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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the fiscal year ended December 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 by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of the Form 10-K
or any amendment to this form 10-K.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock: 6,885,951 shares outstanding as of March 17, 2000.
The aggregate market value of the common stock held by
non-affiliates of the registrant, based on the closing price on March 17,
2000, as reported on Nasdaq, was $82,795,304. (1)
(1) Excludes shares held of record on that date by directors,
executive officers and greater than 10% shareholders of the Registrant.
Exclusion of such shares should not be construed to indicate that any such
person directly or indirectly possesses the power to direct or cause the
direction of the management of the policies of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the
registrant's 2000 Annual Meeting of Shareholders to be held on May 23, 2000,
are incorporated by reference into Part III of this Report.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business......................................................................... 1
ITEM 2. Properties....................................................................... 9
ITEM 3. Legal Proceedings................................................................ 10
ITEM 4. Submission of Matters to a Vote of Security Holders.............................. 10
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters............ 10
ITEM 6. Selected Consolidated Financial Data............................................. 11
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................... 12
ITEM 7A. Qualitative and Quantitative Disclosures about Market Risk....................... 19
ITEM 8. Financial Statements and Supplementary Data...................................... 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant............................... 40
ITEM 11. Executive Compensation........................................................... 40
ITEM 12. Security Ownership of Certain Beneficial Owners and Management................... 40
ITEM 13. Certain Relationships and Related Transactions................................... 40
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................. 41
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PART I
ITEM 1. BUSINESS
The following Business section includes "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
The Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statements as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact the Company makes in this document or in any document
incorporated by reference are forward-looking. In particular, the statements
herein regarding industry prospects and the Company's future results of
operations or financial position are forward-looking statements.
Forward-looking statements reflect management's current expectations and are
inherently uncertain. The Company's actual results may differ significantly
from expectations. The section entitled "Factors Affecting Future Results and
Forward-Looking Statements" describes some, but not all, of the factors that
could cause these differences.
OVERVIEW
Applied Microsystems Corporation ("Applied" or the "Company") is a
leader and innovator in software tools and technologies. Applied's products
and services help customers bring products to market faster by providing
innovative tools to develop, debug, and test products faster, more reliably,
and at a lower cost. The Company's products have historically been targeted
to meet the needs of embedded systems markets, and 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.
The Company is pursuing development efforts to leverage its
expertise in traditional embedded systems markets to apply its development
and performance-enhancement solutions more specifically to complex Internet
infrastructure needs. The Company expects that traditional embedded systems
tools may become the tools of choice for creating modern Internet
applications and establishing and maintaining Internet infrastructure because
these tools are uniquely suited to creating applications that are highly
reliable. Such tools are also able to handle real-time operating requirements
and complex hardware/software integration.
The Company's solutions enhance manufacturers' productivity by
providing a set of solutions that span a product's lifecycle. Applied's
current products and services assist customers with the development of
software and the integration of software and hardware in creating embedded
products. The Company's new software analysis tools include the CodeOPTIX-TM-
family of high-level software visibility tools for application software
verification, analysis and test as well as providing the ability to add
executable code to programs running in the target systems. Applied provides
development tools for third-party operating systems such as Microsoft
Corporation's Windows-Registered Trademark- CE, WindRiver Systems'
VxWorks-Registered Trademark- and pSOS-TM-, Sun Microsystems' ChorusOS-TM-,
and Lynx Real-Time Systems' LynxOS-TM- operating systems; support for
development, debug and testing of a wide range of microprocessors; and
custom engineering capability to provide customers with specialized tools,
intellectual property and design services.
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Applied distributes its development solutions primarily through a
network of direct sales and service offices located in the United States,
Japan, and Europe and distributors throughout the rest of the world, as well
as through partnerships with third-party developers of integrated development
environments.
Applied was incorporated in Washington in 1979 and is headquartered
at 5020 148th Avenue NE, Redmond, Washington. The Company is ISO 9002
certified. For more information, visit Applied's home page on the World Wide
Web: http://www.amc.com.
BACKGROUND
Applied has developed significant expertise in providing development
solutions to the embedded systems marketplace. Embedded systems generally
include an embedded microprocessor (often referred to as a microcontroller or
"MCU"), a read-only memory ("ROM"), real-time operating system ("RTOS")
software, and custom software to implement assigned applications. Embedded
systems are incorporated within electronic devices and are dedicated to
performing specific tasks quickly and reliably in response to rapidly
occurring external events. Manufacturers worldwide are making increasing use
of embedded systems to enhance the functionality and performance, reduce the
cost and size, and improve the reliability of a broad variety of products.
Manufacturers are faced with an expanding competitive market that
requires them to bring increasingly complex products to market faster and at
reduced costs. As the computing power of embedded microprocessors has grown,
and as unit prices for embedded microprocessors have declined, manufacturers
have been able to incorporate vastly improved features, speed and reliability
into their products. This additional sophistication has resulted in
significantly larger and more complicated application software and increased
challenges associated with delivering a product on schedule.
The development of embedded systems using today's high-speed
microprocessors requires the design, debugging and testing of substantial
amounts of complex custom application software, which is typically written in
a high-level programming language. As the complexity and volume of such
software increases, so also increases the potential for programming errors,
the need to eliminate performance shortcomings, and the difficulty of
thoroughly testing the complete system.
In their efforts to remain competitive, manufacturers are
increasingly faced with the demands of conflicting pressures. As they
incorporate advanced microprocessors into their products, these manufacturers
must hire more software engineers, develop more embedded software, and
intensify their debugging and testing efforts, all of which tend to lengthen
product development cycles and/or increase development costs. At the same
time, competitive demands for lower-cost, technologically superior products
create pressures to minimize development costs and time-to-market. Applied's
current development solutions are designed to help customers respond
successfully to these conflicting demands.
PRODUCTS
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. Applied's current
development solutions are targeted principally to software engineers in the
development of embedded software and associated products. Applied designs its
products to support major market segments over a broad range of 16- and
32-bit embedded microprocessors primarily manufactured by Advanced Micro
Devices, Inc., Hitachi, Intel Corporation, MIPS Technologies, Inc., and
Motorola, Inc.
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The Company's products generally enable engineers to perform
debugging functions in high-level programming languages and operate on
IBM-compatible personal computers or engineering workstations produced by
Hewlett-Packard or Sun Microsystems. The Company's tools also enable
engineers to observe software interaction and functions with several
commercially available RTOS products and to read file format output from
compatible compilers.
The Company's current products can be classified into three broad
categories: hardware-enhanced debugging tools, software analysis tools, and
game development systems.
HARDWARE-ENHANCED DEBUGGING TOOLS
The Company manufactures a wide range of hardware-enhanced software
tools for the design and debugging of embedded software. These in-circuit
microprocessor and ROM emulators are utilized primarily by software engineers
during the highly iterative software development and system integration
phases of the embedded systems development process. To a lesser extent, they
are also used by software engineers for low-level testing of software
functions and by hardware engineers in system integration and troubleshooting
their designs.
The Company's emulators perform four basic functions or subsets
thereof, depending on product configuration:
- DOWNLOAD AND RUN CONTROL -- the ability to load the developer's
software program into the system under development; to specify
predetermined events or problems that may occur in the course of
software execution; to stop system operation upon such an
occurrence; and to resume operation at the desired point after
any alterations have been made to the system or software.
- EXECUTION TRACE -- the ability to detect, observe and provide
an execution history of detailed software instructions and flow
by collecting this data in a minimally intrusive manner in the
probe's random access memory, which is a capability particularly
important in identifying bugs or timing problems or in
reconstructing the events leading up to a system failure.
- OVERLAY MEMORY -- the ability to replace the target system's
memory with memory residing in the emulator where embedded
software can be debugged and modified easily before it is
permanently "burned into" the target system's ROM.
- HIGH-LEVEL LANGUAGE DEBUGGING -- the ability to display source
code, data and relevant RTOS information, and to control each of
the development tool's other basic functions through a high-level
language interface to the target system under development.
Applied offers a broad selection of hardware-enhanced software
design and debugging tools with a variety of features and prices. The tools
are accessed through a high-level language debugger human interface licensed
from CAD-UL, Mentor Graphics Corporation, Metrowerks (now Motorola), or
Paradigm and generally resold with Applied's product. These hardware-enhanced
debugging products are available in two categories: (1) lower-priced,
feature-focused products and (2) high-end, higher-priced products based on
traditional embedded architecture.
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The lower-priced, feature-focused products include
CodeTAP-Registered Trademark-, PowerTAP-TM-, and SuperTAP-TM- tools that are
pocket sized and provide a full range of feature capabilities; this category
also includes NetROM-TM-, which provides cost-efficient target ethernet
access and memory substitution. These tools support the latest generation of
microprocessors primarily from Motorola, Intel, Hitachi, Advanced Micro
Devices, and MIPS. This product group represented the largest revenue
category for Applied in 1999, totaling more than 60% of revenues for the
year. Prices for these development solutions range from $3,000 to $30,000,
depending on the model and configuration.
The high-end, higher-priced products include Applied's EL Series and
CodeICE-TM- emulators that represent previous-generation technology. These
full-featured products support older families of microprocessors from
Motorola (680X0 series) and Intel (80960 series). Based upon a shift in
designs to newer microprocessors, demand for these products has declined in
recent years and represented less than 10% of the Company's revenues in 1999.
Applied plans to continue to support its hardware-enhanced debugging
tools and expects to develop additional products in 2000 to support existing
and future microprocessors, as well as to continue to enhance and broaden its
user-interface technology with third parties. The process of developing such
additional products is subject to the challenges and uncertainties normally
associated with product development, and there can be no assurance that the
Company will be able to complete these development efforts successfully or in
a timely manner.
SOFTWARE ANALYSIS TOOLS
The Company's software analysis tools include the CodeOPTIX family
of high-level software visibility tools based on instrumentation for
application software verification, analysis and test as well as providing the
ability to add executable code to programs running in the target systems.
Applied is focused on growing this portion of its business, and software
analysis tools have increased from approximately 10% of revenues in 1997 to
more than 25% of revenues in 1999.
Applied's CodeTEST-Registered Trademark- includes a line of software
testing tools which are designed specifically to offer a broad range of
optimization and testing capabilities to software developers. These tools
measure the performance and reliability of software, as well as the adequacy
of the test process itself, in a minimally intrusive manner. The measurements
are then displayed in an intuitive format. Software engineers use these
products during the full range of system development - beginning with initial
software development, extending to system integration, and then to final
system test and validation.
CodeTEST software analysis tools currently include the following
modules:
- COVERAGE ANALYSIS - Basic Block Coverage: the ability to
measure the percentage of a software program's routines actually
exercised by certain tests; to identify redundancies among tests;
to identify the optimal set of tests to maximize the percentage
of code tested in the shortest test period; and to determine the
point at which the cost of continued testing is likely to exceed
the benefits to be derived.
- ADVANCED COVERAGE TOOLS - adds a finer degree of granularity
for analyzing test execution to the Statement, Decision and
Modified Condition Decision Coverage levels. For certain
industries such as avionics, government regulations mandate test
methodologies for each type of software application based on the
criticality of that application. Advanced Coverage Tools show
what conditions, decision paths, and code statements have been
tested.
- PERFORMANCE ANALYSIS - the ability to measure the time that a
software program takes to perform a particular function and the
degree of embedded microprocessor utilization; to identify any
hindrances to high-speed processing so that system reaction times
and compliance with performance specifications can be optimized.
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- MEMORY ALLOCATION ANALYSIS - the ability to monitor the use of
memory during software execution; to identify likely "memory
leaks" and other memory allocation errors in order to improve
programming reliability and aid in minimizing the size and cost
of the target system's memory.
- SOFTWARE EXECUTION TRACE - the ability to observe software
functions from the source code level to the task level at any
point in execution history to address software performance or
memory problems.
The CodeTEST product line currently includes software modules sold
separately or with a separate hardware probe. CodeTEST supports the most
popular 32-bit microprocessors from Motorola, Intel, Hitachi, Applied Micro
Devices, and MIPS, as well as the VME Bus computer architecture. Applied
plans to support additional embedded microprocessors with additional releases
during 2000, but there can be no assurance as to the success or timeliness of
such development efforts.
In 1997, Applied entered into an OEM agreement with a third-party
developer of real time operating systems for integration of certain CodeTEST
modules within its integrated development environment. In 1998, Applied
released and began shipping a software-only version of two CodeTEST modules,
Basic Block Coverage and Memory Allocation Analysis, through this third
party. This agreement remained in place throughout 1999. The modules run on
the embedded target within the third party's integrated development
environment. Applied plans to expand its software-only CodeTEST with
additional module releases and distribution channels during 2000.
In December 1999, Applied began shipping LiveCODE-TM-, the
industry's first interactive run-time tracing system. LiveCODE incorporates
Applied's automated instrumentation technology, which allows users to
interactively debug their software while the application runs in the target.
With LiveCODE, developers can graphically display program execution at a high
level to quickly understand its operation, trace details in areas of interest
and insert code to diagnose problems. All of this can be done without
recompiling or stopping the program. Interactively debugging software while
the application runs in the target means developers can significantly reduce
the time spent debugging and spend more time on developing code.
GAME DEVELOPMENT SYSTEMS
In August 1999, Applied and Nintendo of America, Inc. announced an
agreement whereby Applied would develop software and hardware for Nintendo's
next-generation gaming system, code-named "Dolphin." During the latter part
of 1999 and into 2000, Applied continued the development effort and
anticipates initial shipments of Nintendo development kits in 2000.
Based in part on the Company's growing expertise in developing tools
for complex gaming systems, Applied announced in March 2000 that it had
joined PowerPlay - an initiative designed to identify and establish a set of
known operating standards for Internet Service Providers and other service
and equipment providers. The goal of PowerPlay is to help create open
standards that improve the performance of multi-player games on the Internet.
Other corporate members of the initiative include Internet infrastructure
companies, Internet service providers and game developers. Applied expects to
focus increasingly greater resources on the development and support of games
development tools.
CUSTOMERS
The Company's sales are presently concentrated primarily in the
internetworking, telecommunications and computer peripherals segments of the
electronics industry. Sales to Lucent Technologies Inc. accounted for 10% of
consolidated revenues in 1999. The Company expects that a substantial portion
of its revenues will continue to be concentrated among a relatively limited
number of customers for the foreseeable future. Sales are generally made
pursuant to customer purchase orders.
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SALES, MARKETING AND CUSTOMER SUPPORT
Applied distributes its development solutions primarily through a
network of direct sales and service offices located in the United States,
Japan, and Europe, and distributors throughout the rest of the world, as well
as through partnerships with third-party developers of integrated development
environments. As of December 31, 1999, the Company had 78 sales and support
employees worldwide, including 44 field sales engineers, inside sales
specialists and application engineers located at the Company's headquarters
and in direct or home sales offices throughout North America, and in the
Company's wholly owned subsidiaries in Japan, Germany, France and the United
Kingdom. Due to the technical nature of its products, the Company believes
that an important aspect of its direct sales strategy is the technical
support and training provided to customers. In addition, a high level of
customer service and support is critical to customer adoption and successful
utilization of design, debugging and testing technology. The Company's field
application engineers offer product support and assist customers in
incorporating Applied's design, debugging and testing tools into their design
process.
The Company maintains international distribution agreements covering
various countries. These agreements generally have a term of 12 months and
are exclusive on a country-by-country basis. The sale of software development
tools in foreign countries involves risks associated with currency exchange
rate fluctuations and restrictions, export-import regulations, customs
matters, potentially longer payment cycles, differing collection issues, and
military, political and transportation risks. The Company's sales through its
foreign subsidiaries are generally denominated in foreign currencies. As a
result, fluctuations in currency exchange rates can have a significant effect
on the Company's sales, even in the absence of an increase or decrease in
unit sales to foreign customers. In addition, foreign sales involve
uncertainties arising from local business practices and cultural
considerations, and risks associated with international trade tensions. The
Company expects that international sales will continue to account for a
significant portion of Applied's net sales in the future.
Applied participates in cooperative marketing activities with other
embedded systems development tools providers and embedded microprocessor
manufacturers. These relationships enable the Company to further leverage its
technical capabilities, customer relationships and international sales and
support infrastructure. The Company believes that developing and maintaining
these relationships is important to its ability to achieve broad market
penetration. Applied's marketing efforts also include attending trade shows,
publishing articles, and advertising in trade magazines and journals, direct
mail and product demonstrations.
The time between order and delivery of the Company's products is
often quite short. The number of orders, as well as the size of individual
orders, can vary substantially from month to month. Because of the short
period between order receipt and shipment of products, the Company typically
does not have a meaningful backlog of unfilled orders and believes a backlog
is neither significant to an understanding of its business nor representative
of potential revenue for any future period.
COMPETITION
The traditional market for embedded software development solutions
is fragmented and highly competitive, with many providers offering technical
solutions to address the design, debugging, testing and service needs of
embedded software developers. This market is also subject to rapid change, as
technological developments create new needs and render prior technical
solutions obsolete. The Company's ability to compete successfully in this
market will depend on its ability to develop and introduce new products and
features that address the increasingly sophisticated needs of its customers,
to implement business relationships that enable it to broaden its product
offerings, to provide worldwide customer service and support, and to respond
to technological advances, emerging industry standards and practices and
competitive developments.
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The principal competition for the Company's hardware-enhanced
debugging tools comes primarily from Agilent Technologies, Inc. (formed from
a spin-off of various business units of Hewlett-Packard), Lauterbach GmbH,
and Embedded Support Tools Corporation, and from various other domestic and
international providers of in-circuit emulators, many of which focus
primarily on developing products to support specific microprocessors, and, to
a lesser extent, from domestic providers of embedded microprocessor
simulators, RTOS debugging software, logic analyzers, ROM monitors and ROM
emulators.
Competition for Applied's software analysis tools comes principally
from domestic providers of embedded debug software, emulators and logic
analyzers, which are generally able to perform only portions of the software
testing functions offered by the Company's CodeOPTIX tools. The Company has
also historically experienced competition from the engineering departments of
major manufacturers, which occasionally develop internal technical solutions
to their design, debugging or testing problems.
Competition among providers of embedded software design, debugging,
testing and services focuses on a variety of factors, including the
availability of tools that are compatible with the customer's chosen embedded
microprocessor, engineering workstation and other software development
equipment; performance characteristics and features such as high-speed
processing, real-time visibility and control, high-level programming language
and ease-of-use; product reliability; price/performance characteristics;
customer service and worldwide support; and product availability and delivery
time. The Company believes that the relative importance of each of these
factors to a prospective customer varies for each development project,
depending upon the complexity of the embedded system design, the
microprocessor to be used, the project development schedule, and the
engineering team's budget and experience level.
The Company anticipates that the embedded systems development market
is likely to experience continued consolidation as companies strive to
broaden their product offerings. For example, in February 2000, Wind River
announced plans to purchase Embedded Support Tools Corporation. The Company
expects competition to increase from both established and emerging companies.
The Company believes that much of its competition is now, and will
increasingly be, from larger companies having substantially greater
technical, financial and marketing resources, as well as larger customer
bases and greater name recognition, than Applied.
MANUFACTURING
The Company maintains manufacturing operations to support its
hardware-enhanced development solutions. The manufacturing operations consist
of the procurement and inspection of parts and components, assembly, software
duplication, and extensive testing of components and finished products.
Applied's products incorporate the Company's proprietary software, as well as
software licensed from others. The Company conducts virtually all steps of
the assembly process, including board assembly, at its facility in Redmond,
Washington. The Company has a computerized manufacturing inventory control
system that integrates and monitors purchasing, inventory control and
production.
The Company thoroughly inspects and tests its manufactured products
during the manufacturing process and tests finished products using tests
designed and developed internally based on the custom requirements and
functionality of the product. In addition, the Company's products undergo
thorough quality inspection and testing, including "burn-in" procedures
throughout the manufacturing process to ensure the quality and reliability of
the Company's products. Applied also requires that all employees involved in
the assembly process undergo thorough training. The Company has maintained
its ISO 9002 certification since December 1995. The Company generally
warrants that its hardware, software and mechanical parts will be free from
defects in materials and workmanship for 90 days domestically and from 90
days to one year internationally, depending on the product and location.
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The Company pursues a strategy of using the latest high-performance
hardware components in the manufacture of its development tools. A number of
these product components, such as microprocessors, ASICs, standard integrated
circuits, memory chips, connectors and cables, are available only from a
single source or a limited number of distributors. The Company has entered
into agreements with a number of its vendors that include provisions
requiring the vendor to maintain specified levels of key parts and
components. In addition, due to fluctuating demand levels and limits on
production, it is typical for a number of key components to be on
"allocation" at any given time. There can be no assurance that the Company
will be able to obtain key components in the future in a timely manner, in
sufficient quantities, and/or on favorable price terms. The Company has a
limited ability to avoid or offset future price increases by suppliers of key
components. If the Company were to experience significant future delays,
interruptions, or reductions in its supply of key components, or unfavorable
price terms, its business, financial condition, and results of operations
could be materially adversely affected.
Although the Company's customers occasionally forecast projected
purchase requirements in advance of shipment dates, customers more frequently
order on an as-needed basis, and products are often shipped within a few
weeks after an order is received. As a result, the Company's ability to plan
production and inventory levels is limited. The need for immediate delivery
by many customers, as well as the numerous products and configurations sold
by the Company, require the Company to maintain a relatively high level of
parts in inventory.
The Company is subject to a variety of federal, state and local
governmental regulations related to the storage, use, discharge and disposal
of toxic, volatile or otherwise hazardous chemicals used in its manufacturing
process. The Company may be subject to future environmental regulations that
may impose the need for additional capital equipment or other requirements.
Any failure by the Company to control the use of, or adequately to restrict
the discharge of, hazardous substances under present or future regulations
could subject the Company to liability. The company is not aware of any
significant liability related to environmental issues.
RESEARCH AND DEVELOPMENT
Applied believes that continued investment in research and
development is critical to the Company's future success. Applied continues to
make substantial investments in the development of new technologies and
products. Because of the competitive importance of offering development
solutions that are compatible with particular microprocessors and other
equipment to be used in developing embedded systems, solutions providers such
as Applied are under continuing pressure to support major new families of
embedded microprocessors, as well as advances in other development software
and hardware. Applied believes that its future growth and financial
performance will depend heavily on its ability to enhance its existing
products, develop and introduce new products and features that address the
increasingly sophisticated needs of its customers, and respond to
technological advances, emerging industry standards and practices, and
competitive developments. Applied's engineering and development group
includes 96 full-time employees. During 1999, research and development
expenses were $11.4 million, compared to $10.4 million in 1998 and $8.5
million in 1997.
PROPRIETARY RIGHTS
The Company's success will depend in part on its ability to protect
its technology and to preserve its trade secrets. Although the Company relies
primarily upon continuing technological innovations, trade secrets and
know-how to develop and maintain its competitive position, it also relies on
a combination of patent, copyright and trademark laws, confidentiality
procedures, and contractual provisions to protect its proprietary rights. The
Company has limited patent protection, and there can be no assurance that any
patents will provide a competitive advantage or will afford protection
against competitors with similar technology, or will not be successfully
challenged or circumvented by competitors. The Company's policies and other
measures designed to protect trade secrets and propriety rights may
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not be adequate to prevent or deter misappropriation of its technology; in
addition, competitors may be able to independently develop technologies
having similar functions or performance characteristics. The laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States. The Company may not have an
adequate legal remedy to prevent or seek redress for future unauthorized
misappropriations of the Company's technology.
The embedded systems development market is characterized by rapid
technological change, with frequent introductions of new products and
technologies. As a result, industry participants often find it necessary to
develop products and features similar to those introduced by others,
increasing the risk that their products and processes may give rise to claims
that they infringe the patents of others. Accordingly, the Company's current
and future products and processes within the traditional embedded markets or
in new markets may conflict with patents that have been granted or may be
granted to competitors or others. Such competitors or others could bring
legal actions against the Company or its customers, claiming damages and
seeking to enjoin manufacturing, marketing or use of the affected product or
processes. Similarly, the Company may in the future find it necessary to
commence litigation in order to enforce and protect its proprietary rights.
If the Company becomes involved in such litigation, it could consume a
substantial portion of the Company's resources and result in a significant
diversion of management attention. If the outcome of any such litigation were
adverse to the Company or its customers, the Company's business, financial
condition and results of operations could be materially and adversely
affected.
The Company believes that it currently owns or has adequate rights
to utilize all material technologies relating to its existing products;
however, as it continues to develop new products and features, the Company
anticipates that it may find it desirable or necessary to obtain nonexclusive
or exclusive licenses from third parties entitling it to use certain
technologies or software solutions. Such licenses may not be available to the
Company on acceptable terms, if at all. The Company currently has licenses to
several software programs that are used in its design, debugging and testing
products. Termination of any such agreement, or failure to renew any such
agreement upon its expiration with respect to products the Company intended
to continue to market, would require product redesign and could significantly
increase the cost to the Company of manufacturing such products and have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's loss of or inability to obtain necessary
or desirable licenses from third parties could have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1999, the Company had 251 employees, of whom 221
were based in the United States and 30 were based internationally. Of the
total, 121 were engaged in Sales, General and Administrative, 96 were in
research and development and 34 were in manufacturing. None of the Company's
employees is represented by a labor union. The Company has not experienced
any work stoppages and considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, research
and development and manufacturing facility is located in an approximately
59,000 square-foot building in Redmond, Washington that is leased through May
31, 2001. The Company also leases nine other domestic sales and support
offices in the United States and five international sales offices in Japan,
France, Germany and the United Kingdom. The Company believes that its
facilities are adequate to satisfy its projected requirements, including its
requirements for production capacity into 2000, and that additional space
will be available as needed.
9
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, Applied is involved in legal proceedings, none of
which is currently considered material to the Company's business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Applied Microsystems' common stock trades on The Nasdaq Stock
Market-Registered Trademark-("Nasdaq") under the symbol "APMC." The Company
estimates that at March 17, 2000, there were approximately 3,000 beneficial
owners of the Company's common stock, as estimated by the number of record
holders including participants in security positions listings.
The closing price of the Company's common stock as reported by
Nasdaq on March 17, 2000 was $19.63 per share. The price per share in the
following table sets forth the low and high closing prices on Nasdaq for the
quarter indicated:
<TABLE>
<CAPTION>
LOW HIGH
------- ------
<S> <C> <C>
1997
First quarter $ 4.88 $ 16.00
Second quarter 3.88 10.50
Third quarter 8.00 12.88
Fourth quarter 5.00 12.63
1998
First quarter $ 4.50 $ 8.88
Second quarter 3.81 7.63
Third quarter 2.63 4.63
Fourth quarter 2.13 4.75
1999
First quarter $ 2.75 $ 4.81
Second quarter 2.50 3.44
Third quarter 2.19 4.13
Fourth quarter 3.56 13.75
</TABLE>
The Company has not paid dividends and does not plan to pay
dividends on its common stock in the foreseeable future.
10
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 33,241 $ 37,020 $ 39,124 $ 38,662 $ 31,039
Cost of sales 8,664 9,587 10,532 10,793 9,530
-------- -------- -------- -------- --------
Gross profit 24,577 27,433 28,592 27,869 21,509
Operating expenses:
Sales, general and administrative 18,929 18,104 18,542 15,142 13,321
Research and development 11,435 10,438 8,468 7,988 6,275
-------- -------- -------- -------- --------
Total operating expenses 30,364 28,542 27,010 23,130 19,596
-------- -------- -------- -------- --------
Income (loss) from operations (5,787) (1,109) 1,582 4,739 1,913
Interest income and other, net 706 783 669 559 (154)
-------- -------- -------- -------- --------
Income (loss) before income taxes (5,081) (326) 2,251 5,298 1,759
Income taxes -- 19 349 1,582 305
-------- -------- -------- -------- --------
Net income (loss) $ (5,081) $ (345) $ 1,902 $ 3,716 $ 1,454
======== ======== ======== ======== ========
Basic earnings (loss) per share $ (0.76) $ (0.05) $ 0.28 $ 0.57 $ 0.94
Shares used in basic per-share calculation 6,727 6,811 6,769 6,545 1,551
Diluted earnings (loss) per share $ (0.76) $ (0.05) $ 0.26 $ 0.52 $ 0.27
Shares used in diluted per-share calculation 6,727 6,811 7,297 7,097 5,329
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 16,311 $ 20,116 $ 20,547 $ 19,415 $ 15,756
Total assets 28,042 33,290 32,582 30,824 26,846
Long-term debt, net of current portion -- -- -- 15 68
Shareholders' equity 19,187 23,931 24,291 22,607 18,654
</TABLE>
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Applied Microsystems Corporation is a leader and innovator in
software tools and technologies. Applied's products help customers bring
products to market faster by providing innovative tools to develop, debug,
and test products faster, more reliably, and at a lower cost. The Company's
products have historically been targeted to meet the needs of embedded
systems markets, and 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.
The Company is pursuing development efforts to leverage its
expertise in traditional embedded systems markets to apply its development
and performance-enhancement solutions more specifically to complex Internet
infrastructure needs. The Company expects that traditional embedded systems
tools may become the tools of choice for creating modern Internet
applications and establishing and maintaining Internet infrastructure because
these tools are uniquely suited to creating applications that are highly
reliable. Such tools are also able to handle real-time operating requirements
and complex hardware/software integration.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
(DOLLARS IN THOUSANDS) 1999 PRIOR YEAR 1998 PRIOR YEAR 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $33,241 $(3,779) $37,020 $(2,104) $39,124
(10%) (5%)
</TABLE>
The Company generally recognizes revenues from product sales upon
shipment, unless the Company has obligations remaining under a sale 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. See Note 1 of Notes
to Consolidated Financial Statements.
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 services. During 1998 and 1999, the Company
experienced continuing declines in sales volumes of its higher-priced
"high-end" emulator products as the overall market demand for this type of
product decreased at a more rapid pace than anticipated. High-end debug
products accounted for over 40% of net sales in 1997, but have since declined
to less than 10% of net sales in 1999. The Company's lower-priced,
hardware-based debug products have increased as a percentage of net sales
from 43% of net sales in 1997 to nearly 60% of net sales in 1999. The
Company's new software analysis tools, including CodeTEST and the recently
released LiveCODE products, have increased from approximately 10% of net
sales in 1997 to more than 25% of net sales in 1999. The Company's net sales
also include product support revenues, which are included within the
aforementioned major categories of Applied's products. These support revenues
represented 14% of net sales in 1999, compared to 13% in 1998 and 12% in 1997.
12
<PAGE>
The decrease in net sales in 1999 as compared to 1998 was primarily
attributable to a decrease in unit sales of high-end debug products and
decreases in unit sales of certain older lower-priced debug products. The
overall lower net sales were partially offset by increased sales of software
analysis tools, primarily from the CodeTEST product line, and increased
consulting revenues as the Company progressed under its agreement with
Nintendo to provide development kits for Nintendo's next-generation gaming
system. Applied also had improved sales in 1999 of certain lower-priced debug
products, including PowerTAP, and favorable year-over-year currency exchange
rate fluctuations affecting the dollar value of international sales.
The decrease in net sales in 1998 as compared to 1997 was primarily
attributable to a decline in unit sales of high-end debug products and to a
lesser extent currency exchange rate fluctuations unfavorably affecting the
dollar value of international sales. These decreases were partially offset by
an increase in unit sales and average selling price of lower-priced debug
products, and to a lesser extent on increased patent license royalties and
consulting services.
International sales represented 38% of net sales in 1999, compare to
44% in 1998 and 49% in 1997. In U.S. dollars, international sales outside of
North America decreased 22% in 1999, as compared to 1998. International sales
decreased 16% in 1998, as compared to net sales in 1997. The decreases in
1999 and 1998 were attributable primarily to a reduction in unit sales and
average selling price of the Company's products internationally, particularly
as the Asian economies have experienced overall weakness. The decrease in
1998 was partially offset by an increase in unit sales 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 a significant effect on the Company's reported net
sales. Had the average exchange rates in 1999 remained constant from 1998,
the dollar amount of overall Company net sales would have decreased 13%
instead of the reported 10% decrease. Had the average exchange rates in 1998
remained constant from 1997, the dollar amount of overall Company sales would
have decreased 3% instead of the reported 5% 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. While international sales have decreased over the past three years in
total and as a percentage of revenues, the Company expects international
sales to continue to account for a significant percentage of its net sales.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
(DOLLARS IN THOUSANDS) 1999 NET SALES 1998 NET SALES 1997 NET SALES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COST OF SALES $8,664 26% $9,587 26% $10,532 27%
GROSS PROFIT $24,577 74% $27,433 74% $28,592 73%
</TABLE>
Cost of sales includes materials, labor and overhead incurred in the
manufacturing of products as well as the cost of providing professional
services and estimated warranty. The Company performs periodic assessments of
required reserves for potential inventory obsolescence, and corresponding
adjustments to such reserves are included within cost of sales. The dollar
amounts of cost of sales and gross profit fluctuate based on the volume of
corresponding net sales.
13
<PAGE>
Overall, cost of sales and gross profit as a percentage of net sales
have remained constant over the reporting periods, despite the change in
product mix toward software analysis tools and lower-priced debug products.
Software analysis tools generally have a higher gross profit percentage than
the Company's traditional debug products. However, the increased gross profit
on software analysis tools was offset by additional required inventory
reserves for high-end inventory, the allocation of overhead expenses over a
lower volume of production as unit sales have decreased, and lower
comparative margins on consulting services.
The Company expects its gross profit to fluctuate based upon its
product mix, geographic mix, product and patent license royalties and
variances in volume and related absorption of factory overhead costs.
Accordingly, there can be no assurance that the Company will be able to
sustain its recent gross profit percentages.
<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
(DOLLARS IN THOUSANDS) 1999 PRIOR YEAR 1998 PRIOR YEAR 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SALES, GENERAL AND
ADMINISTRATIVE EXPENSES $18,929 $825 $18,104 $(438) $18,542
5% (2%)
</TABLE>
The increase in sales, general, and administrative expenses in 1999
was due primarily to higher marketing expenditures incurred as the Company
launched its CodeOPTIX product family, as well as certain higher
personnel-related expenditures. Expenses in 1999 also included accelerated
amortization on certain purchased technology. The higher overall expenses for
the year were offset in part by lower sales commissions, commensurate with
lower reported revenues in 1999, as well as certain lower consulting expenses.
The decrease in 1998 in comparison to 1997 was due primarily to a
reduction in foreign currency exchange losses as well as a reduction in
general operating expenses. These lower expenditure levels were partially
offset by increased headcount, compensation-related expenses, and promotional
costs in connection with the company's expansion of its sales and marketing
efforts.
The Company expects its sales and marketing expenditures to increase
in the future as it introduces and markets new products and continues to
expand its sales, general and administrative organization.
Foreign exchange gains and losses are included in sales, general and
administrative expenses. In order to mitigate certain intercompany risks
associated with exchange rate fluctuations, the Company 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 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.
14
<PAGE>
<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
(DOLLARS IN THOUSANDS) 1999 PRIOR YEAR 1998 PRIOR YEAR 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT
EXPENSES $11,435 $997 $10,438 $1,970 $8,468
10% 23%
</TABLE>
The increase in research and development expenses in 1999, as
compared to 1998, was primarily attributable to increased engineering
headcount and correspondingly higher compensation-related expenses. These
increased expenses were a direct result of the Company's investment in
strategic new initiatives, including the development of LiveCODE, which was
first commercially shipped in December 1999. 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.
Research and development expenses increased in 1998 as compared to
1997 due primarily to an increase in contract labor, headcount and
compensation-related expenses, which were partially offset by lower prototype
expenses.
The Company believes that its continued investment in focused
research and development activities is critical to Applied's future success,
and that the Company's engineering resources represent a competitive
advantage. Therefore, the Company intends to continue to make substantial
investments in product development. These efforts may include development of
software design, debugging and test tools for additional embedded
microprocessors as well as continued advanced development in new products for
current and new market opportunities. As a result, the Company anticipates
that research and development expenses will increase in 2000.
<TABLE>
<CAPTION>
CHANGE FROM CHANGE FROM
(DOLLARS IN THOUSANDS) 1999 PRIOR YEAR 1998 PRIOR YEAR 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME AND OTHER,
NET $706 $(77) $783 $114 $669
(10%) 17%
</TABLE>
The Company's interest income and other, net, decreased in 1999 in
comparison to 1998 due primarily to a decrease in cash available for
short-term investments. In like manner, interest income and other, net,
increased in 1998 in comparison to 1997 primarily as a result of a higher
level of cash available for short-term investing.
INCOME TAXES
As of December 31, 1999 the Company had net operating loss
carryforwards of approximately $6.0 million and research and development
credit carryforwards of approximately $1.9 million for federal income tax
purposes, both of which expire in various amounts through 2019. The
utilization of some of these carryforwards is subject to an annual limit of
approximately $392,000 under rules of the Internal Revenue Code.
Deferred income taxes reflect the net tax effects of temporary
differences between the tax basis of assets and liabilities and the
corresponding financial statement amounts. Due to the uncertainty of the
Company's ability to utilize its net deferred tax assets, including its net
operating losses and research and development credits, a valuation allowance
has been established for financial reporting purposes equal to the amount of
the net deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.
15
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The Company's results of operations have historically fluctuated
significantly from quarter to quarter, and the Company expects that such
fluctuations may continue as a result of a variety of factors. These factors
include the following: product and price competition, fluctuating levels of
internal research and development expenses, the volume and timing of customer
development projects and orders, seasonality of customer orders,
introductions of new embedded microprocessors, announcements or introductions
of new products or technologies by the Company or its competitors,
fluctuations in foreign currency exchange rates, fluctuating levels of
required investments in marketing and distribution, price increases by the
Company's suppliers, potential parts shortages, general conditions in the
Company's target markets, and national and global economic conditions.
Therefore, the Company's quarterly results of operations are not necessarily
indicative of results for any future period. Moreover, a significant portion
of the Company's quarterly net sales have historically been generated from
shipments during the last few weeks of the quarter, thereby adding to the
potential for future fluctuations in operating performance.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had $16.3 million in cash, cash
equivalents, and short-term investments, compared to $17.1 million as of
December 31, 1998. Applied maintains a revolving line of credit with a
commercial bank whereby 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 receivable and general intangible assets and includes certain
financial covenants. There were no amounts outstanding as of December 31,
1999 nor at any time during 1999, and Applied was in compliance with all
applicable financial covenants.
The Company requires capital primarily for the financing of
inventories and accounts receivable, sales and marketing efforts, product
development activities, and capital equipment purchases. As a result of its
operating losses, Applied used cash of $404,000 for operating activities in
1999, compared to generating $1.8 million cash from operating activities in
1998 and $5.3 million in 1997. The Company purchased $729,000 in equipment
during 1999, compared to purchasing $1.3 million in 1998 and $1.5 million in
1997. As of December 31, 1999, the Company had no significant commitments
with regard to capital purchases, but expects to spend approximately $1.2
million in 2000 for new capital items. The Company anticipates that its
annual capital needs will increase in the future as a function of replacement
cycles and anticipated growth of Applied's business.
The Company believes that its existing working capital, together
with amounts anticipated 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
In the years leading up to the Year 2000, the Company performed a
comprehensive analysis of its exposure to potential Year 2000 problems and
took necessary action to address identified problems. The Company estimates
that it spent less than $200,000 in assessing and addressing internal Year
2000 issues, in addition to system upgrades that were made as part of
standard system maintenance. To date, Applied has not experienced any known
Year 2000 issues and has been informed by material suppliers and vendors that
they have also not experienced material Year 2000 issues. The Company will
continue to monitor its position with respect to Year 2000 issues.
16
<PAGE>
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The preceding "Business" section and other areas within this
document contain forward-looking statements that involve risks and
uncertainties. The statements in this document that are not purely historical
are forward-looking statements. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify forward-looking statements, but the absence of these words does not
mean the statement is not forward-looking. The Company cannot guarantee these
statements, which are subject to risks, uncertainties, and assumptions that
are difficult to predict. The Company's actual results may differ materially
from those anticipated due to a variety of factors, including those set forth
in the following risk factors and elsewhere in this document. The Company
will not update any forward-looking statements due to new information, future
events or otherwise.
RECENT OPERATING LOSSES. The Company's revenues declined in 1999 and
1998, and Applied incurred corresponding operating losses in both of these
years. Applied put a new management team in place during 1999 and has taken
steps to improve its financial performance and long-term strategic direction;
however, the Company's future success is not assured.
RAPIDLY CHANGING TECHNOLOGY. The introduction of products embodying
new technologies and the emergence of new industry standards and practices
can render existing products obsolete and unmarketable. The Company's
declining sales of its high-end debug products are indicative of this type of
change in market requirements. The Company's future business, financial
condition and results of operations will depend upon its ability to
anticipate market demand for specific development solutions, develop new
products and features that address the increasingly sophisticated needs of
its customers, and respond to technological advances and emerging industry
standards and practices.
MANUFACTURING AND PRODUCT SHIP SCHEDULES. A number of the Company's
components are manufactured by a single source or distributed through a
limited number of outlets. The Company may be unable to obtain key components
in a timely manner, in sufficient quantities, or on favorable price terms. In
addition, delays in new-product introductions could delay the Company's
expected revenue growth rates and cause its customer base to become
dissatisfied and erode.
DESIGN STARTS. The Company's development solutions span a wide range
of microprocessors, real-time operating systems, and development
environments. However, a substantial decline in the number of design starts
for 16-bit or 32-bit embedded microprocessors supported by Applied, or delays
by semiconductor manufacturers in the release of embedded microprocessors for
which the Company has developed tools, could have an adverse effect on the
Company's revenues.
RELATIONSHIP WITH SEMICONDUCTOR MANUFACTURERS. The Company's ability
to provide timely new products to its customers is enhanced by Applied's
relationship with major semiconductor manufacturers. With access to new
embedded microprocessor technology, Applied is able to adapt its tools to
these new designs and make its tools available at the time the Company's
customers begin to incorporate the new microprocessors into their product
designs. Should Applied be unable to obtain timely access to new embedded
microprocessor technology, the Company's operating results and market share
could suffer.
INDUSTRY FOCUS. The Company's sales are currently derived primarily
from the telecommunications, internetworking, and avionics markets, and
negative events affecting these markets could have an adverse effect on the
Company's revenues.
COMPETITION. The Company has historically participated in the
embedded systems development tools market. This market is rapidly evolving
and intensely competitive. Applied has also entered into new markets, such as
providing development solutions to the gaming industry through its initial
agreement with Nintendo. Competitors may develop and offer products and
services similar to Applied's current or planned product offerings. Applied's
business would be harmed if the Company is not able to compete successfully
against current or future competitors.
17
<PAGE>
Increased competition may result in price reductions, reduced gross
margins, and loss of market share, any of which could harm Applied's
business. The Company's competitors may be able to devote significantly
greater resources to marketing campaigns, adopt more aggressive pricing
policies and may expend substantially more resources on product development.
If Applied is unable to compete effectively, the Company's revenues and
earnings may suffer.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its future
success will depend significantly on its ability to retain and attract key
personnel and skilled employees. There is intense competition for qualified
management, engineering and sales and marketing personnel, and the Company's
failure to recruit, retain, and motivate such skilled employees could affect
the Company's ability to develop new products and increase revenues. The
Company's employees are not subject to employee contracts and are free to
leave at any time. To date, the Company has been successful in meeting its
requirements for highly skilled sales and support personnel and research and
development engineers. However, competition for these personnel is intense
and likely to become more so in the future.
MANAGEMENT OF GROWTH. The Company seeks to grow its business by
strengthening its sales and marketing programs, expanding its product lines,
and providing development solutions to new markets. Such growth, if achieved,
would place additional burden on management and increase the requirement to
recruit and retain personnel with the right skill sets, as well as require
additional infrastructure expenditures. The Company is unable to assure that
it will increase its revenues, nor that it will be able to expand its
management and operational infrastructure to manage such growth successfully.
INTELLECTUAL PROPERTY RIGHTS AND LITIGATION. The Company relies on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure to protect its intellectual property rights. The
Company also enters into nondisclosure agreements with its employees,
consultants and corporate partners, and controls access to proprietary
information. Litigation may be necessary in order to enforce the Company's
intellectual property rights, to protect its trade secrets, to determine the
validity and scope of the proprietary rights of others or to defend against
claims of infringement. Litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
the Company is not aware of any significant third-party intellectual property
rights that would prevent the use and sale of Applied products, the Company
may unknowingly infringe the proprietary rights of others. Any infringement
could result in significant liability to the Company.
PRODUCT LIABILITY. The Company's products and services may result in
exposure to product liability claims in the event that the Company's
development solutions are deemed to pose a risk of injury or harm. The
Company maintains product liability insurance; however, such insurance may be
inadequate for all potential claims.
INTERNATIONAL OPERATIONS. A significant portion of the Company's
business occurs outside of North America. Economic difficulties in any of
these regions, particularly in Japan and Europe, could have a material
adverse effect on the Company's business. As a result of the Company's
international operations, the Company incurs certain expenses in foreign
currencies. The Company's operating results are therefore subject to foreign
exchange rate fluctuations, which are difficult to predict.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND VOLATILITY
OF STOCK PRICE. 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, some of which are outside of the Company's control. 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.
18
<PAGE>
ITEM 7A. QUALITATIVE AND QUANTITATIVE 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 one
year. 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 December 31,
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.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APPLIED MICROSYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUDITED ANNUAL FINANCIAL STATEMENTS: PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............................ 21
Consolidated Balance Sheets as of December 31, 1999 and 1998................. 22
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997........................................... 23
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997..................................... 24
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997........................................... 25
Notes to Consolidated Financial Statements................................... 26
</TABLE>
20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Applied Microsystems Corporation
We have audited the accompanying consolidated balance sheets of
Applied Microsystems Corporation as of December 31, 1999 and 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Applied Microsystems Corporation at December 31, 1999 and 1998,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
Seattle, Washington
February 2, 2000
21
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,682 $ 6,041
Securities available-for-sale 10,664 11,101
Accounts receivable, net 5,848 8,483
Inventories 2,471 3,332
Prepaid and other current assets 501 518
---------- ----------
Total current assets 25,166 29,475
Property and equipment, net 2,372 2,918
Other assets 504 897
---------- ----------
Total assets $ 28,042 $ 33,290
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,494 $ 3,283
Accrued payroll 1,704 1,840
Other accrued expenses 1,058 1,129
Deferred revenue 3,599 3,107
---------- ----------
Total current liabilities 8,855 9,359
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value; 5,000,000 authorized; none issued and
outstanding -- --
Common stock, $0.01 par value; 25,000,000 shares authorized; 6,830,000 and
6,681,000 shares issued and outstanding at December 31, 1999 and
1998, respectively 25,792 25,383
Accumulated other comprehensive income 48 120
Accumulated deficit (6,653) (1,572)
---------- ----------
Total shareholders' equity 19,187 23,931
---------- ----------
Total liabilities and shareholders' equity $ 28,042 $ 33,290
========== ==========
</TABLE>
See accompanying notes.
22
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
Net sales $ 33,241 $ 37,020 $ 39,124
Cost of sales 8,664 9,587 10,532
---------- ---------- ----------
Gross profit 24,577 27,433 28,592
Operating expenses:
Sales, general and administrative 18,929 18,104 18,542
Research and development 11,435 10,438 8,468
---------- ---------- ----------
Total operating expenses 30,364 28,542 27,010
---------- ---------- ----------
Income (loss) from operations (5,787) (1,109) 1,582
Interest income and other, net 706 783 669
---------- ---------- ----------
Income (loss) before income taxes (5,081) (326) 2,251
Income taxes -- 19 349
---------- ---------- ----------
Net income (loss) $ (5,081) $ (345) $ 1,902
========== ========== ==========
Basic earnings (loss) per share $ (0.76) $ (0.05) $ 0.28
Shares used in basic per-share calculation 6,727 6,811 6,769
Diluted earnings (loss) per share $ (0.76) $ (0.05) $ 0.26
Shares used in diluted per-share calculation 6,727 6,811 7,297
</TABLE>
See accompanying notes.
23
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
--------------------- ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT DEFICIT INCOME (LOSS) EQUITY
------ -------- ----------- -------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 6,634 $ 26,068 $ (3,129) $ (332) $ 22,607
Issuance of common stock upon
exercise of common stock
warrants 59 -- -- -- --
Stock options exercised 88 17 -- -- 17
Income tax benefit from stock
plans -- 55 -- -- 55
Sale of common stock to
employees 46 247 -- -- 247
Net income -- -- 1,902 -- 1,902
Foreign currency translation
adjustment -- -- -- (537) (537)
---------
Comprehensive income 1,365
------ -------- -------- -------- ---------
Balance at December 31, 1997 6,827 26,387 (1,227) (869) 24,291
Stock options exercised 126 12 -- -- 12
Sale of common stock to
employees 55 194 -- -- 194
Common stock repurchased (327) (1,210) -- -- (1,210)
Net loss -- -- (345) -- (345)
Foreign currency translation
adjustment -- -- -- 989 989
---------
Comprehensive income 644
------ -------- -------- -------- ---------
Balance at December 31, 1998 6,681 25,383 (1,572) 120 23,931
Stock options exercised 80 228 -- -- 228
Sale of common stock to
employees 69 181 -- -- 181
Net loss -- -- (5,081) -- (5,081)
Foreign currency translation
adjustment -- -- -- (72) (72)
---------
Comprehensive loss (5,153)
------ -------- -------- -------- ---------
Balance at December 31, 1999 6,830 $ 25,792 $ (6,653) $ 48 $ 19,187
====== ======== ======== ======== =========
</TABLE>
See accompanying notes.
24
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (5,081) $ (345) $ 1,902
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,671 1,219 1,148
Net change in operating accounts:
Accounts receivable 2,635 (742) 2,520
Inventories 861 133 (268)
Prepaid and other current assets 17 433 69
Other assets (3) (13) (217)
Accounts payable and accrued expenses (996) 773 82
Deferred revenue 492 310 101
---------- ---------- ----------
Net cash provided by (used in) operating activities (404) 1,768 5,337
INVESTING ACTIVITIES
Purchases of securities available-for-sale (14,477) (16,871) (12,175)
Maturities and sales of securities available-for-sale 14,914 16,115 7,761
Additions to property and equipment (729) (1,277) (1,469)
---------- ---------- ----------
Net cash used in investing activities (292) (2,033) (5,883)
FINANCING ACTIVITIES
Sale of common stock to employees 181 194 247
Stock options exercised 228 12 17
Common stock repurchased -- (1,210) --
Payments on long-term obligations -- (15) (53)
---------- ---------- ----------
Net cash provided by (used in) financing activities 409 (1,019) 211
Effects of foreign currency exchange rate changes on
cash (72) 989 (537)
---------- ---------- ----------
Net decrease in cash and cash equivalents (359) (295) (872)
Cash and cash equivalents at beginning of year 6,041 6,336 7,208
---------- ---------- ----------
Cash and cash equivalents at end of year $ 5,682 $ 6,041 $ 6,336
========== ========== ==========
Supplemental disclosure of cash paid for income
taxes $ -- $ 128 $ 642
</TABLE>
See accompanying notes.
25
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Applied Microsystems Corporation ("Applied" or the "Company") is a
developer and manufacturer of software tools and technologies. The Company's
products and services are currently targeted to meet the needs of embedded
systems markets, and 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. Applied
markets its products and services primarily through its domestic and
international direct sales organizations in the United States, Japan, the
United Kingdom, Germany, and France, and through distributors in key markets
throughout the rest of the world. The Company also markets its products
through partnerships with third-party developers of integrated development
environments.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Applied Microsystems Corporation
Limited, a United Kingdom corporation; Applied Microsystems Japan Limited, a
Japanese corporation; Applied Microsystems Gmbh, a German corporation;
Applied Microsystems SARL, a French corporation; and Applied Microsystems
Foreign Sales Corporation. All significant intercompany accounts and
transactions are eliminated in consolidation.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less at the date of purchase to be cash
equivalents. Cash equivalents are carried at cost, which approximates market
value.
SECURITIES AVAILABLE-FOR-SALE
Applied's investment portfolio is classified as available-for-sale,
and such securities are stated at fair value based on quoted market prices.
Interest earned on securities available-for-sale is included in interest
income. The amortized cost of investments in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion are included in interest income. Realized gains
and losses and declines in value judged to be other than temporary, if any,
are also included in interest income. The cost of securities sold is
calculated using the specific identification method.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash
equivalents, securities available-for-sale, accounts receivable, accounts
payable, and short-term borrowings, if any. The recorded value of these
instruments approximates their fair value due to their short maturities.
26
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Applied's financial instruments that are exposed to concentrations
of credit risk consist primarily of cash, cash equivalents, securities
available-for-sale, and accounts receivable. The Company's investment policy
limits Applied's exposure to concentration of credit risk by limiting the
amounts that may be invested in similar investment categories. The Company's
accounts receivable result primarily from sales to a broad customer base,
both domestically and internationally, and are typically unsecured. Applied
performs on-going credit evaluations of its customers' financial condition,
limits the amount of credit when deemed necessary, and maintains allowances
for potential credit losses; historically, such losses have been immaterial.
As a consequence, concentrations of credit risk are limited.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis)
or market.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. The Company provides for
depreciation and amortization using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes. Leasehold
improvements are amortized over the lesser of their estimated useful lives or
the term of the lease.
The estimated useful lives of equipment for financial reporting
purposes are as follows:
Machinery and equipment...........................3 to 5 years
Office furniture.................................5 to 15 years
ACQUIRED TECHNOLOGY
Costs to acquire technology are capitalized to the extent the
products are technologically feasible. Such amounts are included in other
assets on the balance sheet. The Company amortizes these costs to match the
anticipated revenue stream for the products incorporating the acquired
technology. As of December 31, 1999 and 1998, the Company had recorded
acquired technology with a net book value of $270,000 and $553,000,
respectively, and a corresponding accumulated amortization balance of
$583,000 at December 31, 1999 and $139,000 at December 31, 1998. Amortization
expense was $444,000 in 1999, compared to amortization expense of $150,000 in
1998 and $92,000 in 1997.
Research and development costs are expensed as incurred. The effects
of financial accounting rules requiring capitalization of certain internally
developed software costs have not been material to date.
27
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LONG-LIVED ASSETS
Applied evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standard ("SFAS") 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. Accordingly, the Company
evaluates asset recoverability at each balance sheet date or when an event
occurs that may impair recoverability of the asset. Applied's recoverability
analysis may include a review of the following factors: the undiscounted
value of expected operating cash flows in relation to its net capital
investments, the estimated useful or contractual life of the intangible
asset, the contract or product supporting the intangible asset, and in the
case of purchased technology, the Company periodically reviews the
recoverability of the assets value by evaluating its products with respect to
technological advances, competitive products and the needs of its customers.
REVENUE RECOGNITION
The Company generally recognizes revenues from product sales upon
shipment, unless the Company has obligations remaining under a sale 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. Revenues from support
contracts in 1999, 1998, and 1997 were $4,716,000, $4,671,000, and
$4,644,000, respectively. Revenues from consulting services are recognized as
performed.
In 1998, the Company adopted the software revenue recognition rules
under Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as
amended by SOP 98-4 and SOP 98-9. SOP 97-2 supersedes SOP 91-1, the former
literature on software revenue recognition. The adoption of this statement
did not have a material impact on the financial position or results of
operations of the Company.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Total advertising
expenses incurred during 1999, 1998 and 1997 were $900,000, $766,000, and
$815,000, respectively.
FOREIGN CURRENCIES
Assets and liabilities denominated in foreign currencies are
translated to U.S. dollars at the exchange rates on the balance sheet date.
Revenues and expenses are translated at the average rates of exchange
prevailing during the year. The cumulative translation adjustments resulting
from this process are accumulated in other comprehensive income. Gains and
losses on foreign currency transactions are netted and included in other
income.
28
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company may enter into foreign currency forward contracts to
hedge anticipated foreign currency transactions, primarily intercompany
transactions resulting from sales to international subsidiaries. Such forward
contracts typically mature within three months. Gains and losses on contracts
that are designated and effective as hedges of such transactions are deferred
and recognized in income in the same period as the hedged transactions. No
such contracts were outstanding as of December 31, 1999 or 1998, respectively.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share excludes any dilutive effects of
stock options. 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 dilutive common stock equivalent shares
outstanding during the period.
STOCK-BASED COMPENSATION
Applied has elected to follow the intrinsic value method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations in accounting for its stock
options. Because the exercise price of the Company's common stock options
equals the market price of the underlying stock on the date of grant, no
corresponding compensation expense has been recognized. (See Note 8 for SFAS
123, "Accounting for Stock-Based Compensation," pro forma disclosures.)
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the fair values of those
derivatives would be accounted for in current earnings unless specific hedge
criteria are met. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. Applied must formally document, designate, and assess
the effectiveness of transactions that receive hedge accounting, if any. SFAS
133 will be effective for the Company's consolidated financial statements for
the fiscal year ending December 31, 2001. The Company has not yet determined
the impact, if any, of adopting this Statement.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior-year amounts have been reclassified to conform to the
current-year presentation.
29
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government obligations $ 5,023 $ 9 $ -- $ 5,032
Corporate debt securities 5,623 9 -- 5,632
---------- ---------- ---------- ----------
$ 10,646 $ 18 $ -- $ 10,664
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury and other U.S.
Government obligations $ 8,135 $ 8 $ -- $ 8,143
Corporate debt securities 2,958 -- -- 2,958
---------- ---------- ---------- ----------
$ 11,093 $ 8 $ -- $ 11,101
========== ========== ========== ==========
</TABLE>
As of December 31, 1999, the Company's securities available-for-sale
had average contractual maturities of less than one year. Expected maturities
may differ from contractual maturities because issuers may have the right to
prepay obligations.
30
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET INFORMATION
Detailed balance sheet data is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1999 1998
----------- -----------
(in thousands)
<S> <C> <C>
ACCOUNTS RECEIVABLE
Receivables $ 5,940 $ 8,660
Allowance for sales returns and doubtful accounts (92) (177)
----------- -----------
$ 5,848 $ 8,483
=========== ===========
INVENTORIES
Finished goods $ 557 $ 1,501
Work in process 60 28
Purchased parts 1,854 1,803
----------- -----------
$ 2,471 $ 3,332
=========== ===========
PROPERTY AND EQUIPMENT
Machinery and equipment $ 3,095 $ 3,529
Office furniture 2,855 2,802
----------- -----------
Total property and equipment 5,950 6,331
Accumulated depreciation (3,578) (3,413)
----------- -----------
$ 2,372 $ 2,918
=========== ===========
</TABLE>
4. REVOLVING LINE OF CREDIT AGREEMENT
In May 1999 the Company renewed its revolving line of credit with a
commercial bank. Under the terms of the line of credit, Applied 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 receivable and general intangible assets and includes
certain financial covenants. There were no amounts outstanding during 1998 or
1998.
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable
operating leases, including certain leases that contain renewal options.
Minimum future payments as of December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 1,388
2001 617
2002 140
2003 110
2004 90
Thereafter 342
--------
$ 2,687
========
</TABLE>
Total rent expense in 1999 was $1,393,000, as compared to rent
expense of $1,393,000 in 1998 and $1,378,000 in 1997.
31
<PAGE>
6. INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Federal $ (12) $ (9) $ 179
Foreign -- 28 105
State 12 -- 65
--------- --------- ---------
$ -- $ 19 $ 349
========= ========= =========
</TABLE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed
using the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Tax at U.S. statutory rate $ (1,727) $ (114) $ 788
Utilization of net operating loss and tax credit
carryforwards -- -- (137)
Benefit of foreign sales corporation -- -- (122)
Foreign taxes -- 28 105
State taxes, net of federal benefit 12 10 42
Foreign losses with no tax benefit 91 132 404
Loss on deemed liquidation of subsidiaries -- -- (845)
Tax credits (429) (429) --
Foreign currency 143 375 --
Change in deferred tax valuation allowance 1,868 (42) --
Other 42 59 114
--------- --------- ---------
$ -- $ 19 $ 349
========= ========= =========
</TABLE>
Effective April 1, 1997, the Company elected to treat its
wholly-owned subsidiaries in the United Kingdom, Germany, and France as
branches for U.S. tax purposes. The effect of such election was a deemed
liquidation of each subsidiary, allowing its tax attributes to be utilized by
the Company and thereby reducing the 1997 tax provision by $845,000.
32
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary
differences between the tax basis of assets and liabilities and the
corresponding financial statement amounts. Significant components of the
Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Reserves for sales returns and doubtful accounts $ 215 $ 211
Accrued and other expenses 212 357
Inventories and other 689 448
Net operating loss carryforwards 2,047 1,274
Tax credit carryforwards 1,914 1,485
--------- ---------
5,077 3,775
Deferred tax liabilities:
Depreciation 87 116
Foreign currency 38 467
Intangible and other assets -- 108
--------- ---------
125 691
Valuation allowance (4,952) (3,084)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
</TABLE>
Due to the uncertainty of the Company's ability to generate
sufficient taxable income to realize its deferred tax assets, a valuation
allowance has been established for financial reporting purposes equal to the
amount of the net deferred tax assets. The valuation allowance increased $1.9
million in 1999, and decreased $42,000 in 1998.
As of December 31, 1999, the Company had net operating loss
carryforwards for federal tax purposes of approximately $6.0 million
available to offset future taxable income. The Company also had research and
development credits of approximately $1.9 million that may be carried
forward, subject to certain limitations, to offset future tax liabilities.
The net operating loss and research and development tax credit carryforwards
expire in various amounts from 2000 to 2019. Due to the issuance and sale of
shares of preferred stock in 1992, the Company incurred "ownership changes"
pursuant to applicable regulations in effect under the Internal Revenue Code
of 1986, as amended. Therefore, the Company's use of losses incurred through
the date of the ownership change will be limited during the carryforward
period to approximately $392,000 per year.
33
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
(in thousands, except per-share amounts)
<S> <C> <C> <C>
Numerator:
Net income (loss) $ (5,081) $ (345) $ 1,902
========= ========== ==========
Denominator:
Denominator for basic earnings (loss) per share - weighted
average common shares outstanding 6,727 6,811 6,769
Incremental shares from assumed conversions of dilutive stock
options and warrants -- -- 528
--------- ---------- ----------
Denominator for diluted earnings (loss) per share 6,727 6,811 7,297
========= ========== ==========
Basic earnings (loss) per share $ (0.76) $ (0.05) $ 0.28
========= ========== ==========
Diluted earnings (loss) per share $ (0.76) $ (0.05) $ 0.26
========= ========== ==========
</TABLE>
For the years ended December 31, 1999 and 1998, weighted average
options to purchase 254,070 and 239,086 shares of common stock, respectively,
were excluded from the calculation of earnings (loss) per share because their
effect was antidilutive.
8. SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Company has stock option plans that provide for option grants to
employees, directors, and others. The exercise price of options granted under
these plans has been at fair market value on the date of grant. Options are
not transferable, and expire no later than ten years following the grant date.
Options granted under the Applied Microsystems Corporation 1992
Performance Stock Plan (the "1992 Plan") have generally been immediately
exercisable, but then subject to the Company's rights to repurchase any
shares of common stock received upon exercise in the event that the
optionee's employment with the Company should terminate. Such repurchase
rights generally lapse at a rate of 25% per year from the date of grant. For
presentation purposes, options that are subject to repurchase rights are
treated as unvested. In April 1999, the Company issued a nonqualified stock
option to its new President and Chief Executive Officer from a
specific-purpose stock option plan. The option was issued with
characteristics similar to options granted under the 1992 Plan.
Options granted under the Applied Microsystems Corporation Director
Stock Option Plan generally vest one year following grant date.
34
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity and related
information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- -------------------------- --------------------------
OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE
(000) EXERCISE PRICE (000) EXERCISE PRICE (000) EXERCISE PRICE
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,114 $ 3.79 864 $ 3.13 729 $ 5.99
Granted 642 3.19 525 4.45 631 4.62
Canceled (295) 4.17 (149) 5.34 (408) 11.19
Exercised (80) 2.85 (126) 0.10 (88) 0.20
------- ------- -------
Outstanding at end
of year 1,381 $ 3.49 1,114 $ 3.79 864 $ 3.13
======= ======= =======
Vested options 360 $ 3.05 290 $ 2.34 262 $ 0.67
======= ======= =======
</TABLE>
The weighted average fair value of options granted during 1999,
1998, and 1997 using the Black-Scholes multiple option pricing model was
$2.47, $3.39, and $3.19, respectively. As of December 31, 1999, 420,464
options were available for grant.
The following table summarizes information related to outstanding
and vested options at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING VESTED
----------------------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE REMAINING SHARES EXERCISE
RANGE OF EXERCISE PRICES (000) PRICE TERM (000) PRICE
- ------------------------ ------ -------- --------- ------ --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - 2.00 139 $ 0.21 3.8 139 $ 0.21
2.01 - 4.00 636 3.06 9.2 3 2.84
4.01 - 7.00 590 4.41 7.4 210 4.38
7.01 - 17.50 16 14.87 8.1 8 17.13
----- --------
0.02 - 17.50 1,381 3.49 7.8 360 3.05
===== ========
</TABLE>
35
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS 123 and has been determined as if the Company had
accounted for its stock options under the fair value method of SFAS 123. The
fair value for these options was estimated at the date of grant using a
Black-Scholes multiple option pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Annualized volatility factor 0.979 0.947 0.939
Risk-free interest rate 5.7% 5.0% 6.0%
Expected life of options 5.2 years 5.4 years 4.0 years
Expected dividend rate nil nil nil
</TABLE>
The Black-Scholes option value model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
(in thousands, except per-share data)
Net income (loss), as reported $ (5,081) $ (345) $ 1,902
Pro forma net income (loss) (5,482) (883) 1,580
Diluted net income (loss) per share as reported (0.76) (0.05) 0.26
Pro forma Diluted net income (loss) per share (0.81) (0.13) 0.22
</TABLE>
SFAS 123 pro forma disclosures above are not necessarily indicative
of future pro forma disclosures because of the manner in which SFAS 123
calculations are phased in over time.
STOCK WARRANTS
In 1992, in connection with an equity financing, the Company granted
stock warrants to purchase 114,563 shares of Series I preferred stock at
$4.12 per share, expiring after five years. In connection with the Company's
initial public offering in 1995, these outstanding preferred stock warrants
converted to common stock warrants. In 1997, all of these remaining
outstanding warrants were exercised on a "net exercise" basis, resulting in
the issuance of 58,941 shares of common stock, with no corresponding proceeds
to the Company.
36
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STOCK REPURCHASE PLAN
In 1998, the Board of Directors authorized the Company to repurchase
up to 500,000 shares of its common stock in an effort to offset dilution
associated with stock options issued under the Company's stock incentive
programs and for general corporate purposes. During 1998, the Company
repurchased a total of 327,000 shares for $1,210,000. The repurchase plan was
subsequently suspended, and no further repurchases have been made.
COMMON STOCK RESERVED
At December 31, 1999, common stock was reserved for future issuance
as follows (in thousands):
<TABLE>
<S> <C>
Employee Stock Purchase Plan 63
Stock options 1,801
-----
1,864
=====
</TABLE>
9. EMPLOYEE BENEFITS
The Company has a retirement plan covering substantially all U.S.
employees that provides for voluntary salary deferral contributions on a
pre-tax basis in accordance with Section 401(k) of the Internal Revenue Code.
The Company provides matching contributions based on a defined formula, and
may also make discretionary contributions. During 1999, the Company made
contributions of $219,000, as compared to contributions of $192,000 in 1998
and $162,000 in 1997.
The Company also has an employee stock purchase plan (the "ESPP")
initially approved by the Company's shareholders in May 1996 through which
the Company is authorized to issue up to 250,000 shares of common stock. The
ESPP permits eligible Company personnel to purchase Applied common stock at
not less than 85% of fair market value as defined in the ESPP through payroll
deductions of up to 10% of their compensation, provided that no employee may
purchase common stock worth more than $25,000 in any calendar year.
37
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT AND RELATED INFORMATION
Through 1999, the Company was engaged in a single line of business:
the design, manufacture, and distribution of development and test hardware
and software tools for embedded product manufacturers. Sales to Lucent
Technologies Inc. accounted for 10% of consolidated revenues in 1999. No
customers accounted for more than 10% of net sales in 1998 or 1997. Certain
operating information by geographic area is provided in the table below,
based on the location of the Company's facilities. Sales are not recognized
for financial statement purposes until there has been a sale to an
unaffiliated customer.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
NET SALES
United States $ 21,720 $ 22,325 $ 22,247
Japan 7,820 10,664 13,132
Europe 3,701 4,031 3,745
--------- --------- ---------
Consolidated $ 33,241 $ 37,020 $ 39,124
========= ========= =========
Export sales to unaffiliated customers $ 1,147 $ 1,597 $ 2,446
========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
United States $ (3,867) $ 1,139 $ 4,121
Japan (175) 34 107
Europe (982) (1,037) (623)
Corporate eliminations (57) (462) (1,354)
--------- --------- ---------
Consolidated $ (5,081) $ (326) $ 2,251
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
LONG-LIVED ASSETS
Property and equipment, net
United States $ 2,284 $ 2,797
Japan 41 50
Europe 47 71
--------- ---------
Consolidated $ 2,372 $ 2,918
========= =========
Other assets, net
United States $ 326 $ 723
Japan 145 131
Europe 33 43
--------- ---------
Consolidated $ 504 $ 897
========= =========
</TABLE>
38
<PAGE>
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial information for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1999
------------------------------------------------------------
MARCH 31 JUNE 30 SEP. 30 DEC. 31
-------- ------- ------- -------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Net sales $ 8,518 $ 7,435 $ 8,328 $ 8,960
Gross profit 6,472 5,463 5,995 6,647
Net loss (934) (2,107) (1,423) (617)
Diluted loss per share $ (0.14) $ (0.31) $ (0.21) $ (0.09)
Shares used in diluted per-share
calculation 6,703 6,708 6,738 6,752
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED IN 1998
------------------------------------------------------------
MARCH 31 JUNE 30 SEP. 30 DEC. 31
-------- ------- ------- -------
(In thousands, except per-share data)
<S> <C> <C> <C> <C>
Net sales $ 8,251 $ 9,157 $ 9,957 $ 9,655
Gross profit 5,938 6,832 7,432 7,231
Net Income (loss) (559) 58 113 43
Diluted income (loss) per share $ (0.08) $ 0.01 $ 0.02 $ 0.01
Shares used in diluted per-share
calculation 6,878 7,113 6,983 6,832
</TABLE>
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference
to the information contained in the sections captioned "Board of Directors -
Nominees for Director," "Voting Securities and Principal Holders - Section
16(a) Beneficial Ownership Reporting Compliance," and "Management
Information, Compensation, and Benefits - Executive Officers" in the
definitive Proxy Statement for the Company's Annual Meeting of Shareholders
scheduled to be held on May 23, 2000 (the "Proxy Statement"). Such Proxy
Statement will be filed within 120 days of the Company's last fiscal year
end, December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the information contained in the section captioned "Compensation and
Benefits" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
to the information contained in the section captioned "Voting Securities and
Principal Holders" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) INDEX TO LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS - See Index to Financial Statements at Item 8 of
this report.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
All other schedules have been omitted because they were not applicable
or were not required under the applicable regulations of the Securities
and Exchange Commission.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 (1) Second Restated Articles of Incorporation of Registrant
3.2 (1) Restated Bylaws of Registrant
10.3 (1) 1992 Performance Stock Plan
10.4 (1) 1995 Directors Stock Option Plan
10.7 (1) Lease Agreement between W.R.C. Properties, Inc. and the Registrant dated February 27,
1989; and Amendments to Lease Agreement dated November 7, 1990, May 11, 1992, August
18, 1993 and March 31, 1994
10.8 (1) Third Amended and Restated Investment Agreement dated as of September 15, 1995
10.12 (1) ** Source License and Distribution Agreement between the Registrant and Microtec
Research, Inc. dated August 1, 1994
10.16 Business Loan Agreement between the Registrant and U.S. Bank National Association
dated May 31, 1999; Alternative Rate Options Promissory Note dated May 31, 1995
10.17 (2) Employment Agreement by and between Robert L. Deinhammer and the Registrant, dated
January 4, 1999
10.18 (3) Employment Agreement by and between Stephen J. Verleye and the Registrant, dated
April 1, 1999
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
------------------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on
September 15, 1995 (File No. 33-97002)
(2) Incorporated by reference from the Registrant's March 31, 1999 Form
10-Q filed with the Securities and Exchange Commission
(3) Incorporated by reference from the Registrant's June 30, 1999 and
September 30, 1999 reports on Form 10-Q filed with the Securities and
Exchange Commission
** Confidential treatment has been granted for portions of this exhibit.
41
<PAGE>
(b) REPORTS ON FORM 8-K
None.
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 Seattle, State of Washington, on March 28, 2000.
APPLIED MICROSYSTEMS CORPORATION
By /s/ Robert C. Bateman
------------------------
Robert C. Bateman
VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
CORPORATE SECRETARY, AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Stephen J. Verleye President, Chief Executive Officer March 28, 2000
- ------------------------- and Director (Principal
Stephen J. Verleye Executive Officer)
/s/ Robert C. Bateman Vice President, Chief Financial March 28, 2000
- ------------------------- Officer, Corporate Secretary,
Robert C. Bateman and Treasurer (Principal
Financial and Accounting Officer)
/s/ Robert L. Deinhammer Chairman of the Board March 28, 2000
- ------------------------
Robert L. Deinhammer
/s/ Lary L. Evans Director March 28, 2000
- ------------------------
Lary L. Evans
/s/ Charles H. House Director March 28, 2000
- ------------------------
Charles H. House
/s/ Elwood D. Howse, Jr. Director March 28, 2000
- ------------------------
Elwood D. Howse, Jr.
/s/ Anthony Miadich Director March 28, 2000
- ------------------------
Anthony Miadich
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 (1) Second Restated Articles of Incorporation of Registrant
3.2 (1) Restated Bylaws of Registrant
10.3 (1) 1992 Performance Stock Plan
10.4 (1) 1995 Directors Stock Option Plan
10.7 (1) Lease Agreement between W.R.C. Properties, Inc. and the Registrant dated February 27,
1989; and Amendments to Lease Agreement dated November 7, 1990, May 11, 1992, August
18, 1993 and March 31, 1994
10.8 (1) Third Amended and Restated Investment Agreement dated as of September 15, 1995
10.12 (1) ** Source License and Distribution Agreement between the Registrant and Microtec
Research, Inc. dated August 1, 1994
10.16 Business Loan Agreement between the Registrant and U.S. Bank National Association
dated May 31, 1999; Alternative Rate Options Promissory Note dated May 31, 1995
10.17 (2) Employment Agreement by and between Robert L. Deinhammer and the Registrant, dated
January 4, 1999
10.18 (3) Employment Agreement by and between Stephen J. Verleye and the Registrant, dated
April 1, 1999
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ------------------
(1) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on
September 15, 1995 (File No. 33-97002)
(2) Incorporated by reference from the Registrant's March 31, 1999 Form
10-Q filed with the Securities and Exchange Commission
(3) Incorporated by reference from the Registrant's June 30, 1999 and
September 30, 1999 reports on Form 10-Q filed with the Securities and
Exchange Commission
** Confidential treatment has been granted for portions of this exhibit.
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
APPLIED MICROSYSTEMS CORPORATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
COL A. COL B. COL C. COL D. COL E.
- ----------------------------------------------------------------------------------------------------------------------
ADDITIONS
---------------------------
(1) (2)
CHARGED TO CHARGED TO
BALANCE AT COSTS OTHER BALANCE AT
BEGINNING AND ACCOUNTS: DEDUCTIONS: END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999:
Deducted from asset accounts:
Allowance for sales returns
and doubtful accounts 177,000 1,000 92,000 (B) (178,000) (A) 92,000
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for sales returns
and doubtful accounts 337,000 12,000 (56,000) (B) (116,000) (A) 177,000
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for sales returns
and doubtful accounts 264,000 32,000 396,000 (B) (355,000) (A) 337,000
</TABLE>
(A) Uncollectible accounts written off, net of recoveries, and actual sales
returns
(B) Estimated future sales returns charged to revenue
<PAGE>
EXHIBIT 10.16
USBANK
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$7,000,000.00 05-31-99 05-31-00 391-75 70 0339586566 ABC03
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
Borrower: APPLIED MICROSYSTEMS CORPORATION
5020 148TH AVENUE NORTHEAST
REDMOND, WA 98073
Lender: U.S. Bank National Association
East King County Corporate Banking
10800 NE 8th Street, Suite 1000
Bellevue, WA 98004
THIS BUSINESS LOAN AGREEMENT between APPLIED MICROSYSTEMS CORPORATION
("Borrower") and U.S. Bank National Association ("Lender") is made and
executed on the following terms and conditions. Borrower has received prior
commercial loans from Lender or has applied to Lender for a commercial loan
or loans and other financial accommodations, including those which may be
described on any exhibit or schedule attached to this Agreement. All such
loans and financial accommodations, together with all future loans and
financial accommodations from Lender to Borrower, are referred to in this
Agreement individually as the "Loan" and collectively as the "Loans."
Borrower understands and agrees that: (a) in granting, renewing, or extending
any Loan, Lender Is relying upon Borrower's representations, warranties, and
agreements, as set forth In this Agreement: (b) the granting, renewing, or
extending of any Loan by Lender at all times shall be subject to Lender's
sole judgment and discretion; and (c) all such Loans shall be and shall
remain subject to the following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of May 31, 1999, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
Borrower. The word "Borrower" means APPLIED MICROSYSTEMS CORPORATION. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization,
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA, The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default, The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor, The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness, The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may
be liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise: whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
Lender, The word "Lender" means U.S. Bank National Association, its
successors and assigns.
Liquid Assets, The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and Includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as welt as any substitute, replacement or refinancing
note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet delinquent;
(d) purchase money liens or purchase money security interests upon or in
any property acquired or held by Borrower in the ordinary course of
business to secure indebtedness outstanding on the date of this Agreement
or permitted to be incurred under the paragraph of this Agreement titled
"Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the
Lender in writing: and (I) those liens and security interests which in the
aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
indebtedness.
Security Agreement The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended
as a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA, The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions
set forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests: (d) evidence
of insurance as required below: and (e) any other documents required under
this Agreement or by Lender or its counsel.
[Page 1]
<PAGE>
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duty
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender,
as of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any
Loan, and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Washington
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified
as a foreign corporation and is in good standing in all states in which
the failure to so quality would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower: do not require the consent or approval of
any other person, regulatory authority or governmental body: and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial Statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the Statement, and there has been no material adverse change
in Borrower's financial condition subsequent to the dale of the most
recent financial Statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial Statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and
as accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has
not executed any Security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,"
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., or other applicable State or Federal laws, rules,
or regulations adopted pursuant to any of the foregoing. Except as
disclosed to and acknowledged by Lender in writing, Borrower represents
and warrants that: (a) During the period of Borrower's ownership of the
properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of
any of the properties, or (ii) any actual or threatened litigation or
claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of any
of the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or from
any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, slate, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender and
its agents to enter upon the properties to make such inspections and
tests, as Lender may deem appropriate to determine compliance of the
properties with this Section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or liability
on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's
due diligence in investigating the properties for hazardous waste and
hazardous substances. Borrower hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnity and hold harmless Lender against any and all claims,
losses, liabilities, damages, penalties, and expenses which Lender may
directly or indirectly sustain or suffer resulting from a breach of this
section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of
the Related Documents are binding upon Borrower as well as upon Borrower's
Successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans, Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initialed steps to do so, (iii) no steps have been taken to
terminate any Such plan, and (iv) there are no unfunded liabilities other
than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records, Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 5020 148TH AVENUE NORTHEAST, REDMOND, WA 98073.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified and none of such information is or
will be incomplete by omitting to state any material fact necessary to
make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon the
above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force
and effect until such time as Borrower's Indebtedness shall be paid in
full, or until this Agreement shall be terminated in the manner provided
above, whichever Is the last to occur,
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:"
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or Similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
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Financial Statements. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each
fiscal year. Borrower's balance sheet and income statement for the year
ended, audited by a certified public accountant satisfactory to Lender,
and, as soon as available, but in no event later than sixty (60) days
after the end of each fiscal quarter, Borrower's balance sheet and profit
and loss statement for the period ended, prepared and certified as
correct to the best knowledge and belief by Borrower's chief financial
officer or other officer or person acceptable to Lender. All financial
reports required to be provided under this Agreement shall be prepared
in accordance with generally accepted accounting principles, applied on
a consistent basis, and certified by Borrower as being true and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $10,000,000.00.
Working Capital. Maintain Working Capital in excess of $10,000,000.00
Cash Flow Requirements. Maintain Cash Flow at not less than the
following level: 1.20 TO 1.00, DEFINED AS (NET PROFIT PLUS NON-CASH
EXPENSE PLUS INTEREST EXPENSE PLUS CASH INJECTIONS MINUS UNFUNDED
CAPITAL EXPENDITURES MINUS DIVIDENDS/WITHDRAWALS) DIVIDED BY (CURRENT
PORTION LONG TERM DEBT PLUS INTEREST EXPENSE). THIS CASH FLOW COVERAGE
REOUIREMENT OF 1.20 TO 1.00 WILL BE ESTABLISHED IF TERM OUT OPTION IS
SELECTED. THIS DEFINITION SHALL SUPERSEDE ANY INCONSISTENT DEFINITION IN
THIS AGREEMENT.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios: Compliance
with all covenants and ratios shall be determined by calculating the
ratios/amounts as of the end of each fiscal quarter. Except as provided
above, all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, Including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days" prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer: (b) the risks insured: (c) the amount of the policy:
(d) the properties insured: (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values: and (t) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrowers business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful
claims that, if unpaid, might become a lien or charge upon any of
Borrower's properties, income, or profits. Provided however, Borrower
will not be required to pay and discharge any such assessment, tax,
charge, levy, lien or claim so long as (a) the legality of the same shall
be contested in good faith by appropriate proceedings, and (b) Borrower
shall have established on its books adequate reserves with respect to such
contested assessment, tax, charge, levy, lien, or claim in accordance with
generally accepted accounting practices. Borrower, upon demand of Lender,
will furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written statement
of any assessments, taxes, charges, levies, liens and claims against
Borrower's properties. Income, or profits.
Performance. Perform and comply with aft terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel: provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act
and with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable lime to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party
to permit Lender free access to such records at all reasonable times and
to provide Lender with copies of any records it may request, all at
Borrowers expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
OUARTERLY and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as
of the date of the certificate, no Event of Default exists under this
Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part
or on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
Including capital leases, (b) except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in,
or encumber any of Borrower's assets, or (c) sell with recourse any of
Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c)
pay any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower
may pay cash dividends on its stock to its shareholders from time to time
in amounts necessary to enable the shareholders to pay income taxes and
make estimated Income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as Shareholders
of a Subchapter S Corporation because of their ownership of shares of
stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
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Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (a) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that
Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor
becomes insolvent, files a petition in bankruptcy or similar proceedings, or
is adjudged a bankrupt; (c) there occurs a material adverse change in
Borrower's financial condition, in the financial condition of any Guarantor,
or in the value of any Collateral securing any Loan; (d) any Guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such Guarantor's
guaranty of the Loan or any other loan with Lender; or (e) Lender in good
faith deems itself insecure, even though no Event of Default shall have
occurred. DISCLOSURE, ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT OR FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE
UNDER WASHINGTON LAW.
YEAR 2000. Borrower has reviewed and assessed its business operations and
computer systems and applications to address the "year 2000 problem" (that is
that computer applications and equipment used by Borrower, directly or
indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1, 2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations, properties or prospects or ability to repay Lender. Borrower
agrees that this representation will be true and correct on and shall be
deemed made by Borrower on each date Borrower requests any advance under this
Agreement or Note or delivers any information to Lender. Borrower will
promptly deliver to Lender such information relating to this representation
as Lender requests from time to time.
MAXIMUM QUARTERLY LOSS, BORROWER AND LENDER AGREE THE MAXIMUM QUARTERLY LOSS
WILL BE $5,000,000.00.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest
in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender
all Borrower's right, title and interest in and to, Borrower's accounts with
Lender (whether checking, savings, or some other account), including without
limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh
accounts, and all trust accounts for which the grant of a security interest
would be prohibited by law. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
Indebtedness against any and all such accounts, and, at Lender's option, to
administratively freeze all such accounts to allow Lender to protect Lender's
charge and setoff rights provided on this paragraph.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults, Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or
person that may materially affect any of Borrower's property or Borrower's
or any Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements, Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment, or
levy on or of any of Borrower's deposit accounts with Lender.
Events Affecting Guarantor; Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness.
Change In Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make Loan Advances or disbursements), and, at Lender's Option,
all Indebtedness immediately will become due and payable, all without notice
of any kind to Borrower, except that in the case of an Event of Default of
the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided In the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to exercise its rights and
remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part
of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender In the State of Washington. If there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of King County, the Slate of Washington. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed In
accordance with the laws of the State of Washington.
Arbitration; Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered
in any court having jurisdiction. Nothing in this Agreement shall preclude
any party from seeking equitable relief from a court of competent
jurisdiction. The statute of limitations, estoppel, waiver, laches, and
similar doctrines which would otherwise be applicable in an action brought
by a party shall be applicable in any arbitration proceeding, and the
commencement of an arbitration proceeding shall be deemed the commencement
of an action for these purposes. The Federal Arbitration Act shall apply
to the construction, interpretation, and enforcement of this arbitration
provision.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that
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The purchasers of any such participation interests will be considered as
the absolute owners of such interests in the Loans and will have all the
rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that
Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
SEVERABILITY. It a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made
by Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent in subsequent instances where such
consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY
31, 1999.
BORROWER:
APPLIED MICROSYSTEMS CORPORATION
By: /s/ Robert L. Deinhammer
------------------------
ROBERT L. DEINHAMMER, CHAIRMAN OF THE BOARD
By: /s/ Stephen J. Verleye
-----------------------
STEPHEN J. VERLEYE, PRESIDENT/CHIEF EXECUTIVE OFFICER
LENDER:
U.S. Bank National Association
By: /s/ Ann B.Caldwell
------------------
Authorized Officer
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ALTERNATIVE RATE OPTIONS
PROMISSORY NOTE
(PRIME RATE1 LIBOR)
$7,000,000.00 Dated as of: 05/31/99
APPLIED MICROSYSTEMS CORPORATION ("Borrower")
U.S. BANK NATIONAL ASSOCIATION ("Lender")
1. TYPE OF CREDIT. This note is given to evidence Borrower's obligation to
repay all sums which Lender may from time to time advance to Borrower
("Advances") under a:
/ / single disbursement loan. Amounts loaned to Borrower hereunder will be
disbursed in a single Advance in the amount shown in Section 2.
X revolving line of credit. No Advances shall be made which create a
maximum amount outstanding at any one time which exceeds the maximum
amount shown in Section 2. However, Advances hereunder may be borrowed,
repaid and reborrowed, and the aggregate Advances loaned hereunder from
time to time may exceed such maximum amount.
non-revolving line of credit. Each Advance made from time to time
hereunder shall reduce the maximum amount available shown in Section 2.
Advances loaned hereunder which are repaid may not be reborrowed.
2. PRINCIPAL BALANCE. The unpaid principal balance of all Advances
outstanding under this note ("Principal Balance") at one time shall not
exceed $7,000,000.00
3. PROMISE TO PAY. For value received Borrower promises to pay to Lender
or order at COMMERCIAL LOAN SERVICE CENTER-WEST, the Principal Balance of
this note, with interest thereon at the rate(s) specified in Sections 4 and
11 below.
4. INTEREST RATE. The interest rate on the Principal Balance outstanding
may vary from time to time pursuant to the provisions of this note. Subject
to the provisions of this note, Borrower shall have the option from time to
time of choosing to pay interest at the rate or rates and for the applicable
periods of time based on the rate options provided herein; PROVIDED, however,
that once Borrower notifies Lender of the rate option chosen in accordance
with the provisions of this note, such notice shall be irrevocable. The rate
options are the Prime Borrowing Rate and the LIBOR Borrowing Rate, each as
defined herein.
(a) Definitions. The following terms shall have the following meanings:
"Business Day" means any day other than a Saturday, Sunday, or
other day that commercial banks in Portland, Oregon or New York City are
authorized or required by law to close; provided, however that when used in
connection with a LIBOR Rate, LIBOR Amount or LIBOR Interest Period such term
shall also exclude any day on which dealings in U.S. dollar deposits ARE not
carried on in the London interbank market.
"LIBOR Amount" means each principal amount for which Borrower
chooses to have the LIBOR Borrowing Rate apply for any specified LIBOR
Interest Period.
"LIBOR Interest Period" means as to any LIBOR Amount, a period
of 1,2,3,6 or 12 months commencing on the date the LIBOR Borrowing Rate
becomes applicable thereto; PROVIDED, however, that; (i) the first day of
each LIBOR Interest Period must be a Business Day; (ii) no LIBOR Interest
Period shall be selected which would extend beyond MAY 31, 2000: (iii) no
LIBOR Interest Period shall extend beyond the date of any principal payment
required under Section 6 of this note, unless the sum of the Prime Rate
Amount, plus LIBOR Amounts with LIBOR Interest Periods ending on or before
the scheduled date of such principal payment, plus principal amounts
remaining unborrowed under a tine of credit, equals or exceeds the amount of
such principal payment; (iv) any LIBOR Interest Period which would otherwise
expire on a day which is not a Business Day, shall be extended to the next
succeeding Business Day, unless the result of such extension would be to
extend such LIBOR Interest Period into another calendar month, in which event
the LIBOR Interest Period shall end on the immediately preceding Business
Day; and (v) any LIBOR Interest Period that begins on the last Business Day
of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such LIBOR Interest
Period) shall end on the last Business Day of a calendar month.
"LIBOR Rate" means, for any LIBOR Interest Period, the rate per
annum (computed on the basis of a 360-day year and the actual number of days
elapsed and rounded upward to the nearest 1/16 of 1%) established by Lender
as its LIBOR Rate, based on Lender's determination, on the basis of such
factors as Lender deems relevant, of the rate of Interest at which U.S.
dollar deposits would be offered to U.S. Bank National Association In the
London interbank market at approximately 11 a.m. London time on the date
which is two Business Days prior to the first day of such LIBOR Interest
Period for delivery on the first day of such LIBOR Interest Period for the
number of months therein; PROVIDED, however, that the LIBOR Rate shall be
adjusted to take into account the maximum reserves required to be maintained
for Eurocurrency liabilities by banks during each such LIBOR Interest Period
as specified in Regulation D of the Board of Governors of the Federal Reserve
System or any successor regulation.
"Prime Rate" means the rate of interest which Lender from time
to time establishes as its prime rate and is not, for example, the lowest
rate of interest which Lender collects from any borrower or class of
borrowers. When the Prime Rate is applicable under Section 4(b) or 11(b), the
Interest rate hereunder shall be adjusted without notice effective on the day
the Prime Rate changes, but in no event shall the rate of interest be higher
than allowed by law.
"Prime Rate Amount" means any portion of the Principal Balance
bearing interest at the Prime Borrowing Rate.
(b) The Prime Borrowing Rate.
(i) The Prime Borrowing Rate is a per annum rate equal to the Prime
Rate plus 0.000% per annum.
(ii) Whenever Borrower desires to use the Prime Borrowing Rate
option, Borrower shall give Lender notice orally or in writing in accordance
with Section 15 of this note, which notice shall specify the requested
effective date (which must be a Business Day) and principal amount of the
Advance or increase in the Prime Rate Amount, and whether Borrower is
requesting a new Advance under a line of credit or conversion of a LIBOR
Amount to the Prime Borrowing Rate.
(iii) Subject to Section 11 of this note, interest shall accrue on
the unpaid Principal Balance at the Prime Borrowing Rate unless and except to
the extent that the LIBOR Borrowing Rate is in effect.
(c) The LIBOR Borrowing Rate.
(i) The LIBOR Borrowing Rate is the LIBOR Rate plus 1.450% per annum.
(ii) Borrower may obtain LIBOR Borrowing Rate quotes from Lender
between 8:00 a.m. and 10:00 a.m. (Portland, Oregon time) on any Business Day.
Borrower may request an Advance, conversion of any portion of the Prime Rate
Amount to a LIBOR Amount or a new LIBOR Interest Period for an existing LIBOR
Amount, at such rate only by giving Lender notice in accordance with Section
4 (c) (iii) before 10:00 a.m. (Portland, Oregon time) on such day.
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<PAGE>
(iii) whenever Borrower desires to use the LIBOR Borrowing Rate
option, Borrower shall give Lender irrevocable notice (either in writing or
orally and promptly confirmed in writing) between 8:00 a.m. and 10:00 a.m.
(Portland, Oregon time) two (2) Business Days prior to the desired effective
date of such rate. Any oral notice shall be given by. and any written notice
or confirmation of an oral notice shall be signed by, the person(s)
authorized in Section 15 of this note, and shall specify the requested
effective date of the rate, LIBOR Interest Period and LIBOR Amount, and
whether Borrower is requesting a new Advance at the LIBOR Borrowing Rate
under a line of credit, conversion of all or any portion of the Prime Rate
Amount to a LIBOR Amount, or a new LIBOR Interest Period for an outstanding
LIBOR Amount. Notwithstanding any other term of this note, Borrower may elect
the LIBOR Borrowing Rate in the minimum principal amount of $500,000.00 and
in multiples of $100,000.00 above such amount; PROVIDED, however, that no
more than FIVE separate LIBOR Interest Periods may be in effect at any one
time.
(iv) If at any time the LIBOR Rate is unascertainable or unavailable
to Lender or if LIBOR Rate loans become unlawful, the option to select the
LIBOR Borrowing Rate shall terminate immediately. If the LIBOR Borrowing Rate
is then in effect, (A) it shall terminate automatically with respect to all
LIBOR Amounts (i) on the last day of each then applicable LIBOR Interest
Period, if Lender may lawfully continue to maintain such loans, or (ii)
immediately if Lender may not lawfully continue to maintain such loans
through such day, and (B) Subject to Section 11, the Prime Borrowing Rate
automatically shall become effective as to such amounts upon such termination.
(v) If at any time after the date hereof (A) any revision in or
adoption of any applicable law, rule, or regulation or in the interpretation
or administration thereof (i) shall subject Lender or its Eurodollar lending
office to any tax, duty, or other charge, or change the basis of taxation of
payments to Lender with respect to any loans bearing interest based on the
LIBOR Rate, or (ii) shall impose or modify any reserve, insurance, special
deposit, or similar requirements against assets of, deposits with or for the
account of, or credit extended by Lender or its Eurodollar lending office, or
impose on Lender or its Eurodollar lending office any other condition
affecting any such loans, and (B) the result of any of the foregoing is (i)
to increase the cost to Lender of making or maintaining any such loans or
(ii) to reduce the amount of any sum receivable under this note by Lender or
its Eurodollar lending office, Borrower shall pay Lender within 15 days after
demand by Lender such additional amount as will compensate Lender for such
increased cost or reduction. The determination hereunder by Lender of such
additional amount shall be conclusive in the absence of manifest error. If
Lender demands compensation under this Section 4(c)(v), Borrower may upon
three (3) Business Days' notice to Lender pay the accrued interest on all
LIBOR Amounts, together with any additional amounts payable under Section
4(c)(vi). Subject to Section 11, upon Borrower's paying such accrued interest
and additional costs, the Prime Borrowing Rate immediately shall be effective
with respect to the unpaid principal balance of such LIBOR Amounts.
(vi) Borrower shall pay to Lender, on demand, such amount as Lender
reasonably determines (determined as though 100% of the applicable LIBOR
Amount had been funded in the London interbank market) is necessary to
compensate Lender for any direct or indirect losses, expenses, liabilities,
costs, expenses or reductions in yield to Lender, whether incurred in
connection with liquidation or re-employment of funds or otherwise, incurred
or sustained by Lender as a result of: (A) Any payment or prepayment of a
LIBOR Amount, termination of the LIBOR Borrowing Rate or conversion of a
LIBOR Amount to the Prime Borrowing Rate on a day other than the last day of
the applicable LIBOR Interest Period (including as a result of acceleration
or a notice pursuant to Section 4(c)(v)); or (B) Any failure of Borrower to
borrow, continue or prepay any LIBOR Amount or to convert any portion of the
Prime Rate Amount to a LIBOR Amount after Borrower has given a notice thereof
to Lender.
(vii) If Borrower chooses the LIBOR Borrowing Rate, Borrower shall
pay interest based on such rate, plus any other applicable taxes or charges
hereunder, even though Lender may have obtained the funds loaned to Borrower
from sources other than the London interbank market. Lender's determination
of the LIBOR Borrowing Rate and any such taxes or charges shall be conclusive
in the absence of manifest error.
(viii) Notwithstanding any other term of this note, Borrower may not
select the LIBOR Borrowing Rate if an event of default hereunder has occurred
and is continuing.
(ix) Nothing contained in this note, including without limitation the
determination of any LIBOR Interest Period or Lender's quotation of any LIBOR
Borrowing Rate, shall be construed to prejudice Lender's right, if any to
decline to make any requested Advance or to require payment on demand.
5. COMPUTATION OF INTEREST. All interest under Section 4 and Section
11 will be computed at the applicable rate based on a 360-day year and
applied to the actual number of days elapsed.
6. PAYMENT SCHEDULE.
(a) Principal. Principal shall be paid:
on demand.
on demand, or if no demand, on _____,
X on May 31, 2000
subject to Section 8, in installments of ______ each, plus accrued
interest, beginning on ______ and on the same day of each ______
thereafter until when the entire Principal Balance plus interest
thereon shall be due and payable.
(b) Interest
(i) Interest on the Prime Rate Amount shall be paid:
X on the LAST day of JUNE, 1999 and on the same day of each
MONTH thereafter prior to maturity and at maturity.
at maturity.
at the time each principal installment is due and at maturity.
(ii) Interest on all LIBOR Amounts shall be paid:
on the last day of the applicable LIBOR Interest Period, and
if such LIBOR Interest Period is longer than three months, on
the last day of each three-month period occurring during such
LIBOR Interest Period, and at maturity.
X on the LAST day of JUNE, 1999 and on the same day of each
MONTH thereafter prior to maturity
and at maturity.
at maturity.
at the time each principal installment is due and at maturity.
7. PREPAYMENT.
(a) Prepayments of all or any part of the Prime Rate Amount may be made at
any time without penalty.
(b) Except as otherwise specifically set forth herein, Borrower may not
prepay all or any part of any LIBOR Amount or terminate any LIBOR
Borrowing Rate, except on the last day of the applicable LIBOR Interest
Period.
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<PAGE>
(c) Principal prepayments will not postpone the date of or change the amount
of any regularly scheduled payment. At the time of any principal
prepayment, all accrued interest, fees, costs and expenses shall also be
paid.
8. CHANGE IN PAYMENT AMOUNT. Each time the interest rate on this note
changes the holder of this note may. from time to time, in holder's sole
discretion, increase or decrease the amount of each of the installments
remaining unpaid at the time of such change in rate to an amount holder in
its sole discretion deems necessary to continue amortizing the Principal
Balance at the same rate established by the installment amounts specified in
Section 6(a). whether or not a "balloon" payment may also be due upon
maturity of this note. Holder shall notify the undersigned of each such
change in writing. Whether or not the installment amount is increased under
this Section 8, Borrower understands that, as a result of increases in the
rate of interest the final payment due. whether or not a "balloon" payment,
shall include the entire Principal Balance and interest thereon then
outstanding, and may be substantially more than the installment specified in
Section 6.
9. ALTERNATE PAYMENT DATE. Notwithstanding any other term of this note,
if in any month there is no day on which a scheduled payment would otherwise
be due (e.g. February 31), such payment shall be paid on the last banking day
of that month.
10. PAYMENT BY AUTOMATIC DEBIT.
X Borrower hereby authorizes Lender to automatically deduct the amount of all
principal and interest payments from account number XXXXXXXXXXXX. If there are
insufficient funds in the account to pay the automatic deduction in full, Lender
may allow the account to become overdrawn, or Lender may reverse the automatic
deduction. Borrower will pay all the fees on the account which result from the
automatic deductions, including any overdraft and non-sufficient funds charges.
If for any reason Lender does not charge the account for a payment, or if an
automatic payment is reversed, the payment is still due according to this note.
If the account is a Money Market Account, the number of withdrawals from that
account is limited as set out in the account agreement Lender may cancel the
automatic deduction at any time in its discretion.
Provided, however, if no account number is entered above, Borrower does not
want to make payments by automatic debit.
11. DEFAULT.
(a) Without prejudice to any right of Lender to require payment on demand
or to decline to make any requested Advance, each of the following shall be
an event of default: (i) Borrower fails to make any payment when due. (ii)
Borrower fails to perform or comply with any term, covenant or obligation in
this note or any agreement related to this note, or in any other agreement or
loan Borrower has with Lender. (iii) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this note or
perform Borrower's obligations under this note or any related documents. (iv)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (v) Borrower dies, becomes insolvent,
liquidates or dissolves, a receiver is appointed for any part of Borrower's
property, Borrower makes an assignment for the benefit of creditors, or any
proceeding is commenced either by Borrower or against Borrower under any
bankruptcy or insolvency laws. (vi) My creditor tries to take any of
Borrower's property on or in which Lender has a lien or security interest.
This includes a garnishment of any of Borrower's accounts with Lender. (vii)
Any of the events described in this default section occurs with respect to
any general partner in Borrower or any guarantor of this note, or any
guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted
not to be, in full force and effect. (viii) There is any material adverse
change in the financial condition or management of Borrower or Lender in good
faith deems itself insecure with respect to the payment or performance of
Borrower's obligations to Lender. If this note is payable on demand, the
inclusion of specific events of default shall not prejudice Lender's right to
require payment on demand or to decline to make any requested Advance.
(b) Without prejudice to any right of Lender to require payment on
demand, upon the occurrence of an event of default, Lender may declare the
entire unpaid Principal Balance on this note and all accrued unpaid interest
immediately due and payable, without notice. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted
under applicable law, increase the interest rate on this note to a rate equal
to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the
maximum rate permitted by applicable law. In addition, if any payment of
principal or interest is 19 or more days past due, Borrower will be charged a
late charge of 5% of the delinquent payment.
12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND. Holder's records
shall, at any time, be conclusive evidence of the unpaid Principal Balance
and interest owing on this note. Notwithstanding any other provisions of this
note, in the event holder makes Advances hereunder which result in an unpaid
Principal Balance on this note which at any time exceeds the maximum amount
specified in Section 2, Borrower agrees that all such Advances, with
interest, shall be payable on demand.
13. LINE OF CREDIT PROVISIONS. If the type of credit indicated in Section
1 is a revolving line of credit or a non-revolving line of credit, Borrower
agrees that Lender is under no obligation and has not committed to make any
Advances hereunder. Each Advance hereunder shall be made at the sole option
of Lender.
14. DEMAND NOTE. If this note is payable on demand, Borrower acknowledges
and agrees that (a) Lender is entitled to demand Borrower's immediate payment
in full of all amounts owing hereunder and (b) neither anything to the
contrary contained herein or in any other loan documents (including but not
limited to, provisions relating to defaults, rights of cure, default rate of
interest, installment payments, late charges, periodic review of Borrower's
financial condition, and covenants) nor any act of Lender pursuant to any
such provisions shall limit or impair Lender's right or ability to require
Borrower's payment in full of all amounts owing hereunder immediately upon
Lender's demand.
15. REQUESTS FOR ADVANCES.
(a) Advances under this Note, may be requested orally or in writing by
Borrower or by an authorized person. Lender may, but need not, require that
all oral requests be confirmed in writing. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the e instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced
by endorsements on this Note or by Lender's internal records, including daily
computer print-outs.
(b) All Advances shall be disbursed by deposit directly to Borrower's
account number XXXXXXXXXXX or by cashier's check issued to Borrower.
(c) Borrower agrees that Lender shall have no obligation to verify the
identity of any person making any request pursuant to this Section 15, and
Borrower assumes all risks of the validity and authorization of such
requests. In consideration of Lender agreeing, at its sole discretion, to
make Advances upon such requests, Borrower promises to pay holder, in
accordance with the provisions of this note, the Principal Balance together
with interest thereon and other sums due hereunder, although any Advances may
have been requested by a person or persons not authorized to do so.
16. PERIODIC REVIEW, Lender will review Borrower's credit accommodations
periodically. At the time of the review, Borrower will furnish Lender with
any additional information regarding Borrower's financial condition and
business operations that Lender requests. This information may include but is
not limited to, financial statements, tax returns, lists of assets and
liabilities, agings of receivables and payables, inventory schedules, budgets
and forecasts. If upon review, Lender, in its sole discretion, determines
that there has been a material adverse change in Borrower's financial
condition, Borrower will be in default. Upon default, Lender shall have all
rights specified herein.
17. NOTICES. Any notice hereunder may be given by ordinary mail, postage
paid and addressed to Borrower at the last known address of Borrower as shown
on holder's records. If Borrower consists of more than one person,
notification of any of said persons shall be complete notification of all.
18. ATTORNEY FEES. Whether or not litigation or arbitration is commenced,
Borrower promises to pay all costs of collecting overdue amounts. Without
limiting the foregoing, in the event that holder consults an attorney
regarding the enforcement of any of its rights under this note or any
document securing the same, or if this note is placed in the hands of an
attorney for collection or if suit or litigation is brought to enforce this
note or any document securing the same, Borrower promises to pay all costs
thereof including such additional sums as the court or arbitrator(s) may
adjudge reasonable as attorney fees, including without imitation, costs and
attorney fees incurred in any appellate court, in any proceeding under the
bankruptcy code, or in any receivership and post-judgment attorney fees
incurred in enforcing any judgment.
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19. WAIVERS; CONSENT. Each party hereto, whether maker, co-maker,
guarantor or otherwise, waives diligence, demand, presentment for payment,
notice of non-payment, protest and notice of protest and waives all defenses
based on suretyship or impairment of collateral. Without notice to Borrower
and without diminishing or affecting Lender's rights or Borrower's
obligations hereunder, Lender may deal in any manner with any person who at
any time is liable for, or provides any real or personal property collateral
for, any indebtedness of Borrower to Lender, including the indebtedness
evidenced by this note. Without limiting the foregoing, Lender may, in its
sole discretion: (a) make secured or unsecured loans to Borrower and agree to
any number of waivers, modifications, extensions and renewals of any length
of such loans, including the loan evidenced by this note; (b) impair, release
(with or without substitution of new collateral), fail to perfect a security
interest in, fail to preserve the value of, fail to dispose of in accordance
with applicable law, any collateral provided by any person; (c) sue, fail to
sue, agree not to sue, release, and settle or compromise with, any person.
20. JOINT AND SEVERAL LIABILITY. All undertakings of the undersigned
Borrowers are joint and several and are binding upon any marital community of
which any of the undersigned are members. Holder's rights and remedies under
this note shall be cumulative.
21. SEVERABILITY. If any term or provision of this note is declared by a
court of competent jurisdiction to be illegal. invalid or unenforceable for
any reason whatsoever, such illegality, invalidity or unenforceability shall
not affect the balance of the terms and provisions hereof, which terms and
provisions shall remain binding and enforceable, and this note shall be
construed as if such illegal, invalid or unenforceable provision had not been
contained herein.
22. ARBITRATION.
(a) Either Lender or Borrower may require that all disputes, claims,
counterclaims and defenses, including those based on or arising from any
alleged tort ("Claims") relating in any way to this note or any transac tion
of which this note is a part (the "Loan"), be settled by binding arbitration
in accordance with the Commercial Arbitration Rules of the American
Arbitration Association and Title 9 of the U.S. Code. All Claims will be
subject to the statutes of limitation applicable if they were litigated. This
provision is void if the Loan, at the time of the proposed submission to
arbitration, is secured by real property located outside of Oregon or
Washington, or if the effect of the arbitration procedure (as opposed to any
Claims of Borrower) would be to materially impair Lender's ability to realize
on any collateral securing the Loan.
(b) If arbitration occurs and each party's Claim is less than $100,000,
one neutral arbitrator will decide all issues; if any party's Claim is
$100,000 or more, three neutral arbitrators will decide all issues. All
arbitrators will be active Washington State Bar members in good standing. All
arbitration hearings will be held in Seattle, Washington. In addition to all
other powers. the arbitrator(s) shall have the exclusive right to determine
all issues of arbitrability. Judgment on any arbitration award may be entered
in any court with jurisdiction.
(c) If either party institutes any judicial proceeding relating to the
Loan, such action shall not be a waiver of the right to submit any Claim to
arbitration. In addition, each has the right before, during and after any
arbitration to exercise any number of the following remedies, in any order or
concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or
non-judicial foreclosure against real or personal property collateral; and
(iv) provisional remedies, including injunction, appointment of receiver,
attachment, claim and delivery and replevin.
23. GOVERNING LAW. This note shall be governed by and construed and
enforced in accordance with the laws of the State of Washington without
regard to conflicts of law principles: provided, however, that to the extent
that Lender has greater rights or remedies under Federal law, this provision
shall not be deemed to deprive Lender of such rights and remedies as may be
available under Federal law.
24. YEAR 2000. Borrower has reviewed and assessed its business operations
and computer systems and applications to address the "year 2000 problem"
(that is, that computer applications and equipment used by Borrower, directly
or indirectly through third parties, may be unable to properly perform
date-sensitive functions before, during and after January 1.2000). Borrower
reasonably believes that the year 2000 problem will not result in a material
adverse change in Borrower's business condition (financial or otherwise),
operations. properties or prospects or ability to repay Lender. Borrower
agrees that this representation will be true and correct on and shall be
deemed made by Borrower on each date Borrower requests any advance under this
Agreement or Note or delivers any information to Lender. Borrower will
promptly deliver to Lender such information relating to this representation
as Lender requests from time to time.
25. RENEWAL AND EXTENSION. This Note is given in renewal and extension
and not in novation of the following described indebtedness: That certain
Promissory Note dated May 31, 1998, in the amount of $7,000,000.00 executed
by Borrower payable to Lender. It is further agreed that all liens and
security interest securing said indebtedness are hereby renewed and extended
to secure the Note and all renewals, extensions and modifications thereof.
26. DISCLOSURE.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO
FOREBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER
WASHINGTON LAW.
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF
THIS DOCUMENT.
APPLIED MICROSYSTEMS CORPORATION
Borrower Name (Corporation, Partnership or other Entity)
By: /s/ Robert L. Deinhammer
------------------------
ROBERT L. DEINHAMMER
Title: CHAIRMAN OF THE BOARD
By: /s/ Stephen J. Verleye
----------------------
STEPHEN J. VERLEYE
Title: PRESIDENT/CHIEF EXECUTIVE OFFICER
For valuable consideration, Lender agrees to the terms of the arbitration
provision set forth in this note.
Lender Name: U.S. Bank National Association
------------------------------
By: /s/ Ann B.Caldwell
------------------
ANN B. CALDWELL
Title Vice President
--------------
[Page 4]
<PAGE>
EXHIBIT 21
Applied Microsystems Corporation
SUBSIDIARIES
Applied Microsystems Corporation, Ltd.,
organized under the laws of England and Wales
Applied Microsystems GmbH,
organized under the laws of the Federal Republic of Germany
Applied Microsystems Japan, Ltd.,
organized under the laws of Japan
Applied Microsystems Foreign Sales Corporation,
a Washington Corporation
Applied Microsystems S.A.R.L.,
organized under the laws of France
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-07331) pertaining to the Applied Microsystems Corporation
1996 Employee Stock Purchase Plan, the Registration Statement (Form S-8 No.
333-03396) pertaining to the Applied Microsystems Corporation 1990 Stock
Benefit Plan, the Applied Microsystems Corporation 1992 Performance Stock
Plan, and the Applied Microsystems Corporation Director Stock Option Plan and
the Registration Statement (Form S-8 No. 333-14823) pertaining to the Applied
Microsystems Corporation 1992 Performance Stock Plan of our report dated
February 2, 2000 with respect to the consolidated financial statements and
schedule of Applied Microsystems Corporation included in the Annual Report
(Form 10-K) for the year ended December 31, 1999.
ERNST & YOUNG LLP
Seattle, Washington
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND FOOTNOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,682
<SECURITIES> 10,664
<RECEIVABLES> 5,848
<ALLOWANCES> 0
<INVENTORY> 2,471
<CURRENT-ASSETS> 25,166
<PP&E> 2,372
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,042
<CURRENT-LIABILITIES> 8,855
<BONDS> 0
0
0
<COMMON> 25,792
<OTHER-SE> (6,605)
<TOTAL-LIABILITY-AND-EQUITY> 28,042
<SALES> 33,241
<TOTAL-REVENUES> 33,241
<CGS> 8,664
<TOTAL-COSTS> 30,364
<OTHER-EXPENSES> (706)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,081)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,081)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,081)
<EPS-BASIC> (.76)
<EPS-DILUTED> (.76)
</TABLE>
