<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 June 30, 1999
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
-----------------------
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: 6,737,512 shares outstanding as of August 6, 1999.
This report including exhibits consists of 28 pages. The exhibit index
appears on page 17
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S><C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the quarter and six months ended June 30, 1999 and
1998................................................................................................3
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998...............................4
Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998...............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 4. Submission of matters to a vote of Security Holders................................................14
Item 6. Exhibits and Reports on Form 8-K...................................................................15
Signatures.........................................................................................16
Exhibit Index......................................................................................17
Exhibit 10.18......................................................................................18
</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 JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS , EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
Net sales...................................... $7,435 $9,157 $15,953 $17,408
Cost of sales.................................. 1,972 2,325 4,018 4,638
-------------- -------------- -------------- -------------
Gross profit................................... 5,463 6,832 11,935 12,770
Operating expenses:
Sales, general and administrative......... 4,982 4,418 9,876 8,759
Research and development.................. 2,762 2,583 5,444 4,933
-------------- -------------- -------------- -------------
Total operating expenses....................... 7,744 7,001 15,320 13,692
-------------- -------------- -------------- -------------
Loss from operations........................... (2,281) (169) (3,385) (922)
Interest income and other...................... 175 227 345 422
Interest expense............................... (1) -- (1) (1)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Net income (loss).............................. ($2,107) $58 ($3,041) ($501)
-------------- -------------- -------------- -------------
-------------- -------------- -------------- -------------
Basic income (loss) per share................... ($0.31) $0.01 ($0.45) ($0.07)
Shares used in basic per share calculation...... 6,708 6,914 6,698 6,897
Diluted income (loss) per share................. ($0.31) $0.01 ($0.45) ($0.07)
Shares used in diluted per share calculation.... 6,708 7,113 6,698 6,897
</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>
JUNE 30, DECEMBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................................. $5,688 $6,041
Short term investments................................................ 9,172 11,101
Accounts receivable................................................... 6,558 8,483
Inventories........................................................... 2,835 3,332
Prepaid and other current assets...................................... 719 518
------------------ ------------------
Total current assets.............................................. 24,972 29,475
Property and equipment, net................................................ 2,797 2,918
Other assets............................................................... 997 897
------------------ ------------------
Total assets...................................................... $28,766 $33,290
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $2,751 $3,283
Accrued payroll....................................................... 2,043 1,840
Other accrued expenses................................................ 1,073 1,129
Deferred revenue...................................................... 2,739 3,107
------------------ ------------------
Total current liabilities......................................... 8,606 9,359
Shareholders' equity:
Preferred stock, par value $.01
Authorized - 5,000,000 shares -- --
Common stock, par value $.01
Authorized - 25,000,000 shares
Issued - 6,738,000 and 6,681,000 shares at June 30,
1999 and December 31, 1998, respectively.......................... 25,478 25,383
Cumulative translation adjustment..................................... (705) 120
Accumulated deficit................................................... (4,613) (1,572)
------------------ ------------------
Total shareholders' equity........................................ 20,160 23,931
------------------ ------------------
Total liabilities and shareholders' equity........................ $28,766 $33,290
------------------ ------------------
------------------ ------------------
</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>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------ ------------------
<S> <C> <C>
(IN THOUSANDS)
(UNAUDITED)
Cash flows from operating activities:
Net loss................................................................... ($3,041) ($501)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization......................................... 603 601
Changes in operating assets and liabilities:
Accounts receivable................................................... 1,925 (1,587)
Inventories........................................................... 497 181
Prepaid expenses...................................................... (201) 647
Other assets.......................................................... 17 (43)
Deferred revenue...................................................... (368) 267
Accounts payable and accrued expenses................................. (385) 380
------------------ ------------------
Net cash used in operating activities............................. (953) (55)
Cash flows from investing activities:
Sale of short-term investments........................................ 1,929 336
Property and equipment additions...................................... (599) (553)
------------------ ------------------
Net cash provided by (used in) investing activities............... 1,330 (217)
Cash flows from financing activities:
Sale of common stock to employees..................................... 94 101
Stock options exercised............................................... 1 10
Purchase of treasury stock............................................ -- (327)
------------------ ------------------
Net cash provided by (used in) financing activities............... 95 (216)
Effects of foreign exchange rate changes on cash........................... (825) (170)
------------------ ------------------
Decrease in cash and cash equivalents...................................... (353) (658)
Cash and cash equivalents at beginning of period........................... 6,041 6,336
------------------ ------------------
Cash and cash equivalents at end of period................................. $5,688 $5,678
------------------ ------------------
------------------ ------------------
Supplemental disclosures of cash paid (received):
Interest.............................................................. $1 $1
Income taxes.......................................................... $22 ($57)
</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 three month and six month
periods ended June 30, 1999 and 1998 and the related footnote information are
unaudited and have been prepared on a basis substantially consistent with the
1998 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
1998 Annual Report to Shareholders. The results of operations for the six months
ended June 30, 1999 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 INCOME (LOSS) PER SHARE
Basic earnings per share is computed using the weighted-average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common shares and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation of dilutive earnings per share if their effect
is antidilutive.
3. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net income or loss and current
period translation adjustments which are recorded directly to equity. During the
second quarter of 1999 and 1998, total comprehensive loss amounted to $2.2
million and $21,000, respectively. For the first six months of 1999 and 1998,
total comprehensive loss amounted to $3.9 million and $671,000, respectively.
-6-
<PAGE>
4. INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Numerator for basic and diluted income (loss) per share -
net income (loss).................................................... ($2,107) $58
------------------ ------------------
------------------ ------------------
Denominator:
Denominator for basic income (loss) per share - weighted
average common shares................................................ 6,708 6,914
Effect of dilutive securities:
Stock options based on the treasury
stock method using average market price.............................. -- 199
------------------ ------------------
Denominator for diluted income (loss) per share........................ 6,708 7,113
------------------ ------------------
------------------ ------------------
Basic income (loss) per share.............................................. ($0.31) $0.01
------------------ ------------------
------------------ ------------------
Diluted income (loss) per share............................................ ($0.31) $0.01
------------------ ------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Numerator for basic and diluted loss per share -
net loss............................................................. ($3,041) ($501)
------------------ ------------------
------------------ ------------------
Denominator:
Denominator for basic loss per share - weighted
average common shares................................................ 6,698 6,897
Effect of dilutive securities:
Stock options and warrants based on the treasury
stock method using average market price.............................. -- --
------------------ ------------------
Denominator for diluted loss per share................................. 6,698 6,897
------------------ ------------------
------------------ ------------------
Basic loss per share....................................................... ($0.45) ($0.07)
------------------ ------------------
------------------ ------------------
Diluted loss per share..................................................... ($0.45) ($0.07)
------------------ ------------------
------------------ ------------------
</TABLE>
For the three months and six months ended June 30, 1999 and for the six months
ended June 30, 1998, the effect of outstanding options and warrants has been
excluded from the diluted calculation because they are antidilutive.
-7-
<PAGE>
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------------ ------------------
<S> <C> <C>
(IN THOUSANDS)
Finished goods............................................................. $ 854 $1,501
Work in process............................................................ 23 28
Purchased parts............................................................ 1,958 1,803
------------------ ------------------
$2,835 $3,332
------------------ ------------------
------------------ ------------------
</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 1998 Annual Report to Shareholders.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage
of total revenue represented by each line item in the Company's consolidated
statements of operations and the percentage change from the comparative prior
period in each line item.
<TABLE>
<CAPTION>
Percent of Period-to-Period
Net Sales Percentage Change
-------------------------------- -------------------------
Three months Ended Three months Ended
June 30, June 30, 1999
1999 1998 Compared to 1998
-------------- -------------- -------------------------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% (18.8%)
Cost of sales........................................ 26.5 25.4 (15.2)
-------------- --------------
Gross profit......................................... 73.5 74.6 (20.0)
Operating expenses:
Sales, general and administrative............... 67.0 48.2 12.8
Research and development........................ 37.1 28.2 6.9
-------------- --------------
Total operating expenses............................. 104.1 76.4 10.6
-------------- --------------
Loss from operations................................. (30.6) (1.8) 1,249.7
Interest income and other............................ 2.3 2.4 (22.9)
Interest expense..................................... -- -- --
-------------- --------------
Net income (loss).................................... (28.3%) 0.6% --
-------------- --------------
-------------- --------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percent of Period-to-Period
Net Sales Percentage Change
-------------------------------- -------------------------
Six months Ended Six months Ended
June 30, June 30, 1999
1999 1998 Compared to 1998
-------------- -------------- -------------------------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% (8.4%)
Cost of sales........................................ 25.2 26.6 (13.4)
-------------- --------------
Gross profit......................................... 74.8 73.4 (6.5)
Operating expenses:
Sales, general and administrative............... 61.9 50.3 12.8
Research and development........................ 34.1 28.3 10.4
-------------- --------------
Total operating expenses............................. 96.0 78.6 11.9
-------------- --------------
Loss from operations................................. (21.2) (5.2) 267.1
Interest income and other............................ 2.1 2.3 (18.2)
Interest expense..................................... -- -- --
-------------- --------------
Net loss............................................. (19.1%) (2.9%) 507.0%
-------------- --------------
-------------- --------------
</TABLE>
NET SALES
Net sales decreased by 18.8% to $7.4 million from $9.2 million for
the quarters ended June 30, 1999 and 1998, respectively. For the first six
months of 1999, revenue decreased by 8.4% to $16.0 million from $17.4 million
for the same period of 1998. These decreases were primarily attributable to a
decrease in unit sales of the higher priced debug solutions and to a lesser
extent decrease in unit sales of older low cost debug solutions. The
decreases were partially offset by the increase in unit sales of
CodeTest-Registered Trademark-, revenue from consulting services and
favorable year over year currency exchange rate fluctuations affecting
international sales. The Company's net sales are presently derived
predominantly from sales of software design, debugging, and testing solutions
product support and consulting service revenues. The Company generally
recognizes revenues from product sales upon shipment. Product support
revenues increased by 1.2% over the prior year's three months and increased
as a percentage of sales to 15.9% from 12.8%. For the six month period,
product support revenues increased by 2.5% and increased as a percentage of
sales to 15.0% from 13.4%. The increases in product support revenue as a
percentage of net sales were 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. Product support revenues are recognized ratably over the life
of each maintenance contract, typically 12 months.
International sales expressed in U.S. dollars decreased by 25.2% for
the quarter ended June 30, 1999 over the comparable period of 1998, to 35.8% of
net sales as compared to 38.8% of net sales in the prior comparable quarter. For
the six months ended June 30, 1999, international sales decreased 21.2% over the
same period in 1998, representing 37.6% of total sales versus 43.7% in the prior
comparable period. The reduction in international revenues as expressed in U.S.
dollars was primarily attributable to a decrease in unit sales in Japan, and to
a lesser extent, a decrease in units sales in Europe.
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<PAGE>
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 significant effect on the Company's reported net
sales. Had the exchange rates remained the same from the prior comparable
periods, especially in Japan, the dollar amount of overall company sales would
have decreased 20.5% for the quarter ended June 30, 1999 compared to the
comparable prior period and decreased 10.5% for the six months ended June 30,
1999 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 $5.5 million, or 73.5% of
net sales, from $6.8 million, or 74.6% of net sales, in the quarters ended
June 30, 1999 and 1998, respectively. For the six months ended June 30, 1999,
the Company's gross profit decreased to $11.9 million from $12.8 million in
the prior comparable period, representing 74.8% and 73.4% of net sales,
respectively. For the three months ended June 30, 1999 the decrease in gross
profit as a percentage of sales was primarily attributable to lower unit
production over which to spread fixed manufacturing overhead costs, which was
partially offset by an increase in net sales of higher margin
CodeTest-Registered Trademark- products. For the six months ended June 30,
1999, the increase in gross profit as a percentage of net sales was primarily
attributable to an increase in net sales of the higher margin
CodeTest-Registered Trademark- tools, and to a lesser extent a decrease in
third party royalty fees for product licenses. These were partially offset by
lower unit production over which to spread fixed manufacturing overhead
costs. The Company expects its gross profit to fluctuate based upon its
product mix, geographic mix, product and patent licenses and variances in
volume and the impact on the related absorption of factory overhead costs.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses were $5.0 million or 67.0%
of net sales, and $4.4 million, or 48.2% of net sales, for the quarters ended
June 30, 1999 and 1998, respectively. For the six month periods ended June 30,
1999 and 1998, sales, general and administrative expenses were $9.9 million or
61.9% of net sales, and $8.8 million or 50.3% of net sales, respectively. The
dollar amount increases between comparable periods were primarily attributable
to increased compensation related expense, headcount and promotional costs in
connection with the Company's expansion of its sales and marketing efforts,
which were partially offset by a reduction in professional fees. The percentage
increase in sales, general and administrative expenses as a percentage of net
sales between comparable periods was primarily attributable to lower revenues
than anticipated during the quarter and six months ended June 30, 1999. The
Company expects its sales and marketing expenditures will increase in absolute
dollars in the future but, except for short term fluctuations due to revenue
uncertainties, at a slower rate than the increase in overall revenues.
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 $2.8 million, or 37.1% of net
sales, and $2.6 million, or 28.2% of net sales, for the quarters ended June 30,
1999 and 1998, respectively. For the six month periods ended June 30, 1999 and
June 30, 1998, research and development expenses were $5.4 million, or 34.1% of
net sales, and $4.9 million, or 28.2% of net sales, respectively. The increase
in the dollar amount between comparable periods was primarily attributable to an
increase in headcount and compensation related expenses which was partially
offset by a reduction in prototyping 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 expects that its net research and
development expenses will increase in absolute dollars in the future but, except
for short term fluctuations due to revenue uncertainties, at a slower rate than
the increase in overall revenues.
OTHER
The Company's interest (net) and other income decreased by $52,000
between the comparable three month periods and $77,000 between the comparable
six month periods due primarily to a decrease in short-term investments of
marketable securities.
TAXES
The Company accounts for income tax provision in accordance with SFAS
109, "Accounting for Income Taxes". SFAS 109 requires calculation of an
estimated annual effective tax rate and applies such tax rate to the pre-tax
income of interim periods. The Company anticipates a tax loss for the year, and
accordingly its estimated annual effective tax rate is 0%, and no income tax
provision is required.
A valuation allowance has been provided for all deferred tax assets,
including net operating loss and credit carryforwards. (See Note 7 of "Notes to
Consolidated Financial Statements" included in the Company's 1998 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
sales and marketing expansion, product development activities, new technologies
and potential company or product line acquisitions. Proceeds from the Company's
initial public offering in 1995 were $13.0 million net of costs. Since the
offering, the Company has used $4.6 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 $5.5 million have been invested in short term commercial
and government paper and money market funds. For the six months ended June 30,
1999 and 1998, the Company used $953,000 and $55,000, respectively, of cash from
operations. Investing activities provided $1.3 million during the six months
ended June 30, 1999 from the sale of short term investments partially offset by
equipment purchases. During the six months ended June 30, 1998 investing
activities used $217,000. As of June 30, 1999, the Company had working capital
of $16.4 million, including $14.9 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
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<PAGE>
at least the next 12 months. The Company's future capital requirements will,
however, depend on a number of factors, including costs associated with sales
and marketing expansion, 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.
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 consists of making
Company personnel, and those at third parties, aware of the Year 2000 issue;
Inventory, which consists 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, among other things, the Company's internal
information systems, 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, inventory, analysis,
remediation phases and a contingency plan with respect to other systems.
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 has
completed the analysis and remediation phase with respect to its assessments of
its own products.
The Company estimates that it has expended approximately $175,000 in
assessing and re-mediating internal Year 2000 issues, in addition to those
upgrades that have been made as part of standard system maintenance. The Company
does not believe that its 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 $75,000, to be expended over the next quarter.
The Company cannot predict yet the effect of the Year 2000 problem on
its suppliers or the resulting effect on the Company. The Company has 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. 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 results 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 number
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<PAGE>
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 those set forth under
the heading "Outlook: Issues and Uncertainties " in its annual report for the
year ended December 31, 1998 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.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on May 25, 1999. The
following matters were voted upon by the shareholders with the following
results:
(1) The following persons were elected to serve as directors until the next
Annual Meeting of Shareholders or until their earlier retirement,
resignation or removal: Robert L. Deinhammer, Charles H. House, Elwood D.
Howse, Jr., Anthony Miadich, Paul N. Risinger and Stephen J. Verleye.
The number of votes cast for or withheld for each director
nominee was as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD
------- --- --------
<S> <C> <C>
Robert L. Deinhammer 5,626,253 556,157
Charles H. House 5,630,318 552,362
Elwood D. Howse, Jr. 5,630,118 552,562
Anthony Miadich 5,630,768 551,912
Paul N. Risinger 5,629,718 552,962
Stephen J. Verleye 5,630,348 552,332
</TABLE>
(2) The shareholders voted 3,023,669 shares in the affirmative, 1,332,975
shares in the negative, 15,666 abstained, 1,810,370 broker non-votes and
517,804 other unvoted to stagger the terms of the Board of Directors. Since
an affirmative vote of at least a majority of all outstanding shares of
Common Stock is required for approval of the proposal, it was not adopted.
(3) The shareholders voted 4,905,113 shares in the affirmative, 1,249,773
shares in the negative, 27,794 abstained, and 517,804 other unvoted to
amend the existing Applied Microsystems Corporation 1992 Performance Stock
Plan, as amended, to increase the number of shares issuable thereunder
from 2,575,317 shares to 2,825,317 shares.
(4) The shareholders voted 6,015,246 shares in the affirmative and 157,080
shares in the negative, 10,354 abstained, and 517,804 other unvoted to
ratify the appointment of Ernst & Young LLP, as independent auditors for
the Company's fiscal year ending December 31, 1999.
-14-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report.
10.18 Employment Agreement with Stephen J. Verleye.
(B) Report on Form 8-K
The registrant did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
-15-
<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 August 13, 1999.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
By /s/ Stephen J. Verleye
-----------------------------
Stephen J. Verleye
PRESIDENT & CEO
-16-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
10.18 Employment Agreement with Stephen J. Verleye 18
</TABLE>
-17-
<PAGE>
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
This Agreement is dated as of this 1st day of April, 1999, by and
between Stephen J. Verleye ("Executive") and Applied Microsystems Corporation, a
Washington corporation (the "Company").
RECITALS
WHEREAS Executive is recently employed by the Company as its
President and Chief Executive Officer; and
WHEREAS the Company and Executive desire to define certain terms and
conditions of Executive's employment with the Company;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein, it is agreed:
1. EMPLOYMENT.
1.1 EXECUTIVE'S EMPLOYMENT. The Company hereby employs Executive and
Executive hereby accepts employment by the Company upon the terms and conditions
hereinafter set forth.
1.2 TERM. The term of this Agreement shall commence as of the
Effective Date of this Agreement, and shall continue for a period of four
years from the Effective Date, unless terminated earlier as hereinafter
provided. At the end of the term, upon mutual agreement of the parties, this
Agreement may be renewed for a subsequent period and subject to mutually
agreed terms.
1.3 POSITION AND DUTIES.
(a) PRESIDENT AND CHIEF EXECUTIVE OFFICER. Executive shall
serve as President and Chief Executive Officer ("CEO") of the Company and shall
have such duties, responsibilities and powers as described for such office by
the Company's Bylaws and as may be assigned to Executive from time to time by
the Board of Directors of the Company. Executive shall devote his full time,
energies and best efforts to the performance of his duties hereunder, to the
exclusion of all other business activities, except personal business and
investment activities that do not conflict or interfere with the performance of
his duties under this Agreement. While serving as President and CEO, Executive
shall not engage in any other professional work within the area of his
expertise, whether compensated or not, without the Company's consent.
2. EFFECTIVE DATE. The Effective Date of this Agreement shall be the date
referenced at the top of this Agreement.
3. COMPENSATION.
3.1 SALARY. In consideration of the services and duties to be
performed by Executive hereunder, the Company shall pay Executive an initial
minimum annual base salary of $215,000 (Two Hundred Fifteen Thousand
Dollars), payable in accordance with the Company's normal employee payroll
-18-
<PAGE>
schedule and practices for executives. The Executive's base salary as
President/CEO may be adjusted by the Compensation Committee of the Company's
Board of Directors, based on reviews to occur at the beginning of each new
fiscal year, and provided that Executive shall recuse himself from any Board
decision regarding his base salary.
3.2 INCENTIVE.
(a) ANNUAL BONUS. The Executive shall be entitled to an annual
bonus based upon the Company's financial performance for each fiscal year,
beginning with the 1999 fiscal year, which bonus, if earned, would be prorated
based upon the Executive's starting date. The bonus shall be in an amount and
shall be based upon criteria established by the Board of Directors at the
beginning of each year ("Board Plan"). Executive shall participate in
discussions with the Board regarding criteria established and shall recuse
himself from voting on adoption of the Board Plan. Your 1999 Board Plan is
attached to this Agreement as Attachment A.
3.3 STOCK OPTION GRANT.
(a) OPTION. In consideration of Executive's agreements
hereunder, the Company is granting to Executive upon signing of this Agreement,
pursuant to a Stock Option Letter Agreement of even date ("Stock Option Letter
Agreement"), a stock option to acquire 215,000 shares of the Common Stock of the
Company at a price equal to the closing price on the Executive's first day of
employment. The Stock Option Letter Agreement is attached to this Agreement as
Attachment B and its terms are incorporated herein by reference.
(b) If the Company undergoes a Change of Control as described
in this Section 3.3(b), and Executive does not continue his employment as
President/CEO subsequent to the Change of Control, the Company shall further
limit any right to repurchase shares of stock pursuant to the Stock Option
Letter Agreement, and according to the terms and conditions of Attachment C,
attached hereto. For purposes of this Agreement, "Change of Control" shall mean
a consolidation, merger or other reorganization of the Company with or into
another corporation or other entity or person in which the Company shall not be
the continuing or surviving entity of such merger, consolidation or
reorganization, or the sale of all or substantially all of the Company's
properties and assets to any other person, or any transaction or series of
related transactions by this corporation in which an excess of 50% of this
corporation's voting power is transferred, unless the Company's stockholders of
record immediately prior to such merger, consolidation, reorganization, sale or
transaction are holders of more than 50% of the voting equity securities of the
surviving corporation.
4. BENEFITS.
4.1 BENEFIT PROGRAMS. Executive shall be eligible to participate in the
normal employee benefit programs of the Company.
4.2 EXPENSES. The Company will reimburse Executive for reasonable
expenses for temporary housing, entertainment, travel and similar items that he
incurs on behalf of the Company in accordance with the Company's policies and
procedures for its officers, provided that Executive properly accounts therefor
in accordance with Company policy.
5. TERMINATION BY THE COMPANY OF EXECUTIVE AS PRESIDENT AND CEO.
-19-
<PAGE>
5.1 DISABILITY OR DEATH OF THE EXECUTIVE.
(a) DISABILITY. The Company may terminate Executive's
employment if Executive has been unable through illness or other disability to
perform his duties hereunder for a period of more than three months and the
Board of Directors determines in good faith that the disability is continuing
and will materially restrict or hinder Executive in the performance of his
duties hereunder. Termination of Executive's status as an officer and employee
of the Company for disability shall be effective upon written notice of the
Board's determination or at such other time as specified in the notice, and
Executive shall receive the benefits provided by the Company's disability plan,
if any, then in effect pursuant to the terms and conditions thereof. Executive
shall not be entitled to any additional compensation following the date of
termination, provided that the Company shall pay Executive all cash employee
benefits that accrued or vested through the date of termination, and including
any and all earned but unpaid incentive compensation for the year in which such
termination for Cause or by Executive takes place, provided that Executive shall
have stock options available only as described in Executive's Stock Option
Letter Agreement.
(b) DEATH. If Executive shall die while employed hereunder,
the employment of Executive shall thereupon terminate and all compensation,
except that accrued to the date of death, shall thereupon cease.
(c) OTHER BENEFITS. The provisions of this Section 5.1 shall
not affect the entitlements of Executive's heirs, executors, administrators,
legatees, beneficiaries or assigns under any benefit plan, fund or program of
the Company.
5.2 FOR CAUSE. The Company shall have the right to terminate
Executive's employment hereunder at any time for Cause, as defined below. For
purposes of this Agreement, "Cause" means termination resulting from a good
faith determination by the Board of Directors, with Executive recusing himself
from participation in any such determination, that:
(a) Executive has willfully failed or refused in a material
respect to follow reasonable written policies or directives established by the
Board of Directors or willfully failed to attend to significant duties or
obligations under this Agreement (and other than any such failure resulting from
Executive's incapacity due to physical or mental illness), which failure or
refusal, if susceptible of being cured, is not cured by Executive within thirty
(30) days following delivery to Executive of written demand to do so; or
(b) There has been an act by Executive involving gross
malfeasance of office or flagrant disloyalty to the Company or its subsidiaries,
embezzlement, dishonesty, addictive use of alcohol or drugs, or a conviction of
or plea of nolo contendere to a crime involving moral turpitude. Without
limiting the foregoing, it shall be considered an act of "flagrant disloyalty"
for Executive, during the course of his employment and without the Company's
prior written consent, to "compete" with the Company, which shall mean to
directly or indirectly engage in or perform any services, whether full or
part-time, or on a consulting or advisory basis, or become financially
interested in, any business or undertaking which is competitive with the
Company's business, or to provide to any such business or undertaking any
confidential or proprietary information of the Company with respect to the
Company's products and services, PROVIDED THAT nothing herein shall be construed
to prohibit Executive from owning up to 2% of any publicly traded securities of
any business which competes with the Company.
-20-
<PAGE>
(c) Termination pursuant to Subsections (a) or (b) above
shall be effective immediately on written notice by the Board of Directors to
Executive that it has made the required determination.
5.3 WITHOUT CAUSE. The Company shall have the right to terminate
Executive's employment without Cause immediately upon notice to Executive, which
notice shall specify the date of termination.
5.4 BY EXECUTIVE. Executive shall have the right to terminate his
employment as President/CEO upon ninety (90) days notice to the Company.
6. EFFECT OF TERMINATION.
6.1 FOR CAUSE OR BY EXECUTIVE. If the Company terminates Executive's
employment as President/CEO for Cause or if Executive terminates his employment
as President/CEO, the Company shall pay Executive the full base salary under
Section 3.1 at the rate in effect on the date the notice of termination was
given through the date of termination, together with all cash employee benefits
that accrued or vested through the date of termination, and including any and
all earned but unpaid incentive compensation for the year in which such
termination for Cause or by Executive takes place, at the time such incentive
payments are distributed generally to Company executives and prorated as
described in clauses (i) and (ii) of Section 3.2(b), provided that Executive
shall have stock options available only as described in Executive's Stock Option
Letter Agreement.
6.2 WITHOUT CAUSE. If the Company terminates Executive's employment as
President/CEO due to disability under Section 5.2(a) or without Cause:
(a) The Company shall pay Executive the full base salary under
Section 3.1 at the rate in effect on the date the notice of termination was
given through the date of termination. The Company shall also pay to Executive
as severance, in lieu of any further salary payments subsequent to the date of
termination and any other amounts which may be available under the Company's
employment policies in effect from time to time, an amount equal to Executive's
base salary at the rate in effect on the date the notice of termination is given
for a period terminating six months after the date of termination less, if
termination is due to disability, any amounts received by Executive under the
Company's disability plans; PROVIDED THAT such payments shall cease at the time
Executive obtains other full-time employment, and shall cease if Executive
"competes" with the Company as described in Section 5.3(b). Such severance shall
be paid in accordance with the Company's usual payroll schedule for executives.
(b) In addition, the Company shall pay Executive all cash
employee benefits that accrued or vested through the date of termination, and
including any and all earned but unpaid incentive compensation for the year in
which such termination takes place, at the time such incentive payments are
distributed generally to Company executives and prorated as described in clauses
(i) and (ii) of Section 3.2(b); provided that Executive shall have stock options
available only as described in Executive's Stock Option Letter Agreement.
(c) The Company shall also maintain in full force and effect
for the continued benefit of Executive or Executive's designee, until the
earlier of (i), expiration of severance pursuant to paragraph (a) above, or (ii)
Executive is employed on a full-time basis or substantially equivalent thereto
by another employer, all life, medical and disability insurance executive was
entitled to receive immediately prior to the date of termination, with the
Company and the Executive each paying the same percentage portion of all
premiums which each was paying at the time of termination for such insurance and
benefits, provided that
-21-
<PAGE>
if under the terms of any group plan Executive and his family are no longer
eligible to participate, then the Company shall provide comparable plans and
coverage, with the premiums therefore being paid by the Company and Executive
on the same proportionate basis.
6.3 CONTINUING OBLIGATIONS. Executive's obligations under Section
8 of this Agreement shall survive termination of his employment as
President/CEO for any reason.
8. CONFIDENTIALITY. Executive shall be bound by any agreement he has executed
with regard to Company's confidential or proprietary information and inventions,
including but not limited to the Applied Microsystems Corporation Employee
Agreement.
9. DISPUTE RESOLUTION PROCEDURE.
9.1 The parties agree that any dispute arising out of or related to the
Employment relationship between them, including but not limited to common law or
statutory claims for discrimination, wrongful discharge, and unpaid wages, shall
be resolved by binding arbitration, except where the law specifically forbids
the use of arbitration as a final and binding remedy.
9.2 The party claiming to be aggrieved shall furnish to the other party
a written statement of the grievance identifying any witnesses or documents that
support the grievance and the relief requested or proposed.
9.3 If the other party does not agree to furnish the relief requested
or proposed, or otherwise does not satisfy the demand of the party claiming to
be aggrieved, the parties shall submit the dispute to non-binding mediation
before a mediator to be jointly selected by the parties. The Company will pay
the cost of the mediation.
9.4 If the mediation does not produce a resolution of the dispute, the
parties agree that the dispute shall be resolved by final and binding
arbitration in Seattle, Washington. The parties shall attempt to agree to the
identity of an arbitrator, and, if they are unable to do so, the parties agree
to assignment of an arbitrator from Judicial Arbitration and Mediation Services
(JAMS). The arbitrator shall have the authority to determine whether the conduct
complained of in subsection (g)(ii) violates the rights of the complaining party
and, if so, to grant any relief authorized by law; provided, however, that
nothing herein shall limit the right of the Company to obtain injunctive relief
for violation of the Inventions Agreement. The arbitrator shall not have the
authority to modify, change or refuse to enforce the terms of this Agreement. In
addition, the arbitrator shall not have the authority to require the Company to
change any lawful policy or benefit plan. The hearing shall be transcribed. The
Company shall bear the costs of the arbitration if the Executive prevails. If
the Company prevails, the Executive will pay half the cost of the arbitration or
$500, whichever is less. Each party shall be responsible for paying its own
attorneys fees. Arbitration shall be the exclusive final remedy for any dispute
between the parties, and the parties agree that no dispute shall be submitted to
arbitration where the party claiming to be aggrieved has not complied with the
preliminary steps provided for in clauses (ii) and (iii) above.
9.5 Executive acknowledges that he has carefully read this arbitration
agreement and understands it, and is entering into the agreement voluntarily
after a reasonable period of time to consider it and review it with personal
legal counsel. Executive also acknowledges he may be giving up the opportunity
to bring claims before a court or jury, and does so in order to gain the
benefits of a speedy, impartial and cost-effective resolution procedure.
-22-
<PAGE>
10. MISCELLANEOUS.
10.1 SETOFF. The Company shall be entitled to set off and reduce any
amounts payable to Executive under this Agreement by the amount of any
obligation of Executive to the Company.
10.2 AMENDMENTS. This Agreement may be changed, waived, discharged, or
terminated only by a writing signed by the party against which enforcement is
sought.
10.3 PARTIES IN INTEREST. Executive's obligations under this Agreement
are personal in nature and may not be assigned or transferred. The Company may
assign this Agreement and it shall be binding upon and inure to the benefit of
any successor or successors of the Company, whether by merger, consolidation,
sale of assets, or otherwise, and reference herein to the Company shall be
deemed to include any such successor.
10.4 GOVERNING LAW AND VENUE. This Agreement shall be governed by, and
construed and enforced in accordance with, the laws of the State of Washington.
Subject to the requirements of Section 9 above, in any legal proceeding brought
on or in connection with this Agreement, venue for such action shall be in
Seattle.
10.5 NOTICES. All notices, requests, and other communications hereunder
shall be in writing and shall be deemed to be duly given if delivered or mailed
by prepaid mail addressed to:
If to Executive, to: Stephen J. Verleye
If to the Company, to: Applied Microsystems Corporation
5020 - 148th Avenue NE
Redmond, WA 98073-9702
Attention: Chairman
or to such other address as the addressee may direct in writing.
10.6 CAPTIONS. The captions applied to the paragraphs of this Agreement
are for convenience only and shall not affect their meaning or construction.
10.7 WAIVER. The failure of either party to insist in any instance on
performance of any term of this Agreement shall not be construed as a waiver of
future performance of any such term.
10.8 SEVERABILITY. If any portion of this Agreement is held invalid or
unenforceable, the remainder thereof shall remain in full force and effect, and
if the invalidity or unenforceability is due to the unreasonableness of time or
geographical restrictions, such covenants and restrictions shall be effective
for such period of time and for such area as may be determined to be reasonable
by a court of competent jurisdiction.
10.9 INTEGRATION. This Agreement, together with the Executive's offer
of employment letter (Attachment D), Executive Stock Option Letter Agreement,
the Board Forecast and Plan, and the Applied Microsystems Corporation Employee
Agreement supersedes all other agreements and understandings, whether written or
oral, and contains the entire agreement of the parties relating to the
employment of Executive by the Company.
-23-
<PAGE>
10.10 REVIEW. By the execution of this Agreement Executive
acknowledges he has carefully read the terms of this Agreement and that he
has had the opportunity to be advised by counsel of his choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
EXECUTIVE APPLIED MICROSYSTEMS CORPORATION
By /s/ Stephen J. Verleye By /s/ Anthony Miadich
--------------------------- -----------------------------
Stephen J. Verleye Anthony Miadich, Chairman
-24-
<PAGE>
ATTACHMENT A
1999 MANAGEMENT BONUS PROGRAM
The purpose of the Applied Microsystems Management Bonus Program is to reward
participants for helping to achieve the financial goals of the Company.
FEATURES OF THE 1999 PROGRAM:
1. Bonuses are earned relative to Forecast & Plan financial criteria.
2. Bonus percentage potential based on salary. For Forecast achievement, bonus
is 50% of base salary; for Plan achievement, bonus is 100% of base salary.
3. The Forecast and Plan targets remain cumulative; i.e., 1st quarter results
are compared to 1st quarter targets; 2nd quarter year-to-date (YTD) results
to 2nd quarter YTD targets; and so on. Shortfalls to targets can be made up
until the year is completed.
4. Bonuses can be paid quarterly based on successful achievement of YTD target
objectives (Forecast or Plan).
5. 50% of the (prorated) bonus amount will be tied to the Company achieving
quarterly Revenue targets.
6. 50% of the (prorated) bonus amount will be tied to the Company achieving
quarterly EPS targets.
7. If any quarter's earned bonus is at or below total Forecast for that
quarter, bonus payments will be disbursed within 45 days of the close of
that quarter (within 60 days after year-end). If any quarter's earned
bonus exceeds total Forecast, the Compensation Committee of the Board must
have an expectation that such results are sustainable or a one quarter's
holdback of bonus amounts over Forecast will be required. In no
circumstances will the holdback be more than one quarter in arrears. In
addition, at the end of the fiscal year, all holdback amounts will be paid
(within 60 days after year-end).
-25-
<PAGE>
ATTACHMENT B
STOCK OPTION LETTER AGREEMENT
APRIL 1, 1999
Stephen J. Verleye
Dear Stephen:
We are pleased to inform you that you have been selected by the Compensation
Committee of the Board of Directors of Applied Microsystems Corporation (the
"Company") to receive a stock option for the purchase of the number of shares of
Applied Microsystems Corporation Common Stock at the exercise price set forth on
the signature page. The grant of the option is being made pursuant to Applied
Microsystems Corporation's 1992 Performance Stock Plan, as amended to date (the
"Plan"), a copy of which is attached and incorporated into this Agreement by
reference.
The terms of the option are as set forth in the Plan and this Agreement. The
most important terms are summarized as follows:
TERM: Ten years from date of grant, unless sooner terminated.
EARLY TERMINATION: Thirty days after termination of employment with
the Company, or one year if termination occurs as a result of death
or disability.
VESTING: The option is immediately exercisable, subject to the terms
and conditions of the Plan, other than the vesting schedule in Section
7(a) of the Plan, which shall not apply.
REPURCHASE: The Company or its assignee may repurchase any shares you
purchase upon exercise of this option if your employment terminates for
any reason during the first year after the date of grant of this
option. A number of shares equal to twenty five percent (25%) of the
total number of shares purchasable under this option will be free from
this repurchase right after the first full year, and an additional
twenty-five percent (25%) will be free after each subsequent full year,
so that all shares will be free from any repurchase rights after the
fourth full year from the date of grant of this option. The repurchase
price will be the per share exercise price, as adjusted for any stock
split, stock dividend, or similar change in capitalization. The
repurchase rights will not apply if your employment terminates on
account of death or disability.
TRANSFER OF OPTION: The option is not transferable.
This option does not include stock appreciation rights, as described in
Section 11 of the Plan.
-26-
<PAGE>
Stephen J. Verleye
April 1, 1999
Page -2-
YOUR PARTICULAR ATTENTION IS DIRECTED TO SECTION 16 OF THE PLAN WHICH DESCRIBES
CERTAIN IMPORTANT CONDITIONS RELATING TO FEDERAL AND STATE SECURITIES LAWS THAT
MUST BE SATISFIED PRIOR TO THE ISSUANCE OF ANY SHARES PURSUANT TO THIS OPTION.
Please execute the Acceptance and Acknowledgment set forth below on the enclosed
copy of this Agreement and return it to the undersigned.
Very truly yours,
APPLIED MICROSYSTEMS CORPORATION
By /s/ Anthony Miadich
---------------------------
Anthony Miadich, Chairman
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
ACCEPTANCE AND ACKNOWLEDGMENT
I accept the option described in the above Stock Option Letter Agreement and in
the Plan and acknowledge receipt of a copy of this Agreement, including a copy
of the Plan. I have read and understand the Plan, including the provisions of
Section 16.
Dated: April 1, 1999 /s/ Stephen J. Verleye
------------------------ ----------------------------------
A. Total Number of shares: 215,000
B. Price per share: $2.5000
C. Date of grant: April 1, 1999
D. This is intended to be an Incentive Stock Option to the extent
possible; otherwise, this is a Non-qualified Stock Option
THE EXERCISE OF THIS OPTION AND THE DISPOSITION OF ANY SHARES THUS ACQUIRED MAY
AFFECT YOUR INCOME TAX OBLIGATIONS SIGNIFICANTLY. IF THIS IS A NOT AN INCENTIVE
STOCK OPTION, YOU SHOULD CONSIDER MAKING AN ELECTION PURSUANT TO SECTION 83(b)
OF THE INTERNAL REVENUE CODE AT THE TIME THE OPTION IS EXERCISED. YOU ARE URGED
TO CONSULT YOUR TAX ADVISOR ON THESE MATTERS
-27-
<PAGE>
ATTACHMENT C
REPURCHASE RIGHTS SUBSEQUENT TO A CHANGE OF CONTROL.
Pursuant to the terms of Section 3.3(b) of this Agreement, the Company agrees to
further restrict its Repurchase Rights identified in Executive's Stock Option
Letter Agreement (Attachment B herein) as follows:
1. If a Change of Control occurs within the first year of Executive's
employment, the Company may elect to repurchase no more than 50% of the
shares granted to Executive.
2. If a Change of Control occurs between the first and second years of
Executive's employment, the Company may elect to repurchase no more than
25% of the shares granted to Executive.
3. If a Change of Control occurs after the second year of Executive's
employment, the Company may not elect to repurchase any of the shares
granted to Executive.
-28-
<TABLE> <S> <C>
<PAGE>
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