry. These suppliers can allocate, and in the past have allocated, capacity to the production of other companies' products while reducing deliveries to us on short notice. There is also the potential that they may discontinue manufacturing our products or go out of business. Because establishing relationships, designing or redesigning silicon solutions, and ramping production with new outside foundries may take over a year, there is no readily available alternative source of supply for these products.
Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of outside foundries can lead to reduced yields of our IC products. This risk is substantially higher with respect to the manufacture of our new X-Gene, X-Weave and HeliX products at 40 and 28 nanometers, and would be even higher when using anticipated smaller geometries such as 16 nanometers and more complicated processes such as FinFET. FinFET generally refers to a multi-gate architecture that includes a silicon “fin” that wraps around the conducting portion of the device. The process technology of an outside foundry 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 us and our manufacturer. 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. Manufacturing defects that we do not discover during the manufacturing or testing process may lead to costly product recalls. These risks may lead to increased costs or delayed product delivery, which would harm our profitability and customer relationships.
If the foundries or subcontractors we use to manufacture our products discontinue the manufacturing processes needed to meet our demands, fail to upgrade their technologies needed to manufacture our products, or otherwise fail to perform the necessary manufacturing or operations services on a timely basis, we may be unable to deliver products to our customers, which would materially adversely affect our operating results and harm our reputation. The transition to the next-generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed.
Our requirements typically represent a very small portion of the total production of the third-party foundries and related service providers. As a result, we are subject to the risk that a producer or service provider will cease production of an older or lower-volume process that it uses to produce our parts, cease performing the supply services currently provided, or raise the prices it charges us. We cannot assure you that our external foundries and related service providers will continue to devote resources to the production of parts for our products or continue to advance the process design technologies on which the manufacturing of our products are based. Each of these events could increase our costs, lower our gross margin, cause us to hold more inventory or reduce our ability to deliver our products on time. As our volumes decrease with any third-party foundry, the likelihood of unfavorable pricing or service levels increases.
Our customers’ products incorporate components from other suppliers. If these other suppliers cannot access sufficient production capacity or have other production or delivery issues, our customers may reduce orders for our products.
Our restructuring activities could result in management distractions, operational disruptions and other difficulties.
Over the past several years, we have initiated several restructuring activities in an effort to reduce operating costs and similar activities may continue in the future. For example, our Board of Directors approved reductions in force of between 5% and 10% of our workforce on four occasions from December 2012 to January 2015, the most recent of which was substantially implemented during the fourth quarter of fiscal 2015. Additional reductions in force and senior level employee replacements may be required as we continue to realign our business organization, operations and product lines. Employees whose positions were or will be eliminated in connection with these restructuring activities may seek employment with our competitors, customers or suppliers. Although each of our employees is required to sign a confidentiality agreement with us at the time of employment, which agreement contains covenants prohibiting among other things the disclosure or use of our confidential information and the solicitation of our employees, we cannot guarantee that the confidential nature of our proprietary information will be maintained in the course of such future employment, or that our key continuing employees will not be solicited to terminate their employment with us. Any restructuring effort could also cause disruptions with customers and other business partners, divert the attention of our management away from our operations, harm our reputation, expose us to increased risk of legal claims by terminated employees, increase our expenses, increase the workload placed upon remaining employees and cause our remaining employees to lose confidence in the future performance of the Company and decide to leave. We cannot guarantee that any restructuring activities undertaken in the future will be successful, or that we will be able to realize the cost savings and other anticipated benefits from our previous, current or future restructuring plans. In addition, if we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to new growth opportunities or to remain competitive.

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We may experience difficulties in transitioning to smaller geometry processes or in achieving higher levels of design integration and, as a result, may experience reduced manufacturing yields, delays in product deliveries and increased expenses.
We may not be able to achieve higher levels of design integration or deliver new integrated circuit products on a timely basis. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs and increase performance. As smaller line-width geometry processes, such as 14 or 16 nanometer FinFET, are introduced to and become more prevalent in the industry, we expect to integrate greater levels of functionality into our IC products and to transition our IC products to smaller geometries.
Shifting to smaller geometry process technologies and new manufacturing processes often results in reduced manufacturing yields, delays in product deliveries and increased expenses. The transition to smaller geometries is inherently more expensive, and as we manufacture more products using smaller geometries, the incremental costs could have an adverse impact on our earnings. We may face these difficulties, delays and expenses with respect to the 28 nanometer and smaller versions of X-Gene and X-Weave and as we continue to transition our other products to smaller geometry processes. Transitions to more sophisticated designs and processes, such as FinFET, could result in similar difficulties. We are dependent on our relationships with our foundries to transition to smaller geometry processes and new designs successfully and at competitive pricing. We cannot assure you that our foundries will be able to effectively manage these transitions or that we will be able to maintain our relationships with our foundries. If we or our foundries experience significant delays or difficulties in these transitions or fail to implement them at competitive pricing, our business, financial condition and results of operations could be materially and adversely affected.
The gross margins for our products could decrease rapidly or not increase as forecasted, which would negatively impact our business, financial conditions and results of operations.
The gross margins for our solutions have declined in the past and may do so again in the future. Factors that we expect to cause downward pressure on the gross margins for our products include competitive pricing pressures, the cost sensitivity of our customers, particularly in higher-volume markets, new product introductions by us or our competitors, the overall mix of our products sold during a particular quarter, and other factors. From time to time, for strategic reasons, we may accept orders at less than optimal gross margins in order to facilitate the introduction of new products or the market penetration of existing products. We may also accept orders at less than optimal gross margins to encourage customers to order sooner or in larger quantities than previously anticipated. To maintain acceptable operating results, we will need to offset any reduction in gross margins of our products by reducing costs, increasing sales volume, developing and introducing new products and developing new generations and versions of existing products on a timely basis. If the gross margins for our products decline or not increase as anticipated and we are unable to offset those reductions, our business, financial condition and results of operations will be materially and adversely affected.
Adverse economic and financial market conditions could harm our revenues, operating results and financial condition.
Our business has been negatively affected by occasional downturns in the economies of the United States and other countries, including one in recent years that continues to cause unstable economic conditions in certain countries, including several countries in Europe. Our current operating plans are based on assumptions concerning levels of consumer and corporate spending. If weak global economic and market conditions persist, or if the recent rebound in the U.S. economy deteriorates, our business, operating results and financial condition could suffer materially, which in turn could result in a decline in the price of our common stock. If economic conditions worsen, we may have to implement additional cost reduction measures or delay certain R&D spending, which may adversely impact our ability to introduce new products and technologies. Because we expect to depend on new products for a substantial portion of our future revenues, this could have a material and adverse effect on us.
We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are generally classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive (loss) income. Our portfolio primarily includes fixed income securities, closed end bond funds and mutual funds, the values of which are subject to market price volatility. If our portfolio’s market value declines, we may need to record impairment charges to our earnings. During the fiscal years ended March 31, 2015 and March 31, 2014, we did not record any other-than-temporary impairment charges of our short-term investments and marketable securities. During the fiscal year ended March 31, 2013, we recorded $1.1 million in other-than-temporary impairment charges of our short-term investments and marketable securities. If market prices continue to decline or securities continue to be in a loss position over time, we may recognize impairments in the fair value of our investments.

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Our sales are concentrated among a few large customers, and we expect that our largest customers will continue to account for a substantial portion of our net revenue for the foreseeable future. Adverse economic conditions affecting these large customers could have a particularly significant effect on our business and operating results. Among other things, these conditions could impair the ability of our customers to pay for our products, causing our allowances for doubtful accounts and write-offs of accounts receivable to increase. In addition, adverse economic conditions could cause our contract manufacturers and other suppliers to experience financial difficulties that negatively affect their operations and their ability to supply us with necessary products and services.
Generally to enhance our intellectual property, or IP, portfolio and to augment our R&D resources, we have invested, and may continue to invest, in privately-held companies, most of which can still be considered to be in startup or developmental stages. These investments are inherently risky as the markets for the technologies or products they have under development are typically in the early stages and may never materialize. In some cases, we have determined to write off all or substantially all of the value of our investment, and similar risks exist with respect to the other companies in which we have invested.
Our operating results may fluctuate because of a number of factors, many of which are beyond our control.
If our operating results are below the expectations of research analysts or investors, then the market price of our common stock could decline. Some of the factors that affect our quarterly and annual results, but which are often difficult to control or predict, include those discussed elsewhere in this “Risk Factors” section, as well as the following:

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market acceptance of our products and our customers' products, including without limitation any failure of our X-Gene, X-Weave or HeliX product families to be commercially accepted within the time frames and at the levels we anticipate;
•
fluctuations in the timing and amount of customer requests for product shipments;
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the reduction, rescheduling or cancellation of orders by customers, including without limitation as a result of slowing demand for our products or our customers' products, over-ordering or double booking of our products or our customers' products, or agreements with customers to accelerate, delay, increase or decrease previously anticipated orders;
•
changes in the timing and amounts of shipments due to our decision to phase out a particular product, which often results in near-term “last-time-buy” orders for the “end-of-life” product that would otherwise have been placed and shipped in later periods;
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changes in the mix of product orders;
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the gain or loss of one or more key customers or their key customers, or significant changes in the financial condition of one or more of our key customers or their key customers;
•
our ability to introduce, certify and deliver new products and technologies, including without limitation our X-Gene, X-Weave and HeliX products, on a timely basis;
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the announcement or introduction of new products and technologies by our competitors;
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competitive pressures on selling prices;
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the ability of our customers to obtain components from their other suppliers;
•
risks associated with our or our customers' dependence on third-party manufacturing and supply relationships;
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increases in the costs of mask sets and products, including without limitation with respect to smaller or more sophisticated process technologies such as FinFET, or the discontinuance of products, services or components by our suppliers;
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the amounts and timing of meeting the specifications and expense recovery on non-recurring engineering projects;
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the amounts and timing of costs associated with warranties, product returns and customer indemnification claims;
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the impact of potential claims asserting infringement of third party patent or misappropriation of third party IP rights;
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the amounts and timing of investments in R&D;
•
the product lifecycle and recoverability of architectural licenses, technology access fees and mask set costs;
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revenue and margin fluctuations depending on the timing and amount of any IP licensing or sale transactions that we may undertake;
•
the amounts and timing of the costs associated with payroll taxes related to stock option exercises or settlement of restricted stock units;
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the impact of potential one-time charges related to purchased intangibles;
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the impact on interest income of a significant use of our cash for an acquisition, stock repurchase or other purpose;
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the effects of changes in interest rates or credit worthiness on the value and yield of our short-term investment portfolio;
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the effects of changes in accounting standards; and
•
the availability of ecosystem partners.

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Our business, financial condition and operating results would be harmed if we do not achieve anticipated revenues.
We can have revenue shortfalls for a variety of reasons, including:

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shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to their other customers, which may disrupt our ability to meet our production obligations;
•
our customers may experience shortages from their suppliers that may cause them to delay orders or deliveries of our products;
•
delays in the availability of our products or our customers' products;
•
delays in the availability of the software elements from third party vendors and ecosystem partners that may cause delays in customers using our hardware products resulting in further delays of bringing our product to market;
•
the reduction, rescheduling or cancellation of customer orders, including without limitation agreements with customers to delay the timing or decrease the size of orders, resulting in decreased near-term revenues from the affected products, or to accelerate the timing or increase the size of orders, resulting in reduced revenues from those products in later periods;
•
declines in the average selling prices of our products;
•
delays in the introduction of new products, or lower than expected demand for new products;
•
delays when our customers are transitioning from old architectures, technologies and products to new architectures, technologies and products;
•
a decrease in demand for our products or our customers' products due to technological changes, competitive developments, trends in our customers’ businesses or other factors;
•
a decline in the financial condition or liquidity of our customers or their customers;
•
the failure of our products to be qualified in our customers' systems or certified by our customers;
•
excess inventory of our products held by our customers, resulting in a reduction in their order patterns as they work through the excess inventory of our products;
•
decisions to phase out or “end-of-life” particular products, which may result in higher near-term revenues due to customers’ final, “last-time-buy” orders, but a cessation of revenues from those products in later periods;
•
fabrication, test, product yield, or assembly constraints for our products that adversely affect our ability to meet our production obligations;
•
the failure of one or more of our subcontract manufacturers to perform its obligations to us;
•
our failure to successfully integrate acquired companies, products and technologies; and
•
global economic and industry conditions.
Our business is characterized by short-term orders and shipment schedules. Customer orders typically can be cancelled or rescheduled without significant penalty to the customer. Because we do not have substantial non-cancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which is highly unpredictable and can fluctuate substantially. We generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not pay for these products, we could miss future revenue projections or incur significant charges against our income, which could materially and adversely affect our operating results.
Our expense levels are relatively fixed in the short-term and are based on our expectations of future revenues. We have limited ability to reduce expenses quickly in response to any revenue shortfalls. Changes to production volumes and impact of overhead absorption may result in a decline in our financial condition or liquidity.
We are dependent on orders that are received and shipped in the same quarter and are therefore limited in our visibility of future product shipments.
Our net sales in any given quarter depend upon a combination of shipments from backlog and orders received in that quarter for shipment in that quarter, which we refer to as turns business. We estimate turns business at the beginning of a quarter based on the orders needed to meet the shipment forecasts that we set entering the quarter. Historically, we have relied on our ability to respond quickly to customer orders as part of our competitive strategy, resulting in customers placing orders with relatively short delivery schedules. Shorter lead times generally mean that turns orders as a percentage of our business are relatively high in any particular quarter and reduce our backlog visibility on future product shipments. Turns business correlates to overall semiconductor industry conditions and product lead times. Because turns business is difficult to predict, varying levels of turns business make our net sales more difficult to forecast. If we do not achieve a sufficient level of turns business in a particular quarter relative to our revenue forecasts, our revenue and operating results may suffer.
Our business faces challenges due to declining sales of our older products and the evolving dynamics of the networking and communications industries.

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Each of our Connectivity and Computing product families faces industry-specific challenges, in addition to the risks applicable to our business as a whole. For our Connectivity products, order patterns historically have been uneven from period to period. The unpredictable nature of demand in this sector makes it more difficult to forecast our revenues, and may cause us to incur additional expenses for inventory that may need to be written off. Our Connectivity product lines are also subject to technology transitions within the communications industry. For example, now that the communications industry has completed its shift away from the SONET/SDH standard to the higher speed, lower power optical transport network (OTN) standard, substantially all of our new Connectivity product designs utilize the OTN standard. However, as a result of this transition, many of our older, SONET-based Connectivity products are experiencing declining sales, while our newer Connectivity products, such as the X-Weave product family, have not yet generated significant revenue. Moreover, the transition to OTN, resulting in higher sales volumes and increased competition from integrated solutions providers, is in turn leading to price and margin erosion challenges. The introduction of other technological standards may also affect demand for our products. For our Computing business, as well, the migration of the networking industry away from products utilizing the PowerPC architecture and towards products utilizing other architectures such as ARM, has presented challenges. In line with such migration, we are no longer introducing new PowerPC product designs and are reducing our resources equipped to support our older PowerPC product lines. Moreover, as many of our older, PowerPC-based Computing products are experiencing declining sales, we will increasingly depend on revenues from our new ARM-based products, such as the X-Gene product family and our HeliX embedded products. If we are unable to develop and deliver new Connectivity and Computing products that meet changing customer needs and generate sufficient revenue to offset the decline in sales of our older product lines, our business, results of operations and financial condition would be materially and adversely affected. Our sales of Connectivity and Computing products are also concentrated among a few large customers. Changes in a large customer’s financial condition, budgeting or technology strategy may materially affect our sales and could result in our holding higher than expected unsold inventory, which could result in higher expenses.
Our business may suffer due to downturns in the technology industry, which is cyclical.
The technology equipment industry is cyclical and has in the past experienced significant and extended downturns. The most recent downturn caused a reduction in capital spending on information technology generally, which affected demand for our products. Future downturns may materially and adversely affect our business, operating results and financial condition. We sell our communications IC products primarily to communications equipment manufacturers that in turn sell their equipment to customers that depend on the growth of the Internet and other communications services. We are also developing and introducing new Cloud Servers for the internet and data center markets. If those end markets fail to grow as expected, or experience downturns, demand for our products would be reduced.
Interruptions, delays, security breaches or other unauthorized activities at third-party data centers or other cloud computing infrastructure providers, or other failures within our information technology systems, could materially harm our business.
Our business depends upon the reliable operation of internal and third-party information technology (“IT”) systems, but we have limited control over the integrity and reliability of those systems. We conduct significant business functions and computer operations, including without limitation data storage and email, using the infrastructure systems of third-party vendors, such as remote data centers, virtual servers and other “cloud computing” resources. “Cloud computing” is an information technology hosting and delivery system in which data is stored outside of the user's physical infrastructure and is delivered to and used by the user as an internet-based application service. These third-party systems may experience cyber-attacks and other security breaches, along with the possible risk of loss, theft or unauthorized publication of our confidential information or that of our employees, customers, suppliers and other business partners. Any interruptions or problems at such data centers or other cloud computing facilities could result in significant disruptions to our business operations and potential liabilities to our employees and business partners. We do not control the operation of these third-party providers, and each is vulnerable to damage or interruption from earthquakes, floods, fires, vandalism, power loss, telecommunications failures and similar events. These third-party vendor relationships present further risk and management challenges for us, including, among others: confirming and monitoring the third party's security measures; the potential for improper handling of or access to our data; and data location uncertainty, including the possibility of data storage in inappropriate jurisdictions, where laws or security measures may be inadequate, or the unauthorized movement of technical data between locations in violation of applicable export laws. In addition, third-party data center and other providers have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may experience costs or down-time in connection with the transfer to new third-party providers.
There can be no assurance that we will be successful in preventing cyber attacks, security breaches or other unauthorized activities involving our information technology systems, or detecting and stopping them once they have begun. Any failure of our outsourced service providers or our internal information technology systems to properly protect our data or the confidential

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information of our employees and business partners may adversely affect our business, financial condition and results of operations, as well as significant expenses including governmental penalties.
In addition to the risk of cyber attacks or other unauthorized activities, our internally maintained IT infrastructure may experience interruptions of service or errors in connection with systemic failures (which may be caused by third-party actions including viruses or other externally introduced problems, hardware or software failures, telecommunications or Internet connectivity issues, natural disasters or other causes), systems integration or migration work. In such an event, we may be unable to implement new systems or transition data and processes promptly, which could be expensive, time consuming and disruptive. These disruptions could impair our ability to fulfill orders and interrupt other business functions, resulting in delayed or lost sales, lower margins or lost customers, which could adversely affect our reputation and financial results.
Our business is dependent on selling to distributors and any disruption in their operations could materially harm our business.
Sales to distributors accounted for 54%, 54% and 66% of our revenues for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. Our largest distributor accounted for 26%, 27% and 27% of our revenues for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. We do not have long-term agreements with our distributors, and either party can terminate the relationship with little advance notice.
Any future adverse conditions in the U.S. and global economies or in the U.S. and global credit markets could materially impact the operations of our distributors. Any deterioration in the financial condition of our distributors or any disruption in their operations could adversely impact the flow of our products to our end customers and adversely impact our results of operations. In addition, during an industry or economic downturn, it is possible there will be an oversupply of products and a decrease in sell-through of our products by our distributors, which could cause them to hold excess inventories and reduce our net sales in a given period and result in an increase in stock rotations.
The loss of one or more key customers, diminished demand for our products from a key customer, or the failure to obtain certifications from a key customer or its distribution channel could significantly reduce our revenues and profits.
A relatively small number of customers have accounted for a significant portion of our net revenues in any particular period. Based on direct shipments, net revenues to customers that accounted for at least 10% of total net revenues were as follows:
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Wintec (global logistics provider)*
20
%
 
22
%
 
19
%
Avnet (distributor)
26
%
 
27
%
 
27
%
* Wintec provides vendor managed inventory support primarily for Cisco Systems, Inc.
We have no long-term volume purchase commitments from our key customers. One or more of our key customers may discontinue operations as a result of consolidation, bankruptcy or otherwise. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly reduce our revenues and profits. Our agreements with customers typically are non-exclusive and do not require them to purchase a minimum quantity of our products. 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 ability to maintain or increase sales to key customers and attract significant new customers is subject to a variety of factors, including:

•
customers may stop incorporating our products into their own products with limited notice to us;
•
customers or prospective customers may not incorporate our products into their future product designs;
•
the timing and success of new product introductions by customers;
•
some of our customers may reduce or eliminate future purchase orders or design wins placed with us as an adverse reaction to our having sold patents to third parties that thereafter asserted the acquired patents in infringement actions brought against such customers, or due to other adverse intellectual property developments;
•
sales of customer product lines incorporating our products may rapidly decline or such product lines may be phased out;

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•
our agreements with customers typically are non-exclusive and do not require them to purchase a minimum quantity of our products;
•
many of our customers have pre-existing relationships or may establish relationships with our current or potential competitors that may cause our customers to switch from using our products to using competing products;
•
some of our OEM customers may develop products internally that would replace our products;
•
we may not be able to successfully develop relationships with additional network equipment vendors;
•
our relationships with some of our larger customers may deter other potential customers (who compete with these customers) from buying our products; and
•
the impact of terminating certain sales or support personnel as a result of our workforce reduction or otherwise.
The occurrence of any one of the factors above could have a material adverse effect on our business, financial condition and results of operations.
Any significant order cancellations or order deferrals could cause unplanned inventory growth resulting in excess inventory, which may adversely affect our operating results.
Our customers may increase orders during periods of product shortages or cancel orders if their inventories are too high. Major inventory corrections by our customers are not uncommon and can last for significant periods of time and affect demand for our products. Customers may also cancel or delay orders in anticipation of new products or for other reasons. Cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins by reducing sales prices, incurring inventory write-downs or writing off additional obsolete products.
Increasing lead times from our suppliers cause us to make commitments for inventory purchases earlier in our production cycle which in turn increases our risk of having excess inventory. In addition, from time to time some of our suppliers deliver to us based on allocations which in turn causes us to increase our inventory levels. We must balance our inventory levels between the risk of losing a significant customer to a competitor because we cannot meet our customer's requirements and the risk of having excess inventory if a significant order is cancelled.
In addition, from time to time, in response to anticipated long lead times to obtain inventory and materials from our outside contract manufacturers, suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering has in the past resulted and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render our products less marketable. If we are forced to hold excess inventory or we incur unanticipated inventory write-downs, our financial condition and operating results could be materially and adversely affected.
Inventory fluctuations could affect our results of operations and restrict our ability to fund our operations. Inventory management remains an area of focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times and meet customer expectations against the risk of inventory obsolescence because of changing technology and customer requirements. Customer orders for our products typically have non-standard lead times, which make it difficult for us to predict revenues and plan inventory levels and production schedules. If we are unable to plan inventory levels and production schedules effectively, our business, financial condition and operating results could be materially and adversely affected.
From time to time, we may discuss our “book-to-bill” ratio with analysts and investors, or include it in other public disclosures. The book-to-bill ratio, which is commonly used by investors to compare and evaluate technology and semiconductor companies, is a demand-to-supply ratio that compares the total amount of orders received to the total amount of orders filled. This ratio tells whether we have more orders than we delivered (if greater than 1), have the same amount of orders than we delivered (equals 1), or have less orders than we delivered (under 1). Though the ratio provides a general indicator of whether orders (bookings) are rising or falling at a particular point in time, it does not consider the timing of, or if the order will result in, future revenues or the effect of changing lead times and product phase-out decisions on bookings. As lead times increase, customers will place orders sooner, and when we declare a product to be “end-of-life,” customers may place final, non-recurring orders for such product, thereby increasing our bookings and book-to-bill ratio in the near term. Due to the limitations of this ratio, we recommend that investors do not place undue emphasis on it when evaluating a potential investment in our common stock.
There is no guarantee that design wins will become actual orders and sales.
A “design win” occurs when a customer or prospective customer notifies us that our product has been selected to be integrated with the customer's product. There can be delays of several months or more between the design win and when a customer initiates actual orders of our product. Following a design win, we will commit significant resources to the integration of our product into the customer's product before receiving the initial order. Receipt of an initial order from a customer following a design win, however, is dependent on a number of factors, including the success of the customer's product, which

19


cannot be guaranteed. The design win may never result in an actual order or sale of our products. If we fail to generate revenues after incurring substantial expenses to develop a product or to achieve a design win, our business and operating results would suffer.
Our customers' products typically have lengthy design cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales.
After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customers may need more than six months to test, evaluate and adopt our product and an additional nine months or more to begin volume production of the equipment or devices that incorporate our product. Due to this generally lengthy design cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we cannot guarantee that the customer will ultimately market and sell its equipment or devices, and that such efforts by our customer will be successful. The delays inherent in this lengthy design cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. While our customers' design cycles are typically long, some of our product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to R&D, product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant R&D and marketing expenses and investments in inventory in the future that we are not able to recover, and we are not able to mitigate those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions but still hold higher cost products in inventory, our operating results would be harmed.
An important part of our strategy is to focus on data center markets. If we are unable to further expand our share of these markets or accurately anticipate or react timely or properly to emerging trends, our revenues may not grow and could decline.
Our target markets, including the data center market, 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 or end customers in these markets, or if our products fail to be certified by OEMs, we will lose business from an existing or potential customer and may not have the opportunity to compete for new design wins or certification until the next product transition occurs. If we fail to develop products with required features or performance standards, or if we experience a delay as short as a few months in certifying or bringing a new product to market, or if our customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period.
We expect a significant portion of our revenues to continue to be derived from sales of products based on current, widely accepted transmission standards. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance.
If we do not identify and pursue the correct emerging trends and align ourselves with the correct market leaders, we may not be successful and our business, financial condition and results of operations could be materially and adversely affected.
We face competition from customers developing products internally.
Data center customers for our products, and other customers, generally have substantial technological capabilities and financial resources. Some customers have traditionally used these resources to develop their own products internally. The future prospects for our products in these markets are dependent upon our customers' acceptance of our products as an alternative to their internally developed products. Future sales prospects also are dependent upon acceptance of third-party sourcing for products as an alternative to in-house development. Customers may in the future continue to use internally developed components. They also may decide to develop or acquire components, technologies or products that are similar to, or that may be substituted for, our products. If our customers fail to accept our products as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our products, or if we are otherwise unable to develop or maintain strong relationships with them, our business, financial condition and results of operations would be materially and adversely affected.
Our business strategy contemplates the potential acquisition of other companies, products and technologies, as well as the divestitures of subsidiaries or operations that no longer are material to our core business. Merger and acquisition activities involve numerous risks and we may not be able to conduct these activities successfully without substantial expense,

20


delay or other operational or financial problems that could disrupt our business and harm our results of operations and financial condition.

Acquiring products, technologies or businesses from third parties, making and increasing equity investments in companies developing such products, technologies or businesses, and divesting business units or subsidiaries and selling product lines and technologies that are no longer material to our core business, are all part of our long-term business strategy. The risks involved with merger and acquisition, equity investment and divestiture activities include:

•
diversion of management's attention from our core businesses;
•
failure to integrate or potential loss of key employees, particularly those of the acquired companies;
•
potential difficulties resulting from the divestiture of business operations, with respect to protecting the confidentiality of proprietary information and trade secrets not subject to the divestiture;
•
difficulties and risks associated with the methods, estimates and judgments we use in applying critical accounting policies, such as the methods and judgments we used in valuing the Veloce merger consideration, which affected our R&D expense in certain periods in fiscal 2013 and 2014;
•
difficulty in completing an acquired company's in-process research or development projects;
•
customer dissatisfaction or performance problems with an acquired company's products or services;
•
both expected and unanticipated adverse effects from the loss of technologies, patents and other intellectual property, and personnel relating to divested subsidiaries, product lines and businesses;
•
adverse effects on existing business relationships with suppliers and customers;
•
costs associated with acquisitions, investments and divestitures;
•
difficulties associated with combining, integrating or separating acquired or divested operations, products or technologies;
•
difficulties and risks associated with entering and competing in markets that are unfamiliar to us; and
•
ability of the acquired companies to meet their financial projections and the effect of divesting subsidiaries and businesses on our revenues and margins.
In addition, as a result of our acquisition and investment activities, we could:

•
issue stock that would dilute, in some cases significantly, our current stockholders' percentage ownership;
•
use a significant portion of our cash reserves or incur debt;
•
assume liabilities, including unanticipated third-party litigation and other unknown liabilities and unanticipated costs, events or circumstances;
•
incur adverse tax consequences;
•
incur amortization or impairment expenses related to goodwill and other intangible assets, depreciation and deferred compensation; and
•
incur large one-time charges and immediate write-offs.
Any of these risks could materially harm our business, financial condition and results of operations.
Our past acquisitions required us to capitalize significant amounts of goodwill and purchased intangible assets, and we recorded significant impairment charges against these assets in our previous financial statements. At March 31, 2015, we had $11.4 million of goodwill. Although we had no purchased intangible assets at March 31, 2015, we may be required to take significant charges as a result of impairment to the carrying value of any goodwill or purchased intangible assets that we may record in the future.
We have expended significant effort and expense on divestitures, and may do so in the future. For example, in April 2013, we completed the sale of 100% of the issued and outstanding shares of TPack A/S, a wholly-owned subsidiary of us, and certain intellectual property assets owned by us related to TPack's business for an aggregate consideration of $33.5 million, payable in cash. In January 2013, we sold certain assets relating to our active optical technology platform to Volex Plc for a purchase price of $2.0 million. We may be unable to accomplish future strategic divestitures on favorable terms or at all.
Our industry and markets are subject to consolidation, which may result in stronger competitors, fewer customers and reduced demand.
There has been and continues to be industry consolidation among communications IC companies, network equipment companies and telecommunications companies, such as the acquisition of Acme Packet by Oracle in April 2013, Passif Semiconductor by Apple in July 2013, Volterra Semiconductor by Maxim Integrated in October 2013, Tellabs by Marlin Equity Partners in November 2013, LSI Corporation by Avago Technologies in May 2014, Cortina’s networking and optical transport product lines by Inphi in October 2014 and Emulex Corporation by Avago Technologies in May 2015. In addition, Calxeda, a

21


privately-held developer of ARM-based processors, shut down in late 2013. We expect this consolidation to continue as companies attempt to benefit from economies of scale, gain improved or more comprehensive product portfolios, increase the size of their serviceable markets, and otherwise strengthen or hold their positions in an evolving technology landscape. In addition, we may become a target for a company looking to improve its competitive position through acquisition. Consolidation may result in stronger competitors, fewer customers and reduced demand for our products, which in turn could have a material adverse effect on our business, operating results, and financial condition.
Our operating results are subject to fluctuations because we rely heavily on international sales.
International sales account for a significant part of our revenues and may account for an increasing portion of our future revenues. The revenues we derive from international sales are subject to certain risks, including:

•
foreign currency exchange fluctuations to the extent that this impacts our customers purchasing power;
•
changes in regulatory requirements;
•
tariffs, rising protectionism and other trade barriers;
•
timing and availability of export licenses;
•
political and economic instability;
•
natural disasters;
•
increased exposure to liability under U.S and foreign anti-corruption laws and regulations;
•
difficulties in staffing and managing foreign operations;
•
difficulties in managing distributors;
•
reduced or uncertain protection for intellectual property rights in some countries;
•
longer payment cycles and difficulties in collecting accounts receivable in some countries;
•
burdens of complying with a wide variety of complex foreign laws and treaties;
•
potentially adverse tax consequences; and
•
uncertain economic conditions that may worsen or sustain improvements which trail those in the United States.
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 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 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 laws in the United States, or may require that dispute resolution occur in a foreign country. As a result, our ability to enforce our rights under such agreements may be limited compared with our ability to enforce our rights under agreements governed by laws in the United States and adjudicated in the United States.
Our foreign operations may subject us to risks relating to the U.S. Foreign Corrupt Practices Act, other U.S. and foreign anti-bribery statutes and similar foreign regulations that may have a material adverse impact on our business, financial condition or results of operations.

Our international operations are subject to laws regarding the conduct of business overseas, such as the U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-bribery regulations in foreign jurisdictions where we do business, such as China, India, Vietnam, and Europe. The FCPA prohibits the provision of illegal or improper inducements to foreign government officials in connection with obtaining or retaining business overseas or to secure an improper commercial advantage. The FCPA also requires us to keep accurate books and records of business transactions and maintain an adequate system of internal accounting controls. Violations of the FCPA, anti-bribery statutes or other similar laws by us, any of our foreign subsidiaries, or any of our or their employees, executive officers, distributors or other agents or intermediaries could subject us and the individuals involved to significant criminal or civil liability. In recent years, the Department of Justice and SEC have significantly stepped up their investigation and prosecution of alleged FCPA violations. Any such allegations of non-compliance with the FCPA, anti-bribery statutes or other similar laws could harm our reputation, divert management attention and result in significant expenses, and could therefore materially harm our business, financial condition or results of operations
Our portfolio of short-term investments is exposed to certain market risks.
We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are recorded on our consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of

22


accumulated other comprehensive (loss) income, net of tax. Our investment portfolio is exposed to market risks related to changes in interest rates and credit ratings of the issuers, as well as to the risks of default by the issuers and lack of overall market liquidity. Substantially all of these securities are subject to interest rate and credit rating risk and will decline in value if interest rates increase or one of the issuers' credit ratings is reduced. Increases in interest rates or decreases in the credit worthiness of one or more of the issuers in our investment portfolio could have a material adverse impact on our financial condition or results of operations. As of March 31, 2015 the unrealized losses on these securities that were not previously written down as an other-than-temporary impairment charge were $0.1 million, of which a majority amount has been at an unrealized loss for more than 12 months. If the fair value of any of these securities does not recover to at least the amortized cost of such security or we are unable to hold these securities until they recover, we may be required to record a decline in the carrying value of these securities.
Our operating results depend on manufacturing output and yields of our ICs and printed circuit board assemblies, which may not meet expectations.
The yields on wafers we have manufactured decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors, including minute levels of contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Design iterations and process changes by our suppliers can cause a risk of defects. Many of these problems are difficult to diagnose, are time consuming and expensive to remedy and can result in shipment delays.
We estimate yields per wafer and final packaged parts in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be re-valued. We may have to 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 using a new design geometry or at a new manufacturing facility.
The complexity of our products may lead to errors, defects and bugs, which could negatively impact our reputation with customers and result in liability.
Products as complex as ours may contain errors, defects and bugs when first introduced or as new versions are released. Our products have in the past experienced such errors, defects and bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the products or result in a costly recall and could damage our reputation and adversely affect our ability to retain existing customers and attract new customers. Errors, defects or bugs could cause problems with device functionality, resulting in interruptions, delays or cessation of sales to our customers. We may also be required to make significant expenditures of capital and resources to resolve such problems. We cannot assure you that problems will not be found in new products, both before and after commencement of commercial production, despite testing by us, our suppliers or our customers. Any such problems could result in:

•
delays in development, manufacture and roll-out of new products;
•
additional development costs;
•
loss of, or delays in, market acceptance;
•
diversion of technical and other resources from our other development efforts;
•
claims by our customers or others against us; and
•
loss of credibility with our current and prospective customers.
Any such event could have a material adverse effect on our business, financial condition and results of operations.
Regulatory authorities in jurisdictions into or from which we ship our products could levy fines or restrict our ability to import and export products.
A significant majority of our sales are made outside of the U.S. through the exporting and re-exporting of products. In addition to local jurisdictions' export regulations, our U.S.-manufactured products and products based on U.S. technology are subject to U.S. laws and regulations governing international trade and exports. These laws and regulations include, but are not limited to, the Export Administration Regulations, and trade sanctions against embargoed countries and destinations administered by the U.S. Department of the Treasury, Office of Foreign Assets Control. Licenses or proper license exceptions are required for the shipment of our products to certain countries as well as for the transfer of certain information and technology to certain foreign countries, foreign nationals or other prohibited persons within the United States or abroad. A determination by the U.S. or local government that we have failed to comply with these or other import or export regulations can result in penalties which may include denial of import or export privileges, fines, civil and criminal penalties and seizure of products. Such penalties could have a material adverse effect on our business, including our ability to meet our sales and earnings forecasts. Further, a change in these laws and regulations could restrict our ability to export to previously permitted

23


countries, customers, distributors or other third parties. Any one or more of these sanctions or a change in laws or regulations could have a material adverse effect on our business, financial condition and results of operations. 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.
If our internal control over financial reporting is not considered effective, our business and stock price could be adversely affected.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each fiscal year, and to include a management report assessing the effectiveness of our internal control over financial reporting in our Annual Report on Form 10-K for that fiscal year. Section 404 also requires our independent registered public accounting firm to attest to and report on the effectiveness of our internal control over financial reporting.
Our management, including our chief executive officer and chief financial officer, does not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of control must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal control can provide absolute assurance that all control issues and instances of fraud involving a company have been, or will be, detected. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions. Over time, our internal control over financial reporting may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. In addition, as a result of the reduction in the number of employees assigned to financial reporting and regulatory compliance functions in connection with recently completed and anticipated future restructuring activities, we may be at increased risk of failures in our internal control systems. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Our management has concluded, and our independent registered public accounting firm has attested, that our internal control over financial reporting was effective as of March 31, 2015. We cannot be certain in future periods that any control deficiencies that may constitute one or more “significant deficiencies” (as defined by the relevant auditing standards) or material weaknesses in our internal control over financial reporting will not be identified by us or our independent registered public accounting firm. If we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, and we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations. A material weakness in our internal control over financial reporting would require management and our independent registered public accounting firm to report our internal control over financial reporting as ineffective. If our internal control over financial reporting is not considered effective, we may experience a restatement as we have in the past of our financial statements. Any restatement or actual or perceived weakness or adverse conditions in our internal control over financial reporting, or in management's assessment thereof, could result in a loss of public confidence in our reported financial information, and have a material adverse effect on our business, the market price of our common stock, and our ability to access capital markets, and may result in litigation claims, regulatory actions and diversion of management attention and resources.
Our ability to supply a sufficient number of products to meet customer demand, and customer demand itself, could be severely hampered by natural disasters or other catastrophes, the effects of war, acts of terrorism, global threats or shortages of water, electricity or other supplies.
A significant portion of our R&D and supply chain operations are located in Asia. These areas are subject to natural disasters such as earthquakes, floods and tsunamis, like those that struck Japan and Thailand. In addition, our headquarters in California are located in areas containing known earthquake fault lines. We do not have earthquake insurance for these facilities, because adequate coverage is not offered at economically justifiable rates. A significant natural disaster, shortage of water or other catastrophic event affecting us, our suppliers or our customers could have a material adverse impact on our business, financial condition and operating results.
The effects of war, acts of terrorism or global threats, including, but not limited to, the outbreak of epidemic disease, could have a material adverse effect on our business, operating results and financial condition. The continued threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to local and global economies and create further uncertainties. To the extent that such disruptions or

24


uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, operating results and financial condition could be materially and adversely affected.
We could incur substantial fines, litigation costs and remediation expenses associated with our storage, use and disposal of hazardous materials.
We and the third-party contract manufacturers we utilize are subject to a variety of U.S. federal, state and local and foreign 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. These regulations could require us or our contract manufacturers 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 (“PRP”) along with more than 100 other companies that used Omega Chemical Corporation waste treatment facility in Whittier, California (the “Omega Site”). The U.S. Environmental Protection Agency (“EPA”) has alleged that the Omega Site failed to properly treat and dispose of certain hazardous waste material. We are a member of a large group of PRPs, known as OPOG, that has agreed to fund certain ongoing remediation efforts at the Omega Site and with respect to the regional groundwater allegedly contaminated thereby.
In 2007, the PRPs were sued by a chemical company located downstream from the Omega Site, seeking a judicial determination that the Omega PRPs are responsible for some or all of the plaintiff's potential liability to clean up groundwater contamination beneath the plaintiff's site; that action has been stayed since March 2008 to allow for further delineation of the regional groundwater contamination. In September 2011, EPA issued an interim remedial action proposal, designed to arrest the further spread of groundwater contamination and, in September 2012, it issued a special notice letter that triggered the commencement of good faith settlement negotiations with OPOG. In late 2014, OPOG and EPA agreed upon a term sheet describing the settlement terms and remediation actions for the site that will be set forth in a final consent decree to be filed with the Court. It is anticipated that the consent decree will be finalized and filed during fiscal year 2016. In December 2013, OPOG retained legal counsel to pursue legal claims against numerous other PRPs for the regional groundwater contamination and, in December 2014, OPOG retained legal counsel to protect its interests in connection with bankruptcy proceedings filed by an OPOG member; we have elected to participate in the costs and recoveries associated with these litigation matters. In September 2012, a toxic tort litigation that was commenced in 2010 against Omega and the PRP group by individuals alleging injuries caused by the Omega Site was settled and dismissed with prejudice.
Based on currently available information, we have a loss accrual for the Omega site that is not material and we believe that the actual amount of our costs and liabilities will not be materially different from the amount accrued. However, proceedings are ongoing and the eventual outcome of the clean-up efforts and the pending litigation matters is uncertain at this time. Based on currently available information, we do not believe that any eventual outcome will have a material adverse effect on our operations but we cannot guarantee this result. In 2009, the U.S. Supreme Court decided U.S. v. Burlington Northern & Santa Fe Railway Co., 129 S.Ct. 1870, which determined that hazardous substance cleanup liability need not be joint and several in all cases. As a result of this decision, the liability is potentially divisible among the PRPs at an earlier stage in superfund cases such as Omega. At this time we do not know and cannot predict the full impact of this decision on our liability. In addition, in January 2012, as a result of the PRP group's modification of its liability allocation formulae and the withdrawal of PRP group members, our proportional allocation of responsibility among the PRPs for the current remediation obligations increased. Subsequently, certain other PRPs withdrew from OPOG or initiated bankruptcy proceedings, and settlement negotiations with these parties are continuing. Any future increases to our proportional allocation of responsibility among the PRPs or the future reduction of parties participating in the PRP group due to additional member withdrawals or bankruptcies could materially increase our potential liability relating to the Omega Site.
Although we believe that we have been and currently are in material compliance with applicable environmental laws and regulations, we cannot guarantee 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, or expenses and potential liabilities relating to the pending litigation matter, will not have a material adverse effect on our business and financial condition.
Customer requirements and new regulations related to conflict-free minerals may force us to incur additional expenses or cause us to lose business.
Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted new requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals”) in their products, including products that are manufactured by third parties. These new regulations require companies to investigate, disclose and report whether or not such minerals or metals originated from the Democratic Republic of Congo or adjoining countries, and

25


mandate independent audits under certain circumstances, to confirm that trade in such minerals or metals does not fund armed conflict in those countries. We filed our first report on May 30, 2014 for the 2013 calendar year, and will be required to file similar reports on an annual basis thereafter.
The implementation of these requirements, and any similar requirements that other jurisdictions may impose in the future, will require us to incur additional compliance-related expenses. They could also adversely affect the availability and cost of metals used in the manufacture of many semiconductor devices, including ours. As there may be only a limited number of suppliers offering metals from sources outside of the relevant countries or that have been independently verified as not funding armed conflict in those countries, we cannot be sure that our contract manufacturers and other suppliers will be able to obtain those metals in sufficient quantities or at competitive prices. Also, since our supply chain is complex and some suppliers will not share their confidential supplier information, we may face challenges with our customers and suppliers if we are unable to sufficiently verify the origin of the metals used in our products. Some customers may choose to disqualify us as a supplier, and we may have to write off inventory in the event that it becomes unsalable as a result of these regulations. We may face similar risks in connection with any other regulations focusing on social responsibility or ethical sourcing that may be adopted in the future.
Environmental laws and regulations could cause a disruption in our business and operations.
We are subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making manufacturers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. Such laws and regulations have been passed in several jurisdictions in which we operate, including various European Union (“EU”) member countries. For example, the EU has enacted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and the Waste Electrical and Electronic Equipment (“WEEE”) directives. RoHS prohibits the use of lead and other substances in semiconductors and other products put on the market after July 1, 2006. The WEEE directive obligates parties that place electrical and electronic equipment on the market in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment, and provide a mechanism to take back and properly dispose of the equipment. There can be no assurance that similar programs will not be implemented in other jurisdictions resulting in additional costs, possible delays in delivering products, and even the discontinuance of existing and planned future product replacements if the cost were to become prohibitive.
We may not be able to protect our intellectual property adequately.
We rely in part on patents to protect our IP. We cannot assure you that any of our issued patents will adequately protect the IP in our products and processes, will provide us with competitive advantages, will not be challenged by third parties or that, if challenged, any such patents will be found to be valid or enforceable. In our industry, the assertion of IP rights often results in the other party seeking to assert claims based on its own IP, which can be costly and disruptive. In addition, there can be no assurance our pending patent applications or any future applications will be approved or that we will successfully prepare and file patent applications with respect to new inventions potentially subject to patent protection. Others may independently develop similar products or processes, duplicate our products or processes or design around any patents we currently hold or that may be issued to us.
To protect our IP, 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 assure you that others will not independently develop substantially equivalent IP or otherwise gain access to our trade secrets or IP, or disclose such IP or trade secrets, or that we can meaningfully protect our IP. A failure by us to meaningfully protect our IP could have a material adverse effect on our business, financial condition and operating results.
We generally enter into confidentiality and invention assignment agreements with our employees and contractors, and confidentiality agreements with other third parties including consultants, suppliers, customers, licensees and strategic partners. We also try to control access to and distribution of our technologies, pre-release products, documentation and other proprietary information, through the use of license agreements and other contracts and the implementation and enforcement of physical security measures. Despite these efforts, employees, contractors and third parties may attempt to copy, disclose, obtain or use our confidential information, products, services or technology without our authorization. In such event, any contracts we have in place with such parties might not provide us with adequate remedies to protect our intellectual property rights or to recover adequate damages for this loss. Also, former employees may seek employment with our business partners, customers or competitors and we cannot assure you that the confidential nature of our proprietary information will be maintained in the course of such future employment. Additionally, former employees or third parties could attempt to penetrate our network to misappropriate our proprietary information or interrupt our business. Because the techniques used by computer hackers to access or sabotage networks change frequently and generally are not recognized until launched against a target, we may be

26


unable to anticipate these techniques. As a result, our technologies and processes may be misappropriated, particularly in foreign countries where laws may not protect our proprietary rights as fully as in the United States.
We could be harmed by litigation involving patents, proprietary rights or other claims.
In the past we have sold to third parties, including non-practicing entities (also known as "NPEs" or "patent trolls"), groups of patents previously issued to or acquired by us that we deemed to be no longer essential to our core product lines and technologies. Certain NPE acquirers have brought and may in the future bring legal actions asserting infringement of the acquired patents against various defendants, including customers or potential customers of ours. Although we are expressly licensed and our customers are similarly protected under such acquired patents with respect to all products sold by us, nevertheless certain customers, against whom the NPEs have asserted infringement of the acquired patents by products other than ours (e.g., products internally developed by the customer or purchased from third-party suppliers other than us), have reacted adversely to us based on our initial sale of the acquired patents to the NPEs. Such adverse reactions have included, among other things, demands that we reimburse the customer for expenses incurred in defending against or settling the legal action, as well as threats to reduce or discontinue the customer's current or future business with us. There can be no assurance that any such expense reimbursement payments or other financial consideration extended to such affected customers or any actual reduction or discontinuance of product sales to such affected customers would not adversely affect our business, financial condition or operating results.
In addition, litigation may be necessary to enforce our IP rights, to determine the validity and scope of the proprietary rights of others or to defend against claims that our products are infringing or misappropriating the IP rights of third parties. The semiconductor industry is characterized by substantial litigation regarding patent and other IP rights. Currently we are not a named defendant in any IP infringement lawsuits. Nevertheless, as our products and IP become instantiated in more and more customer products and applications, and as patent infringement litigation brought by our competitors, NPEs and patent-licensing companies is on the rise, we are at an increased risk of being named as a defendant in such litigation. Due in part to the factors described above, we have been or currently are subject to the following:

•
having information about our products and technologies subpoenaed, and our employees deposed, in patent litigation between other third parties;
•
demands that we enter into expensive licenses of third party patent portfolios in order to avoid being named as a defendant in future IP infringement suits;
•
claims, contractual or otherwise, demanding that we indemnify or reimburse customers or end users of our products
with respect to their actual or potential liability, including without limitation defense costs, arising from third party IP infringement claims brought against them; and
•
demands from customers that we enter into “springing licenses” that prospectively grant such customers and related parties automatic license rights to any patents we sell or otherwise divest control over in specified transactions.
Such claims and demands have caused and could in the future result in substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations.
Any current or future litigation relating to the IP rights of third parties 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, expend substantial resources attempting to develop non-infringing products or technologies, or obtain a license under the IP rights of the third party claiming infringement. A license might not be available on reasonable, economic and other terms or at all. From time to time, we may be involved in litigation relating to other claims arising out of our operations in the normal course of business. The ultimate outcome of any such litigation matters could have a material, adverse effect on our business, financial condition and operating results.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly. For example, our stock’s closing price declined from $9.90 per share on March 31, 2014 to $5.10 per share on March 31, 2015. In the future, the market price of our common stock could be subject to significant fluctuations due to general economic and market conditions and in response to:

•
fluctuations in our anticipated or actual operating results;
•
our announcement of actual results or financial outlook that are higher or lower than market or analyst expectations;
•
changes in the economic performance or market valuations of other semiconductor companies or companies perceived by investors to be comparable to us;
•
announcements or introductions of new products by us or our competitors;

27


•
fluctuations in the anticipated or actual operating results or growth rates of our customers, peers or competitors;
•
technological innovations or setbacks by us or our competitors;
•
conditions in the semiconductor, communications or information technology markets;
•
the commencement or outcome of litigation or governmental investigations;
•
changes in ratings and estimates of our performance, or loss of coverage, by securities analysts;
•
positive or negative commentary about our business or prospects by industry bloggers and journalists;
•
volume fluctuations due to inconsistent trading volume levels of our shares;
•
announcements of merger, acquisition or financing transactions;
•
management changes;
•
our inclusion in certain stock indices; and
•
general economic and market conditions.

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. In some instances, these fluctuations appear to have been unrelated or disproportionate to the operating performance of the affected companies. Whether or not our stock is part of one or more Index funds could have a significant impact on our stock. We cannot assure you that our stock will be part of any Index fund. In addition, the past decline and inconsistent recovery of the financial markets and related factors beyond our control, including the credit and mortgage crisis in both the U.S. and worldwide, may cause our stock price to decline rapidly and unexpectedly.
Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation, as amended, and our bylaws, as amended and restated, may have the effect of delaying or preventing a change of control or changes in our directors and management. These provisions include the following:

•
the ability of the board of directors to issue up to 2.0 million shares of “blank check” preferred stock with terms designed to prevent or delay a takeover attempt, as described further below;
•
the prohibition of cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
•
the requirement for advance notice for nominations of directors for election to the board or for proposing matters that can be acted upon at a stockholders' meeting;
•
the ability of the board of directors to alter our bylaws without obtaining stockholder approval;
•
the requirement that any stockholder derivative actions and certain other intra-corporate disputes be litigated solely and exclusively in Delaware state court;
•
the right of the board of directors to elect a director to fill a vacancy created by the expansion of the board of directors; and
•
the prohibition of the right of stockholders to call a special meeting of stockholders.
Our board of directors has the authority to issue up to 2.0 million 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 harmed 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, 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. The issuance of preferred stock could have a dilutive effect on our stockholders.
Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit, restrict or significantly delay large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us.
Although we believe these provisions in our charter and bylaws and under Delaware law collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In any event, these provisions may delay or prevent a third party from acquiring us. Any such delay or prevention could cause the market price of our common stock to decline.


28



Item 1B.
Unresolved Staff Comments.
Not applicable.

Item 2.
Properties.
Our corporate headquarters are located in Sunnyvale, California, where we currently lease approximately 97,000 square feet. The facility contains administration, sales and marketing, research and development and operations functions. The lease expires in August 2015. Upon such expiration date, we currently anticipate moving our corporate headquarters to Santa Clara, California, where we have leased approximately 55,000 square feet.
We lease additional domestic facilities in Andover, Massachusetts. Our foreign leased locations consist of the following: Ottawa, Canada; Tokyo, Japan; Beijing, Shenzhen and Shanghai, the People’s Republic of China; Taipei, Taiwan; Ho Chi Minh City, Vietnam; and Pune and Bangalore, India.
Our domestic and international leased facilities currently comprise an aggregate of approximately 226,000 square feet. These facilities have lease terms expiring between 2015 and 2018. We believe that the facilities under lease by us will be adequate for at least the next 12 months.
For additional information regarding our obligations under property leases, see Note 8, Commitments and Contingencies, to Consolidated Financial Statements, included in Part IV, Item 15, Exhibits, Financial Statement Schedules, of this Annual Report.

Item 3.
Legal Proceedings.
The information set forth under Note 8, Commitments and Contingencies, to Consolidated Financial Statements, included in Part IV, Item 15, Exhibits and Financial Statement Schedules, of this Annual Report, is incorporated herein by reference.

Item 4.
Mine Safety Disclosures
Not applicable

29



PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is traded on the Nasdaq Global Select Market under the symbol AMCC. The following table sets forth the high and low closing sales prices of our common stock as reported by Nasdaq for the periods indicated.
 
Fiscal Year Ended March 31, 2015
High
 
Low
First Quarter
$
11.70

 
$
8.55

Second Quarter
$
11.05

 
$
6.78

Third Quarter
$
7.22

 
$
5.66

Fourth Quarter
$
6.52

 
$
4.70

 
Fiscal Year Ended March 31, 2014
High
 
Low
First Quarter
$
9.73

 
$
6.72

Second Quarter
$
12.93

 
$
8.60

Third Quarter
$
14.29

 
$
10.53

Fourth Quarter
$
12.93

 
$
9.49

At May 14, 2015, there were approximately 180 holders of record of our common stock. Because most of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by the record holders.
Dividend Policy
We have never declared or paid cash dividends on shares of our common stock. We currently intend to retain all of our earnings, if any, for use in our business, for the purchases of our common stock or for the acquisitions of other businesses, assets, products or technologies. We do not anticipate paying any cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
During the fiscal year ended March 31, 2015, we issued 1,054,482 shares of common stock to former holders of Veloce common stock, common stock options and stock equivalents pursuant to the Veloce merger agreement, as described above. These shares were issued without registration under the Securities Act of 1933, as amended, pursuant to the exemption afforded by Section 3(a)(10) of the Securities Act.
Securities Authorized for Issuance under Equity Compensation Plans
The information included in Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, of this Annual Report on Form 10-K is hereby incorporated herein by reference. For additional information on our stock incentive plans and activity, see Note 5, Stockholder's Equity, to Consolidated Financial Statements included in Part IV, Item 15, Exhibits and Financial Statement Schedules, of this Annual Report.
Stock Price Performance Graph
The following information is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent we specifically incorporate it by reference into such a filing.
The graph below matches Applied Micro Circuits Corporation’s cumulative five-year total stockholder return on common stock with the cumulative total returns of the S&P 500 index, the NASDAQ Composite index, the NASDAQ Telecommunications index and the NASDAQ Electronic Components index. The graph tracks the performance of a $100 investment in our common stock and in each index (with the reinvestment of all dividends) from March 31, 2010 to March 31, 2015.

30


The comparisons in the graph below are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock.


 
Fiscal Years Ending March 31,
 
2010
 
2011
 
2012
 
2013
 
2014
 
2015
Applied Micro Circuits Corporation
100.00

 
120.28

 
80.42

 
85.98

 
114.72

 
59.10

S&P 500
100.00

 
115.65

 
125.52

 
143.05

 
174.31

 
196.51

NASDAQ Composite
100.00

 
116.88

 
132.91

 
143.55

 
188.17

 
219.78

NASDAQ Telecommunications
100.00

 
100.68

 
97.60

 
103.52

 
130.88

 
137.97

NASDAQ Electronic Components
100.00

 
115.32

 
118.45

 
110.39

 
147.99

 
182.03




31


Item 6.
Selected Financial Data.
The following table sets forth selected financial data for each of our last five fiscal years ended March 31, 2015. You should read the selected financial data set forth in the table below, together with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements, included in Part IV, Item 15, Exhibits and Financial Statement Schedules, of this Annual Report, as well as Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Annual Report (in thousands, except per share amounts).
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Net revenues
$
165,011

 
$
216,150

 
$
195,642

 
$
230,887

 
$
247,710

Cost of revenues
69,297

 
85,189

 
83,048

 
98,804

 
95,282

Gross profit
95,714

 
130,961

 
112,594

 
132,083

 
152,428

Operating expenses:
 
 
 
 
 
 
 
 
 
Research and development
107,220

 
146,579

 
187,419

 
175,656

 
108,732

Selling, general and administrative
33,643

 
38,927

 
51,684

 
45,794

 
49,173

Gain on sale of TPack
—

 
(19,699
)
 
—

 
—

 
—

Gain on sale of building
—

 
(25,815
)
 
—

 
—

 
—

Amortization of purchased intangible assets
104

 
316

 
1,926

 
3,202

 
5,285

Restructuring
5,421

 
1,134

 
6,435

 
875

 
532

Total operating expenses
146,388

 
141,442

 
247,464

 
225,527

 
163,722

Operating loss
(50,674
)
 
(10,481
)
 
(134,870
)
 
(93,444
)
 
(11,294
)
Net realized gain on short-term investments and interest income, net
2,764

 
5,052

 
2,595

 
4,247

 
9,890

Other (expense) income, net
(3,056
)
 
354

 
(2,394
)
 
7,437

 
797

Loss before income taxes
(50,966
)
 
(5,075
)
 
(134,669
)
 
(81,760
)
 
(607
)
Income tax expense (benefit)
1,092

 
619

 
(554
)
 
928

 
399

Net loss
$
(52,058
)
 
$
(5,694
)
 
$
(134,115
)
 
$
(82,688
)
 
$
(1,006
)
Basic and diluted net loss per share
$
(0.66
)
 
$
(0.08
)
 
$
(2.06
)
 
$
(1.33
)
 
$
(0.02
)
Shares used in calculating basic and diluted net loss per share
78,814

 
72,897

 
65,258

 
62,245

 
65,160

 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
2012
 
2011
Consolidated Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
75,358

 
$
106,583

 
$
85,476

 
$
113,846

 
$
168,051

Working capital
$
96,652

 
$
112,351

 
$
26,860

 
$
118,575

 
$
186,117

Total assets
$
158,863

 
$
207,536

 
$
211,380

 
$
269,052

 
$
308,657

Total current liabilities
$
31,467

 
$
55,155

 
$
114,089

 
$
72,286

 
$
46,847

Total stockholders’ equity
$
123,105

 
$
149,236

 
$
81,504

 
$
169,236

 
$
261,810



32


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to the accompanying Consolidated Financial Statements and footnotes to help provide an understanding of our financial condition, changes in our financial condition and results of our operations. The MD&A is organized as follows:
•
Caution concerning forward-looking statements. This section discusses how forward-looking statements made by us in the MD&A and elsewhere in this Annual Report are based on management’s present expectations about future events and are inherently susceptible to uncertainty and changes in circumstances.
•
Overview. This section provides an introductory overview and context for the discussion and analysis that follows in the MD&A.
•
Critical accounting policies. This section discusses those accounting policies that are both considered important to our financial condition and operating results and require significant judgment and estimates on the part of management in their application.
•
Results of operations. This section provides an analysis of our results of operations for the three fiscal years ended March 31, 2015. A brief description is provided of transactions and events that impact the comparability of the results being analyzed.
•
Liquidity and capital resources. This section provides an analysis of our cash position and cash flows, as well as a discussion of our financing arrangements and financial commitments.
This MD&A should be read in conjunction with the Consolidated Financial Statements and notes thereto included in this report.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This MD&A contains forward-looking statements that are subject to risks and uncertainties. Refer to the Cautionary Statement about Forward-Looking Statements on page 1 for further details.
OVERVIEW
The Company
Applied Micro Circuits Corporation (the “Company”, “we” or “our”) is a global leader in solutions for next-generation cloud infrastructure and data centers, as well as connectivity products for edge, metro and long haul communications equipment.

Our corporate headquarters are located in Sunnyvale, California. Sales and engineering offices are located throughout the world. We serve two target markets, Computing and Connectivity. Our products include the X-Gene® ARM® 64-bit Server on a Chip® solution, or X-Gene. The X-Gene family of products targets existing and emerging hyperscale cloud data center, scientific and high performance computing and enterprise applications. X-Gene is the world's first ARM 64-bit Server on a Chip platform in production. In addition to having a time-to-market advantage, we believe X-Gene will lead the next generation cloud data center silicon market by addressing the need for high performance, lower power, and lower total cost of ownership (“TCO”).

As part of our current business, we offer a line of embedded computing products based on Power Architecture, sometimes referred to as PowerPC products. Our HeliX® family of embedded products is based on the ARM Instruction Set Architecture (“ISA”) and represents the future of our new embedded processor offerings, as sales of our legacy PowerPC products continue to be in secular decline. Our embedded processor products are currently deployed in applications such as control- and data-plane functionality, wireless access points, residential gateways, wireless base stations, storage controllers, network attached storage, network switches and routing products, and multi-function printers.

The connectivity portion of our base business includes a broad array of physical layer (“PHY”), framer and mapper solutions that are high-speed, high-bandwidth, high-reliability communications products. Our highly integrated framer-PHY silicon solutions transmit and receive signals and are used in high-speed optical network infrastructure equipment. For Optical Transport Network (“OTN”) applications, our framer products incorporate our industry-leading forward error correction ("FEC") technology to significantly improve reach. In July 2013, we announced the X-Weave® family of connectivity products, designed to meet the needs of public cloud, private cloud, and enterprise data centers. The X-Weave family includes products spanning 100Gbps to 240Gbps of connectivity with unique multi-protocol features and high density.


33


Since the start of fiscal 2013, we have invested a total of $441.2 million in the Research and Development ("R&D") of new products, including high-speed, high-bandwidth, and low-power products that often combine the functions of multiple existing products into single highly-integrated solutions. A considerable portion of this investment is directed to our ARM 64-bit based server product development. Our products and our customers’ products are highly complex. Due to this complexity, it often takes several years to complete the development and qualification of a product before it enters into volume production. Accordingly, some major products in development during the last few years have not yet started to generate significant revenues. In addition, demand for our products can be impacted by economic downturns, cyclicality in the telecommunications market, competitive and technological developments, and other factors described elsewhere in this Annual Report.
Acquisition of Veloce
On June 20, 2012, we completed the acquisition of Veloce. Veloce has been developing specific ARM-based technology for us. The total purchase consideration for Veloce was $178.5 million based on the benchmarks achieved during product simulations. For accounting purposes, the costs incurred in connection with the development milestones relating to Veloce are considered compensatory and are recognized as R&D expense in the Consolidated Statement of Operations. Veloce completed all three performance milestones relating to the project as of March 31, 2014 and the total consideration relating to the three performance milestones in the amount of $178.5 million has been recognized as R&D expense as of March 31, 2015.
As of March 31, 2015, $168.9 million has been paid and we expect that an additional $1.0 million will be paid in cash and stock by June 30, 2015. The $168.9 million paid to date includes $89.3 million in cash and the issuance of 10.7 million shares of common stock valued at $79.6 million. The consideration not yet paid of $9.6 million can be settled in cash or our common stock (or a combination of cash and stock), at our election. Refer to Note 4, Veloce, to the Consolidated Financial Statements for further details.

CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with GAAP in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. See Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements for details. The methods, estimates and judgments we use in applying these critical accounting policies have a significant impact on the results we report in our financial statements. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances. Our actual results may differ materially and adversely from management’s estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.
We believe the following critical accounting policies require us to make significant judgments and estimates in the preparation of our Consolidated Financial Statements.
Investments

We hold a variety of securities in our investment portfolio. We review our investment portfolio periodically to assess for other-than-temporary impairment. We assess the impairment of our investments in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment primarily including the duration and extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization) and the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. If the fair value of a security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If we do not intend to sell the security, we shall consider available evidence to assess whether it is more likely than not, we will be required to sell the security before the recovery of the amortized cost basis due to cash, working capital requirements, contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs. If it is more likely than not that we are required to sell the security before recovery of the amortized cost basis, an other-than-temporary impairment is considered to have occurred. We use present value cash flow models to determine whether the entire amortized cost basis of the security will be recovered. We will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. An other-than-temporary impairment is said to have occurred if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Refer to Note 2, Investments, to the Consolidated Financial Statements for additional information.
Inventories


34


Our policy is to value inventories at the lower of cost or market on a part-by-part basis, with cost being determined based on the first-in, first-out method. This policy requires us to make estimates regarding the market value of our inventories, including an assessment of excess or obsolete inventories. We determine excess and obsolete inventories based on an estimate of the future demand for its products within a specified time horizon, generally 12 months. If our future demand is lower than our inventory balance, we may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. The written down value of the inventory becomes its new cost basis, and the cost basis for such inventory is not marked-up if market conditions improve. This accounting is consistent with the guidance provided by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 330.
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of the fair value of purchase consideration over the fair values of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed annually or more frequently if impairment indicators arise. We elected to use the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. As part of our qualitative assessment, we evaluated and determined that our market capitalization was well in excess of our book value and based on this and other qualitative factors determined that there was no goodwill impairment as of and for the fiscal year ended March 31, 2015.

Our long-lived assets consist of property, plant and equipment. Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets ranging from 1 to 5 years using the straight line method. Leasehold improvements are stated at cost and amortized over the shorter of the term of the related lease or its estimated useful life. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. In addition, we assess our long-lived assets for impairment if they are abandoned. There was no impairment of long-lived assets other than the write-off of a mask set of $2.6 million relating to a restructuring plan during the fiscal year ended March 31, 2015. There was no impairment during the fiscal year ended March 31, 2014. Refer to the paragraph below, Mask Costs, and Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

Revenue Recognition

We recognize revenue based on four basic criteria: 1) there is evidence that an arrangement exists; 2) delivery has occurred and title and risk of loss have transferred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. We consider the price to be determinable when the price is not subject to refund or adjustments or when any such adjustments can be estimated. We evaluate the creditworthiness of our customers to determine that appropriate credit limits are established prior to the acceptance of an order. Revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor allowances and is recognized upon shipment. These estimates are based on our experience with the contractual terms of the competitive pricing and rebate programs and stock rotations.
From time to time, we generate revenue from the sale of internally developed intellectual property ("IP") and royalty revenues from the sale of our customers' products that contain our technology. We generally recognize revenue from the sale of IP and from royalties when all four basic criteria outlined above are met.

Mask Costs

We incur significant costs for the fabrication of masks used by our contract manufacturers to manufacture our products. If we determine, at the time the costs for the fabrication of masks are incurred, that technological feasibility of the product has been achieved, such costs are capitalized as property and equipment under machinery and equipment. When our related product is released to production, the mask costs are amortized as cost of sales over three years, representing the estimated production period of the product. We periodically reassess the estimated production period for specific mask sets capitalized. During the fiscal years ended March 31, 2015 and 2014, total mask costs capitalized were $5.9 million and $6.4 million, respectively. If we determine, at the time fabrication mask costs are incurred, that either technological feasibility of the product has not occurred or that the mask is not reasonably expected to be used in production or that the commercial feasibility of the product is uncertain, the related mask costs are expensed to R&D in the period in which the costs are incurred. We also periodically assess capitalized mask costs for impairment. As a result of recent restructuring, we recorded an impairment charge of a capitalized mask set of $2.6 million during the fiscal year ended March 31, 2015. There were no impairments during the fiscal year ended March 31, 2014. Refer to Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

35



Stock-Based Compensation Expense

Stock-based compensation cost is measured at the grant date based on the fair value of the award. The fair value of restricted stock units ("RSUs") is estimated using our stock price on the grant date. The fair value of options and employee stock purchase rights is estimated using the Black-Scholes model on the grant date. The Black-Scholes model determines the fair value of share-based payment awards based on assumptions including our stock price on the date of grant, volatility over the term of the awards, actual and projected employee stock option exercise behaviors and risk free interest rate. Our market stock units ("MSUs") were valued using the Monte Carlo pricing model, which uses our stock price, the applicable stock index price, expected volatilities of our stock price and the Index, correlation coefficients and risk free interest rates to determine the fair value.



RESULTS OF OPERATIONS
Summary Financials
The following table presents a summary of our results of operations for the fiscal years ended March 31, 2015 and 2014 (dollars in thousands):
 
 
Fiscal Year Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase
(Decrease)
 
%
Change
Net revenues
$
165,011

 
100.0
 %
 
$
216,150

 
100.0
 %
 
$
(51,139
)
 
(23.7
)%
Cost of revenues
69,297

 
42.0

 
85,189

 
39.4

 
(15,892
)
 
(18.7
)%
Gross profit
95,714

 
58.0

 
130,961

 
60.6

 
(35,247
)
 
(26.9
)%
Total operating expenses *
146,388

 
88.7

 
141,442

 
65.4

 
4,946

 
3.5
 %
Operating loss
(50,674
)
 
(30.7
)
 
(10,481
)
 
(4.8
)
 
40,193

 
383.5
 %
Net realized gain on short-term investments and interest and other (expense) income, net
(292
)
 
(0.2
)
 
5,406

 
2.5

 
(5,698
)
 
(105.4
)%
Loss before income taxes
(50,966
)
 
(30.9
)
 
(5,075
)
 
(2.3
)
 
45,891

 
904.3
 %
Income tax expense
1,092

 
0.7

 
619

 
0.3

 
473

 
76.4
 %
Net loss
$
(52,058
)
 
(31.6
)%
 
$
(5,694
)
 
(2.6
)%
 
$
46,364

 
814.3
 %
* Total operating expense for the fiscal year ended March 31, 2014 included a gain on sale of TPack of $19.7 million and a gain on sale of building of $ 25.8 million.
The following table presents a summary of our results of operations for the fiscal years ended March 31, 2014 and 2013 (dollars in thousands):
 

36


 
Fiscal Year Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase
(Decrease)
 
%
Change
Net revenues
$
216,150

 
100.0
 %
 
$
195,642

 
100.0
 %
 
$
20,508

 
10.5
 %
Cost of revenues
85,189

 
39.4

 
83,048

 
42.4

 
2,141

 
2.6
 %
Gross profit
130,961

 
60.6

 
112,594

 
57.6

 
18,367

 
16.3
 %
Total operating expenses
141,442

 
65.4

 
247,464

 
126.5

 
(106,022
)
 
(42.8
)%
Operating loss
(10,481
)
 
(4.8
)
 
(134,870
)
 
(68.9
)
 
(124,389
)
 
(92.2
)%
Net realized gain on short-term investments and interest and other income, net
5,406

 
2.5

 
201

 
0.1

 
5,205

 
2,589.6
 %
Loss before income taxes
(5,075
)
 
(2.3
)
 
(134,669
)
 
(68.8
)
 
(129,594
)
 
(96.2
)%
Income tax expense (benefit)
619

 
0.3

 
(554
)
 
(0.3
)
 
1,173

 
(211.7
)%
Net loss
$
(5,694
)
 
(2.5
)%
 
$
(134,115
)
 
(68.6
)%
 
$
(128,421
)
 
(95.8
)%

Net Revenues. We generate revenues primarily through sales of our integrated circuit, or IC, products and printed circuit board assemblies to original equipment manufacturers, or OEMs, who in turn supply their equipment principally to data centers and communications service providers.

We classify our revenues into two categories, Connectivity and Computing, based on the markets that the underlying products serve. We use information from each category to analyze our performance and success in the related markets, including our strategy to focus on the transition to the high-growth data center market. As an ongoing part of our business, from time to time we seek to monetize our IP investments through IP licensing or sales arrangements with customers, suppliers and other business partners that have operations beyond IP licensing.

For the fiscal years ended March 31, 2015, 2014 and 2013, our OTN and 10Gbps or faster Ethernet products represented 92%, 86% and 74%, respectively, of our Connectivity revenues, and our SONET/SDH and legacy switch products represented 8%, 14% and 26%, respectively, of our Connectivity revenues. We expect our SONET/SDH and legacy switch products to continue to decline, as Connectivity customers continue to transition to higher speed, lower power products.

Based on direct shipments, net revenues to customers that were equal to or greater than 10% of total net revenues were as follows:
 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Wintec (global logistics provider)*
20
%
 
22
%
 
19
%
Avnet (distributor)
26
%
 
27
%
 
27
%

* Wintec provides vendor managed inventory support primarily for Cisco Systems, Inc.
We expect that our largest customers collectively will continue to account for a substantial portion of our net revenues for the foreseeable future.
Based on ship to location, net revenues by geographic region were as follows (in thousands):
 

37


 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
Amount
 
% of Net Revenue
 
Amount
 
% of Net Revenue
 
Amount
 
% of Net Revenue
United States of America
$
70,977

 
43.1
%
 
$
101,275

 
46.9
%
 
$
79,930

 
40.9
%
Taiwan
13,099

 
7.9

 
13,405

 
6.2

 
22,684

 
11.6

Hong Kong
21,808

 
13.2

 
21,477

 
9.9

 
22,044

 
11.3

China
982

 
0.6

 
6,085

 
2.8

 
2,053

 
1.0

Europe
24,728

 
15.0

 
33,625

 
15.6

 
35,216

 
18.0

Japan
22,974

 
13.9

 
23,125

 
10.7

 
13,237

 
6.8

Malaysia
4,666

 
2.8

 
5,788

 
2.7

 
4,733

 
2.4

Singapore
5,594

 
3.4

 
9,745

 
4.5

 
10,399

 
5.3

Other Asia
173

 
0.1

 
1,217

 
0.6

 
4,621

 
2.4

Other
10

 
—

 
408

 
0.1

 
725

 
0.3

 
$
165,011

 
100.0
%
 
$
216,150

 
100.0
%
 
$
195,642

 
100.0
%

Cost of Revenues. Cost of revenues consists primarily of the cost of semiconductor wafers and other materials, and the cost of assembly and test. Cost of revenues also includes personnel related costs (including stock-based compensation) and overhead related to our operations.
Research and Development. R&D expenses consist primarily of salaries and related costs (including stock-based compensation) of employees engaged in research, design and development activities including amounts relating to Veloce, costs related to engineering licenses and design tools, subcontracting costs and facilities expenses. We believe that a continued commitment to R&D is vital to our goal of maintaining a leadership position with innovative products. In addition to our internal R&D programs, our business strategy includes acquiring products, technologies or businesses from third parties.
Selling, General and Administrative. Selling, general and administrative (“SG&A”) expenses consist primarily of personnel related costs (including stock-based compensation), professional and legal fees, corporate branding and facilities expenses.

Comparison of the Fiscal Year Ended March 31, 2015 to the Fiscal Year Ended March 31, 2014
Net Revenues. Net revenues for the fiscal year ended March 31, 2015 were $165.0 million, representing an decrease of 23.7% from net revenues of $216.2 million for the fiscal year ended March 31, 2014. The following table presents revenues for the Computing and Connectivity end markets (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Computing
$
65,707

 
39.8
%
 
$
107,665

 
49.8
%
 
$
(41,958
)
 
(39.0
)%
Connectivity
99,304

 
60.2

 
108,485

 
50.2

 
(9,181
)
 
(8.5
)%
 
$
165,011

 
100.0
%
 
$
216,150

 
100.0
%
 
$
(51,139
)
 
(23.7
)%

During the fiscal year ended March 31, 2015, our Computing and Connectivity revenues decreased by 39.0% and 8.5%, respectively, compared to the fiscal year ended March 31, 2014. Our Computing revenues reflected the continuing decline in sales of PowerPC-based products, as the networking industry migrates away from the PowerPC architecture and we continue to focus our resources on products based on the ARM architecture, which has not yet generated significant revenue. In addition, the decrease in Computing revenues during the fiscal year ended March 31, 2015, compared to the fiscal year ended March 31, 2014, was due in part to a significant end-of-life order placed during the fiscal year ended March 31, 2014. The decrease in Connectivity revenues during the fiscal year ended March 31, 2015, compared to the fiscal year ended March 31, 2014, was due to softness in telecommunications service provider demand for systems incorporating our products, resulting in a decline in business for our products targeting that market, partially offset by an increase in revenue from the sale and licensing of IP.


38


Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the fiscal years ended March 31, 2015 and 2014 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Net revenues
$
165,011

 
100.0
%
 
$
216,150

 
100.0
%
 
$
(51,139
)
 
(23.7
)%
Cost of revenues
69,297

 
42.0

 
85,189

 
39.4

 
(15,892
)
 
(18.7
)%
Gross profit
$
95,714

 
58.0
%
 
$
130,961

 
60.6
%
 
$
(35,247
)
 
(26.9
)%

The gross profit percentage for the fiscal year ended March 31, 2015 decreased to 58.0%, compared to 60.6% for the fiscal year ended March 31, 2014. The decrease in our gross profit percentage was primarily due to unfavorable product mix, partially offset by the favorable impact of the increase in higher margin revenue from the sale and licensing of IP.

The gross margins for our solutions have declined from time to time in the past. Factors that have caused downward pressure on gross margins for our products include competitive pricing pressures, unfavorable product mix, the cost sensitivity of our customers particularly in the higher-volume markets, new product introductions by us or our competitors and capacity constraints in our supply chain. For strategic reasons, from time to time, we may accept initial orders at less than optimal gross margins in order to facilitate the introduction and/or market penetration of our new or existing products. We may also accept orders for older products at less than optimal gross margins to encourage customers to order sooner or in larger quantities than previously anticipated. To maintain acceptable operating results, we seek to offset any reduction in gross margins of our products by reducing operating costs, increasing sales volume, developing and introducing new products and developing new generations and versions of existing products on a timely basis. In addition, our margins may fluctuate from period to period based on the timing and amount of any IP licensing or sales arrangements that we may undertake. Although historically these arrangements have provided us with higher-margin revenues, we cannot predict the frequency or extent to which we will engage in them in the future. 

Research and Development, Selling, General and Administrative Expenses. The following table presents R&D and SG&A expenses for the fiscal years ended March 31, 2015 and 2014 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Research and development
$
107,220

 
65.0
%
 
$
146,579

 
67.8
%
 
$
(39,359
)
 
(26.9
)%
Selling, general and administrative
$
33,643

 
20.4
%
 
$
38,927

 
18.0
%
 
$
(5,284
)
 
(13.6
)%
Research and Development. The decrease in R&D expense of 26.9% or $39.4 million for the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was mainly due to a $33.5 million decrease in Veloce consideration related expenses and a $8.9 million decrease in personnel costs, partially offset by a $5.4 million increase in stock-based compensation expense.
R&D expense recognized in connection with the Veloce consideration was $9.2 million and $42.7 million during the fiscal years ended March 31, 2015 and 2014, respectively. Refer to Note 4, Veloce, to Consolidated Financial Statements for further details.
Selling, General and Administrative. The decrease in SG&A expense of 13.6% or $5.3 million during the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was mainly due to a $3.8 million decrease in stock-based compensation expense and a $2.2 million decrease in personnel costs.
Stock-Based Compensation. The following table presents stock-based compensation expense for the fiscal years ended March 31, 2015 and 2014, which was included in the tables above (dollars in thousands):
 

39


 
Fiscal Years Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase (Decrease)
 
%
Change
Cost of revenues
$
290

 
0.2
%
 
$
444

 
0.2
%
 
$
(154
)
 
(34.7
)%
Research and development
11,657

 
7.1

 
6,371

 
2.9

 
5,286

 
83.0
 %
Selling, general and administrative
6,358

 
3.9

 
10,206

 
4.7

 
(3,848
)
 
(37.7
)%
 
$
18,305

 
11.2
%
 
$
17,021

 
7.8
%
 
$
1,284

 
7.5
 %
The increase in stock-based compensation of 7.5% during the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was primarily due to the higher expense associated with RSU grants with two-year vesting, as opposed to our typical four-year vesting periods, during the fiscal year ended March 31, 2015, partially offset by the expense relating to Dr. Gopi's 200,000 RSUs that were vested on the grant date and the expense relating to the annual incentive compensation plan during the fiscal year ended March 31, 2014. 
Net Realized Gain on Short-Term Investments and Interest and Other (Expense) Income, Net. The following table presents net realized gain on short-term investments and interest and other (expense) income, net for the fiscal years ended March 31, 2015 and 2014 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2015
 
2014
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Net realized gain on short-term investments and interest income, net
$
2,764

 
1.7
 %
 
$
5,052

 
2.3
%
 
$
(2,288
)
 
(45.3
)%
Other (expense) income, net
$
(3,056
)
 
(1.9
)%
 
$
354

 
0.2
%
 
$
(3,410
)
 
963.3
 %
Net Realized Gain on Short-Term Investments and Interest Income, Net. The decrease in net realized gain on short-term investments and interest income, net during the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was primarily due to a decrease in realized gains from the sale of short-term investments and marketable securities of $2.0 million during the fiscal year ended March 31, 2015.
Other (Expense) Income, Net. The decrease in other (expense) income, net for the fiscal year ended March 31, 2015 compared to the fiscal year ended March 31, 2014 was primarily due to an impairment charge of $3.0 million with respect to certain strategic investments during the fiscal year ended March 31, 2015. Refer to Note 3, Certain Financial Statement Information, to the Consolidated Financial Statements for details.
Income Taxes. The federal statutory income tax rate was 35% each for the fiscal years ended March 31, 2015 and 2014. The effective tax rate differs from the federal statutory income tax rate of 35% primarily due to foreign income tax and the valuation allowance against our domestic deferred tax assets. Income tax expense recorded for the fiscal year ended March 31, 2015 was $1.1 million compared to $0.6 million for the fiscal year ended March 31, 2014. The increase in tax expense in fiscal 2015 versus fiscal 2014 was primarily due to an increase in foreign income taxes related to foreign licensing fees.

Comparison of the Fiscal Year Ended March 31, 2014 to the Fiscal Year Ended March 31, 2013
Net Revenues. Net revenues for the fiscal year ended March 31, 2014 were $216.2 million, representing an increase of 10.5% from the net revenues of $195.6 million for the fiscal years ended March 31, 2013. The following table presents revenues for the Computing and Connectivity end markets (dollars in thousands):


40


 
Fiscal Years Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase
 
%
Change
Computing
$
107,665

 
49.8
%
 
$
104,952

 
53.6
%
 
$
2,713

 
2.6
%
Connectivity
108,485

 
50.2

 
90,690

 
46.4

 
17,795

 
19.6
%
 
$
216,150

 
100.0
%
 
$
195,642

 
100.0
%
 
$
20,508

 
10.5
%

During the fiscal year ended March 31, 2014, our Computing and Connectivity revenues increased by 2.6% and 19.6%, respectively. Our Computing revenues for the fiscal year ended March 31, 2014 included a significant end-of-life order compared to the fiscal year ended March 31, 2013. The increase in Connectivity revenues was a result of higher demand for our new products due to increasing capital expenditure on OTN and Ethernet in telecom and datacenter infrastructures.

Gross Profit. The following table presents net revenues, cost of revenues and gross profit for the fiscal years ended March 31, 2014 and 2013 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase
 
%
Change
Net revenues
$
216,150

 
100.0
%
 
$
195,642

 
100.0
%
 
$
20,508

 
10.5
%
Cost of revenues
85,189

 
39.4

 
83,048

 
42.4

 
2,141

 
2.6
%
Gross profit
$
130,961

 
60.6
%
 
$
112,594

 
57.6
%
 
$
18,367

 
16.3
%

The gross profit percentage for the fiscal year ended March 31, 2014 increased to 60.6%, compared to 57.6% for the fiscal year ended March 31, 2013. The increase in our gross profit percentage was primarily due to favorable product mix and the absorption of fixed costs across higher overall revenues.
Research and Development, Selling, General and Administrative Expenses. The following table presents R&D and SG&A expenses for the fiscal years ended March 31, 2014 and 2013 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Research and development
$
146,579

 
67.8
%
 
$
187,419

 
95.8
%
 
$
(40,840
)
 
(21.8
)%
Selling, general and administrative
$
38,927

 
18.0
%
 
$
51,684

 
26.4
%
 
$
(12,757
)
 
(24.7
)%

Research and Development. The decrease of 21.8% or $40.8 million of R&D expenses for the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 was mainly due to a $23.5 million decrease in Veloce consideration related expenses, a $9.3 million decrease in personnel costs and a $5.4 million decrease in stock-based compensation expense. Research and development expense recognized in connection with the Veloce consideration was $42.7 million and $66.2 million during the fiscal years ended March 31, 2014 and 2013, respectively. Refer to Note 4, Veloce, to Consolidated Financial Statements for further details.

Selling, General and Administrative. The decrease in SG&A expenses of 24.7% or $12.8 million during the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 was mainly due to a $5.5 million decrease in personnel costs, a $5.0 million decrease in legal expenses and a $1.6 million decrease in stock compensation expense.
Stock-Based Compensation. The following table presents stock-based compensation expense for the fiscal years ended March 31, 2014 and 2013, which was included in the tables above (dollars in thousands):
 

41


 
Fiscal Years Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Decrease
 
%
Change
Cost of revenues
$
444

 
0.2
%
 
$
692

 
0.4
%
 
$
(248
)
 
(35.8
)%
Research and development
6,371

 
2.9

 
11,760

 
6.0

 
(5,389
)
 
(45.8
)%
Selling, general and administrative
10,206

 
4.7

 
11,784

 
6.0

 
(1,578
)
 
(13.4
)%
 
$
17,021

 
7.8
%
 
$
24,236

 
12.4
%
 
$
(7,215
)
 
(29.8
)%

The decrease in stock-based compensation of 29.8% during the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 was primarily due to the effect of the expense that was recorded relating to our Performance Retention Grants during the fiscal year ended March 31, 2013, partially offset by the expense relating to Dr. Gopi's vested performance-based restricted stock units during the fiscal year ended March 31, 2014.
 
Net Realized Gain on Short-Term Investments and Interest and Other Income (Expense), Net. The following table presents net realized gain on short-term investments and interest and other income (expense), net for the fiscal years ended March 31, 2014 and 2013 (dollars in thousands):
 
 
Fiscal Years Ended March 31,
 
 
 
 
 
2014
 
2013
 
 
 
 
 
Amount
 
% of Net
Revenue
 
Amount
 
% of Net
Revenue
 
Increase
 
%
Change
Net realized gain on short-term investments and interest income, net
$
5,052

 
2.3
%
 
$
2,595

 
1.3
 %
 
$
2,457

 
94.7
%
Other income (expense), net
$
354

 
0.2
%
 
$
(2,394
)
 
(1.2
)%
 
$
2,748

 
114.8
%

Net Realized Gain on Short-Term Investments and Interest Income, Net. The increase in net realized gain on short-term investments and interest income, net for the fiscal year ended March 31, 2014 compared to the fiscal year ended March 31, 2013 was primarily due to an increase in realized gains from the sale of short-term investments and marketable securities of $2.0 million during the fiscal year ended March 31, 2014 and an other-than-temporary impairment of short-term investments and marketable securities of $1.1 million during the fiscal year ended March 31, 2013.

Other Income (Expense), net. The increase in other income for the fiscal year ended March 31, 2014, compared to the fiscal year ended March 31, 2013 was primarily due an impairment of $2.3 million relating to a strategic equity investment during the fiscal year ended March 31, 2013.

Income Taxes. The federal statutory income tax rate was 35% for the fiscal years ended March 31, 2014 and 2013. Income tax expense recorded for the fiscal year ended March 31, 2014 was an expense of $0.6 million compared to a benefit of $0.6 million for the fiscal year ended March 31, 2013. The increase in tax expense in fiscal 2014 versus fiscal 2013 was primarily related to other comprehensive income. The income tax benefit for the fiscal year ended March 31, 2013 included a tax benefit of $1.0 million in operations with the corresponding tax expense in other comprehensive income, related primarily to the tax effect on unrealized gain on investments.


LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2015, our principal source of liquidity consisted of $75.4 million in cash, cash equivalents and short-term investments. Working capital, defined as net current assets minus net current liabilities, was $96.7 million as of March 31, 2015. Total cash, cash equivalents, and short-term investments decreased by $31.2 million during the fiscal year ended March 31, 2015 primarily due to cash used for operations of $27.0 million, purchase of property and equipment of $9.8 million, funding of taxes withheld upon vesting of restricted stock units of $1.9 million, partially offset by proceeds from issuance of

42


common stock of $3.9 million and remaining proceeds from the sale of TPack of $3.4 million. At March 31, 2015, we had contractual obligations not included on our balance sheet totaling $27.5 million, primarily related to facility leases, IP licenses, engineering design software tool licenses and inventory purchase commitments.

Acquisition of Veloce
On June 20, 2012, we completed our acquisition of Veloce. Veloce has been developing specific ARM-based technology for us. The total purchase consideration for Veloce was $178.5 million based on the benchmarks achieved during product simulations. Veloce completed all three performance milestones relating to the project as of March 31, 2014. During the twelve months ended March 31, 2015 and 2014, we paid $9.2 million and $63.7 million, respectively, in cash and issued 1.1 million shares and 6.7 million shares of common stock, respectively, valued at $5.6 million and $57.3 million, respectively, as part of Veloce acquisition consideration. As of March 31, 2015, $168.9 million has been paid and we expect that an additional $1.0 million will be paid in cash and stock June 30, 2015. The $168.9 million paid to date includes $89.3 million in cash and the issuance of 10.7 million shares of common stock valued at $79.6 million. Payment of the Veloce consideration occurs based upon when a performance milestone is completed and upon satisfaction of vesting requirements, if applicable, and can be settled in cash or our common stock, at the election of management, up to a maximum of 2.2 million shares as of March 31, 2015.

Operating Activities
For the fiscal year ended March 31, 2015, we used $27.0 million of cash in our operations. Our net loss of $52.1 million for the fiscal year ended March 31, 2015 included $40.6 million of non-cash charges and other adjustment consisting of $8.6 million of depreciation, $0.1 million of amortization of purchased intangibles, $18.3 million of stock-based compensation, $9.2 million of additional Veloce compensation cost, $3.0 million of impairment of certain strategic investments and $2.6 million of non-cash restructuring costs, partially offset by $1.3 million gain on short-term investments and other, net. The remaining change in operating cash flows for the fiscal year ended March 31, 2015 primarily reflected decreases in accounts receivable, net of $12.8 million, accounts payable of $9.9 million, accrued payroll and other liabilities of $3.1 million and Veloce accrued liability of $9.2 million, and increases in inventories, net of $4.6 million and other assets of $1.4 million.
For the fiscal year ended March 31, 2014, we used $46.8 million of cash in our operations. Our net loss of $5.7 million for the fiscal year ended March 31, 2014 included $21.8 million of non-cash charges and other adjustments consisting of $10.3 million of depreciation, $0.5 million of amortization of purchased intangibles, $17.0 million of stock-based compensation, $42.7 million of additional Veloce compensation cost, $0.3 million of non-cash restructuring costs, partially offset by $19.7 million of net gain on sale of TPack, $25.8 million gain on sale of our headquarters building and $3.4 million gain on short-term investments and other, net. The remaining change in operating cash flows for the fiscal year ended March 31, 2014 primarily reflected decreases in other assets, accrued payroll and related liabilities, Veloce accrued liability and deferred revenue and increases in accounts receivable, inventory and accounts payable.
For the fiscal year ended March 31, 2015, we used $34.5 million of cash in our operations. Our net loss of $134.1 million for the fiscal year ended March 31, 2013 included $112.0 million of non-cash charges consisting of $9.5 million of depreciation, $4.6 million of amortization of purchased intangibles, $25.5 million of stock-based compensation, $66.2 million of additional Veloce compensation cost, $4.7 million of restructuring costs, $2.2 million impairment of a strategic investment, $1.8 million impairment of notes receivable and other assets and $1.1 million in impairment of short-term investments and marketable securities, partially offset by $2.7 million gain on short-term investments and other, net, $1.0 million relating to the tax effect on other comprehensive income and $0.1 million in acquisition related adjustment (relating to our TPack acquisition in fiscal 2011). The remaining change in operating cash flows relating to changes in working capital for the fiscal year ended March 31, 2013 primarily reflected decreases in inventories, accounts payable, accrued payroll and related liabilities, Veloce accrued liability and deferred revenue and increases in accounts receivable and other assets. 
Our overall quarterly days sales outstanding was 30 days and 44 days for the fourth fiscal quarter ended March 31, 2015 and 2014, respectively. The primary reason for the decrease in our days sales outstanding was the increase in the revenues generated during the first two months of the quarter ended March 31, 2015 as compared to the same period for the quarter ended March 31, 2014.

Investing Activities
Our investing activities used $10.0 million in cash during the fiscal year ended March 31, 2015. During the fiscal year ended March 31, 2015, we used $9.8 million for the purchase of property and equipment and $3.5 million for the net purchase from short-term investment activities and received the remaining $3.4 million proceeds from the sale of TPack.

43


Our investing activities provided $94.8 million during the fiscal year ended March 31, 2014. During the fiscal year ended March 31, 2014, we used $6.0 million for the purchase of property and equipment and received net proceeds of $40.2 million from the sale of our headquarters building and property, equipment and other assets, net proceeds of $29.5 million from the sale of TPack, net proceeds of $29.7 million from short-term investment activities and proceeds of $1.3 million from the sale of an equity investment.
Our investing activities provided $21.3 million during the fiscal year ended March 31, 2013. During the fiscal year ended March 31, 2013, we used $9.0 million for the purchase of property and equipment and $0.5 million for purchase of strategic investment offset by net proceeds of $21.9 million from short-term investment activities, $7.1 million from sales of strategic equity investment and $1.8 million from the sale of equipment and other assets.

Financing Activities
Our financing activities provided $1.9 million in cash during the fiscal year ended March 31, 2015. Cash provided by financing activities during the fiscal year ended March 31, 2015 primarily consisted of proceeds from the issuance of common stock of $3.9 million, partially offset by $1.9 million in tax withholding payments due to the vesting of restricted stock units.

Our financing activities provided $4.5 million in cash during the fiscal year ended March 31, 2014. Cash provided by financing activities during the fiscal year ended March 31, 2014 primarily consisted of proceeds from the issuance of common stock of $11.6 million, partially offset by the withholding of restricted stock units for taxes of $6.6 million.
Our financing activities provided $4.1 million in cash during the fiscal year ended March 31. 2013. Cash provided by financing activities during the fiscal year ended March 31, 2013 consisted of proceeds from the issuance of common stock of $8.9 million, partially offset by the repurchase of common stock of $0.7 million, the payment of a contingent consideration of $0.5 million, restricted stock units withheld for taxes of $3.1 million and other uses of cash of $0.5 million.

Liquidity

We currently believe that our available cash, cash equivalents and short-term investments will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months. Notwithstanding the foregoing, from time to time we have explored one or more potential options to further enhance our balance sheet and liquidity, including without limitation the possibility of issuing equity to strategic investors or pursuing other financing transactions, and we have implemented certain business restructuring activities intended to reduce our ongoing net operating expenses.

We expect to satisfy our remaining Veloce-related payment obligations of $9.6 million using a combination of cash and the issuance of shares of common stock. Our available liquidity could be adversely affected, however, if we decide to satisfy the remaining Veloce obligations using a greater proportion of cash rather than our common stock or if our normal operations or unforeseen events require us to expend more cash than currently anticipated. As a result of any of the above, we could elect or be required to pursue various options to raise additional capital or generate cash. Such options could include, without limitation, issuing equity to one or more strategic or other investors, obtaining debt financing, selling assets or business units or acquiring cash-generating assets or business units from third parties, as well as additional restructuring activities. If our stock price declines or additional equity is issued as a result of any of the foregoing, it could result in greater dilution to our stockholders. Our liquidity could also be adversely affected if we are forced to liquidate our investments on short notice and on unfavorable terms. There can be no assurance that any of the options that we might pursue to raise additional capital or generate cash will be available on commercially reasonable terms or at all.

Contractual Commitments
See Note 8, Commitments and Contingencies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of March 31, 2015.


44


Item 7A.
Quantitative and Qualitative Disclosure About Market Risk.
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and a decline in the stock market. We are exposed to market risks related to changes in interest rates and foreign currency exchange rates.
We maintain an investment portfolio of various holdings, types of instruments and maturities. These securities are classified as available-for-sale and, consequently, are recorded on our Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss. We have 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 interest rate trends. We invest our excess cash in debt instruments of the U.S. Treasury, corporate bonds, commercial paper, mortgage-backed and asset backed securities, with credit ratings as specified in our investment policy. We also have invested in preferred stocks which pay quarterly fixed rate dividends and in closed-end bond funds. We generally do not utilize derivatives to hedge against increases in interest rates which decrease market values.
We are exposed to market risk as it relates to changes in the market value of our investments. At March 31, 2015, our investment portfolio included short-term securities classified as available-for-sale investments with an aggregate fair market value of $38.9 million and a cost basis of $36.9 million. Substantially all of these securities are subject to interest rate risk, as well as credit risk and liquidity risk, and will decline in value if interest rates increase or an issuer’s credit rating or financial condition is weakened.

The following table presents the hypothetical changes in fair value of our short-term investments held at March 31, 2015 (in thousands):
 
 
Valuation of Securities Given an
Interest Rate Decrease of X Basis
Points (“BPS”)
 
Fair Value as of March 31, 2015
 
Valuation of Securities Given an
Interest Rate Increase of X Basis
Points (“BPS”)
 
(150 BPS)
 
(100 BPS)
 
(50 BPS)
 
50 BPS
 
100 BPS
 
150 BPS
Available-for-sale investments
$
39,695

 
$
39,452

 
$
39,167

 
$
38,863

 
$
38,560

 
$
38,257

 
$
37,955


The modeling technique used measures the change in fair market value arising from selected potential changes in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points, 100 basis points and 150 basis points. While this modeling technique provides a measure of our exposure to market risk, the current economic turbulence could cause interest rates to shift by more than 150 basis points.

We generally conduct business, including sales to foreign customers, in U.S. dollars, and as a result, we have limited foreign currency exchange rate risk. We did not enter into any forward currency exchange contract during the fiscal year ended March 31, 2015. Gains and losses are recognized in income or expenses in the Consolidated Statements of Operations in the current period.


Item 8.
Financial Statements and Supplementary Data.
Refer to Item 15 and the Index to Financial Statements on Page F-l.
 
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
 
Item 9A.
Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, that are designed to ensure that information required to be disclosed by us in the

45


reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As required by Exchange Act Rule 13a-15(b), we conducted an evaluation, under the supervision and with the participation of our management, including our CEO and CFO, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2015. Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our CEO and CFO concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using the criteria in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of March 31, 2015.
The effectiveness of our internal control over financial reporting as of March 31, 2015 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report, which is included herein.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.
Other Information.
None.
 
PART III

Item 10.
Directors, Executive Officers and Corporate Governance.
(a) Executive Officers — See the section entitled “Executive Officers of the Registrant” in Part I, Item 1, Business, of this Annual Report.
(b) Directors — The information required by this Part III, Item 10 is contained in the section entitled “Election of Directors” in our Definitive Proxy Statement to be filed with the SEC in connection with the Annual Meeting of Stockholders to be held on August 11, 2015, which will be filed with the SEC within 120 days of March 31, 2015 (the “Proxy Statement”) and is incorporated herein by reference.
Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act. This disclosure is contained in the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement and is incorporated herein by reference.
We have adopted a code of business conduct and ethics that all executive officers and management employees must review and abide by (including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions), which we refer to as our Code of Business Conduct and Ethics. The Code

46


of Business Conduct and Ethics is available free of charge on our website at www.apm.com in the Investor Relations section under the heading “Corporate Governance”. To date, there have been no waivers under our Code of Business Conduct and Ethics. We will promptly disclose on our website (1) the nature of any amendment to the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and (2) the nature of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct and Ethics that is granted to one of these specified officers and the name of such person who is granted the waiver.
We have a separately-designated standing Audit Committee, comprised of Fred Shlapak, Dr. Robert F. Sproull and Duston Williams. The Board of Directors has determined that each such member qualifies as an “independent director” under the current rules of the NASDAQ Stock Market and the rules and regulations of the Securities and Exchange Commission. In addition, the Board of Directors has determined that each of Messrs. Shlapak and Williams qualifies as an “audit committee financial expert” under the definition outlined by the Securities and Exchange Commission.

Item 11.
Executive Compensation.
The information required by this Part III, Item 11 is incorporated herein by reference from the sections entitled “Executive Compensation”, “Report of the Compensation Committee” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement.

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Part III, Item 12 is incorporated herein by reference from the sections entitled “Security Ownership of Management and Directors” and “Equity Compensation Plan Information” in the Proxy Statement.

Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Part III, Item 13 is incorporated by reference from the sections entitled “Certain Relationships and Related Transactions" and “Corporate Governance” in the Proxy Statement.

Item 14.
Principal Accountant Fees and Services.
The information required by this Part III, Item 14 is contained in the section entitled “Audit and Other Fees” in the Proxy Statement and is incorporated herein by reference.

PART IV

Item 15.
Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this Annual Report:
(1) Financial Statements. See Index to Consolidated Financial Statements in Part II, Item 8 of this Form 10-K
(2) Financial Statement Schedule. See Schedule II - Valuation and Qualifying Accounts of this Form 10-K
(3) Exhibits. The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this Form 10-K



47


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
APPLIED MICRO CIRCUITS CORPORATION
 
 
 
 
By:
 
/S/    DR. PARAMESH GOPI        
 
 
 
Dr. Paramesh Gopi
 
 
 
President and Chief Executive Officer
Date: May 22, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Dr. Paramesh Gopi and Douglas T. Ahrens, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his 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/    DR. PARAMESH GOPI        
 
Chief Executive Officer,
President and Director
(Principal Executive Officer)
 
May 22, 2015
Dr. Paramesh Gopi
 
 
 
 
 
 
 
 
 
/S/    DOUGLAS T. AHRENS       
 
Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
May 22, 2015
Douglas T. Ahrens
 
 
 
 
 
 
 
 
 
/S/     CESAR CESARATTO        
 
Chairman of the Board
 
May 22, 2015
Cesar Cesaratto
 
 
 
 
 
 
 
 
 
/s/    DR. PAUL GRAY    
 
Director
 
May 22, 2015
Dr. Paul Gray
 
 
 
 
 
 
 
 
 
/s/    FRED SHLAPAK        
 
Director
 
May 22, 2015
Fred Shlapak
 
 
 
 
 
 
 
 
 
/s/    DR. ROBERT F. SPROULL
 
Director
 
May 22, 2015
Dr. Robert F. Sproull
 
 
 
 
 
 
 
 
 
/s/    DUSTON WILLIAMS        
 
Director
 
May 22, 2015
Duston Williams
 
 
 
 


48


INDEX TO FINANCIAL STATEMENTS
 


F- 1


Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Applied Micro Circuits Corporation:

We have audited the accompanying consolidated balance sheets of Applied Micro Circuits Corporation and its subsidiaries ("the Company") as of March 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the years in the three‑year period ended March 31, 2015. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule of valuation and qualifying accounts. We also have audited the Company's internal control over financial reporting as of March 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Micro Circuits Corporation as of March 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three‑year period ended March 31, 2015, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).


/s/ KPMG LLP
Santa Clara, California
May 22, 2015

F- 2


APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
 
 
March 31,
 
2015
 
2014
 
(In thousands, except par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
36,495

 
$
71,539

Short-term investments
38,863

 
35,044

Accounts receivable, net
12,407

 
25,178

Inventories, net
23,514

 
18,946

Other current assets
16,840

 
16,799

Total current assets
128,119

 
167,506

Property and equipment, net
16,749

 
20,746

Goodwill
11,425

 
11,425

Purchased intangibles, net
—

 
105

Other assets
2,570

 
7,754

Total assets
$
158,863

 
$
207,536

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
13,896

 
$
26,194

Accrued payroll and other accrued liabilities
3,770

 
5,532

Veloce accrued liability
5,742

 
11,985

Other accrued liabilities
7,644

 
10,877

Deferred revenue
415

 
567

Total current liabilities
31,467

 
55,155

Non-current liabilities
4,291

 
3,145

Commitments and contingencies (Notes 8)


 


Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value:
 
 
 
Authorized shares - 2,000, none issued and outstanding
—

 
—

Common stock, $0.01 par value:
 
 
 
Authorized shares - 375,000 at March 31, 2015 and 2014
 
 
 
Issued and outstanding shares - 80,816 at March 31, 2015 and 77,677 at March 31, 2014
808

 
777

Additional paid-in capital
6,032,604

 
6,005,365

Accumulated other comprehensive loss
(7,486
)
 
(6,143
)
Accumulated deficit
(5,902,821
)
 
(5,850,763
)
Total stockholders’ equity
123,105

 
149,236

Total liabilities and stockholders’ equity
$
158,863

 
$
207,536

                                                                                                                                                                                                                                                          


See Accompanying Notes to Consolidated Financial Statements


F- 3


APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
(In thousands, except per share data)
Net revenues
$
165,011

 
$
216,150

 
$
195,642

Cost of revenues
69,297

 
85,189

 
83,048

Gross profit
95,714

 
130,961

 
112,594

Operating expenses:
 
 
 
 
 
Research and development
107,220

 
146,579

 
187,419

Selling, general and administrative
33,643

 
38,927

 
51,684

Gain on sale of TPack
—

 
(19,699
)
 
—

Gain on sale of building
—

 
(25,815
)
 
—

Amortization of purchased intangible assets
104

 
316

 
1,926

Restructuring
5,421

 
1,134

 
6,435

Total operating expenses
146,388

 
141,442

 
247,464

Operating loss
(50,674
)
 
(10,481
)
 
(134,870
)
Net realized gain on short-term investments and interest income, net
2,764

 
5,052

 
2,595

Other (expense) income, net
(3,056
)
 
354

 
(2,394
)
Loss before income taxes
(50,966
)
 
(5,075
)
 
(134,669
)
Income tax expense (benefit)
1,092

 
619

 
(554
)
Net loss
$
(52,058
)
 
$
(5,694
)
 
$
(134,115
)
Basic and diluted net loss per share
$
(0.66
)
 
$
(0.08
)
 
$
(2.06
)
Shares used in calculating basic and diluted net loss per share
78,814

 
72,897

 
65,258




See Accompanying Notes to Consolidated Financial Statements


F- 4


APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
(In thousands)
Net loss
$
(52,058
)
 
$
(5,694
)
 
$
(134,115
)
Change in other comprehensive (loss) gain, net of tax:
 
 
 
 
 
Unrealized (loss) gain on investments*
(954
)
 
(5,039
)
 
1,314

Loss on foreign currency translation
(389
)
 
(367
)
 
(286
)
Other comprehensive (loss) gain, net of tax
(1,343
)
 
(5,406
)
 
1,028

Total comprehensive loss
$
(53,401
)
 
$
(11,100
)
 
$
(133,087
)

* The amounts reclassified from accumulated other comprehensive loss and recorded in net realized gain on short-term investments and interest income, net in the Consolidated Statements of Operations relating to short-term investments were $1.4 million, $3.4 million and $1.4 million for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. Refer to Note 3, Certain Financial Statement Information, to the Consolidated Financial Statements for additional details.



See Accompanying Notes to Consolidated Financial Statements




F- 5


APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
 
Fiscal Years Ended March 31,
 
2015
 
2014 (1)
 
2013 (1)
 
(In thousands)
Operating activities:
 
 
 
 
 
Net loss
$
(52,058
)
 
$
(5,694
)
 
$
(134,115
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
Depreciation
8,555

 
10,273

 
9,542

Amortization of purchased intangible assets
104

 
482

 
4,643

Stock-based compensation expense
18,305

 
17,021

 
25,525

Veloce acquisition consideration
9,230

 
42,684

 
66,188

Acquisition related adjustment
—

 
—

 
(133
)
Gain on sale of TPack
—

 
(19,699
)
 
—

Gain on sale of building
—

 
(25,815
)
 
—

Gain on short-term Investments and other, net
(1,317
)
 
(3,383
)
 
(2,684
)
Impairment of strategic investments
3,000

 
—

 
2,250

Tax effect on other comprehensive loss
126

 
(40
)
 
(989
)
Non-cash restructuring charges
2,615

 
298

 
4,719

Impairment of short-term investments and marketable securities
—

 
—

 
1,143

Impairment of notes receivable and other assets
—

 
—

 
1,800

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable, net
12,771

 
(837
)
 
(1,909
)
Inventories, net
(4,573
)
 
(6,049
)
 
10,344

Other assets
(1,440
)
 
3,232

 
(2,871
)
Accounts payable
(9,911
)
 
5,778

 
(622
)
Accrued payroll and other liabilities
(3,127
)
 
(671
)
 
(82
)
Veloce accrued liability
(9,150
)
 
(63,657
)
 
(16,537
)
Deferred revenue
(152
)
 
(770
)
 
(668
)
Net cash used for operating activities
(27,022
)
 
(46,847
)
 
(34,456
)
Investing activities:
 
 
 
 
 
Proceeds from sales and maturities of short-term investments
16,340

 
47,810

 
43,555

Purchases of short-term investments
(19,887
)
 
(18,081
)
 
(21,633
)
Proceeds from sale of property and equipment
1

 
70

 
1,800

Purchase of property and equipment
(9,772
)
 
(5,952
)
 
(9,045
)
Proceeds from sale of strategic investment
—

 
1,286

 
7,146

Proceeds from the sale of TPack, net
3,353

 
29,498

 
—

Proceeds from sale of building
—

 
40,176

 
—

Purchases of strategic investment
—

 
—

 
(500
)
Net cash (used for) provided by investing activities
(9,965
)
 
94,807

 
21,323

Financing activities:
 
 
 
 
 
Proceeds from issuance of common stock
3,854

 
11,619

 
8,873

Funding of restricted stock units withheld for taxes
(1,911
)
 
(6,550
)
 
(3,121
)
Repurchase of common stock
—

 
—

 
(653
)
Payment of contingent consideration
—

 
—

 
(485
)
Other
—

 
(555
)
 
(481
)
Net cash provided by financing activities
1,943

 
4,514

 
4,133

Net (decrease) increase in cash and cash equivalents
(35,044
)
 
52,474

 
(9,000
)
Cash and cash equivalents at beginning of year
71,539

 
19,065

 
28,065

Cash and cash equivalents at end of year
$
36,495

 
$
71,539

 
$
19,065

Supplementary cash flow disclosures:
 
 
 
 
 
Cash paid for income taxes
$
732

 
$
870

 
$
987


(1) The statements of cash flows for the fiscal years ended March 31, 2014 and 2013 reflect immaterial revisions to correct $3.4 million and $1.4 million of net realized gains on short-term investments previously classified as net cash used for operating activities to net cash provided by investing activities, respectively. As a result, net cash used for operating activities and net cash provided by investing activities for these periods increased by the corresponding amounts.



See Accompanying Notes to Consolidated Financial Statements

F- 6


APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
Common Stock
 
Additional
Paid in
Capital
 
Accumulated
Other
Comprehensive Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
Shares
 
Amount
 
 
(in thousands)
Balance at March 31, 2012
61,879

 
$
619

 
$
5,881,336

 
$
(1,765
)
 
$
(5,710,954
)
 
$
169,236

Issuance of common stock
6,199

 
62

 
22,379

 
—

 
—

 
22,441

Repurchase of common stock
(126
)
 
(1
)
 
(652
)
 
—

 
—

 
(653
)
Stock-based compensation expense
—

 
—

 
23,567

 
—

 
—

 
23,567

Change in other comprehensive gain, net of tax
—

 
—

 
—

 
1,028

 
—

 
1,028

Net loss
—

 
—

 
—

 
—

 
(134,115
)
 
(134,115
)
Balance at March 31, 2013
67,952

 
$
680

 
$
5,926,630

 
$
(737
)
 
$
(5,845,069
)
 
$
81,504

Issuance of common stock
9,725

 
97

 
62,823

 
—

 
—

 
62,920

Stock-based compensation expense
—

 
—

 
15,912

 
—

 
—

 
15,912

Change in other comprehensive loss, net of tax
—

 
—

 
—

 
(5,406
)
 
—

 
(5,406
)
Net loss
—

 
—

 
—

 
—

 
(5,694
)
 
(5,694
)
Balance at March 31, 2014
77,677

 
$
777

 
$
6,005,365

 
$
(6,143
)
 
$
(5,850,763
)
 
$
149,236

Issuance of common stock
3,139

 
31

 
7,557

 
—

 
—

 
7,588

Stock-based compensation expense
—

 
—

 
19,682

 
—

 
—

 
19,682

Change in other comprehensive loss, net of tax
—

 
—

 
—

 
(1,343
)
 
—

 
(1,343
)
Net loss
—

 
—

 
—

 


 
(52,058
)
 
(52,058
)
Balance at March 31, 2015
80,816

 
$
808

 
$
6,032,604

 
$
(7,486
)
 
$
(5,902,821
)
 
$
123,105


 


See Accompanying Notes to Consolidated Financial Statements

F- 7


APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements include all the accounts of Applied Micro Circuits Corporation (the "Company") and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The Company prepared the accompanying Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”).
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to its:
•
capitalized mask sets including their useful lives, which affects cost of goods sold and property and equipment or Research and Development ("R&D") expenses, if not capitalized;
•
inventory valuation, warranty liabilities and revenue reserves, which affects cost of sales, gross margin and revenues;
•
allowance for doubtful accounts, which affects operating expenses;
•
unrealized losses or other-than-temporary impairments of short-term investments available for sale, which affects net interest income (expense), net
•
valuation of other long-lived assets and goodwill, which affects depreciation and impairments of long-lived asset, impairments of goodwill and apportionment of goodwill related to divestitures;
•
valuation of cost method investments, which affects impairment of strategic investments;
•
potential costs of litigation, which affects operating expenses;
•
valuation of deferred income taxes, which affects income tax expense (benefit); and
•
stock-based compensation, which affects gross margin and operating expenses.
The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from management’s estimates. To the extent there are material differences between the estimates and actual results, future results of operations will be affected.

Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity from the date of purchase of 90 days or less to be cash equivalents.
Investments
The Company holds a variety of securities in its investments portfolio. The Company reviews its investment portfolio periodically to assess for other-than-temporary impairment. The Company assesses the impairment of its investments in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. The factors used to determine whether an impairment is temporary or other-than-temporary involve considerable judgment primarily including the duration and extent to which the market value has been less than amortized cost, the nature of underlying assets (including the degree of collateralization) and the financial condition, credit rating, market liquidity conditions and near-term prospects of the issuer. If the fair value of a security is less than its amortized cost basis at the balance sheet date, an assessment would have to be made as to whether the impairment is other-than-temporary. If the Company does not intend to sell the security, the Company shall consider available evidence to assess whether it is more likely than not, it will be required to sell the security before the recovery of the amortized cost basis due to cash, working capital requirements, contractual or regulatory obligations indicate that the security will be required to be sold before a forecasted recovery occurs. If it is more likely than not that the Company is

F- 8

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

required to sell the security before recovery of the amortized cost basis, an other-than-temporary impairment is considered to have occurred. The Company uses present value cash flow models to determine whether the entire amortized cost basis of the security will be recovered. The Company will compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. An other-than-temporary impairment is said to have occurred if the present value of cash flows expected to be collected is less than the amortized cost basis of the security. Refer to Note 2, Investments, to the Consolidated Financial Statements for additional information.

Fair Value of Financial Instruments
Short-term investments are recorded at fair value in the Company’s Consolidated Balance Sheets and are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Accounting Standards Codification ("ASC") 820-10 defines a three-level valuation hierarchy for disclosure of fair value measurements. The Company currently classifies inputs to derive fair values for short-term investments as Level 1 and 2. Instruments classified as Level 1 include highly liquid government and agency securities, money market funds and publicly traded closed end bond funds in active markets. Instruments classified as Level 2 include corporate notes, mortgage-backed securities, asset-backed securities and preferred stock. The Company did not have any Level 3 short-term investments as of any of the periods presented.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of available-for-sale securities and trade receivables. The Company believes that the 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 losses on trade receivables have historically been within management’s expectations.
The Company invests its excess cash primarily in debt instruments of the U.S. Treasury, corporate bonds and mutual funds mainly with investment grade credit ratings. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity of the portfolio. These guidelines are periodically reviewed.
Inventories
The Company’s policy is to value inventories at the lower of cost or market on a part-by-part basis, with cost being determined based on the first-in, first-out method. This policy requires the Company to make estimates regarding the market value of its inventories, including an assessment of excess or obsolete inventories. The Company determines excess and obsolete inventories based on an estimate of the future demand for its products within a specified time horizon, generally 12 months. If the Company’s future demand is lower than its inventory balance, the Company may be required to take additional excess inventory charges, which would decrease gross margin and net operating results. The written down value of the inventory becomes its new cost basis, and the cost basis for such inventory is not marked-up if market conditions improve. This accounting is consistent with the guidance provided by Financial Accounting Standards Board ("FASB") ASC 330.

Strategic Investments
The Company has entered into certain equity investments in privately held businesses to achieve certain strategic business objectives. The Company’s investments in equity securities of privately held businesses are accounted for under the cost method. Under the cost method, strategic investments in which the Company holds less than a 20% voting interest and in which the Company does not have the ability to exercise significant influence are carried at cost reduced by other-than-temporary impairments, as appropriate. The Company periodically reviews these investments for other-than-temporary declines in fair value based on the specific identification method and writes down investments when an other-than-temporary decline has occurred. The fair value was estimated on a non-recurring basis based on Level 3 inputs. The Level 3 inputs used to estimate the fair value of these investments included consideration of the current cash position, recent operational performance, and forecasts of the investees. The Company recorded other-than-temporary impairment charges of $3.0 million, zero, and $2.3 million during the fiscal years ended March 31, 2015, 2014, and 2013, respectively. The strategic investments are included in other assets on the Company’s Consolidated Balance Sheets, and the balance was zero as of March 31, 2015.
Goodwill and Other Long-Lived Assets
Goodwill represents the excess of the fair value of purchase consideration over the fair values of assets acquired and liabilities assumed in a business combination. Goodwill is not amortized but is reviewed annually or more frequently if impairment indicator arise. The Company elected to use the qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two-step goodwill impairment test. As part of its

F- 9

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

qualitative assessment, the Company evaluated and determined that its market capitalization was well in excess of its book value and based on this and other qualitative factors determined that there was no goodwill impairment as of and for the fiscal year ended March 31, 2015.
The Company’s long-lived assets consist of property, plant and equipment. Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets ranging from 1 to 5 years using the straight line method. Leasehold improvements are stated at cost and amortized over the shorter of the term of the related lease or its estimated useful life. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset group is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that an asset group is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset group exceeds its fair value. In addition, the Company assesses its long-lived assets for impairment if they are abandoned. There was no impairment of long-lived assets other than the write-off of a mask set of $2.6 million relating to a restructuring plan during the fiscal year ended March 31, 2015. There was no impairment during the fiscal year ended March 31, 2014. Refer to the paragraph below, Mask Costs, and Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

Revenue Recognition
The Company recognizes revenue based on four basic criteria: 1) there is evidence that an arrangement exists; 2) delivery has occurred and title and risk of loss have transferred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. The Company considers the price to be determinable when the price is not subject to refund or adjustments or when any such adjustments can be estimated. The Company evaluates the creditworthiness of its customers to determine that appropriate credit limits are established prior to the acceptance of an order. Revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor allowances and is recognized upon shipment. These estimates are based on the Company's experience with the contractual terms of the competitive pricing and rebate programs and stock rotations.
From time to time, the Company generates revenue from the sale of internally developed intellectual property ("IP") and royalty revenues from the sale of the Company's customers' products that contain its technology. The Company generally recognizes revenue from the sale of IP and from royalties when all four basic criteria outlined above are met.
Research and Development
R&D costs are expensed as incurred. Substantially all R&D expenses are related to new product development and designing significant improvements to existing products. Also refer to Note 4, Veloce, to the Consolidated Financial Statements.
Mask Costs
The Company incurs significant costs for the fabrication of masks used by its contract manufacturers to manufacture its products. If the Company determines, at the time the costs for the fabrication of masks are incurred, that technological feasibility of the product has been achieved, such costs are capitalized as property and equipment under machinery and equipment. When its related product is released to production, the mask costs are amortized as cost of sales over three years, representing the estimated production period of the product. The Company periodically reassesses the estimated production period for specific mask sets capitalized. During the fiscal years ended March 31, 2015 and 2014, total mask costs capitalized were $5.9 million and $6.4 million, respectively. If the Company determines, at the time fabrication mask costs are incurred, that either technological feasibility of the product has not occurred or that the mask is not reasonably expected to be used in production or that the commercial feasibility of the product is uncertain, the related mask costs are expensed to R&D in the period in which the costs are incurred. The Company also periodically assesses capitalized mask costs for impairment. As a result of recent restructuring, the Company recorded an impairment charge of a capitalized mask set of $2.6 million during the fiscal year ended March 31, 2015. There were no impairments during the fiscal year ended March 31, 2014. Refer to Note 7, Restructuring, to the Consolidated Financial Statements for additional information.
Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award. The fair value of restricted stock units ("RSUs") is estimated using the Company's stock price on the grant date. The fair value of options and employee stock purchase rights is estimated using the Black-Scholes model on the grant date. The Black-Scholes model determines the fair value of share-based payment awards based on assumptions including the Company's stock price on the date

F- 10

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

of grant, volatility over the term of the awards, actual and projected employee stock option exercise behaviors and risk free interest rate. The market stock units ("MSUs") were valued using the Monte Carlo pricing model, which uses the Company's stock price, the Index price, expected volatilities of the Company's stock price and the Index, correlation coefficients and risk free interest rates to determine the fair value.
The following tables summarize the allocation of the stock-based compensation expense (in thousands):
 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Stock-based compensation expense by type of grant:
 
 
 
 
 
Option grants and employee stock purchase rights
$
1,408

 
$
2,520

 
$
3,469

Restricted stock units
16,892

 
14,517

 
20,620

 
18,300

 
17,037

 
24,089

Stock-based compensation expensed from (capitalized to) inventory
5

 
(16
)
 
147

Total stock-based compensation expense
$
18,305

 
$
17,021

 
$
24,236


 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Stock-based compensation expense by cost centers:
 
 
 
 
 
Cost of revenues
$
285

 
$
460

 
$
545

Research and development
11,657

 
6,371

 
11,760

Selling, general and administrative
6,358

 
10,206

 
11,784

 
18,300

 
17,037

 
24,089

Stock-based compensation expensed from (capitalized to) inventory
5

 
(16
)
 
147

Total stock-based compensation expense
$
18,305

 
$
17,021

 
$
24,236


The fair values of the options and employee stock purchase rights granted are estimated as of the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:
 
 
Options
 
Employee Stock Purchase Rights
 
Fiscal Years Ended March 31,
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
2015
 
2014
 
2013
Expected life (years)
*
 
4.4

 
4.4

 
0.5

 
0.5

 
0.5

Risk-free interest rate
*
 
0.6
%
 
0.7
%
 
0.1
%
 
—
%
 
—
%
Volatility
*
 
0.49

 
0.54

 
0.57

 
0.56

 
0.50

Dividend yield
*
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Expected forfeiture rate
*
 
5.8
%
 
6.6
%
 
—
%
 
—
%
 
—
%
Weighted average fair value
*
 
$
2.95

 
$
2.47

 
$
2.17

 
$
3.40

 
$
1.77


* The Company did not grant options during the twelve months ended March 31, 2015.
Compensation Amortization Period. All stock-based compensation is amortized over the requisite service period of the awards, which is generally the same as the vesting period of the awards. The Company amortizes the fair value cost on a straight-line basis over the expected service periods.

Expected Life. The expected life of stock options granted represents the expected weighted average period of time from the date of grant to the estimated date that the stock option would be fully exercised. To calculate the expected term, the Company utilizes historical actual exercise data and assumes that unexercised stock options would be exercised at the midpoint of the valuation date of its analysis and the full contractual term of the option.

F- 11

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Risk-Free Interest Rate. The risk-free interest rate is the implied yield currently available on zero-coupon government issues with a remaining term equal to the expected life.
Expected Volatility. Expected volatility is a measure of the amount by which the stock price is expected to fluctuate. The Company estimates the expected volatility of its stock options at their grant date by equally weighting the historical volatility and the implied volatility of its stock. The historical volatility is calculated using the weekly stock price of its stock over a recent historical period equal to its expected life. The implied volatility is calculated from the implied market volatility of exchange-traded call options on its common stock.
Expected Dividends. The Company has never paid any cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company uses an expected dividend yield of zero percent in valuation models.
Expected Forfeitures. As stock-based compensation expense recognized in the Consolidated Statements of Operations for the fiscal years ended March 31, 2015, 2014 and 2013 is based on awards that are ultimately expected to vest, it should be reduced for estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates were based upon the expected forfeiture data using the Company’s current demographics and standard probabilities of employee turnover.
During the fourth quarter of fiscal 2015, the Company revised the estimated forfeiture rate used in determining the amount of stock-based compensation from 5.8% to 6.1%, which the Company believes is indicative of the rate it will experience during the remaining vesting period of currently outstanding unvested grants.
The weighted average grant-date fair value per share of the RSUs awarded was $7.81, $9.46 and $6.11 during the fiscal years ended March 31, 2015, 2014 and 2013, respectively. The weighted average grant-date fair value per share was calculated based on the fair market value of the Company’s common stock on the respective grant dates.
As of March 31, 2015, the amount of unrecognized stock-based compensation cost, net of estimated forfeitures, related to unvested stock options and unvested RSUs was $24.6 million which will be recognized over a weighted average period of 1.2 years.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes as set forth in ASC 740-10. Under the asset and liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized.
Segments
As of March 31, 2014 and 2013, the Company had two operating segments, Connectivity and Computing, and under the aggregation criteria set forth in ASC 280-10 had one reportable segment, as the two operating segments shared similar economic characteristics and other operating similarities (the nature of the products, the nature of the production processes, the type of customers and the methods of distribution). During fiscal year 2015, the Company continued to conclude that the Company’s Chief Executive Officer is its Chief Operating Decision Maker ("CODM"). As of March 31, 2015, the Company has one operating segment and therefore one reportable segment due to changes in its organizational structure as a result of recent restructuring activities and changes in how the CODM allocates resources and assesses performance of the Company. The Company’s CODM evaluates the performance of the Company and makes decisions regarding allocation of resources based on overall Company results.
New Accounting Pronouncements

In August 2014, the FASB issued Accounting Standard Update ("ASU") No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or within one year after the date that the financial statements are available to be issued, when applicable. The standard is effective for annual periods beginning after December 15, 2016, including interim periods within

F- 12

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

that reporting period. The Company is currently evaluating this new standard, and after adoption, it will incorporate this guidance in its assessment of going concern.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers", which will supersede most of the existing revenue recognition guidance under U.S. GAAP. This ASU requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The ASU allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the potential effect of this ASU on its financial statements and related disclosures.

2.
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 net loss and reported, net of tax, in comprehensive loss. When the investments are sold, such gain or loss will be transferred from accumulated other comprehensive loss to net realized gain on short-term investments and interest income, net on the Consolidated Statements of Operations. The portion of unrealized losses that are deemed to be other-than-temporary in nature are charged to the Consolidated Statements of Operations. The basis for computing realized and unrealized gains or losses is by specific identification. In addition, the Company had $1.1 million each in restricted cash related to its voluntary disability insurance as of March 31, 2015 and 2014, and these amounts are included in cash and cash equivalents on the Consolidated Balance Sheets.
The following is a summary of cash, cash equivalents and available-for-sale investments by type of instrument (in thousands):
 
March 31, 2015
 
March 31, 2014
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
 
Amortized
Cost
 
Gross Unrealized
 
Estimated
Fair Value
 
Gains
 
Losses
 
Gains
 
Losses
 
Cash
$
33,936

 
$
—

 
$
—

 
$
33,936

 
$
65,867

 
$
—

 
$
—

 
$
65,867

Cash equivalents
2,559

 
—

 
—

 
2,559

 
5,672

 
—

 
—

 
5,672

U.S. Treasury securities and agency bonds
1,230

 
—

 
—

 
1,230

 
2,838

 
—

 
—

 
2,838

Corporate bonds
10,772

 
28

 
(6
)
 
10,794

 
10,599

 
30

 
(2
)
 
10,627

Mortgage-backed and asset-backed securities*
—

 
15

 
—

 
15

 
1,793

 
297

 
(16
)
 
2,074

Mutual Funds
24,895

 
1,955

 
(59
)
 
26,791

 
14,373

 
2,392

 
(402
)
 
16,363

Preferred stock
11

 
22

 
—

 
33

 
2,406

 
736

 
—

 
3,142

 
$
73,403

 
$
2,020

 
$
(65
)
 
$
75,358

 
$
103,548

 
$
3,455

 
$
(420
)
 
$
106,583

Reported as:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 
 
 
 
$
36,495

 
 
 
 
 
 
 
$
71,539

Short-term investments available-for-sale
 
 
 
 
 
 
38,863

 
 
 
 
 
 
 
35,044

 
 
 
 
 
 
 
$
75,358

 
 
 
 
 
 
 
$
106,583


*
At March 31, 2015 and 2014, zero and $1.1 million of the estimated fair value presented were mortgage-backed securities, respectively.
 
The established guidelines for measuring fair value and expanded disclosures regarding fair value measurements are defined as a three-level valuation hierarchy for disclosure of fair value measurements as follows:

F- 13

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Level 1 —
 
Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
 
 
 
Level 2 —
 
Inputs (other than quoted market prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
 
 
 
Level 3 —
 
Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Valuation of instruments includes unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of assets or liabilities.
The following is a summary of cash, cash equivalents and available-for-sale investments by type of instruments measured at fair value on a recurring basis (in thousands):
 
March 31, 2015
 
March 31, 2014
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash
$
33,936

 
$
—

 
$
—

 
$
33,936

 
$
65,867

 
$
—

 
$
—

 
$
65,867

Cash equivalents
2,559

 
—

 
—

 
2,559

 
5,672

 
—

 
—

 
5,672

U.S. Treasury securities and agency bonds
1,230

 
—

 
—

 
1,230

 
2,838

 
—

 
—

 
2,838

Corporate bonds
—

 
10,794

 
—

 
10,794

 
—

 
10,627

 
—

 
10,627

Mortgage-backed and asset-backed securities
—

 
15

 
—

 
15

 
—

 
2,074

 
—

 
2,074

Mutual funds
26,791

 
—

 
—

 
26,791

 
16,363

 
—

 
—

 
16,363

Preferred stock
—

 
33

 
—

 
33

 
—

 
3,142

 
—

 
3,142

 
$
64,516

 
$
10,842

 
$
—

 
$
75,358

 
$
90,740

 
$
15,843

 
$
—

 
$
106,583

There were no significant transfers in and out of Level 1 and Level 2 fair value measurements during the fiscal year ended March 31, 2015 and 2014.

The following is a summary of the cost and estimated fair values of available-for-sale securities with stated maturities, which include U.S. Treasury securities and agency bonds, corporate bonds and mortgage-backed and asset-backed securities, by contractual maturity (in thousands): 
 
March 31, 2015
 
Cost
 
Estimated Fair Value
Less than 1 year
$
3,335

 
$
3,340

Mature in 1 – 2 years
7,965

 
7,979

Mature in 3 – 5 years
702

 
706

Mature after 5 years
—

 
14

 
$
12,002

 
$
12,039


The following is a summary of gross unrealized losses (in thousands): 

F- 14

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Less Than 12 Months of
Unrealized Losses
 
12 Months or More of
Unrealized Losses
 
Total
As of March 31, 2015
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities and agency bonds
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Corporate bonds
878

 
(6
)
 
—

 
—

 
878

 
(6
)
Mutual funds
14,592

 
(17
)
 
475

 
(42
)
 
15,067

 
(59
)
 
$
15,470

 
$
(23
)
 
$
475

 
$
(42
)
 
$
15,945

 
$
(65
)
 
 
Less Than 12 Months of
Unrealized Losses
 
12 Months or More of
Unrealized Losses
 
Total
As of March 31, 2014
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Losses
U.S. Treasury securities and agency bonds
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Corporate bonds
992

 
(2
)
 
—

 
—

 
992

 
(2
)
Mortgage-backed and asset-backed securities
431

 
(16
)
 
—

 
—

 
431

 
(16
)
Mutual funds
4,819

 
(333
)
 
405

 
(69
)
 
5,224

 
(402
)
 
$
6,242

 
$
(351
)
 
$
405

 
$
(69
)
 
$
6,647

 
$
(420
)
Other-Than-Temporary Impairment
Based on an evaluation of securities that have been in a continuous loss position, the Company recognized other-than-temporary impairment charges for its short-term investments and marketable securities. During the fiscal years ended March 31, 2015 and 2014, the Company did not record any other-than-temporary impairment charges. During the fiscal year ended March 31, 2013, the Company recorded other-than-temporary impairment charges of $1.1 million. The Company considered various factors which included a credit and liquidity assessment of the underlying securities and the Company’s intent and ability to hold the underlying securities until the estimated date of recovery of its amortized cost.

3.
Certain Financial Statement Information

Accounts receivable, net:
 
March 31,
 
2015
 
2014
 
(In thousands)
Accounts receivable
$
12,709

 
$
25,629

Less: allowance for bad debts
(302
)
 
(451
)
 
$
12,407

 
$
25,178

Inventories, net:
 
March 31,
 
2015
 
2014
 
(In thousands)
Finished goods
$
15,310

 
$
9,375

Work in process
5,377

 
6,510

Raw materials
2,827

 
3,061

 
$
23,514

 
$
18,946


F- 15

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other current assets:
 
March 31,
 
2015
 
2014
 
(In thousands)
Prepaid expenses
$
14,847

 
$
10,978

Executive deferred compensation assets
1,004

 
1,035

Proceeds receivable from sale of strategic investment
—

 
3,353

Other
989

 
1,433

 
$
16,840

 
$
16,799

Property and equipment:
 
Useful
Life
 
March 31,
 
2015
 
2014
 
(In years)
 
(In thousands)
Machinery and equipment*
3-5
 
$
37,286

 
$
44,503

Leasehold improvements
1-5
 
9,909

 
11,574

Computers, office furniture and equipment*
3-5
 
32,902

 
43,365

 
 
 
80,097

 
99,442

Less: accumulated depreciation and amortization*
 
 
(63,348
)
 
(78,696
)
 
 
 
$
16,749

 
$
20,746


*
During the fiscal year ended March 31, 2015, the Company wrote-off fully depreciated assets with an acquired cost of $24.0 million. Also the Company wrote-off of a capitalized mask of $2.6 million as a result of recent restructuring. Refer to Note 7, Restructuring, to the Consolidated Financial Statements for additional information.

 
Goodwill and purchased intangibles:
Goodwill is as follows:
 
March 31,
 
2015
 
2014
 
(In thousands)
Goodwill
$
11,425

 
$
11,425



Purchase-related intangibles are as follows: 
 
March 31, 2015
 
March 31, 2014
 
Gross
 
Accumulated
Amortization
and
Impairments
 
Net
 
Weighted
average
remaining
useful life
 
Gross
 
Accumulated
Amortization
and
Impairments
 
Net
 
Weighted
average
remaining
useful life
 
(In thousands)
 
(In years)
 
(In thousands)
 
(In years)
Developed technology/in-process research and development
$
425,000

 
$
(425,000
)
 
$
—

 
0.0
 
$
425,000

 
$
(425,000
)
 
$
—

 
0.0
Customer relationships
6,330

 
(6,330
)
 
—

 
0.0
 
6,330

 
(6,225
)
 
105

 
0.4
Patents/core technology rights/trade name
62,306

 
(62,306
)
 
—

 
0.0
 
62,306

 
(62,306
)
 
—

 
0.0
 
$
493,636

 
$
(493,636
)
 
$
—

 
 
 
$
493,636

 
$
(493,531
)
 
$
105

 
 

F- 16

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Other Assets:
 
March 31,
 
2015
 
2014
 
(In thousands)
Non-current portion of prepaid expenses
$
1,974

 
$
4,235

Strategic investments*
—

 
3,000

Other
$
596

 
$
519

 
$
2,570

 
$
7,754


*During the fiscal year ended March 31, 2015, the Company recorded other-than-temporary impairment charges of $3.0 million with respect to two of its strategic investments. Refer to Note 1, Summary of Significant Accounting Policies, to the Consolidated Financial Statements for details.

Other accrued liabilities:
 
March 31,
 
2015
 
2014
 
(In thousands)
Employee related liabilities
$
1,454

 
$
1,733

Executive deferred compensation
1,025

 
1,314

Income taxes
1,311

 
962

Professional fees
515

 
1,259

Other
3,339

 
5,609

 
$
7,644

 
$
10,877

Warranty Reserves:
The Company’s products typically carry a one-year warranty. The Company establishes reserves for estimated product warranty costs at the time revenue is recognized. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting any product failure. Should actual product failure rates, use of materials or service delivery costs differ from the Company’s estimates, additional warranty reserves could be required, which could reduce its gross margin.
The following table summarizes warranty reserve activity:
 
March 31,    
 
2015
 
2014
 
(In thousands)
Beginning balance
$
199

 
$
220

Additions during the period
85

 
58

Settlements and expirations
(121
)
 
(79
)
Change in estimates
31

 
—

Ending balance
$
194

 
$
199


F- 17

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Net realized gain on short-term investments and interest income, net:
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
(In thousands)
Net realized gain on short-term investments
1,353

 
3,360

 
1,391

Interest income, net
1,411

 
1,692

 
2,347

Impairments of short-term investments and marketable securities
—

 
—

 
(1,143
)
 
$
2,764

 
$
5,052

 
$
2,595


Other (expense) income, net:
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
(In thousands)
Impairment of strategic investments
$
(3,000
)
 
$
—

 
$
(2,250
)
Impairment of notes receivable and other assets
—

 
—

 
(1,800
)
Net (loss) gain on disposals of property
(27
)
 
67

 
(21
)
Other, net
(29
)
 
287

 
1,677

 
$
(3,056
)
 
$
354

 
$
(2,394
)

Net loss per share:
Shares used in basic net loss per share are computed using the weighted average number of common shares outstanding during each period. Shares used in diluted net loss per share include the dilutive effect of common shares potentially issuable upon the exercise of stock options and vesting of RSUs. The reconciliation of shares used to calculate basic and diluted net loss per share consists of the following (in thousands, except per share data):
 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Net loss
$
(52,058
)
 
$
(5,694
)
 
$
(134,115
)
Shares used in net loss per share computation:
 
 
 
 
 
Weighted average common shares outstanding, basic
78,814

 
72,897

 
65,258

Net effect of dilutive common share equivalents
—

 
—

 
—

Weighted average common shares outstanding, diluted
78,814

 
72,897

 
65,258

Basic and diluted net loss per share
$
(0.66
)
 
$
(0.08
)
 
$
(2.06
)
The effect of dilutive securities (comprised of options and RSUs) totaling 1.4 million, 1.5 million and 0.8 million shares for the fiscal years ended March 31, 2015, 2014 and 2013, respectively, has been excluded from the diluted net loss per share computation since the Company incurred losses in the periods presented and their effect would be antidilutive.

4.
Veloce

On June 20, 2012, the Company completed its acquisition of Veloce. Veloce has been developing specific ARM-based technology for the Company. The total purchase consideration for Veloce was $178.5 million based on the benchmarks achieved during product simulations. For accounting purposes, the costs incurred in connection with the development milestones relating to Veloce are considered compensatory and are recognized as R&D expense in the Consolidated Statement of Operations. Veloce completed all three performance milestones relating to the project as of March 31, 2014 and the total consideration relating to the three performance milestones, in the amount of $178.5 million, has been recognized as R&D expense as of March 31, 2015. During the fiscal years ended March 31, 2015 and 2014, as part of the above arrangement, the

F- 18

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Company paid $9.2 million and $63.7 million, respectively, in cash and issued 1.1 million shares and 6.7 million shares, respectively, valued at $5.6 million and $57.3 million, respectively. Former Veloce equity holders subject to vesting requirements will receive their distribution upon satisfaction of such vesting requirements.
Total R&D expenses recognized related to Veloce were $9.2 million and $42.7 million during the fiscal years ended March 31, 2015 and 2014, respectively. R&D expenses related to Veloce of $9.2 million recognized during the fiscal year ended March 31, 2015 is as a result of the distribution of the remaining 0.6 million Unallocated Veloce Units (Veloce stock equivalents that had not yet been allocated to individuals). Veloce consideration that has been accrued as of March 31, 2015, is classified as long-term if payments of the consideration are expected to occur beyond a 12 month period.

5.
Stockholders' Equity

Stock Repurchase Program
In August 2004, the Board of Directors authorized a stock repurchase program for the repurchase of up to $200.0 million of the Company's common stock. Under the program, the Company is authorized to make purchases in the open market or enter into structured agreements. In October 2008, the Board of Directors increased the stock repurchase program by $100.0 million. There were no stock repurchases during the fiscal years ended March 31, 2015 and 2014. During the fiscal year ended March 31, 2013, 0.1 million shares were repurchased on the open market at a weighted average price of $5.18 per share. Since the program was first implemented in August 2004, from time to time the Company has repurchased on the open market a total of 17.3 million shares at weighted average price of $10.04 per share. All repurchased shares were retired upon delivery to the Company. As of March 31, 2015, the Company had $15.9 million available in its stock repurchase program.

Stock Options
The Company has granted stock options to employees and non-employee directors under several plans. These option plans include two stockholder-approved plans (the 1992 Stock Option Plan and 2011 Equity Incentive Plan) and one plan not approved by stockholders (the 2000 Equity Incentive Plan). Certain other outstanding options were assumed through the Company’s various acquisitions.
A summary of the Company's stock option activity and related information is as follows:
 
Number of Shares (thousands)
 
Weighted
Average
Exercise
Price Per Share
 
Weighted-Average Remaining Contractual Term (years)
 
Aggregate Intrinsic Value (millions)
 
Outstanding as of March 31, 2012
4,164

 
$
10.67

 
 
 
 
 
Granted
40

 
$
5.58

 
 
 
 
 
Exercised
(161
)
 
$
5.31

 
 
 
$
0.3

(1)
Cancelled
(551
)
 
$
14.49

 
 
 
 
 
Outstanding as of March 31, 2013
3,492

 
$
10.26

 
 
 
 
 
Granted
40

 
$
7.35

 
 
 
 
 
Exercised
(662
)
 
$
9.36

 
 
 
$
1.8

(1)
Cancelled
(461
)
 
$
12.35

 
 
 
 
 
Outstanding as of March 31, 2014
2,409

 
$
10.06

 

 


 
Granted
—

 
—

 

 


 
Exercised
(53
)
 
$
6.32

 

 
$
0.2

(1)
Cancelled
(562
)
 
$
13.31

 

 


 
Outstanding as of March 31, 2015
1,794

 
$
9.15

 
1.9
 
$
—

(2)
Vested and expected to vest as of March 31, 2015
1,794

 
$
9.15

 
1.8
 
$
—

(2)
Vested and exercisable at the end of the year
1,794

 
$
9.15

 
1.9
 
$
—

(2)
(1) The aggregate pre-tax intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

F- 19

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) The aggregate pre-tax intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. The closing price of the Company’s common stock was $5.10 on March 31, 2015.

 
Restricted Stock Units
The Company has granted RSUs to employees and non-employee directors pursuant to its 1992 Plan and 2011 Equity Incentive Plan. RSUs are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. Generally, RSUs vest ratably on a quarterly basis over four years from the date of grant. For new employees hired, RSUs will vest on a quarterly basis over four years provided that no shares will vest during the first year of employment, at the end of which the shares that would have vested during that year will vest and the remaining shares will vest over the remaining 12 quarters.
In November 2013, Dr. Gopi was awarded 500,000 RSUs of which 200,000 RSUs were vested on the grant date and the remaining 300,000 RSUs will vest upon the attainment of certain specified X-Gene® and X-Weave® product commercialization goals. The grant-date fair value of these 300,000 performance-based RSUs was $3.3 million. As of March 31, 2015, both product commercialization goals have been attained and the associated stock-based compensation expense of $2.8 million has been recognized in the Company's Consolidated Financial Statements.
In May and November 2013 and May and October 2014, the Compensation Committee (the "Committee") authorized market-performance-based RSUs ("MSUs"). The MSUs will be earned, if at all, based on the Company's Total Shareholder Return (“TSR”) compared to that of the SPDR S&P Semiconductor Index ("Index”) over a two-year performance period for half of the MSU award and a three-year performance period for the remaining half of the MSU award. The MSUs will vest between ranges of 0% and 150% based on the Company's relative TSR compared to the Index. Total grant-date fair value of these MSUs was $4.5 million.

In May 2014, the Committee authorized an annual incentive compensation plan with respect to fiscal year 2015 (the "FY2015 Short-Term Incentive Plan"). The FY2015 Short-Term Incentive Plan will pay out based on our actual performance as measured against two equally weighted financial measures: revenue and non-GAAP earnings per share. Non-GAAP earnings per share is derived by dividing non-GAAP net income (loss) by the weighted average number of common shares outstanding during the applicable periods. Non-GAAP net income (loss) is derived by excluding from net income (loss) the following items required by GAAP: stock-based compensation charges, amortization of purchased intangible assets, Veloce acquisition consideration, restructuring charges, impairment of marketable securities and cost method investments, income taxes effect due to reconciling items, and other one-time and/or non-cash items. The award payouts for each corporate financial measure range from 50% to 150% of the pre-established target level based on the Company's actual performance for fiscal 2015. The performance goal was not attained and no stock-based compensation expense was recognized in the Company's Consolidated Financial Statements for fiscal 2015.
 
A summary of the Company's RSU activity is as follows (in thousands):
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Outstanding at the beginning of the year
6,105

 
6,444

 
9,244

Awarded
3,783

 
3,594

 
1,040

Vested
(1,639
)
 
(2,397
)
 
(2,345
)
Cancelled
(3,921
)
 
(1,536
)
 
(1,495
)
Outstanding at the end of the year
4,328

 
6,105

 
6,444

 
The weighted average remaining contractual term for the RSUs outstanding as of March 31, 2015 was 1.2 years.
As of March 31, 2015, the aggregate pre-tax intrinsic value of RSUs outstanding including performance-based awards which are subject to certain milestone attainments was $22.1 million. The aggregate pretax intrinsic value was calculated based on the closing price of the Company’s common stock of $5.10 on March 31, 2015.
The aggregate pre-tax intrinsic value of RSUs released during the fiscal year ended March 31, 2015 was $11.6 million. This intrinsic value represents the fair market value of the Company’s common stock on the date of release.


F- 20

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Employee Stock Purchase Plan
Under the Company's 2012 Employee Stock Purchase Plan, or ESPP, the Company originally reserved 1.8 million shares for issuance. In August 2014, the Company’s stockholders approved a proposal to reserve an additional 2.0 million shares under the ESPP. Under the terms of the ESPP, eligible employees are entitled to purchase common stock, on a semi-annual basis, at a purchase price 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. During the fiscal years ended March 31, 2015 and 2014, 0.7 million shares each were issued under the ESPP. At March 31, 2015, 1.8 million shares were available for future issuance under the ESPP.
Common Shares Reserved for Future Issuance
At March 31, 2015, the Company had the following shares of common stock reserved for issuance upon the exercise of equity instruments (in thousands):
Options granted and outstanding
1,794

Restricted Stock Units granted and outstanding
4,328

Options and RSUs authorized for future grants
2,330

Employee Stock Purchase Plan
1,839

 
10,291


 
6.
Income Taxes
Loss from operations before income tax consists of the following (in thousands):
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Loss from operations before income tax:
 
 
 
 
 
Domestic loss
$
(53,706
)
 
$
(8,976
)
 
$
(130,552
)
Foreign income (loss)
2,740

 
3,901

 
(4,117
)
 
$
(50,966
)
 
$
(5,075
)
 
$
(134,669
)
Income tax expense (benefit) from operations consists of the following (in thousands):
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Current:
 
 
 
 
 
Federal
$
(17
)
 
$
(20
)
 
$
(1,106
)
Foreign
1,206

 
819

 
847

State
(1
)
 
6

 
(129
)
Total Current
1,188

 
805

 
(388
)
Deferred:
 
 
 
 
 
Foreign
(96
)
 
(186
)
 
(166
)
State
—

 
—

 
—

Total Deferred
(96
)
 
(186
)
 
(166
)
 
$
1,092

 
$
619

 
$
(554
)
The provision (benefit) for income taxes reconciles to the amount computed by applying the federal statutory rate of 35% to the loss before income taxes as follows for operations (in thousands):

F- 21

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
 
$
 
%
 
$
 
%
 
$
 
%
Tax at federal statutory rate
$
(17,838
)
 
35
 %
 
$
(1,776
)
 
35
 %
 
$
(47,134
)
 
35
 %
Tax benefit from loss from continuing operations
—

 
—

 
—

 
—

 
(925
)
 
1

Other permanent differences
979

 
(2
)
 
(6,561
)
 
129

 
1,195

 
(1
)
State taxes, net of federal benefit
(2,345
)
 
5

 
(214
)
 
4

 
(7,263
)
 
5

Federal tax credits
(1,553
)
 
3

 
(1,778
)
 
35

 
(1,909
)
 
1

State tax credits
(460
)
 
1

 
(444
)
 
9

 
(537
)
 
—

Veloce accrued liability
3,655

 
(7
)
 
16,740

 
(330
)
 
26,749

 
(20
)
Refundable credits
(16
)
 
—

 
—

 
—

 
—

 
—

Sale of TPack
—

 
—

 
2,688

 
(53
)
 
—

 
—

Valuation allowance
18,445

 
(36
)
 
(7,809
)
 
154

 
28,715

 
(21
)
Change in contingency reserve
(67
)
 
—

 
(64
)
 
1

 
74

 
—

Other
292

 
(1
)
 
(163
)
 
4

 
481

 
—

 
$
1,092

 
(2
)%
 
$
619

 
(12
)%
 
$
(554
)
 
—
 %

Significant components of the Company’s deferred tax assets and liabilities for federal and state income taxes are as shown below (in thousands):
 
Fiscal Years Ended March 31,
 
2015
 
2014
Deferred tax assets:
 
 
 
Net operating loss carryforwards
$
315,773

 
$
294,910

Research and development credit carryforwards
81,546

 
79,839

Inventory write-downs and other reserves
7,642

 
8,068

Capitalization of research and development costs
6,245

 
5,915

Goodwill
3,147

 
4,007

Intangible assets
26,031

 
32,290

Investment impairment
3,982

 
3,494

Stock-based compensation
28,921

 
26,664

Depreciation and amortization
1,903

 
3,253

Other
970

 
1,182

Total deferred tax assets
476,160

 
459,622

Valuation allowance
(475,545
)
 
(459,081
)
 
$
615

 
$
541

At March 31, 2015, the Company has federal and state R&D tax credit carryforwards of $62.1 million and $29.9 million, respectively, which begin to expire in the fiscal year ending March 31, 2019 unless previously utilized. The Company also has federal and state net operating loss carryforwards of $1,192.9 million and $500.0 million, respectively, which will begin to expire in fiscal year 2018 and fiscal year 2016, respectively. Federal and state laws impose restrictions on the utilization of net operating loss and tax credit carryforwards in the event of an “ownership change” for tax purposes as defined by Section 382 of the Internal Revenue Code. The future utilization of our research and development credit carryforwards and net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or may occur in the future. The Tax Reform Act of 1986 (the "Act") limits a company’s ability to utilize certain tax credit carryforwards and net operating loss carryforwards in the event of a cumulative change in ownership in excess of 50% as defined in the Act.

F- 22

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of the adoption of ASC 718-10, the Company recognizes excess tax benefits associated with the exercise of stock options directly to stockholders’ equity only when realized. Accordingly, deferred tax assets are not recognized for net operating loss carryforwards resulting from excess tax benefits occurring from April 1, 2006 onward. A windfall tax benefit occurs when the actual tax benefit realized upon an employee’s disposition of a share-based award exceeds the deferred tax asset, if any, associated with the award.
The Company has established a valuation allowance against most of its net deferred tax assets due to uncertainty regarding their future realization. In assessing the realizability of its deferred tax assets, management considers cumulative losses, the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable and the full utilization of the Company’s loss carryback potential, management concluded that a valuation allowance should be recorded in 2015, 2014 and 2013 against most of its deferred tax assets.
As of March 31, 2015, income taxes have not been provided for approximately $16.0 million of cumulative undistributed earnings of the Company's foreign subsidiaries. The Company intends to reinvest these earnings indefinitely in operations outside of the U.S. If these earnings were distributed to the United States, the Company may be subject to U.S. income taxes and foreign withholding taxes. Determination of the amount of any unrecognized deferred income tax liability on the excess of the financial reporting basis over the tax basis of investments in foreign subsidiaries is not practicable because of the complexities of the hypothetical calculation.
The following is a tabular reconciliation of the Unrecognized Tax Benefits activity during the fiscal year ended March 31, 2015 (in thousands):
Opening Balance
$
44,231

Gross decreases - tax positions in prior period
122

Gross increases - current-period tax positions
726

Ending Balance
$
45,079


If recognized, $0.6 million of the $45.1 million of unrecognized tax benefits would affect the Company’s effective tax rate.
The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in income tax expense. As of March 31, 2015, the Company has recognized $0.1 million of accrued interest and penalties related to uncertain tax positions.
The Company is subject to taxation in the U.S. and various states and foreign jurisdictions.
The Company’s U.S. federal tax returns for tax years subsequent to 2011 are subject to examination by the Internal Revenue Service and its state income tax returns subsequent to 2010 are subject to examination by state tax authorities. Net operating losses from years for which the statute of limitations has expired (2010 and prior for federal and 2009 and prior for state) could be adjusted in the event that the taxing jurisdictions challenge the amounts of net operating loss carryforwards from such years. With few exceptions, the Company is no longer subject to foreign examinations by the tax authorities for years before 2011.
The Company does not foresee significant changes to its unrecognized tax benefits within the next twelve months.

7.
Restructuring

From time to time, the Company implements plans to reorganize its operations, consolidate sites, reduce its workforce and related operating expenses in order to increase the its operating efficiencies. The plans might include eliminating job redundancies, reducing Company’s workforce and writing off of certain fixed assets.

Fiscal 2015 Restructuring Plans
January 2015 Plan: This plan eliminated approximately 40 positions, or approximately 7% of headcount. During the fiscal quarter ended March 31, 2015, the Company incurred restructuring charges of $4.1 million including the write-off of a fixed asset of $2.6 million and expects to incur the remaining charges of $0.1 million in the first quarter of fiscal 2016. The Company

F- 23

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

anticipates that the restructuring plan will reduce its ongoing net operating expenses by approximately $14.0 million to $18.0 million annually.
April 2014 Plan: The Company completed this plan at the end of the quarter ended December 31, 2014 and incurred cumulative restructuring charges of $1.3 million. As of March 31, 2015, the actual annual savings were approximately $4.6 million for headcount expenses and approximately $0.6 million for other expenses.
Fiscal 2014 and 2013 Restructuring Plans

August 2013 Plan: This plan eliminated approximately 20 positions and certain fixed assets were impaired. The Company incurred cumulative restructuring charges of $1.0 million in connection with this plan.

December 2012 Plan: the Company reduced its workforce by approximately 70 employees and impaired certain fixed assets that were no longer intended to use as a result of the plan and incurred cumulative restructuring charges of $1.8 million for headcount expenses and $4.7 million for asset impairment.
The following table sets forth a summary of restructuring activities related to all of the Company's restructuring plans described above (in thousands): 
 
Workforce
Reduction
 
Operating Lease Commitments
 
Asset Impairment and Other
 
Total
Liability, March 31, 2013
$
548

 
$
—

 
$
—

 
$
548

Restructuring charges
862

 
—

 
272

 
1,134

Cash payments
(1,410
)
 
—

 
—

 
(1,410
)
Non-cash items
—

 
—

 
(272
)
 
(272
)
Liability, March 31, 2014
$
—

 
$
—

 
$
—

 
$
—

Restructuring charges
$
2,613

 
$
126

 
$
2,682

 
$
5,421

Cash payments
(2,160
)
 
(33
)
 
(21
)
 
(2,214
)
Non-cash items
(4
)
 
20

 
(2,646
)
 
(2,630
)
Liability, March 31, 2015
$
449

 
$
113

 
$
15

 
$
577


8.
Commitments and Contingencies

Commitments

The following table summarizes the Company’s contractual operating leases and other purchase commitments as of March 31, 2015 (in thousands): 
 
Operating Leases (1)
 
Purchase Commitments (2)
 
Total
Fiscal Years Ending March 31,
 
 
 
 
 
2016
$
1,589

 
$
17,663

 
$
19,252

2017
1,117

 
3,268

 
4,385

2018
705

 
2,860

 
3,565

2019
345

 
—

 
345

Total minimum payments
$
3,756

 
$
23,791

 
$
27,547

 
(1) Includes the Company's headquarters building lease which expires in August 2015.
(2) Includes open purchase orders with terms that generally allow us the option to cancel or reschedule the order, subject to various restrictions and limitations. Also includes the licensing fees relating to the Company's R&D efforts, including licensed intellectual property, or IP, technology, product design, test and verification tools, of $15.1 million.


F- 24

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company did not have any off balance sheet arrangements at March 31, 2015.
Rent expense for the fiscal years ended March 31, 2015, 2014, and 2013 was $2.4 million, $1.8 million, and $2.6 million, respectively.

Legal Proceedings

The Company is currently a party to certain legal proceedings, including those noted in this section. The Company believes the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm the Company's financial position, results of operations or cash flows. Notwithstanding the foregoing, legal proceedings are subject to inherent uncertainties, unfavorable rulings or other events that could occur. In addition, legal proceedings are expensive to prosecute and defend against and can divert management attention and Company resources away from the Company's business objectives. Unfavorable resolutions could include monetary damages against the Company or injunctions or other restrictions on the conduct of the Company’s business, or preclude the Company from recovering the damages it seeks in legal proceedings it has commenced. It is also possible that the Company could conclude it is in the best interests of its stockholders, employees, and customers to settle one or more such matters, and any such settlement could include substantial payments or the surrender of rights to collect payments from third parties. However, the Company has not reached this conclusion with respect to any material matter at this time.
In 1993, the Company was named as a Potentially Responsible Party (“PRP”) along with more than 100 other companies that used an Omega Chemical Corporation waste treatment facility in Whittier, California (the “Omega Site”). The U.S. Environmental Protection Agency (“EPA”) has alleged that Omega failed to properly treat and dispose of certain hazardous waste materials at the Omega Site. The Company is a member of a large group of PRPs, known as the Omega Chemical Site PRP Organized Group (“OPOG”), that has agreed to fund certain on-going remediation efforts at the Omega Site. In February 2001, the U.S. District Court for the Central District of California (the “Court”) approved a consent decree between EPA and OPOG to study the contamination and evaluate cleanup options at the Omega Site (the Operable Unit 1 or “OU1”). In January 2009, the Court approved two amendments to the consent decree, the first expanding the scope of work to mitigate volatile organic compounds affecting indoor air quality near the Omega Site (the Operable Unit 3 or “OU3”) and the second adding settling parties to the consent decree. Removal of waste materials from the Omega Site has been completed. As part of OU1 and OU3, efforts to remediate the soil and groundwater at the Omega Site, as well as to extract chemical vapors from the soil and improve indoor air quality in and around the site, are underway and are expected to be ongoing for several years. In addition, OPOG and EPA are investigating a regional groundwater contamination plume allegedly originating at the Omega Site (the Operable Unit 2 or “OU2”). In November 2007, Angeles Chemical Company, located downstream from the Omega Site, filed a lawsuit (the “Angeles Litigation”) in the Court against OPOG and the PRPs for cost recovery and indemnification for future response costs allegedly resulting from the contamination plume described above. In March 2008, the Court granted OPOG’s motion to stay the Angeles Litigation pending EPA’s determination of how to investigate and remediate OU2. In September 2011, EPA issued an interim Record of Decision specifying the interim clean-up actions EPA has chosen for OU2, and in September 2012, it issued a special notice letter that triggered the commencement of good faith settlement negotiations with OPOG. In November 2014, EPA submitted a term sheet, accepted by OPOG in December 2014, describing the settlement terms and remediation actions for OU2 that will be set forth in a final consent decree to be filed with the Court. It is anticipated that EPA and OPOG will finalize the remediation consent decree for OU2 in fiscal year 2016. In January 2012, as a result of challenges made by certain PRPs to the criteria previously used to allocate liability among OPOG members, and of the departure of certain PRPs from OPOG, OPOG approved changes to the cost allocation structure that resulted in an increase to the Company’s proportional allocation of liability. In addition, the subsequent departure or bankruptcy of one or more other PRPs from OPOG could have the effect of increasing the proportional liability of the remaining PRPs, including the Company. In December 2013, OPOG retained legal counsel to pursue claims against other PRPs for the regional groundwater contamination and, in December 2014, OPOG retained legal counsel to protect its interests in connection with the bankruptcy proceedings filed by an OPOG member. Although the Company considers a loss relating to the Omega Site probable, its share of any financial obligations for the remediation of the Omega Site, including taking into account the allocation increases described above, is not currently believed to be material to the Company’s financial statements, based on the Company’s approximately 0.5% contribution to the total waste tonnage sent to the site and current estimates of the potential remediation costs. Based on currently available information, the Company has a loss accrual that is not material and believes that the actual amount of its costs will not be materially different from the amount accrued. However, proceedings are ongoing and the eventual outcome of the clean-up efforts and the pending litigation matters is uncertain at this time. Based on currently available information, the Company does not believe that any eventual outcome will have a material adverse effect on its operations.

F- 25

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


9.
Employee Retirement Plan
Effective January 1, 1986, the Company established a 401(k) defined contribution retirement plan (“Retirement Plan”) covering all full-time employees. The Retirement Plan provides for voluntary employee contributions from 1% to 50% 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. Employer contributions vest to participants at a rate of 33% per year of service for the first three years of service and 100% thereafter for each year of service. The Company made a plan contribution of $0.2 million for the fiscal year ended March 31, 2013. The Company did not make any plan contribution for the fiscal years ended March 31, 2015 and 2014.

10.
Significant Customer and Geographic Information

Based on direct shipments, net revenues to customers that were equal to or greater than 10% of total net revenues were as follows: 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
Wintec (global logistics provider)*
20
%
 
22
%
 
19
%
Avnet (distributor)
26
%
 
27
%
 
27
%

* Wintec provides vendor managed inventory support primarily for Cisco Systems, Inc.
Based on ship to location, net revenues by geographic region were as follows (in thousands):
 
 
Fiscal Years Ended March 31,
 
2015
 
2014
 
2013
United States of America
$
70,977

 
$
101,275

 
$
79,930

Taiwan
13,099

 
13,405

 
22,684

Hong Kong
21,808

 
21,477

 
22,044

China
982

 
6,085

 
2,053

Europe
24,728

 
33,625

 
35,216

Japan
22,974

 
23,125

 
13,237

Malaysia
4,666

 
5,788

 
4,733

Singapore
5,594

 
9,745

 
10,399

Other Asia
173

 
1,217

 
4,621

Other
10

 
408

 
725

 
$
165,011

 
$
216,150

 
$
195,642


As of March 31, 2015, 2014 and 2013, long-lived assets, which represent property, plant and equipment, goodwill and intangible assets, net of accumulated depreciation and amortization, located outside the Americas were not material.


11.
Sale of TPack A/S

On April 22, 2013, the Company completed the sale of its former subsidiary, TPack, and certain specified intellectual property assets owned by the Company related to TPack's business for an aggregate consideration of $33.5 million, net of working capital adjustments, payable in cash. In connection with the closing, there was a working capital adjustment of $0.5 million and the Company received a cash payment of $30.2 million. The remaining $3.4 million of the aggregate consideration was received in April 2014.


F- 26

APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In connection with the divestiture, the Company recorded a gain of $19.7 million. The following table summarizes the components of the gain (in thousands):
 
Total proceeds, net of working capital adjustment
$
30,175

Net assets and liabilities
(184
)
Goodwill write off
(1,758
)
Intangibles write off
(11,404
)
Holdback amount
3,353

Legal fees and other costs
(483
)
Gain on sale of TPack
$
19,699



The total assets of TPack included $0.7 million of cash, cash equivalents and short-term investments.

12.
Quarterly Financial Information (unaudited)

 
Fiscal Year Ended March 31, 2015
 
Fiscal Year Ended March 31, 2014
 
Q1 (1)
 
Q2 (2)
 
Q3
 
Q4 (3)
 
Q1 (4)
 
Q2 (5)
 
Q3 (6)
 
Q4(7)
 
(In thousands, except per share data)
Net revenues
$
50,272

 
$
40,945

 
$
36,747

 
$
37,047

 
$
54,148

 
$
55,387

 
$
54,844

 
$
51,771

Cost of revenues
20,257

 
17,716

 
14,842

 
16,482

 
22,342

 
21,397

 
21,644

 
19,806

Gross profit
30,015

 
23,229

 
21,905

 
20,565

 
31,806

 
33,990

 
33,200

 
31,965

Total operating expenses
43,536

 
32,562

 
33,649

 
36,641

 
24,556

 
66,757

 
40,900

 
9,229

Operating (loss) income
(13,521
)
 
(9,333
)
 
(11,744
)
 
(16,076
)
 
7,250

 
(32,767
)
 
(7,700
)
 
22,736

Net realized gain on short-term investments and interest and other income (expense), net
315

 
(2,112
)
 
475

 
1,030

 
3,795

 
576

 
617

 
418

(Loss) income before income taxes
(13,206
)
 
(11,445
)
 
(11,269
)
 
(15,046
)
 
11,045

 
(32,191
)
 
(7,083
)
 
23,154

Income tax (benefit) expense
(141
)
 
272

 
862

 
99

 
188

 
192

 
201

 
38

Net (loss) income
$
(13,065
)
 
$
(11,717
)
 
$
(12,131
)
 
$
(15,145
)
 
$
10,857

 
$
(32,383
)
 
$
(7,284
)
 
$
23,116

Basic net (loss) income per share
$
(0.17
)
 
$
(0.15
)
 
$
(0.15
)
 
$
(0.19
)
 
$
0.16

 
$
(0.45
)
 
$
(0.10
)
 
$
0.31

Shares used in calculating basic net (loss) income per share
77,916

 
78,487

 
78,920

 
80,667

 
69,360

 
72,610

 
73,989

 
75,629

Diluted net (loss) income per share
$
(0.17
)
 
$
(0.15
)
 
$
(0.15
)
 
$
(0.19
)
 
$
0.15

 
$
(0.45
)
 
$
(0.10
)
 
$
0.30

Shares used in calculating diluted (loss) income per share
77,916

 
78,487

 
78,920

 
80,667

 
70,234

 
72,610

 
73,989

 
77,193


(1) The consolidated operating results for the first quarter of fiscal 2015 included a charge of $7.1 million related to the Veloce consideration and a charge of $1.2 million related to restructuring.
(2) The consolidated operating results for the second quarter of fiscal 2015 included an impairment charge of $2.5 million related to a strategic investment.
(3) The consolidated operating results for the fourth quarter of fiscal 2015 included a charge of $2.1 million related to the Veloce consideration, a charge of $4.1 million related to restructuring and an impairment charge of $0.5 million related to a strategic investment.
(4)
The consolidated operating results for the first quarter of fiscal 2014 included a charge of $9.3 million related to the Veloce consideration and a gain on sale of TPack of $19.7 million.
(5) The consolidated operating results for the second quarter of fiscal 2014 included a charge of $30.4 million related to the Veloce consideration and a charge of $1.0 million related to restructuring.
(6) The consolidated operating results for the third quarter of fiscal 2014 included a charge of $2.9 million related to the Veloce consideration.
(7) The consolidated operating results for the fourth quarter of fiscal 2014 included a gain on sale of building of $25.8 million.



F- 27


SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
 
Description
Balance at
Beginning of
Period
 
Charged (Credited)
to Costs and
Expenses
 
Write-Offs
 
Balance at
End of
Period
 
(In thousands)
Allowance for doubtful accounts
 
 
 
 
 
 
 
Year Ended March 31, 2015
$
451

 
$
(149
)
 
$
—

 
$
302

Year Ended March 31, 2014
$
703

 
$
(286
)
 
$
34

 
$
451

Year Ended March 31, 2013
$
1,099

 
$
1

 
$
(397
)
 
$
703


F- 28


Exhibit Index

 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
Date
 
Number
 
Filed Herewith
 
 
 
 
 
 
 
 
 
 
 
2.1+<

 
Agreement and Plan of Merger by and among the Company, Espresso Acquisition Corporation, Veloce Technologies, Inc. and the Stockholders' Representative named therein, dated May 17, 2009.
 
10-Q/A
 
9/4/2009
 
2.1
 
 
 
 
 
 
 
 
 
 
 
 
 
2.2

 
Letter Agreement dated December 20, 2012, relating to Agreement and Plan of Merger by and among the Company, Espresso Acquisition Corporation, Veloce Technologies, Inc. and the Stockholders' Representative named therein, dated May 17, 2009.
 
8-K
 
12/21/2012
 
2.1
 
 
 
 
 
 
 
 
 
 
 
 
 
2.3+<

 
Amendment No. 1 to Agreement and Plan of Merger by and among the Company, Espresso Acquisition Corporation, Veloce Technologies, Inc., and the Stockholders’ Representative named therein, dated November 8, 2010.
 
10-Q
 
1/31/2011
 
2.4
 
 
 
 
 
 
 
 
 
 
 
 
 
2.4+<

 
Amendment No. 2 to Agreement and Plan of Merger by and among the Company, Espresso Acquisition Corporation, Veloce Technologies, Inc., Veloce Technologies LLC and the Stockholders’ Representative named therein, dated April 5, 2012.
 
10-K
 
5/17/2012
 
2.5
 
 
 
 
 
 
 
 
 
 
 
 
 
3.1

 
Amended and Restated Certificate of Incorporation of the Company.
 
S-1
 
10/10/1997
 
3.2
 
 
 
 
 
 
 
 
 
 
 
 
 
3.2

 
Certificate of Amendment of Certificate of Incorporation of the Company.
 
S-4
 
9/12/2000
 
3.3
 
 
 
 
 
 
 
 
 
 
 
 
 
3.3

 
Certificate of Amendment of Certificate of Incorporation of the Company.
 
8-K
 
12/11/2007
 
3.1
 
 
 
 
 
 
 
 
 
 
 
 
 
3.4

 
Amended and Restated Bylaws of the Company.
 
10-Q
 
11/3/2010
 
3.2
 
 
 
 
 
 
 
 
 
 
 
 
 
4.1

 
Specimen Stock Certificate.
 
S-1/A
 
11/12/1997
 
4.1
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1*

 
Form of Indemnification Agreement between the Company and each of its officers and directors.
 
8-K
 
10/2/2013
 
10.2
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2*

 
Form of Restricted Stock Unit Agreement under the 1992 Equity Incentive Plan.
 
10-K
 
5/30/2007
 
10.2
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3*

 
2011 Equity Incentive Plan.
 
8-K
 
8/10/2011
 
10.66
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4*

 
2011 Equity Incentive Plan, as amended and restated on October 23, 2013.
 
8-K
 
10/29/2013
 
10.76
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5*

 
Form of Restricted Stock Unit Award Grant Notice and Agreement under the 2011 Equity Incentive Plan.
 
8-K
 
11/21/2013
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6*

 
Form of Option Agreement under the 1992 Equity Incentive Plan.
 
10-K
 
5/30/2007
 
10.3
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7*

 
1992 Equity Incentive Plan.
 
10-K
 
5/30/2007
 
10.4
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8*

 
401(k) Plan effective April 1, 1985 and form of Enrollment Agreement.
 
S-1/A
 
11/12/1997
 
10.6
 
 
 
 
 
 
 
 
 
 
 
 
 
10.9*

 
2000 Equity Incentive Plan, as amended, and form of Option Agreement.
 
10-Q
 
8/13/2002
 
10.33
 
 
 
 
 
 
 
 
 
 
 
 
 
10.10*

 
Form of Restricted Stock Unit Agreement under the 2000 Equity Incentive Plan.
 
10-K
 
5/30/2007
 
10.34
 
 
 
 
 
 
 
 
 
 
 
 
 
10.11*

 
AMCC Deferred Compensation Plan.
 
10-Q
 
8/13/2002
 
10.38
 
 
 
 
 
 
 
 
 
 
 
 
 
10.12+

 
Patent License Agreement between the Company and IBM dated September 28, 2003.
 
10-Q
 
11/14/2003
 
10.42
 
 
 
 
 
 
 
 
 
 
 
 
 
10.13+

 
Intellectual Property Agreement between the Company and IBM dated September 28, 2003.
 
10-Q
 
11/14/2003
 
10.43
 
 
 
 
 
 
 
 
 
 
 
 
 
10.14*

 
Executive Severance Benefit Plan, as amended and restated on September 19, 2013.
 
8-K
 
9/25/2013
 
10.67
 
 
 
 
 
 
 
 
 
 
 
 
 
10.15+

 
Qualcomm Patent Purchase Agreement dated July 11, 2008.
 
10-Q
 
10/31/2008
 
10.60
 
 
 
 
 
 
 
 
 
 
 
 
 
10.16+

 
Qualcomm Patent Purchase Amendment dated July 11, 2008.
 
10-Q
 
10/31/2008
 
10.61
 
 
 
 
 
 
 
 
 
 
 
 
 

F- 29


10.17

 
LSI Asset Purchase Agreement dated April 5, 2009 and Amendment No. 1 dated April 20, 2009.
 
10-K
 
5/12/2009
 
10.62
 
 
 
 
 
 
 
 
 
 
 
 
 
10.18*

 
Employment agreement dated December 29, 2009 by and between the Company and William Caraccio.
 
10-Q
 
8/9/2010
 
10.65
 
 
 
 
 
 
 
 
 
 
 
 
 
10.19+

 
Development Agreement dated May 17, 2009, by and between the Company and Veloce Technologies, Inc.
 
10-K/A
 
11/5/2012
 
10.66
 
 
 
 
 
 
 
 
 
 
 
 
 
10.20+

 
First Amendment to Development Agreement dated as of November 8, 2010, by and between the Company and Veloce Technologies, Inc.
 
10-K
 
5/17/2012
 
10.67
 
 
 
 
 
 
 
 
 
 
 
 
 
10.21+

 
Second Amendment to Development Agreement dated as of July 18, 2011, by and between the Company and Veloce Technologies, Inc.
 
10-K
 
5/17/2012
 
10.68
 
 
 
 
 
 
 
 
 
 
 
 
 
10.22+

 
Technology License Agreement, dated as of March 31, 2009 between ARM Limited and the Company, including without limitation Annex 1 thereto (“TLA Annex 1”).
 
10-K/A
 
11/5/2012
 
10.69
 
 
 
 
 
 
 
 
 
 
 
 
 
10.23+

 
Amendment One to Technology License Agreement, dated March 31, 2010 between ARM Limited and the Company.
 
10-K/A
 
11/5/2012
 
10.70
 
 
 
 
 
 
 
 
 
 
 
 
 
10.24+

 
Amendment Two to Technology License Agreement, dated July 14, 2010 between ARM Limited and the Company.
 
10-K
 
5/17/2012
 
10.71
 
 
 
 
 
 
 
 
 
 
 
 
 
10.25+

 
Amendment One to TLA Annex 1, dated August 17, 2010, between ARM Limited and the Company.
 
10-K
 
5/17/2012
 
10.72
 
 
 
 
 
 
 
 
 
 
 
 
 
10.26+

 
Amendment Two to TLA Annex 1, dated October 5, 2010, between ARM Limited and the Company.
 
10-K
 
5/17/2012
 
10.73
 
 
 
 
 
 
 
 
 
 
 
 
 
10.27+

 
Amendment Three to TLA Annex 1, dated December 1, 2011, between ARM Limited and the Company.
 
10-K
 
5/17/2012
 
10.74
 
 
 
 
 
 
 
 
 
 
 
 
 
10.28*

 
Applied Micro Circuits Corporation 2012 Employee Stock Purchase Plan, as amended.
 
8-K
 
8/15/2014
 
10.31
 
 
 
 
 
 
 
 
 
 
 
 
 
10.29*

 
Offer Letter Agreement with Douglas T. Ahrens.
 
8-K
 
10/2/2013
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3

 
Agreement of Purchase and Sale, dated January 22, 2014, between the Company and RW9REIT Acquisition, LLC. relating to the Company's headquarters building in Sunnyvale, California.
 
8-K
 
1/22/2014
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
10.31

 
Form of Lease between the Company and Moffett Park Drive Owner, LLC.
 
8-K
 
1/22/2014
 
10.1
 
 
 
 
 
 
 
 
 
 
 
 
 
21.1

 
Subsidiaries of the Registrant.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
23.1

 
Consent of Independent Registered Public Accounting Firm – KPMG LLP.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
 
24.1

 
Power of Attorney. Reference is made to the signature page of this Annual Report.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
31.1

 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
31.2

 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
32.1#

 
Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
32.2#

 
Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
101.INS

 
XBRL Instance Document
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
101.SCH

 
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
101.CAL

 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
101.DEF

 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 
101.LAB

 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
 
 
 
 
x
 
 
 
 
 
 
 
 
 
 

F- 30


101.PRE

 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
 
 
 
 
x

*
Management contract or compensatory plan.
+
The Company has been granted confidential treatment for certain portions of these agreements and certain terms and conditions have been redacted from the exhibits. Omitted portions have been filed separately with the SEC.    
<
Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
#
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K and will not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or Exchange Act.



F- 31



Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
 
 
 
Subsidiary name
 
Jurisdiction of Incorporation or Organization

AMCC Deutschland GmbH
Germany
AMCC Japan Co., Ltd.
Japan
Applied Micro Circuits Corporation Canada
Canada
AMCC Sales Corporation
Delaware
AMCC China, Inc.
Delaware
AMCC Enterprise Corporation
Delaware
3Ware, Inc.
California
Applied Micro Circuits Corporation (AMCC) Vietnam
Vietnam
Applied Micro Circuits India Private Limited
India
Veloce Technologies LLC
Delaware





Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Applied Micro Circuits Corporation:
We consent to the incorporation by reference in the registration statements (Nos. 333‑35408, 333-40905, 333-41572, 333‑46584, 333‑47185, 333-48912, 333-48914, 333-53282, 333-57202, 333-71878, 333-74787, 333‑76767, 333-92507, 333‑99623, 333‑110075, 333-114327, 333-130589, 333-140052, 333-147297, 333‑171960, 333‑177773, 333-183603 and 333-198159) on Form S‑8 of Applied Micro Circuits Corporation of our report dated May 22, 2015, with respect to the consolidated balance sheets of Applied Micro Circuits Corporation and its subsidiaries as of March 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2015, the related consolidated financial statement schedule, and the effectiveness of internal control over financial reporting as of March 31, 2015, which report appears in the March 31, 2015 annual report on Form 10‑K of Applied Micro Circuits Corporation.



/s/ KPMG LLP
Santa Clara, California
May 22, 2015






Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Dr. Paramesh Gopi, certify that:
1.I have reviewed this Annual Report on Form 10-K of Applied Micro Circuits Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under out supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ Paramesh Gopi
Dr. Paramesh Gopi
President and Chief Executive Officer
Date: May 22, 2015







Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Douglas T. Ahrens, certify that:
1.I have reviewed this Annual Report on Form 10-K of Applied Micro Circuits Corporation;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ Douglas T. Ahrens
Douglas T. Ahrens
Vice President and Chief Financial Officer
Dated: May 22, 2015







Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Dr. Paramesh Gopi, Chief Executive Officer of Applied Micro Circuits Corporation (the “Company”), hereby certifies that, to the best of his knowledge:
1.
This Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (“SEC”) or its staff upon request.
This certification accompanies the Report to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
 
/s/ Paramesh Gopi
Dr. Paramesh Gopi
President and Chief Executive Officer
Dated: May 22, 2015







Exhibit 32.2
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Douglas T. Ahrens, Chief Financial Officer of Applied Micro Circuits Corporation (the “Company”), hereby certifies that, to the best of his knowledge:
1.
 This Annual Report on Form 10-K for the fiscal year ended March 31, 2015 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission (“SEC”) or its staff upon request.
This certification accompanies the Report to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Exchange Act (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.
 
/s/ Douglas T. Ahrens
Douglas T. Ahrens
Vice President and Chief Financial Officer
Dated: May 22, 2015



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