<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Applied Microsystems Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
(3) Filing Party:
------------------------------------------------------------------------
(4) Date Filed:
------------------------------------------------------------------------
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
5020 148TH AVENUE N.E.
REDMOND, WASHINGTON 98052
---------------------
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
---------------------
To the Shareholders
OF APPLIED MICROSYSTEMS CORPORATION:
The Annual Meeting of Shareholders of Applied Microsystems Corporation, a
Washington corporation (the "Company"), will be held on May 22, 1998, at 11:00
am, Pacific Daylight Time, at the Company's headquarters, 5020 148th Avenue
N.E., Redmond, WA, for the following purposes as more fully described in the
accompanying Proxy Statement:
1. To elect four directors to serve until the 1999 Annual Meeting of
Shareholders or until their earlier retirement, resignation or
removal;
2. To consider and approve an amendment to the Company's 1992 Performance
Stock Plan;
3. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company's fiscal year ending December 31, 1998; and
4. To transact such other business as may properly come before the
meeting or any adjournments thereof.
Only shareholders of record at the close of business on April 6, 1998 will
be entitled to vote at the meeting. A list of shareholders as of that date will
be available at the meeting and for ten days prior to the meeting at the
Company's headquarters, 5020 148th Avenue N.E., Redmond, Washington 98052.
By order of the Board of Directors
/s/ Robert L Deinhammer
Robert L. Deinhammer
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Redmond, Washington
April 10, 1998
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT!
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE>
---------------
PROXY STATEMENT
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ANNUAL MEETING AND PROXY SOLICITATION INFORMATION. . . . . . . . . . . . . . . . . .1
BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Meetings of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Compensation of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Committees of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Nominees for Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
VOTING SECURITIES AND PRINCIPAL HOLDERS. . . . . . . . . . . . . . . . . . . . . . .4
Ownership Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Exchange Act Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
COMPENSATION AND BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Executive Officer Compensation. . . . . . . . . . . . . . . . . . . . . . . . .6
Compensation Committee Report on Executive Compensation . . . . . . . . . . . .7
Executive Employment Contracts. . . . . . . . . . . . . . . . . . . . . . . . 10
PROPOSAL 1 - ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . 10
PROPOSAL 2 - APPROVAL OF AMENDMENT TO 1992 PERFORMANCE STOCK PLAN. . . . . . . . . 10
PROPOSAL 3 - APPOINTMENT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . 12
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . 13
</TABLE>
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<PAGE>
PROXY STATEMENT
ANNUAL MEETING AND PROXY SOLICITATION INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Applied Microsystems Corporation, a
Washington corporation (the "Company"), for use at the Annual Meeting of
Shareholders on May 22, 1998, and at any adjournments thereof. This Proxy
Statement, a proxy card, and the Report of the President together with the
Company's Form 10-K as filed with the Securities and Exchange Commission on,
March 30, 1998 (hereinafter, the "Annual Report"), including financial
statements for its fiscal year ended December 31, 1997, are being sent to all
shareholders of record as of the close of business on April 3, 1998, for
delivery beginning on or about April 17, 1998.
At the close of business on March 20, 1998, there were 6,904,015 shares of
Common Stock of the Company outstanding. Only holders of record of the shares
outstanding at such time will be entitled to vote at the meeting. The presence
at the meeting of at least a majority of such shares, either in person or by
proxy, is required for a quorum. Proxies are solicited to give all shareholders
who are entitled to vote on the matters that come before the meeting the
opportunity to do so, whether or not they choose to attend the meeting in
person.
If you are a shareholder of record, you may vote by using the proxy card
enclosed with this Proxy Statement. When your proxy card is returned properly
signed, the shares represented will be voted according to your directions. You
can specify how you want your shares voted on each proposal by marking the
appropriate boxes on the proxy card. The proposals are identified by number and
a general subject title on the proxy card. Please review the voting instructions
on the proxy card and read the text of the proposals and the position of the
Board of Directors in the Proxy Statement prior to marking your vote. If your
proxy card is signed and returned without specifying a vote or an abstention on
any proposal, it will be voted according to the recommendations of the Board of
Directors on that proposal. That recommendation is shown for each proposal on
the proxy card. For the reasons stated in more detail later in the Proxy
Statement, the Board of Directors recommends a vote FOR each of the five
individuals nominated to serve as a director, FOR approval of the amendment to
the Company's 1992 Performance Stock Plan, and FOR ratification of the
appointment of Ernst & Young LLP as independent auditors. If you hold shares of
Common Stock through a brokerage firm or other intermediary, you must provide
instructions on voting to your nominee holder.
The Board of Directors knows of no other matters which are to be presented
at the meeting. However, if any other matters are properly presented for action,
the proxies named on the proxy card will be authorized by your proxy to vote on
them in their discretion.
On each matter properly brought before the meeting, shareholders will be
entitled to one vote for each share of Common Stock held. Under Washington law
and the Company's Second Restated Articles of Incorporation and Restated Bylaws,
if a quorum exists at the meeting: (a) the four nominees for director who
receive the greatest number of votes cast in the election of directors will be
elected; (b) the proposal to approve the amendment to the Company's 1992
Performance Stock Plan will be approved if holders of a majority of the
Company's outstanding shares of Common Stock vote in favor of the proposal; and
(c) the proposal to ratify the appointment of auditors will be approved if the
number of votes cast in favor of the proposal exceeds the number of votes cast
against it.
Shareholders may abstain from voting for one or more of the nominees for
director and may abstain from voting on the proposals to approve the amendment
to the Company's 1992 Performance Stock Plan, or to ratify the appointment of
auditors. Abstention from voting or a broker non-vote for a nominee for director
may make it less likely that the nominee will be one of the five nominees for
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<PAGE>
director who receive the greatest number of votes cast. Abstention from voting
or a broker non-vote on the proposal to approve the amendments to the Company's
1992 Performance Stock Plan will have the same effect as a vote against the
proposal, since holders of a majority of the Company's outstanding Common Stock
must vote in favor of the proposal in order for it to be approved. Abstention
from voting or a broker non-vote on the proposal to ratify the appointment of
auditors will have no effect, since approval of each of this proposal is based
solely on the number of votes actually cast.
If you execute a proxy, you may revoke it by taking one of the following
three actions: (a) by giving written notice of the revocation to the Secretary
of the Company at its principal executive offices; (b) by executing a proxy with
a later date and delivering it to the Secretary of the Company at its principal
executive offices; or (c) by personally attending and voting at the meeting.
The Company will bear the expense of preparing, printing and distributing
proxy materials to its shareholders. In addition to solicitations by mail, a
number of regular employees of the Company may solicit proxies on behalf of the
Board of Directors in person or by telephone. The Company will also reimburse
brokerage firms and other intermediaries for their expenses in forwarding proxy
materials to beneficial owners of the Company's Common Stock.
BOARD OF DIRECTORS
The business of the Company is managed under the direction of a Board of
Directors consisting of four directors. The following individuals are currently
serving as directors: Robert L. Deinhammer, Elwood D. Howse, Jr., Anthony
Miadich (Chairman), and Paul N. Risinger.
The full Board of Directors met six times during the Company's fiscal year
ended December 31,1997. No incumbent member attended fewer than 75% of the total
number of meetings of the Board of Directors and of any Board committees of
which he was a member during that fiscal year.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company or representatives of
shareholders of the Company receive $500 for each Board meeting attended ($200
for each Board meeting at which such director participated by telephone or
teleconference). Messrs. Risinger and Howse are currently the only such
directors.
The Company also has established a Directors Stock Option Plan (the
"Director Plan"), under which a grant of a nonqualified stock option covering
2,500 shares of Common Stock is automatically made to each outside director on
the date of each annual meeting of shareholders. During the fiscal year ended
December 31, 1997, 7,500 options were granted under the Director Plan.
COMMITTEES OF THE BOARD
Committees of the Board consist of an Audit Committee and a Compensation
Committee. The Audit Committee, currently composed of Messrs. Howse (Chairman),
Miadich and Risinger, reviews the Company's internal accounting procedures and
consults with and reviews the services provided by the Company's independent
auditors. The Audit Committee met once during the fiscal year ended December
31,1997. The Compensation Committee, currently composed of Messrs. Howse,
Miadich, and Risinger, reviews and recommends to the Board the compensation and
benefits to be provided to the Company's officers and reviews general policy
matters relating to employee compensation and benefits. The Compensation
Committee met once during the fiscal year ended December 31,1997. The Company
does not have a Nominating Committee.
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<PAGE>
NOMINEES FOR DIRECTOR
The following individuals, each of whom currently serves as a director of
the Company, have been nominated for re-election at the meeting:
ROBERT L. DEINHAMMER joined the Company in July 1992 and has served as its
President, Chief Executive Officer and a Director since July 1992. Before
joining the Company, he served as an independent consultant from January 1991 to
July 1992, and held senior management positions at several high-technology
companies, including President and Chief Operating Officer of ADAC Laboratories
from May 1985 to December 1990. From April 1984 to May 1985, Mr. Deinhammer
served as President and Chief Operating Officer of Silicon General, after
serving as Vice President and General Manager of one of its operating divisions
from April 1979 to March 1984.
ANTHONY MIADICH has served as a Director of the Company since January 1990,
and as its Chairman of the Board since August 1992. In addition, Mr. Miadich
served as the Company's Interim Chief Executive Officer from April 1992 to July
1992. Since 1987, he has served as the Managing Partner of Orien Ventures, a
venture capital firm, and since 1988, has been a General Partner of Orien II,
L.P., a venture capital fund ("Orien"). Mr. Miadich has also served as Chairman
of the Investment Committee of the Indonesian Growth fund, a venture firm, since
1993. He is also a director of other private portfolio companies.
ELWOOD D. HOWSE, JR. has served as a Director of the Company since February
1992. Mr. Howse has served as President of Cable & Howse Ventures, a Northwest
venture capital management firm, since 1981, and as General Partner of the CH
Partners venture funds. He is also a Director of OrthoLogic Corporation, which
is listed on the Nasdaq National Market as well as other private companies.
PAUL N. RISINGER has served as a Director of the Company since December
1993. From 1989 to 1996, he was Vice Chairman of the Board of SymmetriCom,
Inc., which is listed on the Nasdaq National Market, as well as a Director of
several of that company's subsidiaries, including Linfinity Microelectronics,
Inc. and Telecom Solutions. He is presently a consultant in the electronics
industry.
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<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS
OWNERSHIP INFORMATION
The following table sets forth, as of March 20, 1998, certain information
regarding beneficial ownership of the Company's Common Stock (a) by each person
known to the Company to be the beneficial owner of more than five percent of the
outstanding Common Stock, (b) by each director and nominee for director, (c) by
the Chief Executive Officer and the other executive officers of the Company
whose total annual salary and bonus, for the fiscal year ended December 31,
1997, exceeded $100,000, and (d) by all of the Company's executive officers and
directors as a group. Unless otherwise noted, the named beneficial owner has
sole voting and investment power.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF PERCENT OF
NAME AND ADDRESS COMMON STOCK COMMON STOCK
BENEFICIALLY OUTSTANDING
OWNED(1)
<S> <C> <C>
Kopp Investment Advisors, Inc. (2) 1,653,150 24.2%
6600 France Avenue South, Suite 672
Edina, MN 55435
Anthony Miadich(3)
Orien II, L.P. 1,308,757 19.2
c/o Orien Ventures
300 Oswego Point Dr., Suite 100
Lake Oswego, OR 97034
Robert L. Deinhammer 567,494 8.3
c/o Applied Microsystems Corporation
5020 148th Avenue N.E.
Redmond, WA 98073-9072
Onex Corporation 521,360 7.6
161 Bay Street, Ste. 4900
Toronto, Ontario
Canada M5J 251
A. James Beach(4) 93,174 1.4
Douglas A. Fullaway(5) 61,515 *
Elwood D. Howse, Jr.(6) 38,231 *
Brian T. Crowley(7) 37,510 *
Larry Ritter(8) 24,134 *
Paul Risinger(9) 15,000 *
All executive officers and Directors 2,108,305 30.9%
as a group (8 individuals)(10)
</TABLE>
- -------------------------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission and includes shares over which the
indicated beneficial owner exercises voting
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<PAGE>
and/or investment power. Shares of Common Stock subject to options
currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person holding
the options but are not deemed outstanding for computing the percentage
ownership of any other person. Except as indicated, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Based entirely on information contained in the Schedule 13G filed, Kopp
Investment Advisors disclaims beneficial ownership of such shares.
(3) Includes 23,039 shares subject to presently exercisable options issued to
Mr. Miadich, 2,500 of which option shares are subject to the Company's
right to repurchase under specified circumstances. Mr. Miadich is a
managing general partner of Orien Venture Partners, L.P., the general
partner of Orien II Partners, L.P., which is the general partner of
Orien, and shares voting and investment power over shares held by Orien
with George Kalan, a general partner of Orien Venture Partners, L.P.
(4) Includes 30,000 shares subject to presently exercisable options, 35,250
are subject to the Company's right to repurchase under specified
circumstances, which right to repurchase does not apply in the event of
termination of employment on account of death or disability or certain
involuntary terminations occurring within 18 months following a change of
control of the Company.
(5) Includes 44,000 shares subject to presently exercisable options, 33,500
of which are subject to the Company's right to repurchase under specified
circumstances, which right to repurchase does not apply in the event of
termination of employment on account of death or disability or certain
involuntary terminations occurring within 18 months following a change of
control of the Company.
(6) Represents 7,500 shares subject to presently exercisable options, 2,500
of which are subject to the Company's right to repurchase under specified
circumstances.
(7) Mr. Crowley terminated his employment with the company on 12/15/97.
(8) Includes 18,750 shares subject to presently exercisable options, 18,750
of which are subject to the Company's right to repurchase under specified
circumstances, which right to repurchase does not apply in the event of
termination of employment on account of death or disability or certain
involuntary terminations occurring within 18 months following a change of
control of the Company.
(9) Represents 15,000 shares subject to presently exercisable options, 2,500
of which are subject to the Company's right to repurchase under specified
circumstances.
(10) Includes 138,289 shares subject to presently exercisable options, 95,000
of which are subject to the Company's right to repurchase under specified
circumstances.
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<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires that the Company's officers and directors, and persons
who own more than ten percent of a registered class of the Company's equity
securities, file reports of ownership and changes of ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent shareholders are required by SEC regulation to furnish the
Company with copies of all such reports they file.
Based solely on its review of the copies of such reports received by the
Company, and on written representations by the Company's officers and directors
regarding their compliance with the applicable reporting requirements under
Section 16(a) of the Exchange Act, the Company believes that, with respect to
its fiscal year ended December 31, 1997, all of the Company's officers and
directors, and all of the persons known to the Company to own more than ten
percent of its Common Stock, complied with all such reporting requirements.
COMPENSATION AND BENEFITS
EXECUTIVE OFFICER COMPENSATION
COMPENSATION SUMMARY. The following table sets forth information regarding
compensation earned during the Company's fiscal year ended December 31, 1997,
and during the two preceding fiscal years, by the Chief Executive Officer and
the other executive officers whose total annual salary and bonus for the fiscal
year ended December 31, 1996, exceeded $100,000 (the "named executive
officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------ -----------------
SECURITIES
NAME AND FISCAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) (BONUS(1)($) STOCK OPTIONS(#) COMPENSATION(2)($)
------------------ ---- --------- ------------ ----------------- ------------------
<S> <C> <C> <C> <C> <C>
Robert L. Deinhammer 1997 $310,000 $0 0 $7,918
President and Chief 1996 $294,613 $275,000 0 $7,804
Executive Officer 1995 $275,002 $275,000 0 $2,685
Douglas A. Fullaway 1997 $130,000 $0 0 $4,514
Vice President 1996 $115,893 $89,500 30,000 $3,777
Worldwide Sales 1995 $109,798 $90,200 0 $738
A. James Beach 1997 $125,000 $0 0 $3,132
Vice President, 1996 $112,356 $94,200 30,000 $3,544
Secretary, 1995 $104,902 $85,000 0 $485
Treasurer and Chief
Financial Officer
Larry Ritter 1997 $125,000 $0 0 $2,156
Vice President and 1996 $99,996 $22,000 15,000 $2,596
Division General 1995 $92,304 $22,100 15,000 $467
Manager
Brian Crowley(3) 1997 $131,000 $0 0 $2,933
Vice President and 1996 $99,902 $30,000 15,000 $2,538
Division General 1995 $94,908 $26,000 0 $423
Manager
</TABLE>
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<PAGE>
(1) Bonuses are reflected in the year they were earned, without regard to when
the amounts were received.
(2) Represents employer 401K matching contribution and term life insurance
premiums.
(3) Mr. Crowley terminated his employment with the company on 12/15/98. 1997
salary includes $13,079 of accrued vacation paid at termination.
OPTION EXERCISES. The following table shows information concerning stock
options exercised by the named executive officers during the Company's fiscal
year ended December 31, 1997, including the aggregate value of any gains
realized on such exercise. The table also shows information regarding the number
and value of unexercised options held by the named executive officers at the end
of that fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR-END(#) FISCAL YEAR-END($)(2)
ACQUIRED ON VALUE -----------------------------------------------------------
NAME EXERCISE(#) REALIZED($)(1) EXCERISABLE UNEXERCISABLE EXCERISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Douglas A. Fullaway - - 44,000 - $ 246,796 $ -
A. James Beach 10,000 $ 41,250 37,800 - $ 212,020 $ -
Larry Ritter 3,750 $ 55,313 18,750 - $ 105,169 $ -
Brian T. Crowley(3) 4,000 $ 38,500 33,510 - $ 187,958 $ -
</TABLE>
(1) Represents the aggregate estimated fair value, on the date of exercise, of
the shares of Common Stock received on exercise of options, less the
aggregate option exercise price.
(2) Represents the aggregate estimated fair value, on December 31, 1997, of the
shares of Common Stock subject to outstanding in-the-money options, less
the aggregate option exercise price.
(3) Mr. Crowley terminated his employment with the company on 12/15/97.
REPORT ON REPRICING OF OPTIONS. On April 22, 1997, the Company's board of
Directors approved a stock option repricing (the "Repricing") pursuant to which
all employees, including executive officers, holding incentive stock options
with an exercise price above the then current fair market value of the Company's
Common Stock were given the opportunity to exchange such options for new
options.
The decision to approve the Repricing followed a review by the Company's
Board of Directors of existing options grants and the recognition that because
of a significant decline in the market value of the Company's Common Stock, many
of the outstanding options at that time were exercisable at prices which
substantially exceeded the market value of the Company's Common Stock. The
Board of Directors determined that , due to this decline in market value, many
of these options were significantly less likely to serve their purposes of
retaining and motivating employees. In addition, the Board of directors was
advised by management that management believed that employee morale and
productivity would benefit as a result of a repricing. In view of the decline
in market value and in keeping with the Company's philosophy of utilizing equity
incentives to motivate and retain qualified employees, the Board of Directors
felt it was important and in the best interests of the company to regain the
incentive intended to be provided by options to purchase shares of the Company's
Common Stock.
In connection with the Repricing, holders of stock options on April 22,
1997 which had an exercise price greater than $4.13 per share (the "Existing
Options") were offered the opportunity to request that the Company issue new
options ("New Options") having an exercise price equal to $4.13, the closing
market value of a share of the Company's Common Stock on that date (the "Base
Exercise
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<PAGE>
Price"). The New Options modify the exercise price of the Existing Options and
restart the option term and repurchase provisions to April 22, 1997. Otherwise,
the option agreements relating to the New Options are substantially identical to
the option agreements for the Existing Options they replaced. The New Options
were issued under and are governed by the 1992 Performance Stock Plan under
which such options were originally granted.
A total of 66 option holders (constituting 97% of eligible option holders)
holding options to purchase an aggregate of 290,313 shares of Common Stock under
Existing Options elected to participate in the repricing and were issued the
same aggregate number of New Options as they had held Existing Options.
The following table provides information with respect to the Repricing of
options held by the individuals named in the Summary Compensation Table who
participated:
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING LENGTH OF
OPTIONS MARKET PRICE EXERCISE ORIGINAL OPTION
REPRICED OF STOCK AT PRICE AT NEW TERM REMAINING
-------- TIME OF TIME OF EXERCISE AT DATE OF
NAME DATE (#)(1) REPRICING ($) REPRICING ($) PRICE ($) REPRICING
---- ---- ------ ------------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Douglas A. Fullaway 4/22/97 30,000 $4.13 $13.38 $4.13 9.5 years
A. James Beach 4/22/97 30,000 4.13 13.38 4.13 9.5 years
Larry Ritter 4/22/97 15,000 4.13 13.38 4.13 9.5 years
Brian T. Crowley(2) 4/22/97 15,000 4.13 13.38 4.13 9.5 years
</TABLE>
(1) The re-priced options were granted under the 1992 Performance Stock Plan.
Each option is exercisable upon issuance, but shares acquired under the
option may be repurchased by the Company or its assignee if the officer's
employment terminates within the four-year period following the new date of
grant. Such shares are released from repurchase provisions at the rate of
25% of the shares subject to the option on each of the first four
anniversaries of the grant date. The options expire 10 years after grant
date.
(2) Mr. Crowley terminated his employment with the company on 12/15/97.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
setting and administering the policies governing annual compensation of the
executive officers, including the annual management bonus plan and the Company's
Stock Option Plan. The Committee is composed exclusively of directors who are
neither employees nor former employees of the Company nor eligible to
participate in the any of the Company's executive compensation programs.
The Committee's compensation philosophy is to provide salary, bonus and
equity incentives to the Company's officers and other employees through programs
designed to attract and retain the best personnel to allow the Company to
achieve its goals and maintain its competitive posture. The Company seeks to
foster an environment that rewards superior performance and joins the interests
of employees to that of the stockholders through equity incentives.
At the beginning of every year, the Committee reviews with the Chief
Executive Officer and approves, with modifications it deems appropriate, an
annual compensation plan for the Company's
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<PAGE>
executive officers. In making individual base salary decisions, the
Compensation Committee considers each officer's duties, the quality of the
individual's performance, the individual's potential, market compensation
practices, and the contribution the officer has made to the Company's overall
performance. The Compensation Committee also compares the salary of each officer
with other officers' salaries, taking into account the number of years employed
by the Company, the possibility of future promotions and the extent and
frequency of prior salary adjustments.
The Company's bonus plan is a material element to the annual compensation
program and is based upon achieving earnings targets and individual goals.
Individual goals relate to such matters as sales or earnings targets, business
and opportunity development, and staff recruitment, development and the like.
Officers are eligible to receive bonuses semiannually, subject to successful
achievement against these targets and individual goals.
In determining the amount of equity compensation to be awarded to executive
officers in any fiscal year, the Committee considers the current stock ownership
of the officer, relevant industry experience, the impact of the officer's
contribution, the number of years each officer has been employed by the Company,
the possibility of future promotions, and the extent and frequency of prior
option grants.
The Committee reviews and sets the base salary of the Chief Executive
Officer based on the assessment of his past performance and its expectations as
to his future contributions in leading the Company and its business. Mr.
Deinhammer's minimum base compensation level was set pursuant to an employment
agreement signed in 1992. In January 1997, the Committee established a base
salary of $310,000 for Mr. Deinhammer for 1997 which was increased by 5.1% from
1996. The Committee's based its decision on the following aspects of the
Company's performance in 1996: increased sales, enhanced operating margins and
profitability, and achieving internal business goals. The Committee also
considered Mr. Deinhammer's efforts in strengthening the Company's management
team. In addition, the Committee established a progressive bonus program based
upon increasing earnings targets for 1997 that if achieved, qualify Mr.
Deinhammer to receive up to a 100% bonus calculated against base salary. The
Committee concluded that the Company's decline in earnings for 1997 as compared
to 1996 did not entitle Mr. Deinhammer to a bonus.
COMPENSATION COMMITTEE
Elwood D. Howse, Jr.
Anthony Miadich
Paul N. Risinger
-9-
<PAGE>
COMPARATIVE PERFORMANCE GRAPH
Set forth below is a graph comparing the cumulative total return to shareholders
on the Company's Common Stock with the cumulative total return of the Nasdaq
Stock Market (U.S. Companies) ("Nasdaq Market Index") and the Nasdaq Computer
and Data Processing Index for the period beginning on November 14, 1995(1), the
date of the Company's initial public offering, and ended on December 31, 1997.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG APPLIED MICROSYSTEMS CORPORATION COMMON STOCK,
THE NASDAQ MARKET INDEX AND
THE NASDAQ COMPUTER & DP INDEX
[GRAPH]
<TABLE>
<CAPTION>
-------------------------------------------
11/14/95 (2) 12/31/95 12/31/96 12/31/97
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<S> <C> <C> <C> <C>
Applied Microsystems Corporation $100.00 $90.00 $132.50 $56.09
Nasdaq Market Index $100.00 $101.26 $124.56 $152.83
Nasdaq Computer and DP Index $100.00 $99.32 $122.66 $150.56
- ------------------------------------------------------------------------------
</TABLE>
(1) For purposes of this presentation, the Company has assumed that its initial
offering price of $10.00 per share would have been the closing sales price
on November 14, 1995, the day prior to commencement of trading.
(2) The total return on the Company's Common Stock and each index assumes the
value of each investment was $100 on November 14, 1995. Return information
is historical and not necessarily indicative of future performance.
-10-
<PAGE>
EXECUTIVE EMPLOYMENT CONTRACTS
Robert L. Deinhammer, the Company's President and Chief Executive Officer,
entered into an employment agreement with the Company dated July 31, 1992, which
expired on December 31, 1997. Mr. Deinhammer's employment is presently "at will"
and not governed by an employment contract.
PROPOSAL 1 - ELECTION OF DIRECTORS
Four directors are to be elected at the annual meeting, to serve until the
1999 Annual Meeting of Shareholders or until their earlier retirement,
resignation or removal. Robert L. Deinhammer, Elwood D. Howse, Jr., Anthony
Miadich, and Paul N. Risinger, all of whom are currently directors of the
Company, have been nominated by the Board of Directors for election at the
annual meeting. The accompanying proxy will be voted for these nominees, except
where authority to so vote is withheld. Should any nominee be unable to serve,
the proxy will be voted for such person as is designated by the Board of
Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED IN PROPOSAL 1.
PROPOSAL 2 - APPROVAL OF AMENDMENT TO 1992 PERFORMANCE STOCK PLAN
The Board of Directors has adopted an amendment to the Company's 1992
Performance Stock Plan (the "1992 Plan") that, subject to shareholder approval,
increases by 400,000 shares the number of shares of Common Stock reserved for
issuance upon exercise of options under the 1992 Plan. The Board of Directors
believes that the additional shares will, among other things, promote the
interests of the Company and its shareholders by assisting the Company in
attracting, retaining and stimulating the performance of officers and employees.
As of March 1, 1998, a total of 1,446,963 shares of Common Stock (inclusive of
the additional shares) were available for issuance upon exercise of options
granted or to be granted under the 1992 plan.
SUMMARY OF PLAN
The 1992 Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Code, nonstatutory stock options, stock
appreciation and stock purchase rights, cash bonus rights and stock bonuses to
eligible directors, employees, consultants, advisors and contractors of the
Company and its subsidiaries (collectively, the "Grantees"). The 1992 Plan is
administered by the Compensation Committee of the Board of Directors (the
"Administrator"), which selects the Grantees and determines the type of grant,
number of shares, exercise price, duration, vesting and other relevant terms
subject to the provisions of the 1992 Plan. The plan provides that no Grantee
will receive options to acquire more than 375,000 shares of Common Stock in any
calendar year. The exercise price of all incentive stock options granted under
the 1992 Plan must be at least equal to the fair market value of the Common
Stock on the date of grant. The exercise price of all nonstatutory stock
options and other grants under the 1992 Plan is determined by the Administrator.
The exercise price of any incentive stock option granted to a Grantee holding
more than 10% of the voting power of the capital stock of the Company must equal
at least 110% of the fair market value of the Common Stock on the grant date,
and the term of the option must not exceed five years. The term of all other
options granted under the 1992 Plan may not exceed ten years.
In the event of certain changes in control of the Company, the 1992 Plan
and any options or other unexercised rights granted thereunder will terminate
unless the 1992 Plan is continued and such options
-11-
<PAGE>
and other unexercised rights are assumed, or new options or rights relating
to securities of the successor entity are substituted for such options and
other unexercised rights, with appropriate adjustments. If, in the event of
such change in control, provision is not made for such continuance and
assumption or substitution, the 1992 Plan provides that the rights of each
Grantee thereunder will be accelerated.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES
With respect to incentive stock options, the tax consequences to an
optionee will vary depending on whether certain holding period requirements are
met. In addition, an option will cease to be an incentive stock option, and
thereafter be taxed as a nonqualified stock option, if the optionee exercises
the option more than three months following termination of employment for any
reason other than death or disability or more than one year following
termination of employment on account of disability.
If an optionee acquiring stock pursuant to an incentive stock option does
not dispose of the stock until at least one year after the transfer of the stock
to the optionee and at least two years from the date of grant of the option,
then, subject to the alternative minimum tax rules discussed below, there will
be no tax consequences to the optionee or the Company when the incentive stock
option is granted or when it is exercised. When the stock is ultimately sold,
gain or loss will be determined, based on the difference between the net
proceeds of the sale and the aggregate exercise price paid for the stock, and
the optionee will be required to report such gain or loss as long-term capital
gain or loss on his or her federal income tax return for the year in which the
sale occurs.
If stock acquired upon exercise of an incentive stock option is sold by the
optionee and, at the time of the sale, the holding period requirements described
in the preceding paragraph have not been met, the federal income tax
consequences to the optionee will be as follows:
(a) The optionee will be required to report, on his or her federal income
tax return for the year in which the sale occurs, additional
compensation income equal to the difference between the fair market
value of the stock at the time of exercise of the option and the
exercise price at which the stock was acquired (the Company will
generally be entitled to a compensation deduction in an equivalent
amount.)
(b) For purposes of determining gain or loss upon sale of the stock, an
amount equal to this compensation income will be added to the exercise
price at which the stock was acquired, and the total will be the
optionee's adjusted cost of the stock. Gain or loss will be
determined, based upon the difference between the optionee's adjusted
cost of the stock and the net proceeds of the sale, and the optionee
will be required to report such gain or loss as long-term or
short-term (depending on how long the optionee held the stock) capital
gain or loss on his or her federal income tax return for the year in
which the sale occurs.
When an optionee exercises an incentive stock option, the difference
between the fair market value of the stock on the date of exercise and the
exercise price paid results in an adjustment in computing alternative minimum
taxable income for purposes of Sections 55 ET SEQ. of the Code, which may
trigger alternative minimum tax consequences for optionees. Any alternative
minimum tax that is payable may ultimately be credited against future taxes
owed.
With respect to nonqualified stock options, there are generally no tax
consequences to the optionee or the Company when the option is granted. Upon
exercise of the option, the optionee will be required to report, on his or her
federal income tax return for the year in which the exercise occurs, additional
compensation or self-employment income equal to the difference between the fair
market value of the stock at the time of exercise of the option and the exercise
price at which the stock was
-12-
<PAGE>
acquired (the Company will generally be entitled to a deduction in an equivalent
amount). When the stock is ultimately sold, the transaction will be taxed in the
manner described in subparagraph (b) above for incentive stock options.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE
1992 PERFORMANCE STOCK PLAN.
PROPOSAL 3 - APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed the firm of Ernst & Young LLP as
independent auditors for the Company's fiscal year ending December 31, 1998.
This firm has audited the accounts of the Company since 1986. The firm performed
audit services in connection with the examination of the consolidated financial
statements of the Company for its fiscal year ended December 31, 1997. In
addition, the firm has rendered and will render other services, including the
review of financial statements and related information in various registration
statements and filings with the SEC and limited review of financial statements
and related information contained in quarterly reports provided to shareholders
and the SEC.
If this proposal does not receive the affirmative approval of a majority of
the votes cast on the proposal, the Board of Directors will reconsider the
appointment. Representatives of Ernst & Young LLP are expected to be present at
the annual meeting, will have the opportunity to make a statement if they desire
to do so, and will be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG LLP.
-13-
<PAGE>
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
An eligible shareholder who desires to have a qualified proposal considered
for inclusion in the proxy statement prepared in connection with the Company's
1999 Annual Meeting of Shareholders must deliver a copy of the proposal to the
Secretary of the Company, at the Company's principal executive offices, no later
than December 10, 1998. A shareholder must have been a record or beneficial
owner of at least one percent of the Company's outstanding Common Stock, or
shares of Common Stock having a market value of at least $1,000, for a period of
at least one year prior to submitting the proposal, and the shareholder must
continue to hold the shares through the date on which the meeting is held.
The Company's Restated Bylaws outline procedures, including minimum notice
provisions, that govern the nomination of directors by shareholders and certain
other matters that a shareholder proposes to bring before the annual meeting. A
copy of the pertinent provisions of the Restated Bylaws is available upon
request to A. James Beach, Corporate Secretary, Applied Microsystems
Corporation, 5020 148th Avenue N.E., Redmond, Washington 98052.
IT IS IMPORTANT THAT PROXIES ARE RETURNED PROMPTLY AND THAT YOUR SHARES ARE
REPRESENTED. SHAREHOLDERS ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
APPLIED MICROSYSTEMS CORPORATION
April 10, 1998
Redmond, Washington
-14-
<PAGE>
PROXY
APPLIED MICROSYSTEMS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the Notice of Annual Meeting of
Shareholders of Applied Microsystems Corporation (the "Company"), and the
related Proxy Statement dated April 16, 1997, hereby appoints Robert L.
Deinhammer and A. James Beach, and each of them, proxies for the undersigned,
with full power of substitution, and authorizes them to attend the Annual
Meeting of Shareholders of the Company on May 22, 1998, and any adjournments
thereof, and to vote thereat all shares of Common Stock of the Company that the
undersigned would be entitled to vote if personally present, such proxies being
instructed to vote as specified below, or to the extent not specified, to vote
FOR the election as directors of all nominees named below and FOR proposals 2
and 3 and to vote in their discretion on any other matters presented at the
meeting or any adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER SPECIFIED
ON THE REVERSE BY THE UNDERSIGNED. EXCEPT AS OTHERWISE SPECIFIED, THIS PROXY
WILL BE VOTED FOR THE PROPOSED AMENDMENT TO THE COMPANY'S 1992 PERFORMANCE STOCK
PLAN AND RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE. -
<PAGE>
Please mark your
votes as indicated /X/
in the example
WITHHOLD
AUTHORITY TO VOTE
FOR ALL NOMINEES
FOR LISTED BELOW
PROPOSAL 1: ELECTION OF DIRECTORS / / / /
Nominees: Robert L. Deinhammer,
Elwood D. Howse, Jr.,
Anthony Madich, and
Paul N. Risinger
(INSTRUCTION: To withhold authority to vote FOR any individual nominee, strike a
line through the nominee's name in the list above.)
FOR AGAINST ABSTAIN
PROPOSAL 2: PROPOSED AMENDMENT TO THE / / / / / /
1992 PERFORMANCE STOCK PLAN
PROPOSAL 3: RATIFICATION OF APPOINTMENT OF / / / / / /
INDEPENDENT AUDITORS
PLEASE SIGN AND DATE THIS PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED
ENVELOPE.
Signature Signature Date
------------------------- -------------------- ----------
NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
- --------------------------------------------------------------------------------
- FOLD AND DETACH HERE.-
