<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-----------------------
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 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)
-----------------------
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 of principal executive offices, including zip code; registrant's
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, $.01 par value: 6,754,878 shares outstanding as of November 5,
1999.
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<PAGE>
APPLIED MICROSYSTEMS CORPORATION
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998.........................3
Consolidated Statements of Operations for the three months and nine months ended September 30,
1999 and 1998.......................................................................................4
Consolidated Statements of Cash Flows for the nine months ended September 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................13
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................14
Signatures.........................................................................................15
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 2,499 $ 6,041
Short-term investments................................... 11,710 11,101
Accounts receivable...................................... 7,584 8,483
Inventories.............................................. 3,031 3,332
Prepaid and other current assets......................... 536 518
-------- --------
Total current assets................................. 25,360 29,475
Property and equipment, net................................... 2,605 2,918
Other assets.................................................. 969 897
-------- --------
Total assets......................................... $ 28,934 $ 33,290
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $ 2,428 $ 3,283
Accrued payroll.......................................... 2,253 1,840
Other accrued expenses................................... 1,157 1,129
Deferred revenue......................................... 3,600 3,107
-------- --------
Total current liabilities............................ 9,438 9,359
Shareholders' equity:
Preferred stock, par value $.01.......................... -- --
Common stock, par value $.01............................. 25,516 25,383
Cumulative translation adjustment........................ 15 120
Accumulated deficit...................................... (6,035) (1,572)
-------- --------
Total shareholders' equity........................... 19,496 23,931
-------- --------
Total liabilities and shareholders' equity........... $ 28,934 $ 33,290
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales...................................... $ 8,328 $ 9,957 $ 24,281 $ 27,365
Cost of sales.................................. 2,333 2,525 6,351 7,163
------- ------- -------- --------
Gross profit................................... 5,995 7,432 17,930 20,202
Operating expenses:
Sales, general and administrative......... 4,604 4,825 14,480 13,584
Research and development.................. 2,989 2,659 8,433 7,592
------- ------- -------- --------
Total operating expenses....................... 7,593 7,484 22,913 21,176
------- ------- -------- --------
Loss from operations........................... (1,598) (52) (4,983) (974)
Interest income and other, net................. 175 184 520 605
------- ------- -------- --------
Income (loss) before income taxes.............. (1,423) 132 (4,463) (369)
Income taxes................................... -- 19 -- 19
------- ------- -------- --------
Net income (loss).............................. $(1,423) $ 113 $ (4,463) $ (388)
------- ------- -------- --------
------- ------- -------- --------
Basic earnings (loss) per share................. $ (0.21) $ 0.02 $ (0.67) $ (0.06)
Shares used in basic per-share calculation...... 6,738 6,789 6,711 6,861
Diluted earnings (loss) per share............... $ (0.21) $ 0.02 $ (0.67) $ (0.06)
Shares used in diluted per-share calculation.... 6,738 6,983 6,711 6,861
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-4-
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................... $(4,463) $ (388)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization......................................... 925 901
Changes in operating assets and liabilities:
Accounts receivable................................................... 899 (2,254)
Inventories........................................................... 301 128
Prepaid expenses...................................................... (18) 545
Other assets.......................................................... (2) (247)
Accounts payable and accrued expenses................................. (414) 1,164
Deferred revenue...................................................... 493 616
------- -------
Net cash provided by (used in) operating activities............... (2,279) 465
Cash flows from investing activities:
Purchases of short-term investments................................... (609) (798)
Property and equipment additions...................................... (682) (819)
------- -------
Net cash used in investing activities............................. (1,291) (1,617)
Cash flows from financing activities:
Sale of common stock to employees..................................... 132 145
Stock options exercised............................................... 1 10
Stock repurchase...................................................... -- (1,099)
Payments on long-term obligations..................................... -- (15)
------- -------
Net cash provided by (used in) financing activities............... 133 (959)
Effects of foreign exchange rate changes on cash........................... (105) 135
------- -------
Decrease in cash and cash equivalents...................................... (3,542) (1,976)
Cash and cash equivalents at beginning of period........................... 6,041 6,336
------- -------
Cash and cash equivalents at end of period................................. $ 2,499 $ 4,360
------- -------
------- -------
Supplemental disclosures of cash paid (received):
Income taxes.......................................................... $ 31 $ (19)
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by Applied Microsystems Corporation ("Applied" or the
"Company") in accordance with generally accepted accounting principles for
interim financial information and according to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (which include only normal recurring adjustments) considered
necessary for a fair presentation have been included. The balance sheet at
December 31, 1998 has been derived from the audited financial statements at
that date, but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. The results of operations for the three-month and nine-month
periods ended September 30, 1999, are not necessarily indicative of results
to be expected for the entire year ending December 31, 1999 or for any other
fiscal period. For further information, refer to the consolidated financial
statements and footnotes thereto incorporated by reference in the Company's
Form 10-K for the year ended December 31, 1998.
2. COMPUTATION OF EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed using the
weighted-average number of common shares outstanding during the period.
Diluted earnings (loss) 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 diluted earnings (loss) per share if their effect is antidilutive.
3. COMPREHENSIVE INCOME (LOSS)
As defined by applicable accounting and reporting standards,
Applied's comprehensive income (loss) is comprised of net income or loss and
the effects of current-period translation adjustments which are recorded
directly to equity. During the third quarter of 1999, comprehensive loss
amounted to $703,000, compared to comprehensive income of $417,000 for the
third quarter of 1998. For the nine months ended September 30, 1999,
comprehensive loss amounted to $4.6 million, compared to comprehensive loss
of $253,000 for the nine months ended September 30, 1998.
-6-
<PAGE>
4. EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
------- -------
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings (loss) per share -
net income (loss).................................................... $(1,423) $ 113
------- -------
------- -------
Denominator:
Denominator for basic earnings (loss) per share - weighted
average common shares outstanding.................................... 6,738 6,789
Effect of dilutive securities:
Stock options based on the treasury-stock method, using average market
price................................................................ -- 194
------- -------
Denominator for diluted earnings (loss) per share...................... 6,738 6,983
------- -------
------- -------
Basic earnings (loss) per share............................................ $ (0.21) $ 0.02
------- -------
------- -------
Diluted earnings (loss) per share.......................................... $ (0.21) $ 0.02
------- -------
------- -------
</TABLE>
The effect of outstanding options was excluded from the calculation of
diluted earnings (loss) per share in those periods in which they were
antidilutive. Therefore, there was no difference between basic and diluted
per-share calculations for the three-month period ended September 30, 1999 shown
in the table above, or for the nine-month periods ended September 30, 1999 and
1998.
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Finished goods.................................... $ 1,027 $ 1,501
Work in process................................... 58 28
Purchased parts................................... 1,946 1,803
------- -------
------- -------
$ 3,031 $ 3,332
------- -------
------- -------
</TABLE>
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Applied Microsystems Corporation ("Applied" or the "Company") is a
leader and innovator in embedded systems solutions. Applied develops, markets
and supports a comprehensive suite of software and hardware-enhanced development
and test tools for the development of complex embedded microprocessor-based
applications. Embedded systems are used extensively in the new Internet device
industry, telecommunications, internetworking, avionics, computer peripherals,
office products, medical instrumentation and industrial process control.
Embedded systems are also found in consumer markets such as the automotive and
entertainment industries. A wide variety of products use embedded systems, such
as hand-held computing devices, cellular telephones, set-top boxes, automated
teller machines, hospital patient monitors, airplane flight control systems,
automotive braking systems, modems, facsimile machines, video games, and so
forth.
Applied's products help embedded software companies bring products to
market faster by providing innovative tools to develop, debug and test embedded
products faster, more reliably and at a lower cost.
NET SALES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------
(dollars in thousands) 1999 1998 CHANGE 1999 1998 CHANGE
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 8,328 $ 9,957 (16%) $ 24,281 $ 27,365 (11%)
</TABLE>
The Company generally recognizes revenues from product sales upon
shipment, unless the Company has obligations remaining under a sales or
licensing agreement, in which case revenue is deferred until earned. Revenues
from sales of product support contracts are deferred and recognized ratably
over the contract period, which is typically 12 months. The Company's net
sales are presently derived primarily from sales of software design,
debugging, and testing solutions, as well as product support and consulting
service revenues.
The decreases in net sales from the prior periods were primarily
attributable to a decrease in unit sales of higher-priced debug products and
decreases in unit sales of certain older lower-priced debug products. These
decreases were partially offset by increased sales of CodeTEST-Registered
Trademark- and PowerTAP-Registered Trademark- products, increased licensing
and consulting revenues, and favorable period-over-period currency exchange
rate fluctuations affecting international sales.
For the three months ended September 30, 1999, product support
revenues accounted for 14% of net sales, as compared to 11% for the
comparable period in 1998. For the nine-month periods, product support
revenues were 15% of net sales in 1999, compared to 13% in 1998. The
increased percentages in 1999 are due primarily to overall lower sales
levels, though actual product support revenues increased by 1% for the
three-month period and 2% for the nine-month period ended September 30, 1999.
-8-
<PAGE>
International sales accounted for 37% of net sales in the three
months ended September 30, 1999 as compared to 42% of net sales in the prior
comparable quarter. For the nine months ended September 30, 1999,
international sales accounted for 37% of net sales as compared to 43% in the
prior comparable period. In comparison to the prior periods in 1998,
international sales decreased 27% in the three months ended September 30,
1999, and decreased 23% in the nine-month period. The decreases in
third-quarter and year-to-date international revenues over the prior periods
in 1998 are primarily the result of decreased product sales volumes in Japan,
and to a lesser extent, decreased product sales volumes in Europe.
Applied's sales through its foreign subsidiaries are generally
denominated in local currencies; as a result, fluctuations in currency
exchange rates can have an effect on the Company's reported net sales. Had
the exchange rates in the third quarter remained constant from the comparable
quarter in 1998, the dollar amount of overall Company sales would have
decreased 20% instead of the reported 16% decrease. Had the exchange rates
remained constant over the nine-month periods, the dollar amount of overall
company sales would have decreased 14% instead of the reported 11% decrease.
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
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
(dollars in thousands) 1999 1998 CHANGE 1999 1998 CHANGE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
GROSS PROFIT $ 5,995 $ 7,432 (19%) $ 17,930 $ 20,202 (11%)
% OF REVENUES 72% 75% 74% 74%
</TABLE>
For the three months ended September 30, 1999, as compared to the
third quarter of 1998, the decrease in gross profit as a percentage of net
sales was primarily attributable to lower unit production over which to
spread fixed manufacturing overhead costs. These increased costs of sales
were partially offset by an increase in other licensing agreements and net
sales of higher-margin CodeTEST-Registered Trademark- software products.
The Company expects its gross profit to fluctuate based on its
product mix, geographic mix, product and patent licenses, and variances in
production volume and the related impact on factory overhead expense
absorption.
-9-
<PAGE>
SALES, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
(dollars in thousands) 1999 1998 CHANGE 1999 1998 CHANGE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES, GENERAL AND ADMINISTRATIVE $ 4,604 $ 4,825 (5%) $ 14,480 $ 13,584 7%
% OF REVENUES 55% 48% 60% 50%
</TABLE>
The decrease in sales, general and administrative expenses in the third
quarter, as compared to the comparable quarter in 1998, was primarily the result
of lower sales commissions, commensurate with the overall lower reported
revenues in the period. These lower expenses in the quarter were partially
offset by increases in certain promotional activities and other
personnel-related costs. The increase in sales, general and administrative
expenses for the nine-month period was primarily the result of higher
personnel-related costs and promotional activities, partially offset by lower
sales commissions.
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 at times hedges 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. No such hedging
activities were in effect during the nine months ended September 30, 1999.
Although the Company may 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.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
(dollars in thousands) 1999 1998 CHANGE 1999 1998 CHANGE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT $ 2,989 $ 2,659 12% $ 8,433 $ 7,592 11%
% OF REVENUES 36% 27% 35% 28%
</TABLE>
The increase in research and development expenses from the 1998
periods was primarily attributable to an increase in engineering headcount
and corresponding compensation-related expenses. These increased expenses are
a direct result of the Company's investment in strategic new initiatives,
including the development of LiveCODE-Registered Trademark-, which is
expected to be released within the next few months. LiveCODE enables
developers to trace and analyze the execution history of their application
software as it is running in the target system. This new product also gives
developers the capability to interact with the program as it is being
executed without interrupting execution or having to recompile the
application. Applied has also increased engineering effort related to
recently announced development agreements with Microsoft Corporation and
Nintendo Co., Ltd.
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.
-10-
<PAGE>
INTEREST INCOME AND OTHER, NET
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
(dollars in thousands) 1999 1998 CHANGE 1999 1998 CHANGE
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME AND OTHER, NET $ 175 $ 184 (5%) $ 520 $ 605 (14%)
</TABLE>
The Company's interest income and other, net, decreased from prior
periods due primarily to a decrease in cash available for short-term
investments.
INCOME TAXES
The Company accounts for its income tax provision in accordance with
Statement of Financial Accounting Standards No. 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 (loss) of interim
periods. The Company anticipates a tax loss for the year; therefore, its
estimated annual effective tax rate is 0%, and no income tax provision or
benefit is recorded.
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 on Form 10-K.)
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital primarily for the financing of
inventories and accounts receivable, capital equipment purchases, sales and
marketing efforts, and product development activities. During the nine months
ended September 30, 1999, Applied used cash of $2.3 million for operating
activities compared to the nine-month period in the prior year in which
operating activities provided $465,000. The Company purchased $682,000 in
equipment during the nine months ended September 30, 1999, compared to
purchasing $819,000 during the comparable nine months in 1998.
As of September 30, 1999, the Company had working capital of $15.9
million, including $14.2 million of cash, cash equivalents and short-term
investments. In May 1999 Applied renewed its revolving line of credit with a
commercial bank. Under the terms of the line of credit, the Company may
borrow up to $7.0 million at either the bank's prime rate or LIBOR plus
1.45%. Any such amounts borrowed would be due at the expiration of the line
of credit on May 31, 2000. The line of credit is secured by all of the
Company's inventories, chattel paper, accounts and general intangibles and
includes certain financial covenants. There were no amounts outstanding as of
September 30, 1999.
-11-
<PAGE>
The Company believes that its existing working capital, together
with funds from operations and its 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
depend on a number of factors, including costs associated with sales and
marketing programs, product development efforts, the success of the
commercial introduction of new Applied products, and the potential use of
funds for strategic purposes. 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 has taken 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: (1) Awareness,
which consists of making Company personnel, and those at third parties, aware
of the Year 2000 issue; (2) Inventory, which consists of identifying the
Company's operations or systems which are Year 2000 sensitive; (3) Analysis,
which consists of determining whether sensitive areas will in fact be
adversely impacted by Year 2000 issues; (4) Remediation, which consists of
addressing potential Year 2000 issues; and (5) 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. This assessment was completed earlier in
1999.
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 estimates
that it has expended approximately $200,000 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 $20,000, to be expended during the fourth quarter of 1999.
The Company cannot predict 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.
-12-
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Statements in this report that 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 new
product introductions, potential declining product prices and margins of
existing products, the ability of the Company's suppliers to provide
components and assemblies when needed, uncertain market acceptance of new
products, uncertain growth in the marketplace in which the Company operates,
competitive product offerings, continuation of Asian economic difficulties,
potential unfavorable foreign currency fluctuations and adverse changes in
general economic conditions in any of the countries in which the Company does
business, the actual 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 the Company's 1998 Annual
Report to Shareholders on Form 10-K.
The Company's competitors continue 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 those 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, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Applied develops products in the United States and sells primarily
in North America, Asia and Europe. As a result, financial results could be
affected by factors such as changes in foreign currency exchange rates or
weak economic conditions in foreign markets. Since the Company's products are
generally initially priced in U.S. Dollars and translated to local currency
amounts, a strengthening of the dollar could make the Company's products less
competitive in foreign markets.
The Company is exposed to market risk related to changes in interest
rates, which could adversely affect the value of the Company's short-term
investments. Applied maintains a short-term investment portfolio consisting
of interest bearing securities with an average maturity of less than six
months. These securities are classified as "available-for-sale" securities.
These interest-bearing securities are subject to interest rate risk and will
fall in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10% from levels at September
30, 1999, the fair value of the portfolio would decline by an immaterial
amount. The Company does not expect its operating results or cash flows to be
affected to any significant degree by a sudden change in market interest
rates.
-13-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this report.
10.18 Attachment B of Employment Agreement with
Stephen J. Verleye.
27 Financial Data Schedule
(B) Report on Form 8-K
The registrant did not file any reports on Form 8-K during the
quarter ended September 30, 1999.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
APPLIED MICROSYSTEMS CORPORATION
(Registrant)
Date: November 12, 1999 By: /s/ Robert C. Bateman
----------------- -------------------------
Robert C. Bateman
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
-15-
<PAGE>
EXHIBIT INDEX
<TABLE>
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Exhibit No. Description
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10.18 Attachment B of Employment Agreement with Stephen J. Verleye.
27 Financial Data Schedule
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EXHIBIT 10.18
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 Board of Directors acknowledges that this
option is offered to you as an inducement essential to your entering into an
employment contract with the Company.
Subject to adjustment as provided below, the stock to be offered under this
Agreement Shall consist of shares of the Company's Common Stock, $.01 par
value (the "Stock").
The terms of the option are as set forth in this Stock Option Letter
Agreement (the "Agreement").
TERM
Ten years from the date of grant, unless sooner terminated.
VESTING
The option is immediately exercisable, subject to the other terms and
conditions of this Agreement.
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.
These repurchase rights are subject to the limitations set forth in Attachment C
to your employment agreement with the Company, dated April 1, 1999.
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TRANSFER OF OPTION
(a) OPTIONS. This stock option is nonassignable and nontransferable by
the optionee, either voluntarily or by operation of law, except by will or by
the laws of descent and distribution of the state or country of the
optionee's domicile at the time of death, and this option by its terms shall
be exercisable during the optionee's lifetime only by the optionee.
(b) STOCK. Stock issued upon exercise of this option may have, in
addition to restrictions on transfer imposed by law, any restrictions on
transfer determined by the Board of Directors.
TERMINATION OF EMPLOYMENT OR DEATH
(a) ACCELERATION OF EXERCISE PERIOD. If the optionee's employment is
terminated by retirement or for any reason, voluntarily or involuntarily,
with or without cause, other than in the circumstances specified in (b)
below, this option may be exercised at any time prior to its expiration date
or the thirtieth day after the date of such termination of employment (or, if
such is not a regular business day, on the last preceding business day),
whichever is the shorter period, but only if and to the extent the optionee
was entitled to exercise the option on the date of such termination. Subject
to such terms and conditions as the Board of Directors may determine, the
Board of Directors may extend the exercise period any length of time not
later than the expiration date of the option and may increase the portion of
the option that may be exercised on termination.
(b) DEATH OR PHYSICAL DISABILITY. If the optionee's employment is
terminated because of death or physical disability (within the meaning of
Section 22(e)(3) of the Internal Revenue Code), the option, including
portions not yet exercisable, may be exercised prior to the earlier of the
expiration of 12 months from the date of death or disability or the
expiration of the option. If the optionee's employment is terminated by
death, any option held by the optionee shall be exercisable only by the
person or persons to whom such optionee's rights under such option shall pass
by the optionee's will or by the laws of descent and distribution of the
state or country of the optionee's domicile at the time of death. Subject
to such terms and conditions as the Board of Directors may determine, the
Board of Directors may extend the exercise period any length of time not
later than the expiration date of the option.
(c) TERMINATION OF OPTION. To the extent that the option is held by
the estate of the deceased optionee or by any optionee whose employment is
terminated and is not exercised within the limited periods provided above,
all further rights to purchase shares pursuant to such option and all other
related rights shall terminate at the end of such periods.
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PURCHASE OF SHARES PURSUANT TO OPTION
Shares may be purchased or acquired pursuant to the option granted under
this Agreement only upon receipt by the Company of notice in writing from the
optionee of the optionee's intention to exercise, specifying the number of
shares as to which the optionee desires to exercise the option and the date
on which the optionee desires to complete the transaction, which shall not be
more than 30 days after receipt of the notice. On or before the date
specified for completion of the purchase of shares pursuant to an option, the
optionee must have paid the Company the full purchase price of such shares in
cash or by bank-certified or cashier's check (including cash that may be the
proceeds of a loan from the Company), in whole or in part in shares of Common
Stock of the company previously acquired and held for not less than one year
by the optionee, or, with the consent of the Board of Directors, in whole or
in part in shares of Common Stock of the Company previously acquired and held
for less than one year by the optionee. Any shares surrendered on payment
for the exercise of options shall be valued at fair market value as
determined by the Board of Directors. No shares shall be issued until full
payment therefor has been made. With the consent of the Board of Directors,
the optionee may request the Company to automatically apply the shares
received upon the exercise of a portion of a stock option (even though stock
certificates have not yet been issued) to satisfy the exercise price for
additional portions of the option. Upon exercise of the option, the
optionee shall, upon notification of the amount due, if any, and prior to or
concurrently with delivery of the certificates representing the shares with
respect to which the option was exercised, pay to the Company, in cash or by
bank-certified or cashier's check, amounts necessary to satisfy any
applicable federal, state, and local tax withholding requirements. If
additional withholding is or becomes required beyond any amount deposited
before delivery of the certificates, the optionee shall pay such amount to
the Company on demand. With the consent of the Board of Directors the
optionee may satisfy this obligation, in whole or in part, by having the
Company withhold from the shares to be issued upon the exercise that number
of shares that would satisfy the withholding amount due or by delivering to
the Company already owned stock to satisfy the withholding amount. In
addition to the forms of payment or satisfaction of the purchase price and
tax withholding requirements permitted herein, the Board of Directors may
accept payment in such other form as it shall approve.
ADJUSTMENTS TO OPTIONS
(a) Upon the effective date of the dissolution or liquidation of the
Company, or of a reorganization, merger or consolidation of the Company with
one or more corporations which results in more than 80% of the outstanding
voting shares of the Company being owned by one or more affiliated
corporations or other affiliated entities, or of a transfer of all or
substantially all the assets or more than 80% or the then outstanding shares
of the Company to another corporation, this Agreement shall terminate unless
provisions be made in writing in connection with such transaction for the
continuance of the Agreement and for the assumption of options and other
rights theretofore granted, or the substitution for such option and other
rights of new options or rights covering the shares of a successor
corporation, or a parent or subsidiary thereof, with appropriate adjustments
as to number and kind of shares and prices, in which event this Agreement and
the option and other rights granted under it, or the new option and other
rights substituted therefor, shall continue in the manner and under the terms
so provided. In the event of such dissolution, liquidation, reorganization,
merger, consolidation, transfer of assets or transfer of stock, and if
provision is not made in such transaction for the continuance of this
Agreement and for the assumption of options and other rights or substitutions
therefor of new options and other rights covering the shares of a successor
corporation or a parent or subsidiary thereof, then the optionee shall be
entitled, prior to the effective date of any such transaction, to purchase
the full number of shares under his option which he otherwise would have been
entitled to purchase during the remaining term of such option or other rights
without regard to any limitation on exercise which may be contained therein.
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(b) If the outstanding shares of Stock are increased or decreased
(other than through a stock dividend of less than 10%) or changed into or
exchanged for a different number or kind of shares or securities of the
Company or shares of a different par value, through recapitalization,
reclassification, stock split, amendment to the Company's Articles of
Incorporation or reverse stock split, an appropriate and proportionate
adjustment shall be made in the maximum number and/or kind of securities
allocated to the options or other rights with a corresponding adjustment in
the price for each share or other unit of any security covered thereby.
(c) Adjustments herein shall be made by the Board of Directors, whose
determination shall be final. No fractional shares shall be issued under
this Agreement or pursuant to any adjustment to it.
CONDITIONS UPON ISSUANCE OF SHARES OF STOCK
Shares of Stock shall not be issued with respect to an option under this
Agreement unless the exercise of such option and the issuance and delivery of
such shares pursuant thereto shall comply with all relevant provisions of
law, including, without limitation, any applicable state securities laws, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed,
and shall be further subject to the approval of counsel for the Company with
respect to such compliance. Without creating any duty on the part of the
Company to seek any regulatory authority, inability of the Company to obtain
from any regulatory body having jurisdictional authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any
shares hereunder shall relieve the Company of any liability in respect of the
nonissuance or sale of such shares as to which such requisite authority shall
not have been obtained.
As a condition to the exercise of an option the Company may require the
optionee to represent and warrant at the time of any such exercise or
performance that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any
of the aforementioned relevant provisions of law. At the option of the
Company, a stop-transfer order against any shares of Stock may be place on
the official stock books and records of the Company, and a legend indicating
that the Stock may not be pledged, sold or otherwise transferred unless an
opinion of counsel is provided (concurred in by counsel for the Company)
stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on stock certificates in order to assure exemption
from registration. The Board may also require such other action or agreement
by the optionee as may from time to time be necessary to comply with the
federal and state securities laws. The Company shall not in any event be
obliged to undertake registration of the options or Stock hereunder.
EMPLOYMENT RIGHTS
Nothing in this Agreement or any option granted, awarded, or sold pursuant to
this Agreement shall confer upon (i) the employee any right to be continued
in the employment of the Company or any parent or subsidiary of the Company,
or shall interfere in any way with the right of the Company or any parent or
subsidiary the Company by whom such employee is employed to terminate such
employee's employment at any time, for any reason, with or without cause, or
to increase or decrease such employee's compensation, or (ii) any person
engaged by the Company any right to be retained or employed by the Company or
to the continuation, extension, renewal, or modification of any compensation,
contract, or arrangement with or by the Company.
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NO RIGHTS AS A SHAREHOLDER
The holder of this option shall have no rights as a shareholder with respect to
any shares covered by any option until the date of issue of a stock certificate
to him for such shares. Except as otherwise expressly provided in this
Agreement, no adjustment shall be made for dividends or other rights for which
the record date is prior to the date such stock certificate is issued.
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
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Anthony Miadich, Chairman
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
ACCEPTANCE AND ACKNOWLEDGMENT
I accept the option described in the above Stock Option Letter Agreement and
acknowledge receipt of a copy of this Agreement. I have read and understand this
Agreement.
Dated: : Apri1 1, 1999 /s/ Stephen J. Verleye
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A. Total Number of shares: 215,000
B. Price per share: $2.50
C. Date of grant: APRIL 1, 1999
D. This is intended to be 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. YOU ARE URGED TO CONSULT YOUR
TAX ADVISOR.
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,499
<SECURITIES> 11,710
<RECEIVABLES> 7,584
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<INVENTORY> 3,031
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0
0
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<CGS> 2,333
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