<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
----------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998
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 0-26778
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APPLIED MICROSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
----------------------
WASHINGTON 91-1074996
(State of incorporation) (I.R.S. Employer Identification Number)
5020 148TH AVENUE N.E., REDMOND, WASHINGTON 98052-5172
(425) 882-2000
(Address, including zip code, of Registrant's principal executive offices and
telephone number, including area code)
----------------------
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 X No
_
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock: 6,664,679 shares outstanding as of October 31, 1998
This report including exhibits consists of 15 pages.
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the quarter and nine
months ended September 30, 1998 and 1997 ...........................3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 ..................................................4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 ........................................5
Notes to Consolidated Financial Statements .........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...............................................8
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................14
Signatures.........................................................15
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
-------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(IN THOUSANDS , EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
Net sales ...................................... $ 9,957 $ 10,758 $ 27,365 $ 29,669
Cost of sales .................................. 2,525 2,861 7,163 8,015
--------- -------- --------- -------
Gross profit ................................... 7,432 7,897 20,202 21,654
Operating expenses:
Sales, general and administrative ......... 4,825 4,870 13,584 13,838
Research and development .................. 2,659 2,010 7,592 6,300
--------- -------- --------- -------
Total operating expenses ....................... 7,484 6,880 21,176 20,138
--------- -------- --------- -------
Income (loss) from operations .................. (52) 1,017 (974) 1,516
Interest income and other ...................... 184 178 606 509
Interest expense ............................... -- (3) (1) (11)
--------- -------- --------- -------
Income (loss) before income taxes .............. 132 1,192 (369) 2,014
Income taxes ................................... 19 180 19 313
--------- -------- --------- -------
Net income (loss) .............................. $ 113 $ 1,012 ($ 388) $ 1,701
--------- -------- --------- -------
--------- -------- --------- -------
Basic income (loss) per share .................. $ 0.02 $ 0.15 ($ 0.06) $ 0.25
Shares used in basic per share calculation...... 6,789 6,798 6,861 6,768
Diluted income (loss) per share ................ $ 0.02 $ 0.14 ($ 0.06) $ 0.23
Shares used in diluted per share calculation ... 6,983 7,393 6,861 7,273
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- --------------
(UNAUDITED)
<C> <C>
ASSETS
<S>
Current assets:
Cash and cash equivalents .......................................... $ 4,360 $ 6,336
Short term investments ............................................. 11,143 10,345
Accounts receivable ................................................ 9,995 7,741
Inventories ........................................................ 3,337 3,465
Prepaid and other current assets ................................... 406 951
------- -------
Total current assets ........................................... 29,241 28,838
Property and equipment, net ............................................. 2,957 2,900
Other assets ............................................................ 952 844
------- -------
Total assets ................................................... $33,150 $32,582
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................... $ 2,882 $ 2,804
Accrued payroll .................................................... 2,251 1,684
Other accrued expenses ............................................. 1,510 991
Deferred revenue ................................................... 3,413 2,797
Current portion of long-term obligations ........................... -- 15
------- -------
Total current liabilities ...................................... 10,056 8,291
Shareholders' equity:
Preferred stock, par value $.01
Authorized - 5,000,000 shares .................................. -- --
Common stock, par value $.01
Authorized - 25,000,000 shares
Issued - 6,670,000 and 6,827,000 shares at September 30,
1998 and December 31, 1997, respectively ....................... 25,443 26,387
Cumulative translation adjustment .................................. (734) (869)
Accumulated deficit ................................................ (1,615) (1,227)
------- -------
Total shareholders' equity ..................................... 23,094 24,291
------- -------
Total liabilities and shareholders' equity ..................... $33,150 $32,582
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------------- --------------
(IN THOUSANDS)
(UNAUDITED)
<C> <C>
<S>
Cash flows from operating activities:
Net income (loss) ....................................................... ($ 388) $ 1,701
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ...................................... 901 858
Changes in operating assets and liabilities:
Accounts receivable ................................................ (2,254) 229
Inventories ........................................................ 128 (217)
Prepaid expenses ................................................... 545 231
Other assets ....................................................... (247) (133)
Deferred revenue ................................................... 616 332
Accounts payable and accrued expenses .............................. 1,164 (97)
------- -------
Net cash provided by operating activities ...................... 465 2,904
Cash flows from investing activities:
Purchase of short-term investments ................................. (798) (2,773)
Property and equipment additions ................................... (819) (1,201)
------- -------
Net cash used in investing activities .......................... (1,617) (3,974)
Cash flows from financing activities:
Sale of common stock to employees .................................. 145 186
Stock options exercised ............................................ 10 12
Purchase of treasury stock ......................................... (1,099) --
Repayment of long-term obligations ................................. (15) (39)
------- -------
Net cash provided by (used in) financing activities ............ (959) 159
Effects of foreign exchange rate changes on cash ........................ 135 (170)
------- -------
Decrease in cash and cash equivalents ................................... (1,976) (1,081)
Cash and cash equivalents at beginning of period ........................ 6,336 7,208
------- -------
Cash and cash equivalents at end of period .............................. $ 4,360 $ 6,127
------- -------
------- -------
Supplemental disclosures of cash paid (received):
Interest ........................................................... $ 0 $ 11
Income Taxes ....................................................... ($ 19) $ 729
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements for the nine month period ended
September 30, 1998 and 1997 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with the
1997 audited consolidated financial statements. In the opinion of management,
the financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary for fair presentation of the results of this
interim period. These statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
1997 Annual Report to Shareholders. The results of operations for the nine
months ended September 30, 1998 are not necessarily indicative of the results
to be expected for the entire year.
Certain prior year amounts have been reclassified to conform to the
current year presentation. Such reclassifications have no effect on
previously reported results of operations.
2. COMPUTATION OF EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported earnings per share. In addition, the Securities and Exchange
Commission (SEC) previously had requirements for common and common stock
equivalent shares issued during the 12-month period prior to filing of an
initial public offering to be included in the calculation of earnings per
share as if they were outstanding for all periods presented using the
treasury stock method assuming the initial public offering price. In 1998,
the SEC issued new requirements for dilutive common stock equivalent shares.
All earnings (loss) per share amounts for all periods have been presented to
conform with FAS 128 and the new SEC requirements.
3. COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement 130, REPORTING
COMPREHENSIVE INCOME. Statement 130 establishes new rules for the reporting
and display of comprehensive income and its components; however the
adaptation of this Statement has no impact on the Company's net income or
shareholders' equity. Statement 130 requires the Company's foreign currency
translation adjustments, which are reported separately in shareholders'
equity to be included in other comprehensive income.
During the third quarter of 1998 and 1997, total comprehensive income
amounted to $417,000 and $877,000. For the first nine months of 1998 and
1997, total comprehensive loss and income, respectively, amounted to
($253,000) and $1.5 million.
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<PAGE>
4. SOFTWARE REVENUE RECOGNITION
As of January 1, 1998, the Company adopted AICPA SOP 97-2, Software
Revenue Recognition, which was effective for transactions that the Company
entered into in 1998. Prior years were not restated. The effect of adopting
SOP 97-2 was not material.
5. INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------- -----------
<S> <C> <C>
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted income per share -
net income ........................................... $ 113 $1,012
----------- -----------
----------- -----------
Denominator:
Denominator for basic income per share - weighted
average common shares ................................ 6,789 6,798
Effect of dilutive securities:
Stock options based on the treasury
stock method using average market price .............. 194 595
----------- -----------
Denominator for diluted income per share ............... 6,983 7,393
----------- -----------
----------- -----------
Basic income per share ..................................... $ 0.02 $ 0.15
----------- -----------
----------- -----------
Diluted income per share ................................... $ 0.02 $ 0.14
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
<S> <C> <C>
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted income per share -
net income(loss) ..................................... ($ 388) $1,701
------------ ------------
------------ ------------
Denominator:
Denominator for basic income per share - weighted
average common shares ................................ 6,861 6,768
Effect of dilutive securities:
Stock options and warrants based on the treasury
stock method using average market price .............. -- 505
------------ ------------
Denominator for diluted income per share ............... 6,861 7,273
------------ ------------
------------ ------------
Basic income (loss) per share .............................. ($0.06) $ 0.25
------------ ------------
------------ ------------
Diluted income (loss) per share ............................ ($0.06) $ 0.23
------------ ------------
------------ ------------
</TABLE>
For the nine months ended September 30, 1998, the effect of outstanding
options and warrants have been excluded from the diluted calculation because
they are antidilutive.
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<PAGE>
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods ........... $1,427 $1,303
Work in process .......... 82 157
Purchased parts .......... 1,828 2,005
------------ ------------
$3,337 $3,465
------------ ------------
------------ ------------
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Conditions and Results
of Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes. Further
reference should be made to the Company's 1997 Annual Report to Shareholders.
RESULTS OF OPERATIONS
The following table sets forth for the period indicated the percentage
of total revenue represented by each line item in the Company's condensed
consolidated statements of income and the percentage change from comparative
prior period in each line item.
<TABLE>
<CAPTION>
Percent of Period-to-Period
Net Sales Percentage Change
------------------------- --------------------
Three months Ended Three months Ended
September 30, September 30, 1998
1998 1997 Compared to 1997
------- ------- --------------------
<S> <C> <C> <C>
Net sales .................................... 100.0% 100.0% (7.4%)
Cost of sales ................................ 25.4 26.6 (11.7)
-------- -------
Gross profit ................................. 74.6 73.4 (5.9)
Operating expenses:
Sales, general and administrative ....... 48.4 45.3 (0.9)
Research and development ................ 26.7 18.7 32.3
-------- -------
Total operating expenses ..................... 75.1 64.0 8.8
-------- -------
Loss from operations ......................... (0.5) 9.4 (105.1)
Interest income and other .................... 1.8 1.7 3.4
Interest expense ............................. -- -- --
-------- -------
Income (loss) before income taxes ............ 1.3 11.1 (88.9)
Income taxes ................................. .2 1.7 (89.4)
-------- -------
Net income ................................... 1.1% 9.4% (88.8%)
-------- -------
-------- -------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PERCENT OF PERIOD-TO-PERIOD
NET SALES PERCENTAGE CHANGE
-------------------------------- --------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, 1998
1998 1997 COMPARED TO 1997
------------- ------------- --------------------------
<S> <C> <C> <C>
Net sales ............................... 100.0% 100.0% (7.8%)
Cost of sales ........................... 26.2 27.0 (10.6)
------------- -------------
Gross profit ............................ 73.8 73.0 (6.7)
Operating expenses:
Sales, general and administrative .. 49.6 46.6 (1.8)
Research and development ........... 27.7 21.2 20.5
------------- -------------
Total operating expenses ................ 77.3 67.8 5.2
------------- -------------
Loss from operations .................... (3.5) 5.2 (164.2)
Interest income and other ............... 2.2 1.6 19.1
Interest expense ........................ -- -- --
------------- -------------
Income (loss) before income taxes ....... (1.3) 6.8 --
Income taxes ............................ 0.1 1.1 --
------------- -------------
Net income (loss) ....................... (1.4%) 5.7% --
------------- -------------
------------- -------------
</TABLE>
NET SALES
Net sales decreased by 7.4% to $10.0 million from $10.8 million for the
quarters ended September 30, 1998 and 1997, respectively. For the first nine
months of 1998, revenue decreased by 7.8% to $27.4 million from $29.7 million
for the same period of 1997. These decreases were primarily attributable to
the reduction in unit sales of higher priced debug solutions, and to a lesser
extent currency exchange rate fluctuations affecting international sales. The
decreases were partially offset by an increase in unit sales of the low cost
debug solutions and to a lesser extent, consulting services. The Company's
net sales are presently derived predominantly from sales of software design,
debugging, and testing solutions and support and consulting service revenues.
The Company generally recognizes revenues from product sales upon shipment.
Product support revenues decreased by 6.3% over the prior year's three months
but increased as a percentage of sales to 11.4% from 11.2%. The revenue
decrease relates to reduced revenue levels in prior quarters that the
associated service contracts are sold against, but recognized ratably over
the life of each maintenance contract, typically 12 months. Product support
revenues increased by 1.5% and increased as a percentage of sales to 12.7%
from 11.5% over the prior years nine months. The increases in product support
revenue as a percentage of net sales is due primarily to the continued pro
rata recognition of revenue from product support contracts entered into in
prior periods, in combination with a decrease in product sales revenue
compared to prior periods.
International sales expressed in U.S. dollars decreased by 30.5% for the
quarter ended September 30, 1998 over the comparable period of 1997, to 42.2%
of net sales as compared to 56.2% of net sales in the prior comparable
quarter. For the nine months ending September 30, 1998, international sales
decreased 23.6% over the same period in 1997, representing 43.2% of the total
sales versus 52.1% in the prior comparable period. The reduction in
international revenues as expressed in U.S. dollars is primarily attributable
to the Asian financial crisis that resulted in decreases in unit sales and
average selling price in Japan and other Pacific Rim nations and currency
exchange rates, and to a lesser extent, decreases in units sales in Europe.
The Company's sales through its foreign subsidiaries are generally
denominated in local currencies, and as a result, fluctuations in currency
exchange rates can have a
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<PAGE>
significant effect on the Company's reported net sales. Had the exchange
rates remained the same from the prior comparable periods, especially in
Japan, overall company sales would have decreased 4.3 percentage points for
the quarter ended September 30, 1998 and decreased 3.6 percentage points for
the nine months ended September 30, 1998. The Company is unable to predict
currency exchange rate fluctuations and anticipates that such fluctuations
will continue to affect its net sales to varying degrees in the future. The
Company expects international sales, especially in Japan, to continue to
account for a significant percentage of its net sales.
GROSS PROFIT
The Company's gross profit decreased to $7.4 million, or 74.6% of net
sales, from $7.9 million, or 73.4% of net sales, in the quarters ended
September 30, 1998 and 1997, respectively. For the nine months ending
September 30, 1998, the Company's gross profit decreased to $20.2 million
from $21.7 million in the prior comparable period, representing 73.8% and
73.0% of net sales, respectively. The increase in gross profit as a
percentage of net sales was primarily attributable to an increase in net
sales of the higher margin low cost debug solutions, decrease in third party
royalty fees and an increase in patent and software licenses that had nominal
costs. These were partially offset by lower unit production over which to
spread fixed manufacturing overhead costs and to a lesser extent due to
declines in sales revenue due to unfavorable currency exchange rate
fluctuations. The company expects its gross profit to fluctuate based upon
its product mix, geographic mix, product and patent licenses and variances in
volume and related absorption of factory overhead costs.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses were $4.8 million or 48.4% of
net sales, and $4.9 million, or 45.3% of net sales, for the quarters ended
September 30, 1998 and 1997, respectively. For the nine month periods ended
September 30, 1998 and 1997, sales, general and administrative expenses were
$13.6 million or 49.6% of net sales, and $13.8 million or 46.6% of net sales,
respectively. The dollar amount decreases between comparable periods were
primarily attributable to reduction in foreign currency exchange losses and
promotional expenses, which were partially offset by increased compensation
related expense in connection with the company's expansion of its sales and
marketing efforts. The percentage increase between comparable periods was
primarily attributable to lower revenues for the quarter ending September 30,
1998. The Company expects its sales and marketing expenditures to continue to
increase in absolute dollars in the future as it introduces and markets new
products, and continues to expand its sales, general and administrative
organization.
Foreign exchange gains and losses are included in sales, general and
administrative expenses. In order to mitigate certain intercompany risks
associated with exchange rate fluctuations, the Company, does from time to
time, hedge a portion of its foreign exchange risk in Japan as it relates to
the trade debt the Company's Japanese subsidiary owes to the Company.
Although the Company generally plans to continue to engage in exchange rate
hedging activities with respect to certain exchange rate risks, there can be
no assurance that it will do so or that any such activities will successfully
protect the Company against such risks.
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<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.7 million, or 26.7% of net
sales, and $2.0 million, or 18.7% of net sales, for the quarters ended
September 30, 1998 and 1997, respectively. For the nine month periods ending
September 30, 1998 and September 30 1997, research and development expenses
were $7.6 million, or 27.7% of net sales, and $6.3 million, or 21.2% of net
sales, respectively. The increase in the dollar amount between comparable
periods was primarily attributable to an increase in contract labor,
headcount and compensation related expenses which was partially offset by a
reduction in recruiting costs. The Company intends to continue to make
substantial investments in product development, including development of
software design, debugging and test tools for additional embedded
microprocessors as well as continued advanced development in new product and
market directions. As a result, the Company anticipates that net research and
development expenses are likely to increase for the foreseeable future.
OTHER
The Company's interest (net) and other income increased by $9,000
between the comparable three month periods and $107,000 between the
comparable nine month periods due primarily to an increase in marketable
securities generated from operations and a one time interest payment for
settlement of a business tax refund.
TAXES
The Company's estimated annualized effective tax rate has been reduced
from 15% in 1997 to 0% in 1998. The company anticipates that, for tax
purposes, deductible temporary differences will result in a loss for the year
and accordingly no current tax liability. A full valuation allowance has been
provided for all deferred tax assets, including net operating loss
carryforwards. (See Note 7 of "Notes to Consolidated Financial Statements"
included in the Company's 1997 Annual Report to Shareholders.)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for the financing of inventory,
capital equipment and accounts receivable, and for investment in product
development activities, new technologies and potential company or product
line acquisitions. Proceeds from the Company's initial public offering were
$13.0 million net of costs. Since the offering, the Company has used $3.5
million to purchase capital equipment, $2.4 million to pay off bank debt, $.5
million to purchase a product line and the remaining proceeds of $6.6 million
have been invested in short term commercial and government paper and money
market funds. For the nine months ended September 30, 1998 and 1997, the
Company generated $465,000 and $2.9 million, respectively, of cash from
operations, and utilized $1.6 million and $4.0 million, respectively, of cash
for purchases of short-term investments and equipment. As of September 30,
1998, the Company had working capital of $19.2 million, including $15.5
million of cash, cash equivalents and short-term investments.
The Company believes that its existing working capital, together with
funds from operations and available revolving credit line, will provide the
Company with sufficient funds to finance its operations for at least the next
12 months. The Company's future capital requirements will, however, depend on
a number of factors, including costs associated with product development
efforts, the success of the commercial introduction of the Company's new
products and the acquisition of complementary businesses, products or
technologies. To the extent additional capital is required, the Company may
sell additional equity, debt or convertible securities, or obtain additional
credit facilities.
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<PAGE>
IMPACT OF YEAR 2000
The Company is taking steps to evaluate and minimize the risk presented by
the potential impact of the Year 2000 issue. The Company formed a committee
to conduct an assessment of the Company's preparedness for the Year 2000, as
well as the preparedness of third parties relevant to the Company's business.
The assessment consists of five phases: Awareness, which consist of making
Company personnel, and those at third parties, aware of the Year 2000 issue;
Inventory, which consist of identifying the Company's operations or systems
which are Year 2000 sensitive; Analysis, which consists of determining
whether sensitive areas will in fact be adversely impacted by Year 2000
issues; Remediation, which consists of addressing potential Year 2000 issues;
and Contingency Planning, which consists of developing strategies for those
areas where remediation may not be effective or practicable. In conducting
its assessment, the committee evaluated the Company's internal information
system, the engineering and product development software, the Company's
hardware, and general facilities infrastructure. The assessment has been
completed for the Company's information system and general facilities
infrastructure. The Company has completed the awareness and inventory phases
with respect to other systems, and believes it will have completed the
analysis phase by the end of November, 1998. Based on results of analysis
conducted to date, the Company believes the remediation phase will be
completed prior to December, 1998. The Company anticipates that it will
complete its contingency planning within 2 months after completing the other
phases of its assessment.
The Company's business operations information system was upgraded in the
standard course of systems maintenance early in 1998. The current version has
been certified by Oracle to be Year 2000 compliant. The Company is currently
in the analysis phase with respect to its assessments of its own product. The
Company believes it will have completed the analysis and remediation by
March, 1999.
The Company estimates that it has expended approximately $100,000 in
assessing and re-mediating internal Year 2000 issues, in addition to those
upgrades that have been made as part standard system maintenance. The Company
does not believe that is assessment and remediation activities have resulted
in any material delay or deferral of systems maintenance or upgrades. The
Company believes the additional aggregate costs of its internal assessment
and upgrade, other than those implemented in the course of normal maintenance
and equipment upgrades, will not exceed $150,000, to be expended over the
next two to three quarters.
At this point, the Company cannot predict the effect of the Year 2000 problem
on its suppliers or the resulting effect on the Company. The Company has not
yet developed a contingency plan to operate in the event that critical
systems of vendors, suppliers, or other third parties are not Year 2000
compliant and have a material adverse effect on the Company. The Company
expects to develop such contingency plan by March, 1999. If any of the
Company's critical systems are not in fact Year 2000 compliant, or if
preventive and/or corrective actions by those entities with whom the Company
does business are not made in a timely matter, the Year 2000 issue could have
a material adverse effect on the Company's business, financial condition, and
result of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Statements in this report concerning sales, costs, expenses, adequacy of
working capital and other matters which are not historical facts, constitute
forward-looking statements which are subject to a
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<PAGE>
number of risks and uncertainties which might cause actual results to differ
materially from stated expectations. Such risks and uncertainties include
delays in shipments of the Company's new products, declining product prices
and margins, ability of its suppliers to provide components and assemblies,
uncertain market acceptance of new products, growth in the marketplace in
which the Company operates, competitive product offerings, continuation of
Asian financial crisis, unfavorable foreign currency fluctuations and adverse
changes in general economic conditions in any of the countries in which the
Company does business, level of compliance with Year 2000 issues by the
Company and third parties and other risks set forth in the Company's filings
with the Securities and Exchange Commission, including its annual report for
the year ended December 31, 1997 on Form 10-K. During the last twelve months,
the Company's competitors have continued to make a variety of product
announcements and offerings. The Company continues to release new versions of
its product lines and the successful acceptance of these products will be a
key determinant of future growth. The impact of any of these factors is
difficult to predict or forecast.
The Company's future earnings and stock price may be subject to
significant volatility, particularly on a quarterly basis, due to a variety
of factors, including factors noted above. Any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate
and significant adverse effect on the trading price of the Company's common
stock in any given period. Additionally, the Company often does not learn of
such shortfalls until late in the fiscal quarter, or even after the quarter
is over, at which time budgeted expenses have already been committed, which
could result in an even more immediate and adverse effect on the trading
price of the Company's common stock. The Company participates in a highly
dynamic industry, which often results in significant volatility of the
Company's common stock price. Consequently, purchasing or holding of the
Company's stock involves a high degree of risk.
- 13 -
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report.
None.
(B) Report on Form 8-K
The registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Redmond, State of Washington, on November 6, 1998.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
By /s/ A. James Beach
------------------
A. James Beach
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
- 15 -
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