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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996 Commission File Number 0-26778
APPLIED MICROSYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
----------------
Washington 91-1074996
(State of incorporation) (I.R.S. Employer Identification Number)
5020 148th Avenue N.E. 98052
Redmond, Washington (Zip Code)
(Address of principal executive offices)
(206) 882-2000
(Registrant's telephone number, including area code)
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01 Per Share
(Title of Class)
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 this Form
10-K or any amendment to this Form 10-K. / /
The aggregate market value of the Common Stock held by non-affiliates of
the registrant, based on the closing price on March 20, 1997, as reported on
NASDAQ, was $32,017,369. (1)
The number of shares of the registrant's Common Stock outstanding as of
March 20, 1997, was 6,713,120.
(1) Excludes shares held of record on that date by directors, 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
1997 Annual Meeting of Stockholders to be held on May 30, 1997, are incorporated
by reference into Part III of this Report.
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Business................................................... 1
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 16
Item 4A. Executive Officers of the Registrant....................... 16
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 17
Item 6. Selected Financial Data.................................... 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 18
Item 8. Financial Statements and Supplementary Data................ 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure........................ 44
PART III.
Item 10. Directors and Executive Officers of the Registrant......... 44
Item 11. Executive Compensation..................................... 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 44
Item 13. Certain Relationships and Related Transactions............. 44
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K................................................ 45
PART I
ITEM 1. BUSINESS
OVERVIEW
Applied Microsystems is a leading provider of hardware-assisted software
tools for the design, debugging and testing of embedded software. The Company
believes that, by using its tools, manufacturers are able to improve the
quality and performance of their embedded software, reduce development costs
and accelerate time-to-market.
INDUSTRY BACKGROUND
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. Embedded systems are
incorporated within larger electronic devices and are dedicated to performing
specific tasks quickly and reliably in response to rapidly occurring external
events. 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 used extensively in industries
such as internetworking, telecommunications, computer peripherals, office
products, medical instrumentation and industrial process control, as well as
in consumer markets such as the automotive and entertainment industries. For
example, cellular telephone switching systems use embedded systems to
coordinate the routing and connection of thousands of simultaneous calls as
users move from cell to cell. Use of embedded systems is now widespread among
manufacturers of a wide variety of products, including automotive braking
systems, hospital patient monitors, airplane flight control systems, modems
and facsimile machines, stereo equipment, cellular telephones, automated
teller machines and video games.
Industry sources estimate that embedded microprocessors accounted for
more than 90% of all microprocessors sold worldwide in 1995. As the computing
power of embedded microprocessors has grown from early 4- and 8-bit
architectures to today's 16- and 32-bit architectures, and as unit prices for
most embedded microprocessors have declined, manufacturers have been able to
incorporate vastly improved features, speed and reliability into their
products at relatively low incremental cost. According to industry sources,
microprocessors manufactured by Intel, AMD and Motorola account for a
majority of the 16- and 32-bit embedded microprocessors purchased annually on
a worldwide basis. High-speed 32-bit embedded microprocessors, although
currently accounting for a small portion of the overall embedded
microprocessor market, represent the fastest growing segment of the embedded
microprocessor market, according to industry sources.
The development of embedded systems using today's high-speed
microprocessors requires the design, debugging and testing of substantial
amounts of complex custom applications software ("embedded software"), which
is typically written in a high-level programming language such as C or C++.
As the complexity and volume of such software increases, the need to
eliminate performance shortcomings, the potential for programming errors, and
the difficulty of thoroughly testing the complete system all increase
dramatically. As embedded systems are used increasingly in medical diagnostic
equipment, avionics systems and other applications where software errors may
have serious consequences, the need for careful debugging and testing of
embedded software increases.
1
The absence of any visual display, keyboard or other input/output device,
and the need to translate embedded software from the engineer's programming
language into machine code that can be understood by the embedded
microprocessor, both complicate the technical challenge posed by embedded
systems development. The software development phase of the process, as well
as the system integration phase in which hardware and software are first
operated together, are highly iterative, error-prone and time-consuming
phases during which software bugs and system errors are identified and
remedied. Following system integration, during the system test and validation
phase, the performance and reliability of the embedded software are assessed,
typically by means of relatively incomplete and time-consuming testing
procedures.
As the volume and complexity of embedded software have increased in
recent years, the Company believes that many manufacturers have come to view
the design, debugging and testing of embedded software as a bottleneck that
may impede the timely development of new products. In an effort to address
the complex challenges posed by these necessary tasks, manufacturers
typically purchase development tools from third-party vendors. A variety of
alternative technical solutions are available to help embedded systems
developers in their efforts to shorten product development cycles and deliver
high-quality, reliable products. These solutions fall into two major groups:
software-only solutions and hardware-assisted software solutions.
Software-only solutions, such as ROM monitors and high-level language
debuggers, reside partially in the embedded system and partially on the
software engineer's workstation or personal computer. These products have the
advantage of relatively low cost and ease-of-use, but require extra system
memory and an input/output path, one or both of which may not exist in the
embedded system's design. They also are vulnerable to complete system
failures (or "crashes") and can interfere with the real-time behavior of the
embedded system. These drawbacks render such software-only solutions less
effective for many applications, especially those in which the embedded
system must deal with multiple, high-speed, random inputs where timing
considerations are critical.
Hardware-assisted software solutions, such as in-circuit emulators and
logic analyzers, utilize both software and hardware components in performing
design, debugging and testing functions. In an emulator, for example, the
software component resides partially on the engineer's workstation and
partially within the emulator's hardware. An emulator's hardware includes
control, communications and memory components, connected to the embedded
system's circuitry through a "probe" which replaces or attaches to the
embedded microprocessor. Both the software and hardware components of a
hardware-assisted software tool are generally designed for use with a
specific type of embedded microprocessor. By emulating the embedded
microprocessor and its memory, emulators can perform design and debugging
functions at earlier stages of the development process than software-only
solutions. Emulators are also less susceptible to system crashes, can provide
the software engineer with broader features and capabilities, and allow
operation of the embedded system in real-time with minimal interference from
the tool. Hardware-assisted software solutions, however, are typically more
expensive than software-only solutions, and historically have been relatively
difficult to learn to use and to operate.
Both software-only and hardware-assisted software solutions, although
capable of performing some basic testing functions, have traditionally been
used primarily for debugging embedded systems. Neither class of tools has
historically been optimized to perform a broad range of tests for embedded
software. As a result, real-time testing of embedded software has remained an
especially difficult problem for which the tools available to software
engineers have provided limited solutions.
2
In their efforts to remain competitive, manufacturers are increasingly
faced with the demands of two fundamental but conflicting pressures. As they
incorporate increasing numbers of 16- and 32-bit embedded 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 or increase
development costs. At the same time, competitive demands for technologically
superior products without corresponding cost increases and decreasing
electronics product life cycles create pressures to minimize development
costs and time-to-market. The Company's products are designed to help
electronics manufacturers respond successfully to both of these conflicting
demands.
THE APPLIED MICROSYSTEMS SOLUTION
The Company is a leading provider of hardware-assisted software tools for
the design, debugging and testing of embedded software. Its software design
and debugging tools, including CodeICE, CodeTAP, SuperTAP and EL Series
in-circuit emulation devices and NetROM ROM emulator, enable software
engineers to observe and control software functions in a high-level
programming language during the design and system integration phases of
embedded software development. The Company's CodeTEST software testing tools
are designed to measure the performance and reliability of embedded software
in a minimally intrusive manner, as well as the adequacy of the test process
itself, and to present these measurements in a format designed to be
understood easily by software engineers. Additionally, the Company's recently
announced VSP/TAP-TM-/Eagle co-verification tools allow a project team to
simulate their entire design, both hardware and software, prior to committing
to expensive custom integrated circuits and printed circuit boards. The
Company's tools are used in a variety of industries characterized by rapid
technological advances and competitive pressures to shorten development
cycles, with a resulting need for extensive debugging and testing of embedded
software prior to product release. The Company believes that, by using the
Company's tools, customers are able to improve the quality and reliability of
their embedded software and the performance of their products, shorten
product development cycles, increase engineering productivity and reduce
overall embedded systems development costs.
The Company's products support a broad range of 16- and 32-bit embedded
microprocessors manufactured primarily by Intel, AMD and Motorola. Its tools
are designed to run at the highest clock speeds of the microprocessors
supported by the Company, which allows debugging and testing to be conducted
in real-time. Each of the Company's products includes two specialized
components: a hardware probe that replaces or attaches to the embedded
microprocessor, and software that resides in the hardware and on the
engineer's workstation. The hardware component provides an input/output path
through which the software engineer can observe and in certain cases control
the microprocessor's execution of software. The software component permits
the engineer to observe, test or control embedded software functions in a
high-level programming language and at real-time speeds without significantly
interfering with the embedded system's performance. The hardware and software
components of the Company's tools work together to perform design, debugging
and testing tasks, and are designed specifically for use with a particular
type of embedded microprocessor. In addition to supporting a broad range of
embedded microprocessors, the Company's tools offer a variety of easy-to-use
features and capabilities, across a range of prices.
BUSINESS STRATEGY
The Company's principal business objective is to be the leading worldwide
provider of tools for use in the design, debugging and testing of embedded
software. The central elements of the Company's business strategy include:
3
MAINTAIN TECHNOLOGY LEADERSHIP. The Company has established a technology
leadership position in a number of areas, including emulator speeds,
emulator form factors, embedded software testing tools and hardware/software
co-verification. Through the use of ASICs and certain hardware design
techniques, the Company has been able to develop smaller tools capable of
operating at the highest clock speeds of the microprocessors supported by
the Company. With its patented CodeTAP design, the Company believes it was
the first to provide emulation capabilities in a pocket-sized form factor.
It believes that its CodeTEST tools are the only commercially available
tools to offer a broad range of real time testing capabilities to embedded
software developers. It also believes that its VSP-TAP tools, introduced in
September, 1996, are the first tools available that allow developers to use
the actual microprocessor to integrate and verify software and hardware
early in the design cycle, before physical hardware is available. The
Company intends to continue expanding these and other technologies in order
to enhance its competitive position.
OFFER COST-EFFECTIVE SOLUTIONS. The Company's pocket-sized CodeTAP and
its more fully featured SuperTAP and CodeICE products utilize advanced
hardware designs to reduce both the size and cost of high-speed emulation.
The Company believes that, by using a combination of its emulation products,
customers can reduce the per-engineer cost of equipping increasing numbers
of software engineers. Most of the Company's products have a common user
interface, which reduces customer retraining costs.
BROADEN PRODUCT OFFERINGS. The Company plans to continue its focus on
products that enable embedded systems developers to shorten product
development cycles while at the same time addressing the increasing
complexity of embedded software designs. For example, the Company's CodeTEST
tools offer embedded software developers a previously unavailable range of
testing capabilities. The Company intends to leverage its customer base by
expanding its product offerings to address additional needs within the
embedded software development process. In order to achieve these objectives,
the Company intends to pursue internal product development and to explore
potential acquisitions of other businesses, products or technologies in
related market segments.
TARGET HIGH-GROWTH EMBEDDED SYSTEMS SECTORS. The Company focuses its
product development and marketing efforts on tools for use with those
microprocessors that it believes are most commonly specified for use in
embedded system design starts. Its tools are designed for use predominantly
with embedded microprocessors produced primarily by Intel, AMD and Motorola,
which together account for a majority of 16- and 32-bit embedded
microprocessors purchased annually on a worldwide basis. Currently, the
Company's marketing efforts are concentrated principally on industries which
it believes are experiencing rapid growth in design starts, such as
internetworking, telecommunications and computer peripherals.
PURSUE STRATEGIC RELATIONSHIPS. The Company intends to enter into an
increasing number of development, marketing and other strategic
relationships in order to expand sales and broaden its product offerings.
The Company maintains close working relationships with Intel, AMD and
Motorola to coordinate the design of its tools for use with their embedded
microprocessors, and engages in joint sales activities with these
manufacturers. The Company also participates in cooperative marketing
activities and, in certain cases, reselling, licensing or joint product
development arrangements with providers of other embedded systems
development tools, such as compilers, debuggers and RTOS software and CAE
vendors.
4
o EMPHASIZE GLOBAL DIRECT SALES. The Company believes that both customer
loyalty and the effectiveness of its sales force are enhanced by relying
principally on direct sales employees, both domestically and
internationally. The Company believes that its substantial international
sales, which accounted for over 47.6% of net sales in 1996, allow it to
maintain close working relationships with major semiconductor manufacturers,
take advantage of worldwide growth in embedded systems development and serve
the needs of multinational customers.
PRODUCTS
The Company provides design, debugging and testing tools for use
principally by software engineers in the development of embedded software.
The Company designs its products to support a broad range of 16-and 32-bit
embedded microprocessors primarily manufactured by Intel, AMD and Motorola,
and to run at the highest clock speeds of the microprocessors supported by
the Company. The Company's products are designed to address three distinct
requirements of embedded software developers: software design and debugging,
testing, and hardware/software co-verification tools.
The Company's products generally enable engineers to perform debugging
functions in high-level programming languages, such as C or C++, 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 (including certain of those produced by
Integrated Systems, Microtec Research and Wind River) and to read file format
output from compatible compilers (including certain of those produced by
Borland, GNU, Intel, Microsoft and Microtec Research).
The majority of the Company's tools are designed specifically for use
with a particular type of embedded microprocessor. As a result, customers
desiring to utilize the Company's tools for a different microprocessor must
purchase either a new version of the Company's tools or, where available, an
upgrade package. Although software engineers often require considerable
training in order to realize the full benefit of the Company's design and
debugging tools, the Company's products generally employ a common user
interface within a family of microprocessor, which reduces customer
retraining costs.
SOFTWARE DESIGN AND DEBUGGING TOOLS
The Company manufactures a wide range of hardware-assisted 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 in-circuit microprocessor emulators perform four basic
functions (the Company's ROM emulators support a subset of these functions):
o 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.
5
o 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, a capability particularly important in
identifying bugs or timing problems, or in reconstructing the
events leading up to a system failure.
o OVERLAY MEMORY the ability to replace the 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 system's ROM.
o HIGH-LEVEL LANGUAGE DEBUGGING the ability to display source code,
data and relevant RTOS information, and to control each of the
tool's other basic functions through a high-level language
interface to the system under development.
The Company offers a broad selection of hardware-assisted software design
and debugging tools with a variety of features and prices. The Company's
principal software design and debugging tools include its EL Series
emulators, originally introduced in 1989 and now subject to limited
continuing development; its CodeICE product, introduced in 1994 as an
economical, next-generation alternative to traditional chassis emulators; its
pocket-sized CodeTAP product, which was reengineered in 1993; its SuperTAP
product, introduced in 1996, incorporates the features of a CodeICE product
in a form factor only slightly larger than a CodeTAP; and its NetROM product,
which provides low cost target ethernet access and memory substitution. The
Company believes that the breadth of its product offerings enables
manufacturers to reduce the per-engineer cost of equipping increasing numbers
of software engineers with hardware-assisted software tools by using a
combination of more expensive CodeICE, or EL Series emulators, mid-priced
SuperTAP emulators and more economical CodeTAP and NetROM emulators. The
following table highlights key characteristics pertaining to the Company's
software design and debugging tools:
PRINCIPAL
ARCHITECTURE/ PRICE CURRENT MICROPROCESSOR
MODEL FORM FACTOR RANGE PRODUCTS FAMILIES SERVED CORE CAPABILITIES
- --------------- -------------- --------- ----------- ----------------------- ------------------------
EL Series Modular, $15,000 40 Mhz Intel 80960CX; Full-featured emulation;
multi-board to Motorola 68000, 68302, up to 4Mb overlay memory;
architecture/ $50,000 68330/340/360 advanced trace and event
desktop form system
factor
CodeICE Motherboard $15,000 66 Mhz Intel 80960JX; 80960HX, High-speed, full featured
architecture/ to 80960 RP; Motorola emulation; up to 16Mb
compact $35,000 68020/30/40/60, overlay memory; advanced
desktop form MCF5102 trace and event systems.
factor
SuperTAP Single-board $12,000 40 Mhz Intel 80186, 80386; High-speed, full featured
architecture/ to AMD 80186, 80386; emulation; up to 16Mb overlay
pocket-sized $20,000 Motorola PPC 860 memory; advanced trace and
form factor event systems.
CodeTAP Single-board $3,000 40 Mhz Intel 80186, 80386, Limited to features frequently
architecture/ to 80960 CX, 80960 HX, used by software engineers; up
pocket-sized $12,000 80960 RP; AMD 80186, to 1Mb overlay memory; modest
form factor 80386; Motorola CPU trace and event systems.
32, 68331/2;
NetROM Single-board $6,000 Access Many different 8, 16 Memory overlay, target connection
architecture to time > 45 and 32 bit ROM through ROM, integrated w/3rd
with probing $8,200 ns devices Party Software
cables
6
The Company intends during 1997 to continue developing additional
software design and debugging tools for use with certain embedded
microprocessors, which are intended to operate at the increased processing
speeds of certain of such microprocessors, as indicated in the above table.
In addition to the products listed above, the Company believes it will be
necessary to develop additional products to support existing and future
microprocessors, as well as to continue to enhance and broaden its
user-interface technology. 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 TESTING TOOLS
The company produces a line of software testing tools called CodeTEST,
which are designed specifically to offer a broad range of testing
capabilities to developers of embedded software. These tools were introduced
in November, 1995, and are designed to measure the performance and
reliability of embedded software, as well as the adequacy of the test process
itself, in a minimally intrusive manner, and to present these measurements in
a format designed to be understood easily by software engineers. These
products are expected to be utilized by software engineers during the
software development, system integration, and system test and validation
phases of embedded systems development.
CodeTEST software testing tools are designed to perform four basic
functions:
o COVERAGE ANALYSIS 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.
o 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, and to identify any
hindrances to high-speed processing so that system reaction times
and compliance with performance specifications can be optimized.
o MEMORY ALLOCATION ANALYSIS the ability to monitor the use of
memory during software execution, and 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 embedded system's memory.
o SOFTWARE EXECUTION TRACE the ability to observe software functions
from the source code level to the task level at any point in
execution history, in order to address software performance or
memory problems.
7
The CodeTEST line includes four software modules sold separately, one for
each of the above functions, and a separate hardware probe designed for use
with a specific embedded microprocessor. CodeTest support includes probes for
Intel 80960 JX, HX, and CX, Intel 80C186/188 EA and XL, AMD 186/188, Motorola
68020, 68030, 68040, 68060, 68HC000, 68EC000, 68340, 68360, PPC860, VME Bus,
and a microprocessor universal probe. The Company plans to support additional
embedded microprocessors with additional releases during 1997, but there can
be no assurance as to the success or timeliness of such development efforts.
Prices for the Company's software testing tools range from $11,000 to
$30,000, depending on the software modules purchased.
HARDWARE/SOFTWARE CO-VERIFICATION TOOLS
The Company entered into an agreement in April, 1996, with Eagle Design
Automation, to distribute worldwide, their Eaglei-TM- products of
hardware/software co-verification tools for the embedded market and to
jointly develop interface products that allows both companies products to
work together. When combined with a hardware simulator, designers can use
Eaglei to integrate hardware and software without waiting for the actual
prototype.
In September, 1996, the Company announced the first result of their joint
effort with Eagle, VSP-TAP-TM-. VSP-TAP enables a high speed connection from
an Applied debug tool (with the actual target processor) to many commercially
available hardware simulators through Eaglei. For the first time, embedded
developers can use the actual microprocessor with full software debug
interfaces to integrate and verify software and hardware early in the design
cycle, before physical hardware is available, when errors can be detected and
corrected much faster and at lower cost than at the physical prototype stage.
Applied's first VSP-TAP supports Intel's 80960Hx microprocessor. No
significant revenue was recognized from this new product area in 1996.
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CUSTOMERS
The Company's sales are presently concentrated primarily in the
internetworking, telecommunications and computer peripherals segments of the
electronics industry. The following table sets forth representative industries
and customers for the Company's products, and representative applications for
embedded microprocessors supported by the Company's products:
INDUSTRY REPRESENTATIVE CUSTOMERS REPRESENTATIVE APPLICATIONS
- --------------------------- -------------------------------------------------- ------------------------------
Internetworking Bay Networks Hitachi ATM Equipment, Bridges,
Cabletron Hughes Network Systems Concentrators, Hubs, ISDN
Cascade Communications Toshiba Equipment, Network Cards,
Cisco Newbridge Routers
- ---------------------------------------------------------------------------------------------------------------
Telecommunications Alcatel NORTEL Cellular Phones, Central
AT&T NTT Office Switches, Pagers,
Dialogic OKI Electric PBXs, Satellite
Ericsson Qualcomm Communications,
GPT Communications Samsung Teleconferencing, Telephone
Lucent Siemens Swithches, Voice Mail
Matsushita Tellabs Systems
Mitsubishi Toshiba
Motorola
- ---------------------------------------------------------------------------------------------------------------
Computer Peripherals/ Canon LG Electronics Copiers, Disk Drives, Fax
Office Products Eastman Kodak Lucent Machines, Modems, PC
Fuji Xerox Ricoh Plug-In Cards, Printers
Fujitsu Samsung
Hewlett-Packard Storage Technology
Hitachi Tandem
IBM Unisys
- ---------------------------------------------------------------------------------------------------------------
Other Acuson Physio-Control Bar Code Scanners,
Allen Bradley Puritan Bennett Defibrillators, Global
PT Siemens Positioning Systems, RAID
EMC Tektronix Controllers, Test
GEC Marconi Westinghouse Electric Instrumentation,
Intermec Zexel Ultrasound, Video Games
IGT
Although the composition of the Company's customers has changed from year
to year, a relatively limited number of customers have historically accounted
for a substantial portion of the Company's net sales. In addition, sales to
leasing and rental companies have become an increasingly significant portion
of net sales, particularly sales to leasing and rental companies serving
customers in Japan. During 1996 and 1995, sales to Orix Rentec, a leasing and
rental company in Japan, accounted for 10.1% and 10.6% of net sales,
respectively. The Company expects that a substantial portion of its net sales
will continue to be concentrated among a relatively limited number of
customers for the foreseeable future and that, so long as sales in Japan
remain a significant portion of net sales, sales to leasing and rental
companies will continue to constitute a significant percentage of net sales.
Increased sales to leasing and rental companies could adversely affect the
Company's net sales, as products purchased by such companies may be used by
5
more than one customer. However, in Japan, customers are more likely to finance
equipment acquisitions through leasing or rental arrangements, and, as a result,
sales to leasing and rental companies in Japan should not adversely affect net
sales. Other than its distributor agreements, the Company currently has no
long-term contracts with any of its customers, and sales are generally made
pursuant to purchase orders.
9
SALES, MARKETING AND CUSTOMER SUPPORT
The Company markets its products and services primarily through its
domestic and international direct sales organization. As of December 31,
1996, the Company had 68 sales employees worldwide, including 40 sales and
field application engineers located at the Company's headquarters and in five
direct sales offices throughout North America, and in the Company's
wholly-owned subsidiaries in Japan, Germany, France and the United Kingdom.
Due to the highly 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, and that 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 ongoing support and product demonstration, and assist
customers to incorporate the Company's design, debugging and testing tools
into their design process. Support for international customers is provided by
field support engineers from the Company's overseas direct sales offices,
with assistance from field application engineers located at the Company's
headquarters in Redmond. The Company also offers its customers renewable
annual service contracts which entitle customers to receive technical and
emergency support, as well as software updates and hardware repair.
International sales represented 46.1%, 48.7% and 47.6% of the Company's
net sales in 1994, 1995 and 1996, respectively. Sales through the Company's
subsidiary in Japan accounted for 29.9%, 33.5% and 33.3% of the Company's net
sales in 1994, 1995 and 1996, respectively. The Company also has
international distribution agreements covering 24 countries. Sales to the
Company's international distributors in 1994, 1995 and 1996 accounted for
approximately 12%, 13.2% and 11.0%, respectively, of the Company's net sales.
Generally, the Company's agreements with its international distributors 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, longer payment cycles, foreign
collection problems, 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 of unit sales to foreign customers. For example, the
Company estimates that currency fluctuations affecting sales by the Company's
foreign subsidiaries, especially in Japan, accounted for 3.4% increase and a
7.0% decrease in the Company's net sales in 1995 and 1996, respectively. In
addition, foreign sales involve uncertainties arising from local business
practices and cultural considerations, and risks associated with
international trade tensions. Sales of the Company's products in Japan, in
particular, are subject to the risks associated with trade tensions between
the United States and Japan, which could adversely affect the volume of
U.S.-manufactured microprocessors purchased by Japanese embedded systems
developers, thus reducing the need for the Company's products in Japan. The
Company expects that international sales, in particular sales in Japan, will
continue to account for a significant portion of the Company's net sales in
the future.
The Company participates in cooperative marketing activities with other
embedded systems development tools providers and embedded microprocessor
manufacturers, such as Intel, AMD, Motorola, Microtec Research division of
Mentor Graphics, Integrated Systems and Wind River Systems. 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. The Company's marketing efforts
also include attending trade shows, publishing articles and advertising in trade
magazines
6
and journals, direct mail and product demonstrations. The Company also
maintains a home page on the World Wide Web at http:\\www.amc.com.
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 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 market for tools used in the development of embedded software is
fragmented, highly competitive and characterized by relatively low barriers
to entry, with over 50 providers offering technical solutions to address the
design and debugging, testing and co-verification 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 respond to
technological advances, emerging industry standards and practices and
competitive developments, and to implement relationships and acquisitions
that enable it to broaden its product offerings.
The principal competition for the Company's hardware-assisted software
design and debugging tools comes primarily from Hewlett-Packard, from various
other domestic and international providers of in-circuit emulators, many of
which focus primarily on developing products to support either Intel or
Motorola microprocessors, and, to a lesser extent, from domestic providers of
embedded microprocessor simulators, RTOS debugging software, logic analyzers,
ROM monitors and ROM emulators. The Company anticipates that competition for
its CodeTEST product line will come 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
CodeTEST tools. The Company believes that at present there are no other
commercially available testing products that offer the ability to perform
both coverage analysis and memory allocation analysis on embedded software,
although there can be no assurance that competitors will not develop such
products in the future. For its recently introduced co-verification tools,
the Company's major competition is currently from Mentor Graphics. The
Company expects other domestic CAE (computer aided engineering) vendors to
offer products in the future. 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 and debugging,
testing, and co-verification tools 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 software engineer's budget and experience level. The Company believes its
products are most competitive in situations involving high-speed, complex 16-
and 32-bit microprocessor designs.
11
The Company anticipates that the embedded systems development market is
likely to experience consolidation as providers of various embedded software
development tools strive to broaden their product offerings. 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 the Company. To compete effectively,
the Company may find it necessary to enter into alliances with other
providers, or to acquire other technologies or product lines, in order to
broaden its product offerings. Some of the Company's competitors bundle their
design and debugging solutions with sales of other embedded systems
development products, and the Company anticipates that such competitive
tactics may increase as competitors broaden their product offerings. Major
semiconductor manufacturers have increasingly been incorporating features
into their newer embedded microprocessors which facilitate visibility into
and control over internal software debugging functions. This trend may
further lower technological barriers to entry and encourage new or lower-cost
competition, and could render the Company's technologies or products wholly
or partially unnecessary or obsolete. Increased competition could result in
price reductions, reduced margins or loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations. If the Company is unable to compete successfully
against current and future competitors, its business, financial condition and
results of operations will be materially adversely affected.
MANUFACTURING
The Company's manufacturing operations consist of the procurement and
inspection of parts and components, assembly, software duplication, and
extensive testing of components and finished products. The Company'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 which
integrates and monitors purchasing, inventory control and production.
The Company thoroughly inspects and tests its 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. The Company also requires that all employees involved in the
assembly process undergo thorough training. The Company was ISO 9002
certified in December, 1995. The Company 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.
The Company pursues a strategy of using the latest high-performance hardware
components in the manufacture of its software 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 high demand 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 in the future to obtain key components in a timely
manner, in sufficient quantities, 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 in the future to experience significant delays,
12
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, more frequently customers 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, requires 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. There can be no assurance that changes in environmental regulations
will not 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 does not
believe such liability would have a material adverse effect on the Company's
business, financial condition and results of operations.
RESEARCH AND DEVELOPMENT
The Company has made and intends to continue making substantial
investments in the development of new technologies and products. Because of
the competitive importance of offering tools that are compatible with the
particular microprocessors and other equipment to be used in developing
embedded systems, tool providers are under continuing pressure to support
major new families of embedded microprocessors, as well as advances in other
development equipment. The Company 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.
A major portion of the Company's annual research and development budget
is devoted to the development of tools for use with new embedded
microprocessors, particularly those 16- and 32-bit microprocessors which the
Company believes are most commonly specified for use in embedded system
design starts. The timing of development of certain of the Company's products
may be accelerated by external development funding provided by the
manufacturer of the particular embedded microprocessor for which the tool is
to be designed. In general, however, there can
13
be no assurance that the Company will be able to anticipate levels of future
usage of particular new embedded microprocessors so as to allow timely
development of related tools, that tools for use with particular embedded
microprocessors will be developed successfully or in a timely manner, or that
new embedded microprocessors for which the Company has developed tools will
be released successfully or in a timely manner by their manufacturers.
The Company intends to continue to enhance and expand its existing
product lines and to offer new or additional products for the embedded
systems software development market. While the Company expects that many of
these product enhancements and new products may be developed internally, the
Company may also, based on timing and cost considerations, seek to expand its
product offerings through acquisitions, technology licensing or joint
development relationships with other providers. There can be no assurance
that the Company's efforts to enhance its existing products or develop new
products will be completed successfully or in a timely manner, or that such
enhancements or new products will achieve market acceptance. The Company has
in the past experienced delays in product development and there can be no
assurance that the Company will not experience similar delays in the future.
If the Company is unable, for technological or other reasons, to develop and
introduce new products or features in a timely manner and achieve market
acceptance, its business, financial condition and results of operations will
be materially adversely affected.
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. There can be no assurance that the
trade secrecy and other measures taken by the Company will be adequate to
prevent or deter misappropriation of its technology, or that competitors will
not be able independently to develop technologies having similar functions or
performance characteristics. In addition, 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. There can be no assurance that the Company will
have an adequate legal remedy to prevent or seek redress for future
unauthorized misappropriations of the Company's technology. The Company has
been issued two U.S. patents and a Japanese patent covering certain
technology incorporated in the Company's CodeTAP product. A corresponding
European patent application has been published for purposes of opposition,
and a competitor has filed an opposition which is presently under review. If
the opposition is dismissed, the European patent will be registered in
France, Germany and the United Kingdom. The U.S. patents will expire in 2010
and the foreign patents will expire in 2011.
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, or uses thereof, 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. In addition to any potential liability for
damages, the Company or its customers could be enjoined from continuing to
manufacture or market the affected product or use the affected process, and
could be required to obtain a license to continue to manufacture or market
the affected product or use the affected process. There can be no assurance
that the Company or its customers would prevail in any such action or that
any license required under any such patent would be made available on
acceptable terms, if at all .
Third parties have in the past made patent infringement claims against
the Company. In certain cases, the Company has resolved these claims by
obtaining a license to the technology. The Company has also asserted claims
of infringement of its trade secrets and certain of its patents against
various competitors and in one instance has brought suit to protect trade
secrets and enforce patent rights relating
14
to its CodeTAP product. In that instance, the competitor settled by paying
damages for past infringement and obtaining a license to the patented
technology. The Company is currently involved in the initial stages of
disputes concerning potential patent infringement relating to the same
technology by two other competitors, both of which have asserted various
defenses, including prior art, and one of which has filed an opposition to
the Company's European patent relating to such technology. There can be no
assurance as to the outcome of any pending or future claims, litigation or
proceedings involving the Company's proprietary rights.
Although the Company believes that it currently owns or has adequate
rights to utilize all material technologies relating to its existing
products, as it continues to develop new products and features it anticipates
that it may find it desirable or necessary to obtain other nonexclusive or
exclusive licenses from third parties entitling it to use certain
technologies or software solutions. There can be no assurance that such
licenses would be available to the Company on acceptable terms, if at all.
The Company currently has licenses to several software programs, which 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, 1996, the Company had 234 employees, of whom 200 were
based in the United States and 34 were based overseas. Of the total, 121 were
engaged in Sales, General and Administrative, 73 were in research and
development and 40 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 five 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 1997 and that additional space will be available
as needed.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor its properties are currently subject to any
material legal proceedings. See "--Proprietary Rights."
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are elected annually at the meeting of
the Board of Directors held in conjunction with the annual meeting of
stockholders. The following are the current executive officers of the Company:
NAME AGE Position
- ----------------------------------------------------- ---- -----------------------------------------------------
Robert L. Deinhammer 51 President, Chief Executive Officer and Director
A. James Beach 40 Vice President, Secretary, Treasurer and Chief
Financial Officer
Douglas A. Fullaway 45 Vice President, Worldwide Sales
Brian Crowley 36 Vice President and Division General Manager
Larry Ritter 38 Vice President and Division General Manager
Robert L. Deinhammer joined the Company in May 1992 and has served as its
President, Chief Executive Officer and a Director since July 1992. Before
joining the Company, he served as an independent consultant from January 1991
to July 1992, and held senior management positions at several high-technology
companies, including President and Chief Operating Officer of ADAC
Laboratories from May 1985 to December 1990. From April 1984 to May 1985, Mr.
Deinhammer served as President and Chief Operating Officer of Silicon
General, after serving as Vice President and General Manager of one of its
operating divisions from April 1979 to March 1984.
A. James Beach has served as the Company's Vice President and Chief
Financial Officer since October 1992, and was elected Secretary and Treasurer in
November 1992. Before joining the Company, Mr. Beach spent eight years at
Microcosm Inc., where he served as Vice President of Finance & Administration
from June 1984 to October 1988 and as President and General Manager from October
1988 to May 1992. Microcosm Inc. was acquired by Microtek International Inc. in
April 1990. From April 1980 to June 1984, he served as a senior auditor with the
Technology and Emerging Business Practice at the accounting and consulting firm
of Deloitte & Touche.
Douglas A. Fullaway has served as the Company's Vice President, Worldwide
Sales, since January 1995, after serving as Vice President, International Sales
from November 1993 to December 1994. Prior to joining the Company, Mr. Fullaway
held positions of increasing management responsibility at Mentor Graphics
Corporation from January 1984 to October 1993, including Pacific Rim General
Manager from August 1987 to August 1989, European Operations Manager from August
1985 to August 1987 and Manufacturing Manager from January 1984 to August 1985.
From 1980 to 1983, he was employed by Tektronix Inc. in a variety of operational
positions.
16
Brian Crowley joined the Company in May 1986 and served in positions of
increasing engineering and management responsibility. Mr. Crowley was named
Director of Engineering in August 1992 and was elected Vice President and
Division General Manager in February 1996. Prior to joining the Company, Mr.
Crowley served as a design engineer at Sigma Research.
Larry Ritter joined the Company as Director of Marketing in January 1995 and
has served as the Company's Vice President and Division General Manager since
February 1996. Before joining the Company, Mr. Ritter spent 15 years at Hewlett
Packard where he served as Product Marketing Manager at the Colorado Springs
Division from June 1992 to January 1995, and in various positions of increasing
marketing and sales responsibility prior to June 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Applied Microsystems' common stock has been traded on the Nasdaq National
Market System under the symbol APMC since the Company's initial public offering
on November 14, 1995.
The closing price of the Company's common stock as reported by the Nasdaq
National Market on March 20, 1997 was $11.50 per share. The price per share in
the following table sets forth the low and high closing prices in the Nasdaq
National Market for the quarter indicated below:
Low High
1995 November 15 to December 31 $ 6 3/4 $10 3/4
1996
First Quarter 7 3/4 12 3/4
Second Quarter 9 20 3/4
Third Quarter 11 1/4 23 7/8
Fourth Quarter 9 23 3/4
The Company has not paid dividends and does not plan to pay dividends on its
common stock in the foreseeable future. The Company estimates that at March 20,
1997, there were approximately 2,000 beneficial owners of the common stock of
the Company.
17
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Statement of Income Data:
Net Sales.................................................. $ 38,662 $ 31,039 $ 25,663 $ 21,273 $ 22,013
Cost of Sales.............................................. 10,793 9,530 8,903 8,531 8,222
Gross Profit............................................... 27,869 21,509 16,760 12,742 13,791
Operating expenses:
Sales, general and administrative........................ 15,142 13,321 11,715 9,985 11,420
Research and development................................. 7,988 6,275 4,482 4,025 4,773
Restructuring charge (1)................................. 0 0 0 0 2,403
--------- ------ --------- --------- --------
Total operating expenses................................. 23,130 19,596 16,167 14,010 18,596
--------- ------ --------- --------- --------
Income from operations..................................... 4,739 1,913 563 (1,268) (4,805)
Interest Expense and other income.......................... 559 (154) (465) (355) (682)
--------- ------ --------- --------- --------
Income (loss) Before income taxes.......................... 5,298 1,759 98 (1,623) (5,487)
Provision for Income taxes................................. 1,582 305 68 0 0
--------- ------ --------- --------- --------
Net Income (loss).......................................... 3,716 1,454 30 (1,623) (5,487)
--------- ------ --------- --------- --------
Net Income (loss) per Share (2)............................ $ 0.52 $ 0.25 $ 0.01 ($ 1.30) --
Average Number of Common and Equivalent Shares
Outstanding.............................................. 7,097 5,729 4,337 1,253 --
- ------------------------
(1) See "Management's Discussion and Analysis of Financial Condition and Results
of Operations"
(2) Net income (loss) per share information is not presented for all years, as
such data is not considered meaningful.
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
Balance Sheet Data
Working Capital................................................ $ 19,415 $ 15,756 $ 1,800 $ 981 $ 1,778
Total Assets................................................... 30,824 26,846 14,011 13,388 16,163
Long-term Debt, Net of Current................................. 15 68 385 649 1,413
Shareholders' Equity........................................... 22,607 18,654 4,286 4,065 5,682
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated Financial
Statements and Notes thereto included elsewhere in this document.
OVERVIEW
Since its inception in 1979, the Company has focused on designing,
manufacturing and marketing tools used in the design, debugging and testing of
embedded software. The Company's product line initially consisted primarily of
chassis-style in-circuit emulators, highly technical tools utilized at that time
by hardware engineers. In the late 1980s, customer demand focused increasingly
on tools with greater speed, software sophistication, ease-of-use and
price/performance value. By 1991, the Company's sales and profitability began to
decline due to various factors, including a poorly targeted product development
strategy, slowness in responding to changing customer requirements and
increasing competition.
18
Beginning in mid-1992, the Company assembled a new management team that
devised and began implementing a new business strategy. As a part of this new
strategy, management effected a restructuring of the Company, which included
significant headcount reductions and a refocusing of its product line by
concentrating marketing and engineering activity on new hardware-assisted
software tools for use with a broad range of Intel and Motorola 16- and 32-bit
embedded microprocessors, employing advanced hardware designs to reduce size and
cost, and emphasizing ease-of-use by software engineers. Following this
restructuring, the Company reengineered its pocket-sized CodeTAP emulator in
late 1993; introduced its compact and more affordable CodeICE emulator in 1994;
began shipping CodeTEST software testing tools focused on embedded test in late
1995; and in 1996, released SuperTAP, which brings full featured emulation into
a CodeTAP form factor and introduced its hardware/software co-verification tool
VSP-TAP to enhance its Eagle distribution agreement. The Company's strategy has
resulted in lower average selling prices and increased unit volumes.
The Company's sales through its foreign subsidiaries are generally
denominated in foreign currencies, and as a result fluctuations in currency
exchange rates can have a significant effect on the Company's reported net
sales. The effect of currency exchange rate fluctuations on the Company's net
sales is dependent in part upon the Company's pricing policies. The Company is,
however, unable to predict currency exchange rate fluctuations and anticipates
that such fluctuations will continue to affect its net sales to varying degrees
in the future. The Company expects international sales, especially in Japan, to
continue to account for a significant percentage of its net sales.
To enhance its competitive position, it will be necessary for the Company to
continue developing its technology base and broadening its product offerings to
address additional needs within the embedded software development process. These
objectives may require expansion of the Company's internal product development
efforts or acquisitions of or investments in complementary businesses, products
or technologies in related market segments.
The Company believes that the growth rates reflected in results of
operations for prior periods should not be relied upon as an indication of
growth rates for future periods. The Company also believes that competition is
likely to increase, which could result in loss of market share, price reductions
or reduced margins, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's Consolidated Statements of Income, expressed as a percentage
of sales.
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------ ------ ------
Net Sales................................... 100.0% 100.0% 100.0%
Cost of Sales............................... 27.9 30.7 34.7
----- ----- -----
Gross profit................................ 72.1 69.3 65.3
Operating expenses:.........................
Sales, general and administrative......... 39.2 43.0 45.6
Research and development.................. 20.7 20.2 17.5
----- ----- -----
Total operating expenses................. 59.9 63.2 63.1
----- ----- -----
Operating income............................ 12.2 6.1 2.2
Interest expense and other income........... 1.5 (0.5) (1.8)
----- ----- -----
Income before income taxes................ 13.7 5.6 0.4
Income taxes................................ 4.1 1.0 0.3
----- ----- -----
Net income.................................. 9.6% 4.6% 0.1%
----- ----- -----
19
Years Ended December 31, 1996 and 1995
NET SALES. Net sales increased by 24.6% to $38.7 million in 1996 from $31.0
million in 1995. This increase was primarily attributable to increased unit
sales of debug products and to sales of CodeTEST (which began shipping in
November, 1995) which were partially offset by a decline in average selling
prices due to an increased proportion of sales represented by lower-priced
CodeTAP and NetROM tools and to negative currency exchange rate fluctuation. The
Company's net sales are presently derived predominantly from sales of software
design, debugging and testing tools. The Company's net sales also include
product support revenues, which represented 8.3% and 8.4% of net sales in 1996
and 1995, respectively, as well as patent license royalties commencing in the
second quarter of 1995. The Company generally recognizes revenues from product
sales upon shipment, and recognizes product support revenues ratably over the
life of each maintenance contract, typically 12 months. See Note 1 of Notes to
Consolidated Financial Statements.
International sales outside of North America in U.S. dollars increased by
21.8% in 1996 over the comparable period of 1995, to 47.6% of net sales as
compared to 48.7% of net sales in the prior year. The increase in international
sales is attributable to increased unit sales, which is due primarily to
increased sales and marketing efforts. The Company estimates that unfavorable
currency rate fluctuations affecting sales by the Company's foreign
subsidiaries, especially in Japan, resulted in a 7.0% reduction in the Company's
net sales in 1996 based upon the change from the 1995 rate.
GROSS PROFIT. The Company's gross profit increased to $27.9 million, or
72.1% of net sales, in 1996 from $21.5 million, or 69.3% of net sales, in 1995.
The increases in gross profit as a percentage of net sales was primarily
attributable to an increase in the percentage of net sales attributable to newer
debug and recently introduced CodeTEST products that have lower material and
labor costs, and to a lesser extent, increased leverage of fixed and
semi-variable manufacturing costs, and favorable cost reductions on certain
hardware components. These savings were partially offset by declines in sales
revenue due to unfavorable currency exchange rate fluctuations.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expenses were $15.1 million or 39.2% of net sales, and $13.3 million, or 43.0%
of net sales, in 1996 and 1995, respectively. The dollar amount increase between
comparable periods was primarily attributable to increased compensation-related
expenses resulting principally from increased sales force headcount. Sales,
general and administrative expenses declined as a percentage of net sales due to
the Company's ability to leverage certain fixed selling, general and
administrative expenses over an increased sales base. Sales, general and
administrative expenses include salaries, bonuses, commissions, benefits,
depreciation, travel and entertainment, rent, telephone, supplies and
promotional costs. The Company expects its sales and marketing expenditures to
continue to increase in the future as it introduces and markets new products,
and continues to expand its sales, general and administrative organization.
RESEARCH AND DEVELOPMENT. Research and development expenses were $8.0
million, or 20.7% of net sales, and $6.3 million, or 20.2% of net sales, in 1996
and 1995, respectively. The 27.3% increase in the dollar amount of research and
development expenses between comparable periods was primarily attributable to
increased compensation-related expenses resulting principally from increased
engineering headcount relating to new product development. Aggregate amounts
devoted to product development, prior to offsetting such amounts with external
development funding from semiconductor manufacturers,
20
increased to $8.3 million in 1996 from $6.7 million in 1995. Although
external product development funding cannot be relied upon, the Company
intends to continue to make substantial investments in product development,
including development of software design, debugging and test tools for
additional embedded microprocessors as well as continued advanced development
in future directions. As a result, the Company anticipates that net research
and development expenses are likely to increase for the foreseeable future.
INCOME TAXES. The Company's income tax provision for 1996 and 1995 reflects
utilization of Net Operating Loss (NOL) and General Business Credit
carryforwards. In 1994, the provision represented federal alternative minimum
tax, state taxes and foreign income taxes. As of December 31, 1996 the Company
had remaining NOL carryforwards of $2.4 million and research and development
credit carryforwards of $953,000, both of which will expire in various amounts
through 2008. The utilization of these amounts in the future is subject to an
annual limit of approximately $390,000 under the Internal Revenue Code. As a
result of these limitations, the Company anticipates that in the future its
effective tax rate will approach the statutory rate in future years. See Note 7
of Notes to Consolidated Financial Statements.
Years Ended December 31, 1995 and 1994
NET SALES. Net sales increased by 20.9% to $31.0 million in 1995 from $25.7
million in 1994. This increase was primarily attributable to increased unit
sales, particularly to foreign customers, which were partially offset by a
decline in average selling prices due to an increased proportion of sales
represented by lower-priced CodeTAP tools. To a lesser extent, net sales were
also impacted by favorable currency exchange rate fluctuations affecting
international sales, and shipments of CodeTEST, that began in November 1995.
Product support revenues represented 8.4% and 8.8% of net sales in 1995 and
1994, respectively.
International sales in U.S. dollars increased by 27.9% in 1995 over the
comparable period of 1994, to 48.7% of net sales as compared to 46.1% of net
sales in the prior year. The rapid growth rate of international sales is
attributable to increased unit sales, which is due primarily to increased sales
and marketing efforts and the shift from foreign distributors to an
international direct sales force in four countries. In addition, the Company
estimates favorable currency fluctuations affecting sales by the Company's
foreign subsidiaries, especially in Japan, accounted for 2.8% of the Company's
net sales in 1995 based upon the change from the 1994 rate.
GROSS PROFIT. The Company's gross profit increased to $21.5 million, or
69.3% of net sales, in 1995 from $16.8 million, or 65.3% of net sales, in 1994.
The increase in gross profit as a percentage of net sales was primarily
attributable to an increase in the percentage of net sales attributable to newer
products (CodeICE, CodeTAP, and CodeTEST) that have lower material and labor
costs. To a lesser extent, the increase in gross margin as a percentage of sales
is attributable to favorable currency fluctuations, cost reductions on certain
hardware components, and increased leverage of fixed and semi-variable
manufacturing costs.
SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative
expenses were $13.3 million or 43.0% of net sales, and $11.7 million, or 45.6%
of net sales, in 1995 and 1994, respectively. The dollar amount increase between
comparable periods was primarily attributable to increased compensation-related
expenses resulting principally from increased sales force headcount, partially
offset by a decrease in trade secret and patent litigation costs. Sales, general
and administrative expenses decreased as a percentage of
21
net sales due to the Company's ability to leverage certain fixed selling
expenses over an increased sales base.
RESEARCH AND DEVELOPMENT. Research and development expenses were $6.3
million, or 20.2% of net sales, and $4.5 million, or 17.5% of net sales, in 1995
and 1994, respectively. The 40.0% increase in research and development expenses
between comparable periods was primarily attributable to increased
compensation-related expenses resulting principally from CodeTEST development
and other increases in engineering headcount. Aggregate amounts devoted to
product development, prior to offsetting such amounts with external development
funding from semiconductor manufacturers, increased to $6.7 million in 1995 from
$5.2 million in 1994.
QUARTERLY RESULTS OF OPERATIONS
The Company's results of operations have in the past fluctuated
substantially from quarter to quarter, and the Company expects such fluctuations
to continue as a result of a variety of factors. Product and price competition,
research and development requirements, the volume and timing of customer
development projects and orders, introductions of new embedded microprocessors,
announcements or introductions of new products or technologies by the Company or
its competitors, foreign currency exchange rates, variations in external product
development funding, investments in marketing and distribution, price increases
by suppliers, parts shortages, conditions in the embedded systems market and the
electronics industry in general, and national and global economic conditions may
be expected to cause significant variations in the Company's quarterly operating
results. As a result, the results of operations for any quarter are not
necessarily indicative of results for any future period.
The Company's net sales have historically reflected some seasonality in that
sales growth typically tends to flatten between the second and third quarters of
the year, coincident with the slowing of business activity during the summer
months in many industrialized nations. Moreover, a significant portion of the
Company's net sales in each quarter generally results from shipments during the
last few weeks of the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally for the financing of inventory,
capital equipment and accounts receivable, and for investment in product
development activities and new technologies. To date, the Company has financed
its operations primarily through cash flow from operations, bank borrowings and
private placements of equity securities. In November 1995, the Company completed
its initial public offering pursuant to which it sold 1,500,000 shares of common
stock and received net proceeds of approximately $13 million. During 1996, the
Company generated $1.7 million of cash from operations; utilized $1.2 million of
cash for equipment purchases; and utilized $67,000 of cash for net debt
reduction. As of December 31, 1996, the Company had working capital of $19.4
million, including $13.1 million of cash and cash equivalents.
The Company has revolving credit facilities aggregating $7.0 million from a
commercial bank. There were no outstanding balances under these facilities as of
December 31, 1996. The credit facilities bear interest at the bank's floating
prime rate and are unsecured. The loan documents also contain customary negative
covenants. The credit facilities expire in May 1997 and the Company anticipates
renegotiating a new line at comparable terms.
22
The Company currently has no specific commitments with regard to capital
expenditures, but expects to spend an aggregate of approximately $1.5 million in
1997 for new capital equipment. The Company anticipates that its annual capital
expenditures will increase gradually in the future as a function of replacement
cycles and anticipated growth of the Company's business. The Company's capital
needs may be further affected by its plans to broaden product offerings through
a combination of internal development, third party relationships and
acquisitions of other business products or technologies.
The Company believes that the net proceeds from the November, 1995 initial
public offering, together with funds from operations and borrowings, will
provide the Company with sufficient funds to finance its operations for at least
the next 12 months. The Company's future capital requirements will, however,
depend on a number of factors, including costs associated with product
development efforts, the success of the commercial introduction of the Company's
CodeTEST product line and the acquisition of complementary businesses, products
or technologies. To the extent additional capital is required, the Company may
sell additional equity, debt or convertible securities, or obtain additional
credit facilities.
Outlook: Issues and Uncertainties
The Company does not provide forecasts of future financial performance or
sales volumes, although this Annual Report contains certain forward-looking
statements that involve risks and uncertainties. The Company may, in
discussions of its future plans, objectives and expected performance in
periodic reports filed by the Company with the Securities and Exchange
Commission (or documents incorporated by reference therein) and in written
and oral presentations made by the Company, include forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 or
Section 21E of the Securities Exchange Act of 1934, as amended. Such
forward-looking statements are based on assumptions which the Company
believes are reasonable, but are by their nature inherently uncertain. In all
cases, there can be no assurance that such assumptions will prove correct or
that projected events will occur. Actual results could differ materially from
those projected depending on a variety of factors, including, but not limited
to, the issues discussed below. While the Company management is optimistic
about the Company's long-term prospects, the following issues and
uncertainties, among others, should be considered in evaluating its growth
outlook and forward-looking statements.
RAPIDLY CHANGING TECHNOLOGY AND PRODUCT DEVELOPMENT UNCERTAINTIES. 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 future business, financial condition and results of
operations will depend upon its ability to anticipate market demand for specific
embedded microprocessors, 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 UNCERTAINTIES. A number of the Company's components are
manufactured by a single source or distributed through a limited number of
outlets. There can be no assurance that the Company will be able in the future
to obtain key components in a timely manner, in sufficient quantities, or on
favorable price terms.
PRODUCT SHIP SCHEDULES. Delays in new-product releases could impact revenue
growth rates and cause customer base to become dissatisfied and erode.
PRICES. Prices the Company can obtain for its products may decrease from
historical levels, depending on competitive market or cost factors which could
have an adverse effect on revenues and gross margin.
COST OF SALES. Although cost of sales as a percentage of net sales
decreased in 1995 and 1996, it varies with channel mix and product mix within
channels. Such mix factors may increase cost of sales as a percentage of
revenues in future periods.
SEMICONDUCTOR MANUFACTURERS. A substantial decline in the number of design
starts for 16-bit or 32-bit embedded microprocessors produced by Intel, AMD or
Motorola or delays by such manufacturers in the release of embedded
microprocessors for which the Company has developed tools could have an adverse
effect on the Company's revenues.
23
INDUSTRY FOCUS. The Company's sales are concentrated primarily in the
internetworking, telecommunications and computer peripherals markets and any
negative events affecting the electronics industry or these markets in
particular could have an adverse effect on revenues.
COMPETITION. The Company expects competition to increase from established
and emerging companies. Sales and marketing and research and development costs
may increase in dollar amounts and as a percentage of sales in order for the
Company to successfully compete.
KEY PERSONNEL. The Company believes that its future success will depend
largely upon its ability to retain and attract key personnel and skilled
employees.
MANAGEMENT OF GROWTH. The Company has grown rapidly since 1993 and plans to
continue to invest in product lines and sales and marketing. The Company's
growth plans will present management, competitive and other challenges to the
Company's managers and employees.
INTELLECTUAL PROPERTY. The Company's success will depend in part on its
ability to protect its technology and preserve its trade secrets.
PRODUCT LIABILITY. The use of the Company's tools in the development of
embedded systems that are incorporated in products used by or affecting the
general public, or that otherwise pose a risk of serious consequences if they do
not perform flawlessly under critical conditions, could expose the Company to
significant product liability claims.
FOREIGN EXCHANGE. A large percentage of the Company's sales, costs of sales
and marketing is transacted in local currencies. As a result, the Company's
international results of operations are subject to foreign exchange rate
fluctuations.
LITIGATION. The Company may become subject to litigation regarding
intellectual property rights, patents, and copyrights. If an adverse judgment
were entered against the Company, such a proceeding could adversely affect the
Company's financial condition and results of operation.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
APPLIED MICROSYSTEMS CORPORATION
INDEX TO FINANCIAL STATEMENTS
AUDITED ANNUAL FINANCIAL STATEMENTS: PAGE
----
Report of Ernst & Young LLP, Independent Auditors........................................ 26
Balance Sheets as of December 31, 1996 and 1995.......................................... 27
Statements of Income for the Years Ended December 31, 1996, 1995 and 1994................ 28
Statements of Stockholders' Equity for the Years Ended December 31, 1996
1995 and 1994.......................................................................... 29
Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............ 30
Notes to Financial Statements............................................................ 31
25
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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. 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
Corporation'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 generally accepted auditing
standards. 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. 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 5, 1997
26
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------------------
1996 1995
--------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND PER SHARE AMOUNT)
Current Assets:
Cash and cash equivalents............................................... $ 7,208 $ 12,771
Short Term Investments.................................................. 5,931 --
Accounts receivable, net of allowance for doubtful accounts of $264 and
$168, respectively.................................................... 10,261 7,510
Inventories............................................................. 3,197 3,145
Prepaid and other current assets........................................ 1,020 454
--------- ---------
Total current assets.................................................... 27,617 23,880
Property and equipment, net............................................. 2,441 2,212
Other assets............................................................ 766 754
--------- ---------
Total assets............................................................ $ 30,824 $ 26,846
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 2,394 $ 3,442
Accrued payroll......................................................... 1,839 1,698
Other accrued expenses.................................................. 1,220 1,083
Deferred revenue........................................................ 2,696 1,834
Current portion of long-term obligations................................ 53 67
--------- ---------
Total current liabilities............................................... 8,202 8,124
Long-term obligations, less current portion............................. 15 68
Commitments and Contingencies (Note 6)
Shareholders' equity:
Preferred stock, par value $.01 Authorized--5,000,000 shares............ -- --
Common stock, par value $.01
Authorized--25,000,000 shares Issued--6,634,000 shares (6,468,000 in
1995)................................................................. 26,068 25,655
Cumulative translation adjustment....................................... (332) (156)
Accumulated deficit..................................................... (3,129) (6,845)
--------- ---------
Total shareholders' equity.............................................. 22,607 18,654
--------- ---------
Total liabilities and shareholders' equity.............................. $ 30,824 $ 26,846
--------- ---------
--------- ---------
SEE ACCOMPANYING NOTES
27
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
(in thousands,
except per share amount)
Net sales.................................. $ 38,662 $ 31,039 $ 25,663
Cost of sales.............................. 10,793 9,530 8,903
-------- -------- --------
Gross profit............................... 27,869 21,509 16,760
Operating expenses:
Sales, general and administrative........ 15,142 13,321 11,716
Research and development................. 7,988 6,275 4,482
-------- -------- --------
Total operating expenses................... 23,130 19,596 16,197
-------- -------- --------
Income from operations..................... 4,739 1,913 563
Interest income and other.................. 601 76 89
Interest expense........................... (42) (230) (554)
-------- -------- --------
Income before income taxes................. 5,298 1,759 98
Income taxes............................... 1,582 305 68
-------- -------- --------
Net income................................. $ 3,716 $ 1,454 $ 30
-------- -------- --------
-------- -------- --------
Net income per share....................... $ 0.52 $ 0.25 $ 0.01
Shares used in per share calculation....... 7,097,000 5,729,000 4,337,000
See accompanying notes.
28
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY
Cumulative Total
Preferred Stock Common Stock Translation Accumulated Shareholders'
-------------------- -------------------
Shares Amount Shares Amount Adjustments Deficit Equity
-------- -------- -------- ------- ------------ ----------- -------------
(In thousands)
Balance at December 31, 1993.......... 1,789 $12,099 425 $406 ($111) (58,329) $4,065
Foreign currency translation
adjustment........................ -- -- -- -- 179 -- 179
Stock options exercised............. -- -- 269 12 -- -- 12
Net income.......................... -- -- -- -- -- 30 30
------- -------- -------- ------- ----------- ---------- -------------
Balance at December 31, 1994.......... 1,789 12,099 694 418 69 (8,299) 4,286
Foreign currency translation
adjustment........................ -- -- -- -- (224) -- (224)
Common stock repurchased............ -- -- (36) (40) -- -- (40)
Stock options exercised............. -- -- 411 29 -- -- 29
Issuance of common stock upon
exercise of preferred stock
warrants........................ -- -- 21 59 -- -- 59
Issuance of common stock upon
exercise of common stock
warrants........................ -- -- 45 66 -- -- 66
Issuance of common stock upon
conversion of preferred stock..... (1,789) (12,099) 3,835 12,099 -- -- --
Issuance of common stock to public,
net of issuance costs of $1,975 -- -- 1,500 13,024 -- -- 13,024
Net income.......................... -- -- -- -- -- 1,454 1,454
------- -------- -------- ------- ----------- ---------- -------------
Balance at December 31, 1995.......... -- -- 6,468 25,655 (156) (6,845) 18,654
Foreign currency translation
adjustment........................ -- -- -- -- (176) -- (176)
Issuance of common stock upon
exercise of common stock
warrants........................ -- -- 35 -- -- -- --
Stock options exercised............. -- -- 113 23 -- -- 23
Income tax benefit from stock plans. -- -- -- 204 -- -- 204
Sale of common stock to employees... -- -- 16 156 -- -- 156
Net income.......................... -- -- -- -- -- 3,716 3,716
------- -------- -------- ------- ----------- ---------- -------------
Balance at December 31, 1996.......... -- $ -- 6,634 $28,068 (332) ($3,129) $22,607
------- -------- -------- ------- ----------- ---------- -------------
------- -------- -------- ------- ----------- ---------- -------------
See accompanying notes.
29
APPLIED MICROSYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- ------- ------
(in thousands, except per share amount)
Cash flows from operating activities:
Net income.............................. $3,716 $1,454 $30
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization..... 1,116 1,154 1,467
Changes in operating assets
and liabilities
Accounts receivable............... (2,751) (1,863) (1,166)
Inventories....................... (52) (247) 11
Prepaid and other current assets.. (566) 29 (57)
Other assets...................... (96) 106 (16)
Deferred revenue.................. 862 356 250
Accounts payable and accured
expenses....................... (566) 2,019 1,087
-------- -------- -------
Net cash provided by
operating activities........ 1,663 3,008 1,606
Cash flows from investing activities:
Purchase of short term
investments.................... (5,931) -- --
Property and equipment
additions...................... (1,261) (905) (589)
Purchase of product line.......... -- (450) --
-------- -------- ------
Net cash used in investing
activities.................. (7,192) (1,355) (589)
Cash flows from financing acitivities:
Sale of common stock to
employees...................... 186 -- --
Stock options exercised........... 23 29 12
Proceeds from stock warrants
exercised...................... -- 125 --
Public offering of Common Stock,
net of issuance costs.......... -- 13,024 --
Proceeds from long-term
obligations.................... -- 918 440
Repayment of long-term
obligations.................... (67) (1,502) (1,147)
Proceeds from notes payable
to banks....................... -- 16,450 417
Repayment of notes payable to
banks.......................... -- (19,774) (645)
-------- -------- -------
Net cash provided by (used
in) financing activities.... 142 9,270 (923)
Effects of foreign exchange rate
changes on cash...................... (176) (224) 179
-------- -------- -------
Increase (decrease) in cash and cash
equivalents.......................... (5,563) 10,699 273
Cash and cash equivalents at
beginning of period.................. 12,771 2,072 1,799
-------- -------- -------
Cash and cash equivalents at end
of period............................ $7,208 $12,771 $2,072
-------- -------- -------
-------- -------- -------
Supplemental disclosures of cash paid:
Interest............................. $42 $246 560
Income taxes......................... $1,230 $81 $12
Supplemental disclosures of
non-cash activities:
Tax benefit realized from
non-qualifying dispositions of
stock options..................... $204 -- --
See accompanying notes.
30
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
Applied Microsystems Corporation (the Company) provides design,
debugging, testing and co-verification tools for use principally by software
engineers in the development of embedded software. The Company designs its
products to support a broad range of Intel, AMD and Motorola 16 and 32 bit
embedded microprocessors, and to run at the highest clock speeds of the
microprocessors supported by the Company. The Company's products are designed
to address two distinct requirements of embedded software developers:
software development and debugging tools and software testing tools. The
Company 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 is supplemented with distributors
throughout the rest of the world
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Applied Microsystems Corporation Limited
(AML), Applied Microsystems Japan Limited (AMJ), Applied Microsystems Gmbh
(AMG), Applied Microsystems SARL (AMF) and Applied Microsystems Foreign Sales
Corporation (FSC). All significant intercompany accounts and transactions are
eliminated in consolidation.
INVENTORIES
Inventories, including demonstration equipment, are stated at the lower
of cost (first-in, first-out basis) or market.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
SECURITIES AVAILABLE FOR SALE
Securities available for sale consist primarily of investment-grade
corporate obligations, all of which mature in 1997. Management currently
classifies the Company's entire investment portfolio-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
cost of debt securities 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 on securities available
for sale (none in 1996) are also included in interest income. The cost of
securities sold is calculated using the specific identification method.
31
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable and payable, and long-and short-term borrowings. The fair
value of these instruments approximates their recorded value.
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.
Depreciation expense includes amounts amortized for assets recorded under
capital leases.
The estimated useful lives of equipment for financial reporting purposes
are as follows:
Machinery and equipment...................... 3 to 5 years
Office furniture and equipment............... 5 to 15 years
REVENUE RECOGNITION
Generally, revenues from sales of products are recognized when products
are shipped unless the Company has obligations remaining under a sales or
licensing agreement, in which case revenue is deferred until all obligations
are satisfied. Revenues from sales of maintenance contracts are deferred and
recognized ratably over the contract period. Revenues from maintenance
contracts in 1996, 1995, and 1994 were $3,158,000, $2,590,000, and
$2,216,000, respectively.
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 that could differ from estimates include
sales returns, doubtful accounts and obsolescence of inventory.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. The Company's
policy is to capitalize software development from the time "technological
feasibility" has been reached in accordance with SFAS No. 86. Technological
feasibility is reached upon completion of a working model. No such costs have
been capitalized because the impact on the accompanying consolidated
financial statements would be immaterial.
32
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FOREIGN CURRENCIES
The functional currencies of each of the Company's subsidiaries outside
the United States is that country's local currency. The related gains and
losses resulting from the translation of the subsidiaries' financial
statements are credited or charged to shareholders' equity in the cumulative
translation adjustments account. Realized and unrealized gains and losses on
foreign currency transactions are included in other income and expense.
The Company has a program in place to manage foreign currency risk. As
part of that program, the Company has entered into foreign currency forward
contracts to hedge anticipated foreign currency transactions, primarily
intercompany accounts resulting from sales to international subsidiaries. The
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. At December 31, 1996, contracts totaling 50,000,000 Yen with
maturity dates through January 1997 were outstanding.
INCOME TAXES
The provisions for income taxes include federal, state and foreign taxes
currently payable and the change in its deferred tax assets and liabilities.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents,
short-term investments and trade accounts receivable. By policy, the Company
places its investments only in high credit quality financial securities and
limits the amounts invested in any one institution or in any type of
instrument. The Company's trade accounts receivable are geographically
dispersed and include customers in many different industries. The Company
performs ongoing credit evaluations of its customers' financial condition and
limits its exposure to losses from bad debts by limiting the amount of credit
extended whenever deemed necessary and generally does not require collateral.
The Company sells certain trade account receivable with recourse in the
ordinary course of business. At December 31, 1996 accounts receivable sold
with recourse totaled $381,000.
33
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NET INCOME PER SHARE
Net income per share is based on the weighted average number of common
and common equivalent shares outstanding during each period. Common
equivalent shares include the effect of all outstanding convertible preferred
stock and outstanding stock options and warrants. Common equivalent shares
are not included in the per share calculations where the effect of their
inclusion would be antidilutive, except that, in accordance with Securities
and Exchange Commission requirements, common and common equivalent shares
issued during the 12-month period prior to its filing of the initial public
offering have been included in the calculation as if they were outstanding
for all periods through November 1995 (the closing of its initial public
offering), using the treasury stock method and the initial public offering
price.
STOCK-BASED COMPENSATION
In accordance with the provisions of SFAS No. 123, the Company applies
APB Opinion 25 and related interpretations in accounting for its stock option
plan and, accordingly, compensation expense, if any, is generally determined
based on the difference between the exercise price of stock options or awards
and the related fair market value of the common stock. Note 8 to the
Consolidated Financial Statements contains a summary of the pro forma effects
to reported net income and earnings per share if the Corporation had elected
to recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation. Such reclassifications have no effect on
previously reported results of operations.
2. SECURITIES AVAILABLE FOR SALE
Securities available-for-sale consist of the following as of December 31:
1996
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
U.S. Treasury securities
and other
U.S. Government
obligations............. $ 2,917 $ 47 $ 0 $ 2,964
Corporate debt securities... 2,951 16 0 2,967
------- ---- --- -------
$ 5,868 $ 63 $ 0 $ 5,931
------- ---- --- -------
------- ---- --- -------
As of December 31, 1996, the securities available for sale have
contractual maturities of less than one year. Expected maturities will differ
from contractual maturities because the issuers of the securities may have
the right to prepay obligations without prepayment penalties.
34
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INVENTORIES
Inventories consist of:
DECEMBER 31,
--------------------
1996 1995
-------- ------
(IN THOUSANDS)
Finished goods................................ $ 1,282 $ 1,275
Work in process............................... 168 155
Purchased parts............................... 1,747 1,715
------- -------
$ 3,197 $ 3,145
------- -------
------- -------
4. PROPERTY AND EQUIPMENT
Property and equipment consist of:
DECEMBER 31,
--------------------
1996 1995
------ ------
(IN THOUSANDS)
Machinery and equipment....................... $ 3,845 $ 4,034
Office furniture and equipment................ 2,388 2,342
Leased equipment.............................. 410 536
------- -------
6,643 6,912
Less accumulated depreciation and
amortization................................ 4,202 4,700
------- -------
$ 2,441 $ 2,212
------- -------
------- -------
5. REVOLVING LINE OF CREDIT AGREEMENTS
In January, 1996, the Company negotiated a revolving line of credit
agreement with a commercial bank aggregating $7.0 million, which expires in
May 1997. Borrowings pursuant to this agreement bear interest at the bank's
prime lending rate and provide an option to take $2.0 million of the
available line and amortize over a five year term. The line of credit
agreement is unsecured, except for the term loan option, and includes certain
financial covenants.
35
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable
operating leases and equipment under capital leases. Certain leases contain
renewal options. Future minimum payments under these leases are as follows:
DECEMBER 31, 1996
-----------------
CAPITAL OPERATING
LEASES LEASES
------- ---------
(IN THOUSANDS)
1997.......................... $ 62 $ 1,094
1998.......................... 15 1,048
1999.......................... -- 831
2000.......................... -- 789
2001.......................... -- 381
Thereafter.................... -- 557
----- -------
77 $ 4,700
-------
-------
Less amount representing
interest.................... 9
-----
Present value of net minimum
capital lease obligations... 68
Less current portion.......... 53
-----
Capital lease obligations,
less current portion........ $ 15
-----
-----
Total rent expense for the years ended December 31, 1996, 1995, and 1994
was $1,278,000, $1,361,000, and $1,268,000, respectively.
The Company is subject to various pending and threatened legal actions
that arise in the normal course of business. In the opinion of management,
liabilities arising from these claims, if any, will not have a material
effect on the consolidated financial statements of the Company.
36
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INCOME TAXES
The provision for incomes taxes in 1996, 1995 and 1994 is as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- -----
(IN THOUSANDS)
Federal................................................................................... $ 1,402 $ 187 $ 29
Foreign................................................................................... 90 90 36
State..................................................................................... 90 28 3
--------- --------- ---
$ 1,582 $ 305 $ 68
--------- --------- ---
--------- --------- ---
SFAS No. 109 requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Deferred income taxes reflect the
net tax effect of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes and operating loss and tax credit carryforwards. The
tax effects of significant items comprising the Company's deferred taxes were
as follows:
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
(IN THOUSANDS)
Deferred tax assets:
Accrued and other expenses................................................. $ 179 $ 297
Inventories................................................................ 348 316
Net operating loss carryforwards........................................... 849 958
Tax credit carryforwards................................................... 953 1,289
--------- ---------
Total deferred tax assets.................................................. 2,329 2,860
Deferred tax liabilities:
Depreciation............................................................... 81 103
Intangible and other assets................................................ 25 5
Other...................................................................... -- --
--------- ---------
Total deferred tax liabilities............................................. 106 108
Valuation allowance........................................................ (2,223) (2,752)
--------- ---------
Net deferred taxes......................................................... $ 0 $ 0
--------- ---------
--------- ---------
37
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 1996, the Company has net operating loss carryforwards
for federal tax purposes of approximately $2,426,000 available to offset
future taxable income. The Company also has research and development credits
of approximately $953,000, which 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 1997 to 2008. Sections 382 and 383 of the Internal Revenue Code of 1986,
as amended, set forth annual limits for the utilization of tax net operating
loss and credit carryforwards in the event of a significant change in
ownership. The issuance of Series J preferred stock in 1992 resulted in such
"ownership change." Accordingly, utilization of the net operating loss
carryforwards is limited to approximately $390,000 per year.
A reconciliation from the U.S. statutory rate to the effective tax rate
is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---------- --------- -------
(IN THOUSANDS)
Tax at U.S. statutory rate of 35%............. $1,854 $616 $33
Utilization of net operating loss and tax
credit carryforwards........................ (532) (429) (32)
Benefit of foreign sales corporation.......... (98) -- --
Alternative minimum tax....................... -- -- 29
Foreign taxes................................. 90 90 35
State taxes, net of federal effect............ 59 28 3
Foreign losses with no tax benefit............ 212 -- --
Other......................................... (3) -- --
------ ---- -----
$1,582 $305 $68
------ ---- -----
------ ---- -----
8. SHAREHOLDERS' EQUITY
On November 14, 1995, the Company completed its initial public offering
of 1,500,000 shares of common stock at $10.00 a share. All outstanding shares
of preferred stock were converted to common stock at that time.
STOCK OPTIONS
Stock option plans (the Plans) have been established that authorize the
issuance of options for 1,775,317 shares of common stock to selected
directors, officers, employees, and consultants of the Company. As of
December 31, 1996 options for 726,617 shares are outstanding and exercisable,
options for 439,708 contain repurchase rights and options for 59,196 shares
are available to be granted.
38
APPLIED MICROSYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Plans provide for granting incentive stock options, nonincentive
stock options, and stock appreciation rights. The Plans vest substantial
authority in the compensation committee of the Board of Directors to
determine the terms of each option. Shares issued as a result of exercise of
options are subject to repurchase rights by the Company in the event that the
optionee's employment with the Company should terminate; most rights lapse at
a rate of 25% per year from the date of grant. Options are not transferable
and terminate following the optionholder's cessation of employment. Options
issued to date have been at fair value at date of grant.
A summary of stock option transactions for the years ended December 31
follows:
1996 1995 1994
-------------------------------------------- -------------------------------------------- -----------
WEIGHTED-AVERAGE
OPTIONS EXERCISE OPTIONS WEIGHTED-AVERAGE OPTIONS
(000) PRICE (000) EXERCISE PRICE (000)
------------- ----------------------------- ----------- ------------------------------- -----------
Outstanding-
beginning
of year... 541 $ .31 927 $ .11 911
Granted..... 316 $ 13.05 40 $ 2.53 327
Forfeited... (25) $ 3.06 (15) $ .25 (42)
Exercised... (115) $ .20 (411) $ .07 (269)
---------- ------- -------
Outstanding-
end of
year...... 717 $ 5.84 541 $ .31 927
---------- ------- -------
---------- ------- -------
Exercisable
at end of
year...... 287 $ .14 258 $ .14 187
---------- ------- -------
---------- ------- -------
Weighted-
average
fair value
of options
granted
during the
year...... $ 10.01 -- --
WEIGHTED-AVERAGE
EXERCISE PRICE
---------------------------------
Outstanding-
beginning
of year... $ .08
Granted..... $ .18
Forfeited... $ .39
Exercised... $ .05
Outstanding-
end of
year...... $ .11
Exercisable
at end of
year...... $ .12
Weighted-
average
fair value
of options
granted
during the
year......
39
The following table summarizes information related to outstanding and
exercisable options at December 31, 1996:
OUTSTANDING EXERCISABLE
-------------------------------------------------------------- -----------------------------------
RANGE OF EXERCISE WEIGHTED AVERAGE WEIGHTED AVERAGE REMAINING WEIGHTED AVERAGE
PRICES SHARES(000) EXERCISE PRICE CONTRACTUAL LIFE SHARES (000) EXERCISE PRICE
- ---------------------- --------------- ----------------- ------------------------------- --------------- -------------------
$.02--2.00........... 401 $ .18 7.2 287 $ .13
$6.50--8.75.......... 1 $ 6.50 8.7 -- --
$12.00--13.38........ 315 $ 13.05 9.7 -- --
---------- -----------
$.02--13.38.......... 717 $ 5.84 8.3 287 $ .13
---------- -----------
---------- -----------
39
Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
Company's net income and earnings per share would have been as follows:
1996 1995
--------- ---------
Net income--as reported (000).............................................. $ 3,716 $ 1,454
Net income--pro forma (000)................................................ $ 3,305 $ 1,450
Net income per share as reported........................................... $ .52 $ .25
Net Income per share pro forma............................................. $ .47 $ .25
The fair value of each option is estimated on the date of grant using the
Black-Scholes multiple-option approach pricing model with the following
weighted average assumptions:
1996 1995
---------- ----------
Annualized volatility................................................. 89.6% 25.0%
Risk-free interest rate............................................... 6.4% 6.2%
Forfeiture rate....................................................... 6.2% 7.0%
Expected life......................................................... 5.8 years 4.7 years
Expected dividend rate................................................ nil nil
On September 11, 1995, the Company's shareholders adopted the Director
Stock Option Plan which authorized the annual issuance of 2,500 shares of
common stock per outside director upon the exercise of stock options that may
be granted pursuant to this plan.
STOCK WARRANTS
During 1991, the Company granted a stock purchase warrant for 60,680
shares of common stock at $4.12 per share expiring after five years which
were issued to a shareholder in consideration for a one-year personal
guarantee of a $500,000 bank loan obtained by the Company. During 1996 all of
the outstanding warrants were exercised on a net basis resulting in issuance
of 35,679 shares of common stock.
In 1992, in connection with an equity financing, the Company granted
stock purchase warrants for 114,563 shares of Series I preferred stock at
$4.12 per share expiring after five years. In connection with the initial
public offering, these outstanding preferred stock warrants converted to
common stock warrants. Warrants for 100,243 are still outstanding as of
December 31, 1996.
40
EMPLOYEE STOCK PURCHASE PLAN
On May 22, 1996, the Company's shareholders approved the 1996 Employee
Stock Purchase Plan (ESPP) and reserved a total of 250,000 shares of common
stock for issuance. The purpose of the ESPP is to provide eligible employees
of the Company with a means of acquiring common stock of the Company through
payroll deductions. The purchase price of such stock under the ESPP cannot be
less than 85% of the lower of the fair market value on the specified purchase
date or the beginning of the offering period. During 1996, 16,165 shares were
sold through the ESPP.
COMMON STOCK RESERVED
Common stock reserved for future issuance at December 31, 1996 is as
follows:
Common stock warrant............................................... 100,243
Employee Stock Purchase Plan....................................... 233,835
Common stock options............................................... 59,196
-------
393,274
-------
-------
9. EMPLOYEE BENEFIT PLAN
The Company maintains a Profit Sharing Plan (the Plan) under section 401K
of the Internal Revenue Code. All U.S. based employees are eligible to
participate in the Plan at the start of each calendar quarter. Contributions
by the company are based on a matching formula as defined in the Plan. The
Company may also make discretionary contributions. During 1996 and 1995, the
Company made contributions of $133,000 and $58,000, respectively. No
contributions were made in 1994.
10. PRODUCT DEVELOPMENT CONTRACTS
The Company has entered into various product development agreements
whereby the costs of certain product development projects are subsidized
through periodic nonrefundable support subsidies from third parties based on
the achievement of previously established milestones. These contracts can be
terminated by either party at any stage of the contract. Total costs incurred
on these product development projects and the related support subsidies,
which are recognized as a reduction of product development expense, were as
follows:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Direct product development costs.......................................................... $ 269 $ 575 $ 498
Related product development support subsidies............................................. 335 450 691
41
11. GEOGRAPHIC INFORMATION
The Company is engaged in one line of business: the design, manufacture,
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(A)(1) FINANCIAL STATEMENTS--SEE INDEX TO FINANCIAL STATEMENTS AT ITEM 8 OF
THIS REPORT.
(A)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is included in the
Consolidated Financial Statements or notes thereto.
(A)(3) EXHIBITS
The following exhibits are filed with this report:
EXHIBIT NO. 3: ARTICLES OF INCORPORATION AND BYLAWS
3.1 Second Restated Articles of Incorporation of Registrant
3.2 Restated Bylaws of Registrant
Exhibit No. 10: Material Contracts
EXECUTIVE COMPENSATION PLANS AND AGREEMENTS
10.1 Employment Agreement between the Registrant and Robert L.Deinhammer
dated July 10.1 31, 1992
10.2 1990 Stock Benefit Plan
10.3 1992 Performance Stock Plan
10.4 1995 Directors Stock Option Plan
OTHER MATERIAL CONTRACTS
10.5 Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated October 20, 1992; Schedule to Loan and Security
Agreement dated October 20, 1992; Amendment to Loan and Security
Agreement dated June 15, 1993; Loan Modification Agreements to
Loan and Security Agreement dated June 13, 1994, March 27, 1995
and June 27, 1995; and Secured Promissory Notes dated
March 27, 1995 and June 27, 1995
10.6 Loan and Security Agreement (Exim) between the Registrant and
Silicon Valley Bank dated October 20, 1992; Schedule to Loan and
Security Agreement (Exim) dated October 20, 1992; Amendments to
Loan and Security Agreement (Exim) dated June 15, 1993 and
August 15, 1993; Loan Modification Agreements to Loan and Security
Agreement (Exim) dated June 13, 1994 and June 27, 1995; Exim
Working Capital Borrower Agreement dated June 27, 1995; Letter
Agreement dated June 29, 1995 modifying Loan Modification Agreement
(Exim) dated June 27, 1995; and Secured Promissory Note dated
October 20, 1992
-45-
10.6 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 Third Amended and Restated Investment Agreement dated as of
September 15, 1995
10.9 License Agreement between the Registrant and Intel Corporation
dated March 30, 1990
10.10 Tools Development and Bond-Out License Agreement between the
Registrant and Intel Corporation dated September 30, 1993, as
amended April 13, 1994
10.11 Bond-Out License Agreement between the Registrant and Intel
Corporation dated September 16, 1994
10.12 Source License and Distribution Agreement between the Registrant
and Microtec Research, Inc. dated August 1, 1994
10.13 Specimen Series H Warrant
10.14 Specimen Series I Warrant
10.15 Processor feature Technology License Agreement between the
Registrant and Intel Corporation dated September 21, 1995
10.16 Business Loan Agreement between the Registrant and U.S. Bank of
Washington, N.A. dated February 9, 1996; Alternative Rate Options
Promissory Note dated February 9, 1996.
EXHIBIT NO. 11: STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
EXHIBIT NO. 21: SUBSIDIARIES OF REGISTRANT
(B) REPORTS ON FORM 8-K
None.
-46-
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 31, 1997.
APPLIED MICROSYSTEMS CORPORATION
By /s/ A. James Beach
---------------------------------------------
A. James Beach
Chief Financial 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/ Robert L. Deinhammer President, Chief Executive Officer and
- ---------------------------------- Director (Principal Executive Officer) March 31, 1997
Robert L. Deinhammer
/s/ A. James Beach Vice President, Chief Financial Officer, March 31, 1997
- ---------------------------------- Secretary and Treasurer (Principal Financial
A. James Beach and Accounting Officer)
/s/ Anthony Miadich Chairman of the Board March 31, 1997
- ----------------------------------
Anthony Miadich
/s/ Elwood D. Howse, Jr. Director March 31, 1997
- ----------------------------------
Elwood D. Howse, Jr.
/s/ David E. Stitt Director March 31, 1997
- ----------------------------------
David E. Stitt
/s/ Paul N. Risinger Director March 31, 1997
- ----------------------------------
Paul N. Risinger
-47-
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
3.1 Restated Articles of Incorporation of Registrant (incorporated by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on
September 15, 1995 (File No. 33-97002)
3.2 Restated Bylaws of Registrant (incorporated by reference from Exhibit 3.2 to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 15,
1995 (File No. 33-97002)
10.1 Employment Agreement between the Registrant and Robert L. Deinhammer dated July 31, 1992
(incorporated by reference from Exhibit 10.3 to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on September 15, 1995 (File No. 33-97002)
10.2 1990 Stock Benefit Plan (incorporated by reference from Exhibit 10.5 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on September 15, 1995 (File
No. 33-97002)
10.3 1992 Performance Stock Plan (incorporated by reference from Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 15,
1995 (File No. 33-97002)
10.4 1995 Directors Stock Option Plan (incorporated by reference from Exhibit 10.7 to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 15,
1995 (File No. 33-97002)
10.5 Loan and Security Agreement between the Registrant and Silicon Valley Bank dated October 20, 1992;
Schedule to Loan and Security Agreement dated October 20, 1992; Amendment to Loan and Security
Agreement dated June 15, 1993; Loan Modification Agreements to Loan and Security Agreement dated June
13, 1994, March 27, 1995 and June 27, 1995; and Secured Promissory Notes dated March 27, 1995 and
June 27, 1995 (incorporated by reference from Exhibit 10.1 to the Registrant's Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on September 15, 1995 (File No.
33-97002)
10.6 Loan and Security Agreement (Exim) between the Registrant and Silicon Valley Bank dated October 20,
1992; Schedule to Loan and Security Agreement (Exim) dated October 20, 1992;
48
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
Amendments to Loan and Security Agreement (Exim) dated June 15, 1993 and August 15, 1993; Loan
Modification Agreements to Loan and Security Agreement (Exim) dated June 13, 1994 and June 27,
1995; Exim Working Capital Borrower Agreement dated June 27, 1995; Letter Agreement dated June 29,
1995 modifying Loan Modification Agreement (Exim) dated June 27, 1995; and Secured Promissory
Note dated October 20, 1992 (incorporated by reference from Exhibit 10.2 to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on
September 15, 1995 (File No. 33-97002)
10.7 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 (incorporated by reference from Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 filed with the Securities and Exchange Commission on September 15, 1995 (File No. 33-97002)
10.8 Third Amended and Restated Investment Agreement dated as of September 15, 1995 (incorporated by
reference from Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on September 15, 1995 (File No. 33-97002)
**10.9 License Agreement between the Registrant and Intel Corporation dated March 30, 1990 (incorporated by
reference from Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission on September 15, 1995 (File No. 33-97002)
**10.10 Tools Development and Bond-Out License Agreement between the Registrant and Intel Corporation dated
September 30, 1993, as amended April 13, 1994 (incorporated by reference from Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange Commission on
September 15, 1995 (File No. 33-97002)
**10.11 Bond-Out License Agreement between the Registrant and Intel Corporation dated September 16, 1994
(incorporated by reference from Exhibit 10.11 to the Registrant's Registration Statement on Form S-1
filed with the Securities and Exchange Commission on September 15, 1995 (File No. 33-97002)
**10.12 Source License and Distribution Agreement between the Registrant and Microtec Research, Inc. dated
August 1, 1994
49
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
(incorporated by reference from Exhibit 10.12 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on September 15, 1995 (File
No. 33-97002)
**10.15 Processor feature Technology License Agreement between the Registrant and Intel Corporation dated
September 21, 1995 (incorporated by reference from Exhibit 10.15 to the Registrant's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on September 15, 1995 (File
No. 33-97002))
10.16 Business Loan Agreement between the Registrant and U.S. Bank of Washington, N.A. dated February 9,
1996; Alternative Rate Options Promissory Note dated February 9, 1996 (incorporated by reference from
Exhibit 10.16 to the Company's annual report on form 10K for year ended December 31, 1995)
11 Computation of Earnings per Share
21 Subsidiaries of the Registrant (incorporated by reference from Exhibit 21.1 to the Registrant's
Registration Statement on Form S-1 filed with the Securities and Exchange Commission on September 15,
1995 (File No. 33-97002)
23 Consent of Ernst & Young LLP, Independent Auditors
- -----------------------
** Confidential treatment has been granted for portions of this exhibit.
50
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
APPLIED MICROSYSTEMS CORPORATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
COL. C
ADDITIONS
------------------------
(1) (2)
COL. B CHARGED CHARGED
BALANCE AT TO TO COL. E
BEGINNING COSTS OTHER COL. D BALANCE
COL. A OF AND ACCOUNTS DEDUCTIONS: END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ---------------------------------------------------------------- ----------- ----------- ----------- ------------ -----------
Year ended December 31,1996
Deducted from asset accounts:
Allowance for doubtful accounts............................. $ 55,000 ($ 3,000) -- -- $ 52,000
Allowance for sales returns................................. $ 113,000 -- 507,000(B) (408,000)(C) $ 212,000
--------- --------- --------- --------- ---------
Totals...................................................... $ 168,000 ($ 3,000) $ 248,000 ($ 149,000) $ 264,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts............................. $ 48,000 $ 14,000 -- ($ 7,000 (A) $ 55,000
Allowance for sales returns................................. $ 97,000 -- 140,000(B) (124,000 (C) $ 113,000
--------- -------- --------- --------- ---------
Totals...................................................... $ 145,000 $ 14,000 140,000 ($ 131,000) $ 168,000
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
Year ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts............................. $ 41,000 14,000 -- ($ 7,000)(A) $ 48,000
Allowance for sales returns................................. $ 156,000 -- 276,000(B) (335,000)(C) $ 97,000
--------- -------- --------- --------- ---------
Totals...................................................... $ 197,000 $ 14,000 $ 276,000 ($ 342,000) $ 145,000
--------- -------- --------- --------- ---------
--------- -------- --------- --------- ---------
- ------------------------
(A) Uncollectible accounts written off, net of recoveries
(B) Estimated future sales returns charged to revenue
(C) Actual Sales Returns
51