<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 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
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APPLIED MICROSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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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)
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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: 6,715,309 shares outstanding as of May 7, 1999.
This report including exhibits consists of 25 pages. The exhibit index
appears on page 15
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998............ 3
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............................. 4
Consolidated Statements of Cash Flows for the three months ended March 31, 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 6. Exhibits and Reports on Form 8-K.................................................................... 13
Signatures.......................................................................................... 14
Exhibit Index....................................................................................... 15
Exhibit 10.17....................................................................................... 16
</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 MARCH 31,
1999 1998
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
<S> <C> <C>
Net sales.................................................................. $8,518 $8,251
Cost of sales.............................................................. 2,046 2,313
------------------ ------------------
Gross profit............................................................... 6,472 5,938
Operating expenses:
Sales, general and administrative..................................... 4,894 4,341
Research and development.............................................. 2,682 2,350
------------------ ------------------
Total operating expenses................................................... 7,576 6,691
------------------ ------------------
Loss from operations....................................................... (1,104) (753)
Interest income and other.................................................. 170 195
Interest expense........................................................... --- (1)
------------------ ------------------
Net loss................................................................... ($934) ($559)
------------------ ------------------
------------------ ------------------
Basic loss per share....................................................... ($0.14) ($0.08)
Shares used in basic per share calculation................................. 6,703 6,878
Diluted loss per share..................................................... ($0.14) ($0.08)
Shares used in diluted per share calculation............................... 6,703 6,878
</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>
MARCH 31, DECEMBER 31,
1999 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $5,143 $6,041
Short term investments................................................ 11,134 11,101
Accounts receivable................................................... 7,552 8,483
Inventories........................................................... 2,931 3,332
Prepaid and other current assets...................................... 609 518
------------------ ------------------
Total current assets.............................................. 27,369 29,475
Property and equipment, net................................................ 2,943 2,918
Other assets............................................................... 976 897
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Total assets...................................................... $31,288 $33,290
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $2,791 $3,283
Accrued payroll....................................................... 2,144 1,840
Other accrued expenses................................................ 1,226 1,129
Deferred revenue...................................................... 2,787 3,107
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Total current liabilities......................................... 8,948 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 - 6,703,000 and 6,681,000 shares at March 31,
1999 and December 31, 1998, respectively.......................... 25,432 25,383
Cumulative translation adjustment..................................... (586) 120
Accumulated deficit................................................... (2,506) (1,572)
------------------ ------------------
Total shareholders' equity........................................ 22,340 23,931
------------------ ------------------
Total liabilities and shareholders' equity........................ $31,288 $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>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------------ ------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... ($934) ($559)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization......................................... 298 316
Changes in operating assets and liabilities:
Accounts receivable................................................... 931 512
Inventories........................................................... 401 78
Prepaid expenses...................................................... (91) 38
Other assets.......................................................... (112) (40)
Deferred revenue...................................................... (320) 48
Accounts payable and accrued expenses................................. (91) (262)
------------------ ------------------
Net cash provided by operating activities......................... 82 131
Cash flows from investing activities:
Purchase of short-term investments.................................... (33) (106)
Property and equipment additions...................................... (290) (361)
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Net cash used in investing activities............................. (323) (467)
Cash flows from financing activities:
Sale of common stock to employees..................................... 48 50
Stock options exercised............................................... 1 5
Repayment of long-term obligations.................................... --- (15)
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Net cash provided by financing activities......................... 49 40
Effects of foreign exchange rate changes on cash........................... (706) (90)
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Decrease in cash and cash equivalents...................................... (898) (386)
Cash and cash equivalents at beginning of period........................... 6,041 6,336
------------------ ------------------
------------------ ------------------
Cash and cash equivalents at end of period................................. $5,143 $5,950
------------------ ------------------
------------------ ------------------
Supplemental disclosures of cash paid:
Interest.............................................................. $-- $1
</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 period ended
March 31, 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 three months ended
March 31, 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 LOSS PER SHARE
Basic earnings per share excludes any dilutive effects of stock options.
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 if their effect is antidilutive.
3. COMPREHENSIVE LOSS
During the first quarter of 1999 and 1998, total comprehensive loss
amounted to $1,640,000 and $649,000, respectively.
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<PAGE>
4. LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------------ ------------------
<S> <C> <C>
(in thousands, except per share amount)
Numerator:
Numerator for basic and diluted income per share --
net loss............................................................. ($934) ($559)
------------------ ------------------
------------------ ------------------
Denominator:
Denominator for basic income per share -- weighted
average common shares................................................ 6,703 6,878
Effect of dilutive securities:
Stock options based on the treasury
stock method using average market price.............................. --- ---
------------------ ------------------
Denominator for diluted loss per share................................. 6,703 6,878
------------------ ------------------
------------------ ------------------
Basic loss per share....................................................... ($0.14) ($0.08)
------------------ ------------------
------------------ ------------------
Diluted loss per share..................................................... ($0.14) ($0.08)
------------------ ------------------
------------------ ------------------
</TABLE>
For the three months ended March 31, 1999 and March 31, 1998, the effect of
outstanding options and warrants have been excluded from the diluted calculation
because they are antidilutive.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods............................................................. $879 $1,501
Work in process............................................................ 105 28
Purchased parts............................................................ 1,947 1,803
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$2,931 $3,332
------------------ ------------------
------------------ ------------------
</TABLE>
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<PAGE>
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 period indicated the percentage of
total revenue represented by each line item in the Company's condensed
consolidated statements of income and the percentage change from 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
March 31, March 31, 1999
1999 1998 Compared to 1998
-------------- -------------- -------------------------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 3.2%
Cost of sales........................................ 24.0 28.0 (11.5)
-------------- --------------
Gross profit......................................... 76.0 72.0 9.0
Operating expenses:
Sales, general and administrative............... 57.5 52.6 12.7
Research and development........................ 31.5 28.5 14.1
-------------- --------------
Total operating expenses............................. 89.0 81.1 13.2
-------------- --------------
Loss from operations................................. (13.0) (9.1) 46.6
Interest income and other............................ 2.0 2.3 (12.8)
Interest expense..................................... --- --- ---
-------------- --------------
-------------- --------------
Net loss............................................. (11.0%) (6.8%) 67.1%
-------------- --------------
-------------- --------------
</TABLE>
NET SALES
Net sales increased by 3.2% to $8.5 million from $8.3 million for the
quarters ended March 31, 1999 and 1998, respectively. These increases were
primarily attributable to an increase in unit sales of the low cost debug
solutions and to a lesser extent, increases in CodeTest-Registered Trademark-
license royalties, revenue from consulting services and favorable year over
year currency exchange rate fluctuations affecting international sales. The
increases were partially offset by the reduction in unit sales of higher
priced debug solutions. The Company's net sales are presently derived
predominantly from sales of software design, debugging, and testing solutions
and support and consulting service revenues. The Company generally recognizes
revenues from product sales upon shipment. Product support revenues increased
by 3.7% over the prior year's three months and as a percentage of sales were
basically the same at 14.2%. Product support revenues are recognized ratably
over the life of each maintenance contract, typically 12 months.
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<PAGE>
International sales expressed in U.S. dollars decreased by 17.8% for the
quarter ended March 31, 1999 over the comparable period of 1998, to 40.7% of net
sales as compared to 49.1% of net sales in the prior comparable quarter. The
reduction in international revenues as expressed in U.S. dollars is primarily
attributable to a decrease in unit sales in Europe, and to a lesser extent, a
decrease in the average selling price for products in Japan.
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 2.2% for the quarter ended March 31,1999 compared to the
comparably period. 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 increased to $6.5 million, or 76.0% of net
sales, from $5.9 million, or 72.0% of net sales, in the quarters ended March 31,
1999 and 1998, respectively. The increase in gross profit as a percentage of net
sales was primarily attributable to an increase in net sales of the higher
margin low cost debug solutions and to a lesser extent an increase 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 related
absorption of factory overhead costs.
SALES, GENERAL AND ADMINISTRATIVE
Sales, general and administrative expenses were $4.9 million or 57.5% of
net sales, and $4.3 million, or 52.6% of net sales, for the quarters ended March
31, 1999 and 1998, 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 between comparable periods was
primarily attributable to lower revenues then anticipated, for the quarter
ending March 31, 1999. The Company expects its sales and marketing
expenditures to increase in absolute dollars in the future but, expect 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.
9
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $2.7 million, or 31.5% of net sales,
and $2.4 million, or 28.5% of net sales, for the quarters ended March 31, 1999
and 1998, 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 to increase in
absolute dollars in the future but, expect 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 $25,000 between
the comparable three month periods due primarily to lower interest rates on cash
balances in 1999.
TAXES
The Company's computes its 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. Since the Company anticipates a tax loss for the
year, its estimated annual effective tax rate is 0%, and no income tax provision
is required.
A full valuation allowance has been provided for all deferred tax assets,
including net operating loss carryforwards 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 were $13.0 million net of costs. Since the offering, the
Company has used $4.0 million to purchase capital equipment, $2.4 million to pay
off bank debt, $.5 million to purchase a product line and the remaining proceeds
of $6.1 million have been invested in short term commercial and government paper
and money market funds. For the three months ended March 31, 1999 and 1998, the
Company generated $82,000 and $131,000, respectively, of cash from operations,
and utilized $323,000 and $467,000, respectively, of cash for purchases of
short-term investments and equipment. As of March 31, 1999, the Company had
working capital of $18.4 million, including $16.3 million of cash, cash
equivalents and short-term investments.
The Company believes that its existing working capital, together with funds
from operations and available revolving credit line, will provide the Company
with sufficient funds to finance its operations for at least the next 12 months.
The Company's future capital requirements will, however, depend on a number of
factors, including costs associated with 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.
10
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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
product.
The Company estimates that it has expended approximately $100,000 in
assessing and re-mediating internal Year 2000 issues, in addition to those
upgrades that have been made as part 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 $150,000, to be expended over the next two quarters.
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 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
-11-
<PAGE>
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report.
10.17 Employment Agreement with Robert L. Deinhammer.
(B) Report on Form 8-K
The registrant did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
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<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 May 14, 1999.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
By /s/ Stephen J. Verleye
---------------------------
Stephen J. Verleye
PRESIDENT
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
10.17 Employment Agreement with Robert L. Deinhammer 16
</TABLE>
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<PAGE>
EXHIBIT 10.17
EMPLOYMENT AGREEMENT
This Agreement is effective as of the 4th day of January, 1999, by and
between Robert L. Deinhammer ("Executive") and Applied Microsystems
Corporation, a Washington corporation (the "Company").
RECITALS
WHEREAS Executive is currently employed by the Company as its President and
Chief Executive Officer, and his experience, ability and knowledge are valuable
to Company; and
WHEREAS the Company desires Executive to continue in the employ of the
Company, and Executive is willing to continue in the employ of Company, upon the
terms and conditions set forth in this Agreement;
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 unless terminated earlier as
hereinafter provided. The Company's Board of Directors intends to review the
continuing need for Executive's services on a quarterly basis.
1.3 POSITION AND DUTIES.
(a) PRESIDENT AND CHIEF EXECUTIVE OFFICER. Initially, 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.
(b) REPLACEMENT OF EXECUTIVE AS PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Due to Executive's relocation to California, Executive does not wish
to continue as CEO/President. For this reason, it is understood that the
Company is presently seeking a new President and Chief Executive Officer and
that upon the Company's engagement of a new President and Chief Executive
Officer, Executive's employment in those capacities shall terminate, as stated
in Section 5.1 (Transition to Chairman of the Board).
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<PAGE>
(c) BOARD MEMBER/CHAIRMAN OF THE BOARD. Executive presently serves
as a member of the Board of Directors and shall continue to so serve until such
time as the Company engages a new President and Chief Executive Officer.
Promptly following the Company's engagement on a full-time basis of a new
President and Chief Executive Officer, the Board of Directors shall elect
Executive as Chairman of the Board. As Chairman of the Board, Executive shall
devote his best efforts for up to one fourth of his working time (calculated on
a non-cumulative monthly basis) providing advisory services to the Company as
requested by the CEO or the Board, regarding its operations, sales and marketing
efforts, and strategic planning, and performing such other duties as the CEO or
the Board may request from time to time. Executive may engage in other
professional activities after he ceases serving as President and CEO and while
serving as Chairman, subject to the restrictions in Section 8, and provided that
such activities do not conflict or interfere with the performance of his duties
as Chairman.
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 initial annual base
salary of $325,000 (Three Hundred Twenty-Five Thousand Dollars), payable in
accordance with the Company's normal employee payroll schedule and practices for
executives. Beginning the first full month after the Company has engaged on a
full-time basis a new President and Chief Executive Officer, Executive's annual
base compensation shall be $120,000, also payable in accordance with the
Company's normal payroll schedule and practices for executives. The Executive's
base salary as President/CEO will remain fixed, and as Chairman of the Board may
be adjusted by the Compensation Committee of the Company's Board of Directors,
based on reviews to occur not less than annually from the Effective Date of this
Agreement, 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. 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 ("Plan"). Executive shall participate in discussions with the Board
regarding criteria established and shall recuse himself from voting on adoption
of the Plan.
(b) The Executive shall be entitled to receive a bonus if the
requirements of the Board Forecast and Plan are met. In the event the Board
decides to award bonus compensation to the new President/CEO based on results
less than as determined by the Board Forecast & Plan, the Executive shall be
entitled to receive a bonus consistent with the performance considerations
applied to the new President/CEO. If the Company undergoes a Change in Control
as defined in Section 3.3(c), or the Executive's employment is terminated as a
result of a Change in Control, the Executive shall be entitled to a bonus as
described in the Plan. In the event Executive transitions from President/CEO to
Chairman of the Board during a Plan year, the amount of his bonus for such year
shall be determined on a prorated basis as follows: (i) the bonus amount that
he would have been entitled to receive had he remained President/CEO for the
entire year, determined in accordance with the Plan, shall be prorated into
twelve monthly increments, and Executive shall be entitled to receive the
prorated amount for each month his base salary was $325,000 (Three Hundred
Twenty-five Thousand Dollars) during the year; and (ii) the bonus amount that he
would have been entitled to receive had he been employed as Chairman (at a
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reduced base compensation rate) for the entire year, determined in accordance
with the Plan, shall be prorated into twelve monthly increments, and Executive
shall be entitled to receive the prorated amount for each full month during
which he was employed as Chairman during the year.
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 60,000 shares of the Common Stock of the Company. The
Stock Option Letter Agreement is attached to this Agreement as Attachment A and
its terms are incorporated herein by reference.
(b) If Executive's employment is terminated for any reason other than
as described in Sections 5.3 or 5.5, the Company shall not exercise any right to
repurchase stock pursuant to the Stock Option Letter Agreement.
(c) If the Company undergoes a Change of Control as described in this
Section 3.3(b), or the Executive's employment is terminated as a result of a
Change in Control, Company shall not exercise any right to repurchase stock
pursuant to the Stock Option Letter Agreement. 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 continue to be eligible to
participate in the employee benefit programs that have been available to
Executive prior to this Agreement, such as paid vacation, life insurance,
medical, disability, and other similar plans. Executive's entitlement to paid
vacation time will accrue on a monthly basis and will be prorated to reflect his
change in position to Chairman; specifically, when Executive becomes Chairman he
will be entitled to accrue each month one-fourth the amount of paid vacation
time which he was entitled to accrue each month as President/CEO. Executive
shall be compensated in cash for any accrued vacation time which Executive does
not use during his employment as President/CEO or Chairman, but Executive may
not carry over vacation time which is accrued but unused as President/CEO to be
used during his tenure as Chairman.
4.2 EXPENSES. The Company will reimburse Executive for reasonable
expenses for 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.
5.1 TRANSITION TO CHAIRMAN OF THE BOARD. It is understood that Company
seeks to replace Executive as President and CEO. At the time Company engages a
new President and CEO, and that
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person begins full-time work, Executive's employment as President and CEO
shall terminate and promptly thereafter the Board shall elect him Chairman.
5.2 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. Except as provided
in the preceding sentence and in Section 6.2(a) or 7.2(a), whichever applies,
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 severance period, 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 Section 3 of this Agreement and 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 5.2 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.
(d) ASSIGNMENT OF BENEFITS. Executive shall have the right to
designate in writing, delivered to the Company, a beneficiary or beneficiaries
who shall be entitled to receive, in the event of his death, all or part of any
benefits to which he may be entitled under this Agreement. Any such designation
may be amended or revoked in writing delivered to the Company by Executive at
any time prior to his death. Except as provided in the preceding sentence, none
of Executive's rights or benefits under this Agreement shall in any way be
subject to anticipation, alienation, sale, transfer, assignment, pledge or
encumbrance, and any attempted anticipation, alienation, sale, transfer,
assignment, pledge or encumbrance of such rights or benefits shall be void.
5.3 FOR CAUSE. The Company shall have the right to terminate Executive's
employment hereunder, as President/CEO or as Chairman of the Board, 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 (including but not limited to his obligation to devote up
to 25% of his working time to his duties as Chairman, and other than any such
failure resulting from Executive's incapacity due to physical or mental
illness), which failure or refusal, if susceptible of
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<PAGE>
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.
(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.
5.4 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. In the event Executive terminates
his employment as Chairman as a result of action by the Company's Board of
Directors to reduce Executive's salary or incentive program as Chairman, such
termination shall be deemed for all purposes hereunder to have been a
termination by the Company without Cause, under this Section 5.4.
5.5 BY EXECUTIVE. Executive shall have the right to terminate his
employment as President/CEO upon sixty (60) days notice to the Company, and
shall have the right to terminate his employment as Chairman immediately upon
notice to the Company; provided that a termination of employment by Executive
under the circumstances described in the second sentence of Section 5.4 shall
not be deemed to be a termination by Executive under this Section 5.5.
6. EFFECT OF TERMINATION AS PRESIDENT/CHIEF EXECUTIVE OFFICER.
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 pursuant to Section 5.5, 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 Section 3 of this
Agreement and 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 under
Section 5.4:
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(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 Section 3 of this Agreement and in Executive's
Stock Option Letter Agreement, the terms of Section 3 prevailing in the event of
conflicting language; and
(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
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.
7. EFFECT OF TERMINATION AS CHAIRMAN OF BOARD. Company shall have the right
to terminate Executive's employment and remove Executive from his position as
Chairman of the Board, pursuant to its usual practices and policies for removal
of the Chairman, and nothing in this Employment Agreement is intended to limit
that right; provided, however, that the requirements of Section 3.3(b) shall
apply.
7.1 FOR CAUSE OR BY EXECUTIVE. If the Company terminates Executive's
employment as Chairman for Cause or if Executive terminates his employment as
Chairman pursuant to Section 5.5, 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 Section 3 of this
Agreement and in Executive's Stock Option Letter Agreement.
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<PAGE>
7.2 WITHOUT CAUSE. If the Company terminates Executive's employment
and removes him from the position of Chairman due to disability under Section
5.2(a) or without Cause under Section 5.4:
(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 one year 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 Section 3 of this Agreement and in Executive's
Stock Option Letter Agreement, the terms of Section 3 prevailing in the event of
conflicting language; and
(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
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.
7.3 CONTINUING OBLIGATIONS. Executive's obligations under Section 8 of
this Agreement shall survive termination of his employment as Chairman for any
reason.
8. CONFIDENTIALITY. Executive shall continue to 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.
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<PAGE>
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 nonbinding 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 San Francisco, California. 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.
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 California.
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 San
Francisco.
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:
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If to Executive, to: Robert L. Deinhammer
21 Comistas Court
Walnut Creek, CA 94598
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 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.
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.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
EXECUTIVE APPLIED MICROSYSTEMS CORPORATION
By /s/ Robert L. Deinhammer By /s/ Anthony Miadich
------------------------------- -------------------------------
Robert L. Deinhammer Anthony Miadich, Chairman
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