-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HMz3/KqCQ1C9t5aRJETKwCf+tWUv/DCWbjlC9DcDItvTgYJd98Jwcu8yBCKGVGD4 ACvQs9i3AiLzOZN09ko0mA== 0001047469-98-012528.txt : 19980331 0001047469-98-012528.hdr.sgml : 19980331 ACCESSION NUMBER: 0001047469-98-012528 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICROSYSTEMS CORP /WA/ CENTRAL INDEX KEY: 0001000787 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 911074996 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26778 FILM NUMBER: 98579171 BUSINESS ADDRESS: STREET 1: 5020 148TH AVE NE STREET 2: P O BOX 97002 CITY: REDMOND STATE: WA ZIP: 98073-9702 BUSINESS PHONE: 2068822000 MAIL ADDRESS: STREET 1: 5020 148TH AVE NE CITY: REDMOND STATE: WA ZIP: 98073-9702 10-K 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K -------------------- (Mark One) /X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended December 31, 1997 or / / Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from __________ to __________ Commission File Number 0-26778 -------------------- APPLIED MICROSYSTEMS CORPORATION (Exact name of registrant as specified in its charter) -------------------- Washington 91-1074996 (State of incorporation) (I.R.S. Employer Identification Number) 5020 148th Avenue N.E., Redmond, Washington 98052-5172 (425) 882-2000 (Address, including zip code, of Registrant's principal executive offices and telephone number, including area code) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock: 6,904,015 shares outstanding as of March 20, 1998 The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price on March 20, 1998, as reported on NASDAQ, was $19,776,415.(1) (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 1998 Annual Meeting of Stockholders to be held on May 22, 1998, are incorporated by reference into Part III of this Report. This report includes exhibits consists of 53 pages. The exhibit index appears on page 49. TABLE OF CONTENTS
PAGE ----- Part I. Item 1. Business................................................... 1 Item 2. Properties................................................. 14 Item 3. Legal Proceedings.......................................... 14 Item 4. Submission of Matters to a Vote of Security Holders........ 14 Item 4A. Executive Officers of the Registrant....................... 15 Part II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 16 Item 6. Selected Financial Data.................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 17 Item 8. Financial Statements and Supplementary Data................ 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................ 45 Part III. Item 10. Directors and Executive Officers of the Registrant......... 45 Item 11. Executive Compensation................................... 45 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 45 Item 13. Certain Relationships and Related Transactions........... 45 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................................. 45
i PART I ITEM 1. BUSINESS OVERVIEW Applied Microsystems is a leading provider of hardware-enhanced 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 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 1996. 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. 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. 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, 1 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-enhanced 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-enhanced 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-enhanced 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-enhanced 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-enhanced 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. 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 2 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-enhanced software tools for the design, debugging and testing of embedded software. Its software design and debugging tools, including CodeICE-TM-, CodeTAP-TM-, SuperTAP-TM- and EL Series in-circuit emulation devices and NetROM-TM- 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-TM- 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. The Company's 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 solutions provider of tools for use in the design, debugging and testing of embedded software. The central elements of the Company's business strategy include: - 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 hardware enhanced tools to offer a broad range of 3 real time testing capabilities to embedded software developers. It also believes that its VSP-TAP-TM- and Core-TAP-TM- tools, 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 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 relationships that could involve acquisitions of other businesses, products or technologies in related market segments and/or related licensing, re-selling and/or joint selling of said products or technologies. - 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. - 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 49% of net sales in 1997, 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. 4 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 and Wind River) and to read file format output from compatible compilers (including certain of those produced by Borland, GNU, Intel, Microsoft and Microtec). 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-enhanced software tools for the design and debugging of embedded software. These in-circuit microprocessor and ROM emulators are utilized primarily by software engineers during the highly iterative software development and system integration phases of the embedded systems development process. To a lesser extent, they are also used by software engineers for low-level testing of software functions and by hardware engineers in system integration and troubleshooting their designs. The Company's in-circuit microprocessor emulators perform four basic functions (the Company's ROM emulators support a subset of these functions): - DOWNLOAD AND RUN CONTROL--the ability to load the developer's software program into the system under development, to specify predetermined events or problems that may occur in the course of software execution, to stop system operation upon such an occurrence and to resume operation at the desired point after any alterations have been made to the system or software. - EXECUTION TRACE--the ability to detect, observe and provide an execution history of detailed software instructions and flow by collecting this data in a minimally intrusive manner in the probe's random access memory, a capability particularly important in identifying bugs or timing problems, or in reconstructing the events leading up to a system failure. - OVERLAY MEMORY--the ability to replace the 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. 5 - 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-enhanced 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, which 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 CORE MODEL FORM FACTOR RANGE PRODUCTS FAMILIES SERVED CAPABILITIES - --------------- ------------------------ --------- --------- --------------------------- ------------------------------------ EL Series Modular, multi-board $15,000 40 Mhz Intel 80960CX; Motorola Full-featured emulation; up to 4Mb architecture/desktop to 68000, 68302, overlay memory; advanced trace and form factor $50,000 68330/340/360 event system CodeICE Motherboard $15,000 66 Mhz Intel 80960JX; 80960HX, High-speed, full featured emulation; architecture/compact to 80960 RP; Motorola up to 16Mb overlay memory; advanced desktop form factor $35,000 68020/30/40/60, MCF5102 trace and event systems. SuperTAP Single-board $12,000 40 Mhz Intel 80186/386/486 AMD High-speed, full featured emulation; architecture/pocket- to 80186/386/486 Motorola up to 16Mb overlay memory; advanced sized form factor $20,000 PPC 850/860, 68302 trace and event systems. CodeTAP Single-board $3,000 40 Mhz Intel 80186, 80386, 80960 Limited to features frequently used architecture/pocket- to CX, 80960 HX, 80960 RP, by software engineers; up to 1Mb sized form factor $12,000 AMD 80186, 80386; overlay memory; modest trace and Motorola CPU 32, 68331/2; event systems. PPC 603/740/750/8XX NetROM Single-board $6,000 Access Many different 8, 16 Memory overlay, target connection architecture with to time > 45 and 32 bit ROM devices through ROM, integrated w/3rd Party probing cables $8,200 ns Software
The Company intends during 1998 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 are designed to measure the performance and reliability of embedded software, as well as the adequacy of 6 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 five basic functions: - COVERAGE ANALYSIS--Basic Block Coverage: the ability to measure the percentage of a software program's routines actually exercised by certain tests, to identify redundancies among tests, to identify the optimal set of tests to maximize the percentage of code tested in the shortest test period, and to determine the point at which the cost of continued testing is likely to exceed the benefits to be derived. - CodeTEST-ACT, ADVANCED COVERAGE TOOLS--adds a finer degree of granularity for analyzing test execution to the Statement, Decision and Modified Condition Decision Coverage (MCDC) levels. For mandated industries like avionics, the FAA specifies test methodologies for each type of software application based on the criticality of that application. MCDC shows what conditions, as well as, what decision paths and code statements have been tested. - PERFORMANCE ANALYSIS--the ability to measure the time that a software program takes to perform a particular function and the degree of embedded microprocessor utilization, and to identify any hindrances to high-speed processing so that system reaction times and compliance with performance specifications can be optimized. - 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. - 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. The CodeTEST line includes six software modules sold separately (Performance, Basic Block Coverage, MCDC, Decision Coverage, Memory Analysis, Software Trace), 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 486 and 386EX, Intel 80C186/188 EA and XL, AMD 486 and 386EX, AMD 186/188, Motorola 68020, 68030, 68040, 68060, 68HC000, 68EC000, 68340, 68360, 68302 and 68LC302, PPC860, PPC850, and MIPS 3000, as well as VME Bus, and a microprocessor universal probe. The Company plans to support additional embedded microprocessors with additional releases during 1998, 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 $50,000, depending on the software modules purchased. HARDWARE/SOFTWARE CO-VERIFICATION TOOLS The Company has an agreement with Synopsis, Inc., 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. The resulting products enable software and hardware engineers to debug software and hardware interaction prior to having a prototype. This capability is useful when a microprocessor is being coupled with an ASIC either in discrete form or when used as an embedded microprocessor plus ASIC on the same piece of silicon. The Company's 7 products are VSP-TAP for use with standard microprocessors such as 68360, PPC860 and Core-TAP for development with an embedded microprocessor core such as ARM7. When combined with a VSP-TAP or Core-TAP and a hardware simulator, designers can use Applied and Eaglei to integrate hardware and software without waiting for the actual prototype. VSP-TAP and Core-TAP enables a high speed connection from an Applied debug tool (with the actual target processor) to many commercially available hardware simulators through Eaglei. 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. These tools enable the Company's existing products for debugging and testing software to be used earlier in the development cycle, gaining familiarity with their use. This makes for easier and more efficient use of the tool once prototype hardware is available. 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 Ascend/Cascade FujitsuNetwork Communications ATM Equipment, Bridges, Communications Bay Networks Hitachi Concentrators, Hubs, ISDN Cabletron Hughes Network Systems Equipment, Network Cards, Cisco Newbridge Routers Telecommunications AG Communications NORTEL Cellular Phones, Central Office Alcatel NTT Switches, Pagers, PBXs, Satellite DSC Communications OKI Electric Communications, GPT Communications Qualcomm Teleconferencing, Telephone Lucent Samsung Switches, Voice Mail Systems Matsushita Siemens Mitsubishi Tellabs Motorola Toshiba Computer Peripherals/ Office Canon LG Electronics Copiers, Disk Drives, Fax Products Compaq Lucent Machines, Modems, PC Plug-In Distributed Processing Tech. NEC Cards, Printers Eastman Kodak Picturetel Fuji Xerox Ricoh Fujitsu Samsung Hewlett-Packard Storage Technology Hitachi Tandem Other Acuson Litton Avionics, Bar Code Scanners, Honeywell Lockheed Martin Defibrillators, Defense, Global Garmin Panasonic Positioning Systems, RAID GTE Physio-Control Controllers, Test Instrumentation, International Games Tech. Rockwell Ultrasound, Video Games IBM Siemens ITT Tektronix
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 serving customers in Japan are a significant portion of net sales. During 1997 and 1996, sales to Orix Rentec, a leasing and rental company in Japan, accounted for 9.1% and 10.1% 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 8 sales, sales to leasing and rental companies will continue to constitute a significant percentage of net sales as customers in Japan are more likely to finance equipment acquisitions through leasing or rental arrangements. 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. 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, 1997, the Company had 65 sales and support employees worldwide, including 42 field sales engineers, inside sales specialists and field application engineers located at the Company's headquarters and in direct or home sales offices throughout North America, and in the Company's wholly-owned subsidiaries in Japan, Germany, France and the United Kingdom. Due to the 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 49.4%, 47.6% and 48.7% of the Company's net sales in 1997, 1996 and 1995, respectively. Sales through the Company's subsidiary in Japan accounted for 33.6%, 33.3 and 33.5 of the Company's net sales in 1997, 1996 and 1995, respectively. The Company also has international distribution agreements covering 24 countries. Sales to the Company's international distributors in 1997, 1996 and 1995 accounted for approximately 8.3%, 11.0% and 13.2%, 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 3.7% decrease, 7.0% decrease and a 3.4% increase in the dollar value of the Company's net sales value in 1997, 1996 and 1995, 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 division of Mentor Graphics, Integrated Systems and Wind River Systems. These relationships enable the Company to further leverage its technical capabilities, customer relationships 9 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 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-enhanced 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 hardware enhanced 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 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. 10 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, 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. 11 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 32-bit microprocessors which the Company believes are most commonly specified for use in embedded system design starts. In general, however, there can 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. 12 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 and SuperTAP products. 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 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 has filed suit and is currently involved in the initial stages of disputes concerning potential patent infringement relating to the same technology by a competitor, which has asserted various defenses, including prior art, and 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. 13 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, 1997, the Company had 236 employees, of whom 205 were based in the United States and 31 were based overseas. Of the total, 126 were engaged in Sales, General and Administrative, 68 were in research and development and 42 were in manufacturing. None of the Company's employees is represented by a labor union. The Company has not experienced any work stoppages and considers its relations with its employees to be good. ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing, research and development and manufacturing facility is located in an approximately 59,000 square-foot building in Redmond, Washington that is leased through May 31, 2001. The Company also leases nine other domestic sales and support offices in the United States and five international sales offices in Japan, France, Germany and the United Kingdom. The Company believes that its facilities are adequate to satisfy its projected requirements, including its requirements for production capacity into 1998 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." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 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 52 President, Chief Executive Officer and Director A. James Beach 41 Vice President, Secretary, Treasurer and Chief Financial Officer Douglas A. Fullaway 46 Vice President, Worldwide Sales Larry Ritter 39 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. 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. 15 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, 1998 was $6.06 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 1997 First Quarter 4 7/8 16 Second Quarter 3 7/8 10 1/2 Third Quarter 8 12 7/8 Fourth Quarter 5 12 5/8
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, 1998, there were approximately 2,200 beneficial owners of the common stock of the Company. Proceeds from the Company's initial public offering were $13.0 million net of costs. Since the offering, the Company has used $2.7 million to purchase capital equipment, $2.5 million to pay off bank debt, $.5 million to purchase a product line and the remaining proceeds of $7.3 million have been invested in short term commercial and government paper and money market funds. 16 ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ----------------------------------------------------- (IN THOUSANDS, EXCEPT FOR EARNINGS PER SHARE) 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Statement of Income Data: Net Sales.................................................. $ 39,124 $ 38,662 $ 31,039 $ 25,663 $ 21,273 Cost of Sales.............................................. 10,532 10,793 9,530 8,903 8,531 --------- --------- --------- --------- --------- Gross Profit............................................... 28,592 27,869 21,509 16,760 12,742 Operating expenses: Sales, general and administrative........................ 18,542 15,142 13,321 11,715 9,985 Research and development................................. 8,468 7,988 6,275 4,482 4,025 --------- --------- --------- --------- --------- Total operating expenses................................. 27,010 23,130 19,596 16,197 14,010 --------- --------- --------- --------- --------- Income from operations..................................... 1,582 4,739 1,913 563 (1,268) Interest Expense and other income.......................... 669 559 (154) (465) (355) --------- --------- --------- --------- --------- Income (loss) Before income taxes.......................... 2,251 5,298 1,759 98 (1,623) Provision for Income Taxes................................. 349 1,582 305 68 0 --------- --------- --------- --------- --------- Net Income (loss).......................................... 1,902 3,716 1,454 30 (1,623) --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Diluted Net Income (loss) per Share........................ $ 0.26 $ 0.52 $ 0.27 $ 0.01 $(0.49) Average Number of Common and Equivalent Shares Outstanding.............................................. 7,297 7,097 5,329 3,502 3,294
The 1995, 1994 and 1993 dilutive earnings (loss) per share have been restated to comply with SFAS 128 and new SEC requirements.
DECEMBER 31, ----------------------------------------------------- (IN THOUSANDS) 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Balance Sheet Data: Working Capital.............................................. $ 20,547 $ 19,415 $ 15,756 $ 1,800 $ 981 Total Assets................................................. 32,582 30,824 26,846 14,011 13,388 Long-term Debt, Net of Current............................... -- 15 68 385 649 Shareholders' Equity......................................... 24,291 22,607 18,654 4,286 4,065
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 From its inception in 1979 until 1994, the Company has focused on designing, manufacturing and marketing tools used in the debugging 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. 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-enhanced 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 17 in late 1993; introduced its compact and more affordable CodeICE emulator in 1994; and began shipping CodeTEST software testing tools focused on embedded test in late 1995. In 1996, the Company 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 distribution agreement with Eagle Design Automation. In 1997, the Company released CodeTEST-Registered Trademark--ACT, an enhanced suite of MCDC software test and analysis tools for C language applications, and CodeTRACE-TM-, a source-level trace analysis tool. 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, ------------------------------- 1997 1996 1995 --------- --------- --------- Net Sales......................................... 100.0% 100.0% 100.0% Cost of Sales..................................... 26.9 27.9 30.7 --------- --------- --------- Gross profit...................................... 73.1 72.1 69.3 Operating expenses: Sales, general and administrative................ 47.4 39.2 43.0 Research and development......................... 21.6 20.7 20.2 --------- --------- --------- Total operating expenses......................... 69.0 59.9 63.2 --------- --------- --------- --------- --------- --------- Operating income.................................. 4.1 12.2 6.1 Interest expense and other income................. 1.7 1.5 (0.5) --------- --------- --------- Income before income taxes........................ 5.8 13.7 5.6 Income taxes...................................... 0.9 4.1 1.0 --------- --------- --------- Net income........................................ 4.9% 9.6% 4.6% --------- --------- --------- --------- --------- ---------
YEARS ENDED DECEMBER 31, 1997 AND 1996 NET SALES. Net sales increased by 1.2% to $39.1 million in 1997 from $38.7 million in 1996. The increase was primarily attributable to the unit growth and average selling price in sales of low cost debug and CodeTEST-TM- tools and an increase in support contract revenues. The increase was partially 18 offset by a decline in unit sales of higher priced debug tools and to a lesser extent currency exchange rate fluctuations affecting the dollar value of international sales. 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 12.6% and 8.3% of net sales in 1997 and 1996, respectively, as well as patent license royalties. 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 4.9% in 1997 over the comparable period of 1996, to 49.4% of net sales as compared to 47.6% 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 the dollar value of sales by the Company's foreign subsidiaries, especially in Japan, resulted in a 3.7% reduction in the Company's net sales in 1997 based upon the change from the average 1996 rate. GROSS PROFIT. The Company's gross profit increased to $28.6 million, or 73.1% of net sales, in 1997 from $27.9 million, or 72.1% of net sales, in 1996. The increases in gross profit as a percentage of net sales was primarily attributable to an increase in higher margin support contract revenue, an increase in the percentage of net sales attributable to newer low cost debug and CodeTEST products that have lower material costs as a percentage of sales price, 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 and an increase in factory overhead. SALES, GENERAL AND ADMINISTRATIVE. Sales, general and administrative expenses were $18.5 million or 47.4% of net sales, and $15.1 million, or 39.2% of net sales, in 1997 and 1996, respectively. The dollar amount increase between comparable periods was primarily attributable to increased compensation-related expenses resulting principally from increased headcount and salaries, and to a lesser extent, increases in travel and entertainment, recruiting, and promotional costs and foreign exchange losses. The percentage increase between comparable periods was primarily attributable to lower than anticipated revenues for the year as compared to the increase in budgeted costs. The Company expects its sales and marketing expenditures to continue to increase in absolute dollars in the future as it introduces and markets new products, and continues to expand its sales, general and administrative organization. Foreign exchange gains and losses are included in sales, general and administrative expenses. In order to mitigate certain intercompany risks associated with exchange rate fluctuations, the Company, does from time to time, hedge a portion of its foreign exchange risk in Japan as it relates to the trade debt the Company's Japanese subsidiary owes to the Company. Although the Company generally plans to continue to engage in exchange rate hedging activities with respect to certain exchange rate risks, there can be no assurance that it will do so or that any such activities will successfully protect the Company against such risks. RESEARCH AND DEVELOPMENT. Research and development expenses were $8.5 million, or 21.6% of net sales, and $8.0 million, or 20.7% of net sales, in 1997 and 1996, respectively. The 6.0% increase in the dollar amount of research and development expenses between comparable periods was primarily attributable to a decrease in external development funding received from third parties that offsets expenses and to an increase hardware prototype related costs. The Company intends to continue to make substantial investments in product development, including development of software design, debugging and test tools for additional embedded microprocessors as well as continued advanced development in future directions. As a result, the Company anticipates that net research and development expenses are likely to increase for the foreseeable future. 19 INCOME TAXES. The Company's income tax provision for 1997, 1996 and 1995 reflects utilization of Net Operating Loss (NOL) and General Business Credit carryforwards. As of December 31, 1997 the Company had remaining NOL carryforwards of $2.3 million and research and development credit carryforwards of $1.2 million, both of which will expire in various amounts through 2012. The utilization of these amounts in the future is subject to an annual limit of approximately $392,000 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, 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 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. 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. 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, increased to $8.3 million in 1996 from $6.7 million in 1995. 20 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 1997, the Company generated $5.3 million of cash from operations; utilized $1.5 million of cash for equipment purchases; and utilized $53,000 of cash for net debt reduction. As of December 31, 1997, the Company had working capital of $20.6 million, including $16.7 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, 1997. 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 1998 and the Company anticipates renegotiating a new line at comparable terms. The Company currently has no specific commitments with regard to capital expenditures, but expects to spend an aggregate of approximately $1.6 million in 1998 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 its current cash and cash equivalent balances at year end 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 products and the acquisition of complementary businesses, products or technologies. To the extent additional capital is required, the Company may sell additional equity, debt or convertible securities, or obtain additional credit facilities. 21 IMPACT OF YEAR 2000 Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company has completed an assessment with its software vendors and will have to upgrade portions of its software so that its computer systems will functions properly with respect to dates in the year 2000 and thereafter.. The Company systematically upgrades its software to take advantage of bug fixes, feature enhancement and performance improvements as a standard course of business. The upgrades scheduled for 1998 will address all identified Year 2000 issues and will not involve any extra costs that would not normally occur in the standard course of business. The Company believes that with the upgrades to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such upgrades are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company is also planning to inquire with key suppliers and financial institutions, to verify that they will not be at risk from this problem. The Company believes its products are not subject to this problem and plans to test its products before the year 2000 OUTLOOK: ISSUES AND UNCERTAINTIES The Company does not provide forecasts of future financial performance or sales volumes, although this Annual Report contains certain other 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 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 for 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. 22 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. 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. GLOBAL ECONOMIC CONDITIONS. Almost half of the Company's business occurs outside of North America. Economic crisis in any of these regions could have a material adverse effect on the Company's business. 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. 23 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................... 25 Balance Sheets as of December 31, 1997 and 1996..................... 26 Statements of Income for the Years Ended December 31, 1997, 1996 and 1995.................................. 27 Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.................................. 28 Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.................................. 29 Notes to Financial Statements....................................... 30
24 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, 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, 1998 25 APPLIED MICROSYSTEMS CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------ 1997 1996 --------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents.................................... $ 6,336 $ 7,208 Short term investments....................................... 10,345 5,931 Accounts receivable, net of allowance for doubtful accounts of $611 and $264, respectively............................. 7,741 10,261 Inventories.................................................. 3,465 3,197 Prepaid and other current assets............................. 951 1,020 --------- ---------- Total current assets......................................... 28,838 27,617 Property and equipment, net.................................. 2,900 2,441 Other assets................................................. 844 766 --------- ---------- Total assets................................................. $ 32,582 $ 30,824 --------- ---------- --------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................. $ 2,804 $ 2,394 Accrued payroll.............................................. 1,684 1,839 Other accrued expenses....................................... 991 1,220 Deferred revenue............................................. 2,797 2,696 Current portion of long-term obligations..................... 15 53 --------- ---------- Total current liabilities.................................... 8,291 8,202 Long-term obligations, less current portion.................. -- 15 Shareholders' equity: Preferred stock, par value $.01 Authorized--5,000,000 shares -- -- Common stock, par value $.01 Authorized--25,000,000 shares Issued--6,827,000 shares (6,634,000 shares in 1996)...... 26,387 26,068 Cumulative translation adjustment............................ (869) (332) Accumulated deficit.......................................... (1,227) (3,129) --------- --------- Total shareholders' equity................................... 24,291 22,607 --------- --------- Total liabilities and shareholders' equity................... $32,582 $ 30,824 --------- --------- --------- ---------
See accompanying notes. 26 APPLIED MICROSYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales........................................... $ 39,124 $ 38,662 $ 31,039 Cost of sales....................................... 10,532 10,793 9,530 --------- --------- --------- Gross profit........................................ 28,592 27,869 21,509 Operating expenses: Sales, general and administrative................... 18,542 15,142 13,321 Research and development............................ 8,468 7,988 6,275 --------- --------- --------- Total operating expenses............................ 27,010 23,130 19,596 --------- --------- --------- Income from operations.............................. 1,582 4,739 1,913 Interest income and other........................... 682 601 76 Interest expense.................................... (13) (42) (230) --------- --------- --------- Income before income taxes.......................... 2,251 5,298 1,759 Income taxes........................................ 349 1,582 305 --------- --------- --------- Net income.......................................... $ 1,902 $ 3,716 $ 1,454 --------- --------- --------- --------- --------- --------- Basic income per share.............................. $ 0.28 $ 0.57 $ 0.94 Shares used in basic per share calculation.......... 6,769 6,545 1,551 Diluted income per share............................ $ 0.26 $ 0.52 $ 0.27 Shares used in diluted per share calculation........ 7,297 7,097 5,329
See accompanying notes. 27 APPLIED MICROSYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK CUMULATIVE TOTAL ------------------ -------------------- TRANSLATION ACCCUMULATED SHAREHOLDERS SHARES AMOUNT SHARES AMOUNT ADJUSTMENTS DEFICIT EQUITY -------- -------- --------- --------- ------------- ------------ ------------ (IN THOUSANDS) Balance at December 31, 1994................ 1,789 694 $ 418 $ 68 $(8,299) $ 4,286 Foreign currency translation adjustment .... --- --- --- --- (224) --- (224) Common stock repurchased ................... --- --- (38) (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 option exercised...................... --- --- 115 23 --- --- 23 Income tax benefit from stock plans......... --- --- --- 204 --- --- 204 Sale of common stock to employees........... --- --- 16 186 --- --- 186 Net Income ................................. --- --- --- --- --- 3,716 3,716 ------ -------- ----- ------- ----- -------- ------- Balance at December 31, 1996................ --- --- 6,634 26,068 (332) (3,129) 22,607 Foreign currency translation adjustment..... --- --- --- --- (537) --- (537) Issuance of common stock upon exercise of common stock warrants.................... --- --- 59 --- --- --- --- Stock option exercised ..................... --- --- 88 17 --- --- 17 Income tax benefit from stock plans......... --- --- --- 55 --- --- 55 Sale of common stock to employees........... --- --- 46 247 --- --- 247 Net Income ................................. --- --- --- --- --- 1,902 1,902 ------ -------- ----- ------- ----- -------- ------- Balance at December 31, 1997................ --- --- 6,827 $26,387 $(869) $(1,227) $24,291 ------ -------- ----- ------- ----- -------- ------- ------ -------- ----- ------- ----- -------- -------
See accompanying notes. 28 APPLIED MICROSYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Net income....................................................... $ 1,902 $ 3,716 $ 1,454 Adjustments to reconcile net income to net cash provided byoperating activities: Depreciation and amortization.................................... 1,148 1,116 1,154 Changes in operating assets and liabilities: Accounts receivable............................................ 2,520 (2,751) (1,863) Inventories.................................................... (268) (52) (247) Prepaid expenses and other current assets...................... 69 (566) 29 Other assets................................................... (217) (96) 106 Deferred revenue............................................... 101 862 356 Accounts payable and accrued expenses.......................... 82 (566) 2,019 --------- --------- --------- Net cash provided by operating activities................... 5,337 1,663 3,008 Cash flows from investing activities: Purchase of short-term investments............................. (4,414) (5,931) --- Property and equipment additions............................... (1,469) (1,261) (905) Purchase of product line ...................................... --- --- (450) --------- --------- --------- Net cash used in investing activities....................... (5,883) (7,192) (1,355) Cash flows from financing activities: Sale of common stock to employees.............................. 247 186 --- Stock options exercised........................................ 17 23 29 Proceeds from stock warrants exercised ........................ --- --- 125 Public offering of Common stock, net ofissuance costs.......... --- --- 13,024 Proceeds from long-term obligations ........................... --- --- 918 Repayment of long-term obligations............................. (53) (67) (1,502) Proceeds from notes payable to banks .......................... --- --- 16,450 Repayment of notes payable to banks ........................... --- --- (19,774) --------- --------- --------- Net cash provided by financing activities........................ 211 142 9,270 Effects of foreign exchange rate changes on cash................. (537) (176) (224) --------- --------- --------- Increase (decrease) in cash and cash equivalents................. (872) (5,563) 10,699 Cash and cash equivalents at beginning of year................... 7,208 12,771 2,072 --------- --------- --------- Cash and cash equivalents at end of year......................... $ 6,336 $ 7,208 $ 12,771 --------- --------- --------- --------- --------- --------- Supplemental disclosures of cash paid: Interest....................................................... $ 13 $ 42 $ 246 Income Taxes................................................... $ 642 $ 1,320 $ 81 Supplemental disclosures of non-cash activities: Tax benefit realized from non-qualifying dispositions of stock options............................... $ 55 $ 204 ---
See accompanying notes. 29 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES Applied Microsystems Corporation (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 embedded 16 and 32 bit microprocessor, primarily those 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 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 1998. 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 1997) are also included in interest income. The cost of securities sold is calculated using the specific identification method. 30 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 1997, 1996, and 1995 were $4,644,000, $3,158,000, and $2,590,000, respectively. In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition," which changes the requirements for revenue recognition effective for the transactions that the Company will enter into beginning January 1, 1998. The Company has not yet assessed what impact the SOP will have on its fiscal 1998 financial statements. 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. 31 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ACQUIRED TECHNOLOGY Costs to acquire technology are capitalized to the extent the products are technologically feasible and are included in other assets in the balance sheet. The Company's policy is to amortize these costs to match the associated revenue stream for the products containing the acquired technology. As of December 31, 1997 and 1996, amounts capitalized, net of accumulated amortization of $139,000 and $47,000, were $561,000 and $405,000, respectively. Amortization expense was $92,000 and $47,000 in 1997 and 1996, respectively. 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, 1997, contracts totaling 120,000,000 Yen with maturity dates through February 1998 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 in Japan with recourse in the ordinary course of business. At December 31, 1997 accounts receivable sold with recourse totaled $71,000. 32 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share" (FAS 128). FAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported earnings per share. In addition, the Securities and Exchange Commission (SEC) previously had requirements for common and common stock equivalent shares issued during the 12-month period prior to filing of an initial public offering to be included in the calculation of earnings per share as if they were outstanding for all periods presented using the treasury stock method assuming the initial public offering price. In 1998, the SEC issued new requirements for dilutive common stock equivalent shares. All earnings per share amounts for all periods have been presented to conform with FAS 128 and new the SEC requirements. As a result of the adoption of SFAS No. 128 and the new SEC requirements, the Company's previously reported net income per share changed from $0.25 to $0.27 on a diluted basis for the year ended December 31, 1995. 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 Company had elected to recognize compensation expense 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. RECENT ACCOUNTING PRONOUNCEMENTS The FASB issued Statement No. 130, "Reporting Comprehensive income" (FAS 130) and Statement No 131, "Disclosure about Segments of an Enterprise and Related Information" (FAS 131). FAS 130 established standards for reporting comprehensive income in annual and interim financial statements. FAS 131 established standards for the way a public business enterprise reports information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS 130 and 131 are effective for financial statements having fiscal years beginning after December 15, 1997. The adoption of FAS 130 and 131 is not expected to have a significant impact on the Company's consolidated results of operations, financial position or cash flow. 33 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SECURITIES AVAILABLE FOR SALE Securities available-for-sale consist of the following as of December 31:
1997 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- --------------- --------------- ----------- (IN THOUSANDS) U.S. Treasury securities and other U.S Government obligations....................... $ 2,956 $ 0 $ 0 $ 2,956 Corporate debt securities.......................... 7,387 2 0 $ 7,389 ----------- ------ ------ ----------- $ 10,343 $ 2 $ 0 $ 10,345 ----------- ------ ------ ----------- ----------- ------ ------ -----------
1996 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ----------- --------------- --------------- ----------- (IN THOUSANDS) U.S. Treasury securities and other U.S Government obligations....................... $ 2,964 $ 0 $ 0 $ 2,964 Corporate debt securities.......................... 2,967 0 0 $ 2,967 ----------- ------ ------ ----------- $ 5,931 $ 0 $ 0 $ 5,931 ----------- ------ ------ ----------- ----------- ------ ------ -----------
As of December 31, 1997, 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, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Finished goods.................................................. $ 1,303 $ 1,282 Work in process................................................. 157 168 Purchased parts................................................. 2,005 1,747 --------- --------- $ 3,465 $ 3,197 --------- --------- --------- ---------
4. PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 31, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Machinery and equipment................................ $ 3,973 $ 3,845 Office furniture and equipment......................... 2,465 2,388 Leased equipment....................................... 410 410 --------- --------- 6,848 6,643 Less accumulated depreciation and amortization......... 3,948 4,202 --------- --------- $ 2,900 $ 2,441 --------- --------- --------- ---------
5. REVOLVING LINE OF CREDIT AGREEMENTS In January 1997, the Company negotiated a revolving line of credit agreement with a commercial bank aggregating $7.0 million, which expires in May 1998. 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 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, 1997 ------------------------ CAPITAL OPERATING LEASES LEASES ----------- ----------- (IN THOUSANDS) 1998 ...................................... $ 16 $ 1,215 1999 ...................................... -- 912 2000 ...................................... -- 865 2001 ...................................... -- 420 2002 ...................................... -- 73 Thereafter................................. -- 456 ------- ----------- 16 $ 3,941 ------- ----------- ------- ----------- Less amount representing interest............... 1 ------- Present value of net minimum capital lease obligations............................. 15 Less current portion............................ 15 ------- Capital lease obligations, less current portion.......................... $ 0 ------- -------
Total rent expense for the years ended December 31, 1997, 1996 and 1995 was $1,378,000, $1,278,000, and $1,361,000, 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 1997, 1996 and 1995 is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Federal....................................... $ 179 $ 1,402 $ 187 Foreign....................................... 105 90 90 State......................................... 65 90 28 --------- --------- --------- $ 349 $ 1,582 $ 305 --------- --------- --------- --------- --------- ---------
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, -------------------- 1997 1996 --------- --------- (IN THOUSANDS) Deferred tax assets: Accrued and other expenses................................ $ 166 $ 179 Inventories............................................... 568 348 Net operating loss carryforwards.......................... 791 849 Tax credit carryforwards.................................. 1,208 953 --------- --------- Total deferred tax assets................................. 2,733 2,329 Deferred tax liabilities: Depreciation.............................................. 11 81 Intangible and other assets............................... 219 25 --------- --------- Total deferred tax liabilities............................ 230 106 Valuation allowance....................................... (2,503) (2,223) --------- --------- Net deferred taxes........................................ $ 0 $ 0 --------- --------- --------- ---------
As of December 31, 1997, the Company has net operating loss carryforwards for federal tax purposes of approximately $2,261,000 available to offset future taxable income. The Company also has research and development credits of approximately $1,208,000, 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 1998 to 2012. 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 preferred stock in 1992 resulted in such "ownership change." Accordingly, utilization of the net operating loss carryforwards is limited to approximately $392,000 per year. 37 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The valuation allowance for deferred tax assets increased approximately $280,000 and decreased approximately $529,000 during 1997 and 1996, respectively. A reconciliation from the U.S. statutory rate to the effective tax rate is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Tax at U.S. statutory rate of 35%....................... $ 788 $ 1,854 $ 616 Utilization of net operating loss and tax credit carryforwards...................... (137) (532) (429) Benefit of foreign sales corporation.................... (122) (98) --- Alternative minimum tax................................. 57 --- --- Foreign taxes........................................... 105 90 90 State taxes, net of federal effect...................... 42 59 28 Foreign losseswith no tax benefit....................... 404 212 --- Loss on deemed liquidation of subsidiaries............. (845) --- --- Other................................................... 57 (3) --- --------- --------- --------- $ 349 $ 1,582 $ 305 --------- --------- --------- --------- --------- ---------
Effective as of April 1, 1997, the Company elected, pursuant to newly issued Treasury Regulations, to treat its wholly-owned subsidiaries in the United Kingdom, Germany and France as branches for U.S. tax purposes. The effect of such election was a deemed liquidation of each subsidiary allowing its tax attributes to be utilized by the Company, thereby reducing the 1997 tax provision by $845,000. In 1997, income tax benefits of $55,000 were allocated to stockholders equity. Such benefits were attributable to employee stock option transactions. Income taxes paid during 1997, 1996 and 1995, including deposits, were $642,000, $1,320,000 and $81,000 respectively. 38 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. INCOME PER SHARE The following table sets forth the computation of basic and diluted income per share:
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (in thousands, except per share amount) Numerator: Numerator for basic and diluted income per share- net income......................................................................... $ 1,902 $ 3,716 $ 1,454 --------- --------- --------- --------- --------- --------- Denominator: Denominator for basic income per share--weighted average common shares............................................................ 6,769 6,545 1,551 Effect of dilutive securities: Stock options and warrants based on the treasury stock method using average market price.......................................... 528 552 375 Convertible preferred stock........................................................ -- -- 3,403 --------- --------- --------- Denominator for diluted income per share........................................... 7,297 7,097 5,329 --------- --------- --------- --------- --------- --------- Basic income per share............................................................... $ 0.28 $ 0.57 $ 0.94 --------- --------- --------- --------- --------- --------- Diluted income per share............................................................. $ 0.26 $ 0.52 $ 0.27 --------- --------- --------- --------- --------- ---------
9. 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 2,175,317 shares of common stock to selected directors, officers, employees, and consultants of the Company. As of December 31, 1997 options for 848,620 shares are outstanding and exercisable, of which options for 593,636 shares are unvested. Options for 234,648 shares are available to be granted. 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. 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. As of December 31, 1997, options for 15,000 shares are outstanding and exercisable and options for 7,500 shares contain repurchase rights. 39 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of stock option transactions for the years ended December 31 follows:
1997 1996 ------------------------------------------- ------------------------------ OPTIONS WEIGHTED-AVERAGE OPTIONS WEIGHTED-AVERAGE OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE (000) ----------- ----------------- ----------- ----------------- ----------- Outstanding-beginning of year.......... 729 $ 5.99 541 $ .31 927 Granted................................ 631 $ 4.62 326 $ 13.18 40 Forfeited.............................. (407) $ 11.19 (25) $ 3.06 (15) Exercised.............................. (89) $ .20 (113) $ .20 (411) ----- ------ --- ------ ---- Outstanding-end of year................ 864 $ 3.13 729 $ 5.99 541 ----- ------ --- ------ ---- ----- ------ --- ------ ---- Vested options......................... 262 $ .67 287 $ .14 258 ----- ------ --- ------ ---- ----- ------ --- ------ ---- Weighted-average fair value of options granted during the year.............. $ 3.19 $ 10.14 -- 1995 WEIGHTED-AVERAGE EXERCISE PRICE ----------------- Outstanding-beginning of year.......... $ .11 Granted................................ $ 2.53 Forfeited.............................. $ .25 Exercised.............................. $ .07 ----- Outstanding-end of year................ $ .31 Vested options......................... $ .14 Weighted-average fair value of options granted during the year..............
The following table summarizes information related to outstanding and exercisable options at December 31, 1997:
VESTED OUTSTANDING AND EXERCISABLE OPTIONS -------------------------------------------------- ----------- WEIGHTED WEIGHTED AVERAGE WEIGHTED RANGE OF AVERAGE REMAINING AVERAGE EXERCISE PRICES SHARES(000) EXERCISE PRICE CONTRACTUAL LIFE SHARES(000) EXERCISE PRICE - ----------------- ----------- ----------------- ------------------- ----------- -------------- $.02--2.00...... 295 $ .18 5.1 255 $ .15 $4.13--6.50..... 531 $ 4.27 9.2 -- -- $7.00--8.75..... 29 $ 7.94 9.5 -- -- $12.25--17.50... 9 $ 16.75 8.4 8 $ 17.29 --- ----------- --- ----------- $.02--13.38..... 864 $ 3.13 7.8 263 $ .67 --- --- --- ---
Had compensation expense 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:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT) 1997 1996 1995 - ------------------------------------------------------------------------------------- --------- --------- --------- Net income--as reported.............................................................. $ 1,902 $ 3,716 $ 1,454 Net income--pro forma................................................................ $ 1,411 $ 3,282 $ 1,450 Diluted net income per share as reported............................................. $ .26 $ .52 $ .27 Diluted net Income per share pro-forma............................................... $ .19 $ .46 $ .27
40 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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:
1997 1996 1995 ---------- ---------- ---------- Annualized volatility........................................................ 93.9% 89.6% 25.0% Risk-free interest rate...................................................... 6.0% 6.4% 6.2% Forfeiture rate.............................................................. 6.6% 6.2% 7.0% Expected life................................................................ 4.0 years 5.8 years 4.7 years Expected dividend rate....................................................... nil nil nil
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. During 1997 all of the remaining outstanding warrants were exercised on a net basis resulting in issuance of 58,941 shares of common stock. 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 1997 and 1996, 45,844 and 16,165 shares were sold through the ESPP, respectively. COMMON STOCK RESERVED Common stock reserved for future issuance at December 31, 1997 is as follows: Employee Stock Purchase Plan..................................................... 187,991 Common stock options............................................................. 1,118,268 --------- 1,306,259 --------- ---------
41 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. 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 1997, 1996 and 1995, the Company made contributions of $162,000, $133,000 and $58,000, respectively. 11. 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, ------------------------------- 1997 1996 1995 ----- --------- --------- Direct product development costs........................................................... $ 0 $ 269 $ 575 Related product development support subsidies.............................................. 0 335 450
42 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. GEOGRAPHIC INFORMATION The Company is engaged in one line of business: the design, manufacture, and marketing of specialized test instruments and software for the microprocessor industry. Certain financial information of operations by geographic area is provided in the table below based on the location of the Company's facilities. Sales are not recognized for financial statement purposes until there has been a sale to an unaffiliated customer.
YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Net Sales: United States.................................................................... $ 22,247 $ 22,615 $ 17,839 Japan............................................................................ 13,132 12,842 10,412 Europe........................................................................... 3,745 3,205 2,788 --------- --------- --------- Consolidated net sales........................................................... $ 39,124 $ 38,662 $ 31,039 --------- --------- --------- --------- --------- --------- Export Sales to unaffiliated customers........................................... $ 2,446 $ 2,367 $ 1,917 --------- --------- --------- --------- --------- --------- Income(Loss) before income taxes: United States.................................................................... $ 4,121 $ 5,900 $ 2,778 Japan............................................................................ 107 266 183 Europe........................................................................... (623) (214) (413) Corporate elimination's.......................................................... (1,354) (654) (789) --------- --------- --------- Consolidated income before income tax............................................ $ 2,251 $ 5,298 $ 1,759 --------- --------- --------- --------- --------- --------- Identifiable assets: United States.................................................................... $ 25,646 $ 24,071 $ 21,638 Japan............................................................................ 5,112 5,225 3,888 Europe........................................................................... 1,824 1,528 1,320 --------- --------- --------- Consolidated assets.............................................................. $ 32,582 $ 30,824 $ 26,846 --------- --------- --------- --------- --------- ---------
43 APPLIED MICROSYSTEMS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Quarterly Financial Information (unaudited) Summarized quarterly financial information for 1997 and 1996 is as follows:
1997 ------------------------------------------ FOR THE QUARTERS ENDED: MAR. 31 JUNE 30 SEPT. 30 DEC. 31 - ------------------------------------------------------------------------ --------- --------- --------- --------- (In thousands, except per share data) Net sales............................................................. $ 8,902 $ 10,009 $ 10,758 $ 9,455 Gross profit.......................................................... 6,446 7,310 7,897 6,939 Net Income............................................................ 42 647 1,012 201 Diluted earnings per share: Net income............................................................ $ 0.01 $ 0.09 $ 0.14 $ 0.03 Weighted average common shares and equivalents........................ 7,101 7,259 7,393 7,397 Market price per share: High................................................................ $ 16.00 $ 10.50 $ 12.88 $ 12.63 Low................................................................. 4.88 3.88 8.00 5.00
1996 ------------------------------------------ FOR THE QUARTERS ENDED: MAR. 31 JUNE 30 SEPT. 30 DEC. 31 - ------------------------------------------------------------------------ --------- --------- --------- --------- (In thousands, except per share data) Net sales............................................................. $ 8,704 $ 9,750 $ 9,711 $ 10,496 Gross profit.......................................................... 6,147 6,944 7,101 7,677 Net Income............................................................ 702 996 967 1,052 Diluted earnings per share: Net income............................................................ $ 0.10 $ 0.14 $ 0.14 $ 0.15 Weighted average common shares and equivalents........................ 7,083 7,106 7,128 7,094 Market price per share: High................................................................ $ 12.75 $ 20.75 $ 23.875 $ 23.75 Low................................................................. 7.75 9.00 11.25 9.00
The 1996 and first three quarters of 1997 dilutive earnings per share have been restated to comply with SFAS 128 which was adopted on the fourth quarter of 1997. 44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is contained in part in the sections captioned "Board of Directors Nominees for Director" and "Voting Securities and Principal Holders Exchange Act Compliance" in the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on May 22, 1998, and such information is incorporated herein by reference. The remaining information required by this Item is set forth as Item 4A in Part I of this report under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information contained in the section captioned "Compensation and Benefits" of the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on May 22, 1998. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information contained in the sections captioned "Voting Securities and Principal Holders" and "Compensation and Benefits Certain Transactions" of the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on May 22, 1998. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information contained in the section captioned "Compensation and Benefits Certain Transactions" of the Proxy Statement for the Company's Annual Meeting of Stockholders scheduled to be held on May 22, 1998. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS 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 45 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 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 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 10.8 Third Amended and Restated Investment Agreement dated as of September 15, 1995 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 10.15 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. 46 Exhibit No. 21: Subsidiaries of Registrant (b) Reports on Form 8-K None. 47 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 27, 1998. 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 March 27, 1998 - ------------------------------ Officer and Director Robert L. Deinhammer (Principal Executive Officer) /s/ A. James Beach Vice President, Chief March 27, 1998 - ------------------------------ Financial Officer, Secretary A. James Beach and Treasurer (Principal Financial and Accounting Officer) /s/ Anthony Miadich Chairman of the Board March 27, 1998 - ------------------------------ Anthony Miadich /s/ Elwood D. Howse, Jr. Director March 27, 1998 - ------------------------------ Elwood D. Howse, Jr. /s/ Paul N. Risinger Director March 27, 1998 - ------------------------------ Paul N. Risinger
48 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,
49
EXHIBIT NO. DESCRIPTION 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 (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
50
EXHIBIT NO. DESCRIPTION Registrant and Microtec Research, Inc. dated August 1, 1994 (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) 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. 51 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS APPLIED MICROSYSTEMS CORPORATION Years Ended December 31, 1997, 1996 and 1995
COL C. ADDITIONS ------------------------- (1) (2) COL B. CHARGED TO CHARGED TO COL. E. BALANCE AT COSTS OTHER COL D. BALANCE COL A. BEGINNING AND ACCOUNTS: DEDUCTIONS: END OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD - ------------------------------------------- ---------- ----------- ------------ ----------- ----------- Year ended December 31, 1997: Deducted from asset accounts: Allowance for doubtful accounts........... $ 52,000 $32,000 -- -- $ 84,000 Allowance for sales returns............... $212,000 -- 670,000(B) (355,000)(C) $ 527,000 ---------- ----------- ------------ ----------- ----------- Totals.................................... $264,000 $32,000 $670,000 $(355,000) $ 611,000 ---------- ----------- ------------ ----------- ----------- ---------- ----------- ------------ ----------- ----------- 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) $507,000 $(408,000) $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 ---------- ----------- ------------ ----------- ----------- ---------- ----------- ------------ ----------- -----------
- ------------------------ (A) Uncollectible accounts written off, net of recoveries (B) Estimated future sales returns charged to revenue (C) Actual Sales Returns 52 EX-23 2 EX-23 Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-07331) pertaining to the Applied Microsystems Corporation 1996 Stock Purchase Plan, the Registration Statement (Form S-8 No. 333-03396) pertaining to the Applied Microsystems Corporation 1990 Stock Benefit Plan, the Applied Microsystems Corporation 1992 Performance Stock Plan, and the Applied Microsystems Corporation Director Stock Option Plan and the Registration Statement (Form S-8 No. 333-14823) pertaining to the 1992 Performance Stock Plan of our report dated February 5, 1998 with respect to the consolidated financial statements and schedule of Applied Microsystems Corporation included in its Annual Report (Form 10-K) for the year ended December 31, 1997 filed with the Securities and Exchange Commission. ERNST & YOUNG LLP SEATTLE, WASHINGTON March 27, 1998 EX-27.1 3 EX-27.1
5 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 6,336 10,345 7,741 0 3,465 28,838 2,900 0 32,582 8,291 0 0 0 26,387 (2,096) 32,582 39,124 39,124 10,532 27,010 (682) 0 13 2,251 349 1,902 0 0 0 1,902 .28 .26
EX-27.2 4 EX-27.2
5 1,000 YEAR YEAR 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 12771 7208 8684 6706 7053 0 5931 3936 5918 5993 7510 10261 7727 8735 8882 0 0 0 0 0 3145 3197 3076 3715 3013 23880 27617 23936 25591 25823 2212 2491 2295 2255 2456 0 0 0 0 0 26846 30829 26949 28506 28991 8124 8202 7592 8202 7649 68 15 55 38 29 0 0 0 0 0 0 0 0 0 0 25655 26068 25658 25674 25789 (7001) (3461) (6356) (5408) (4476) 26846 30824 26949 28506 28991 31039 38662 8704 9750 9711 31039 38662 8704 9750 9711 9530 10793 2557 2806 2610 19596 23130 5254 5716 5850 (76) (601) (153) (139) (151) 0 0 0 0 0 230 42 14 12 9 1759 5298 1032 1355 1393 305 1582 330 359 426 1454 3716 702 996 967 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1454 3716 702 996 967 .94 .57 .11 .15 .15 .27 .52 .10 .14 .14 The adoption in fourth quarter 1997 of FAS 128, a new standard of computing and presenting both basic and diluted net income per share.
EX-27.3 5 EX-27.3
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 7626 7571 6127 5933 5966 8704 8863 9799 10032 0 0 0 3322 3504 3414 26783 27776 29066 2704 2873 2885 0 0 0 30222 31438 32749 7876 7986 8358 5 0 0 0 0 0 0 0 0 26070 26259 26321 (3729) (2807) (1930) 30222 31438 32749 8902 10009 10758 8902 10009 10758 2456 2698 2861 6545 6713 6880 (164) (167) (178) 0 0 0 4 4 3 61 761 1192 19 114 180 42 647 1012 0 0 0 0 0 0 0 0 0 42 647 1012 .01 .10 .15 .01 .09 .14 The adoption in fourth quarter 1997 of FAS 128, a new standard of computing and presenting both basic and diluted net income per share.
-----END PRIVACY-ENHANCED MESSAGE-----