SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [X]
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Check the appropriate box:
[_] Preliminary Proxy Statement [_]Confidential, for Use of the
Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
APPLIED MICROSYSTEMS CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
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1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount previously paid:
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4) Date Filed:
APPLIED MICROSYSTEMS CORPORATION
5020 148th Avenue N.E.
Redmond, Washington 98052
-----------------
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
-----------------
To the Shareholders
of APPLIED MICROSYSTEMS CORPORATION:
The Annual Meeting of Shareholders of Applied Microsystems Corporation, a
Washington corporation (the "Company"), will be held on May 21, 2002, at 11:00
a.m. local time at the Company's headquarters, 5020 148th Avenue NE, Redmond,
WA, for the following purposes as more fully described in the accompanying
Proxy Statement:
1. To elect four directors to hold office for the term as described in the
attached Proxy Statement or until their respective successors are
elected and qualified;
2. To ratify the appointment of Ernst & Young LLP as independent auditors
for the Company's fiscal year ending December 31, 2002; and
3. To transact such other business as may properly come before the meeting
or any adjournments thereof.
Only shareholders of record at the close of business on March 27, 2002 are
entitled to notice of and to vote at the meeting and any adjournment or
postponement. A list of shareholders as of that date will be available at the
meeting and for ten days prior to the meeting at the Company's headquarters,
5020 148th Avenue NE, Redmond, Washington 98052.
By order of the Board of Directors
/s/ Charles H. House
Charles H. House
Chairman
Redmond, Washington
April 12, 2002
YOUR VOTE IS IMPORTANT!
Please mark, sign and date the enclosed proxy card and
mail it promptly in the enclosed return envelope.
PROXY STATEMENT
ANNUAL MEETING AND PROXY SOLICITATION INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Applied Microsystems Corporation, a
Washington corporation ("Applied" or the "Company"), for use at the Annual
Meeting of Shareholders on May 21, 2002, and at any adjournments or
postponements thereof (the "Annual Meeting"), for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders. The date of this Proxy
Statement is April 12, 2002, the approximate date on which this Proxy Statement
and the accompanying form of proxy were first sent or given to shareholders.
At the close of business on March 27, 2002, there were 7,182,262 shares of
Common Stock of the Company outstanding. Only holders of record of the shares
outstanding at such time will be entitled to vote at the meeting. The presence
at the meeting of at least a majority of such shares, either in person or by
proxy, is required for a quorum. Proxies are solicited to give all shareholders
who are entitled to vote on the matters that come before the meeting the
opportunity to do so, whether or not they choose to attend the meeting in
person.
If you are a shareholder of record, you may vote by using the proxy card
enclosed with this Proxy Statement. When your proxy card is returned properly
signed, the shares represented will be voted according to your directions. You
can specify how you want your shares voted on each proposal by marking the
appropriate boxes on the proxy card. The proposals are identified by number and
by a general subject title on the proxy card. Please review the voting
instructions on the proxy card and read the text of the proposals and the
position of the Board of Directors in the Proxy Statement prior to marking your
vote. If your proxy card is signed and returned without specifying a vote or an
abstention on any proposal, it will be voted according to the recommendations
of the Board of Directors on that proposal. That recommendation is shown for
each proposal on the proxy card.
For the reasons stated in more detail later in the Proxy Statement, the
Board of Directors recommends a vote FOR each of the four individuals nominated
to serve as a director and FOR ratification of the appointment of Ernst & Young
LLP as independent auditors. If you hold shares of Common Stock through a
brokerage firm or other intermediary, we request that you provide instructions
on voting to your nominee holder.
The Board of Directors knows of no other matters which are to be presented
at the meeting. However, if any other matters are properly presented for
action, the proxies named on the proxy card will be authorized by your proxy to
vote on them in their discretion.
On each matter properly brought before the meeting, shareholders will be
entitled to one vote for each share of Common Stock held. Under Washington law
and the Company's Articles of Incorporation and Bylaws, if a quorum exists at
the meeting, the four nominees for director who receive the greatest number of
votes cast in the election of directors will be elected, and the proposal to
ratify the appointment of auditors will be approved if the number of votes cast
in favor of the proposal exceeds the number of votes cast against it.
Shareholders may abstain from voting on one or more of the nominees for
director and may abstain from voting on the proposal to ratify the appointment
of auditors. Abstentions and broker non-votes will be considered represented at
the Annual Meeting for the purpose of calculating a quorum. Abstention from
voting or a broker non-vote for a nominee for director may make it less likely
that the nominee will be one of the four nominees for director who receive the
greatest number of votes cast. Abstention from voting or a broker non-vote on
the proposal to ratify the appointment of auditors will have no effect since
approval of this proposal is based solely on the number of votes actually cast.
If you execute a proxy, you may revoke it by taking one of the following
three actions: (a) by giving written notice of the revocation to the Secretary
of the Company at its principal executive offices; (b) by executing a proxy
with a later date and delivering it to the Secretary of the Company at its
principal executive offices; or (c) by personally attending and voting at the
meeting.
1
Applied will bear the expense of preparing, printing and distributing proxy
materials to its share-holders. In addition to solicitations by mail, Applied's
directors, officers, or other employees may solicit proxies on behalf of the
Board of Directors in person or by telephone. The Company will also request
banks, brokers, and other custodians, nominees, and fiduciaries to solicit
customers for whom they hold stock and will reimburse them for their reasonable
out-of-pocket expenses.
BOARD OF DIRECTORS
The Company's business is managed under the direction of a Board of
Directors consisting of four directors. The following individuals are currently
serving as directors: Lary L. Evans, Charles H. House (Chairman), Elwood D.
Howse, Jr, and Stephen J. Verleye. Anthony Miadich retired from the Board in
July 2001, after having served since January 1990.
The full Board of Directors met eight times during 2001. Each director
attended at least 75% of all board meetings and meetings of committees on which
he served.
Compensation of Directors
During 2001, directors who are not employees of the Company or
representatives of shareholders of the Company received $1,000 for each Board
meeting attended ($500 for each telephonic Board meeting). Mr. Evans, Mr.
House, and Mr. Howse were such directors. Mr. House also received $53,000 in
consulting fees from the Company during 2001.
The Company also has a Director Stock Option Plan (the "Director Plan"),
under which a grant of a nonqualified stock option covering 5,000 shares of
Common Stock is automatically made to each outside director on the date of each
annual meeting of shareholders. During 2001, 20,000 options were granted under
the Director Plan. Each of these options has an exercise price of $3.97, a
ten-year term, and will vest on the date of the 2002 annual meeting of
shareholders.
Committees of the Board
The Company's Board of Directors has standing Audit and Compensation
Committees. The Company does not have a Nominating Committee. Each of the
committees is responsible to the full Board of Directors, and its activities
are therefore subject to approval of the Board of Directors. The members of
each committee and the functions performed thereby are described below:
Audit Committee. During 2001, the Audit Committee was composed of Mr.
Evans, Mr. House, who was appointed in July 2001, and Mr. Howse, who was a
member throughout 2001 and was appointed Chairman in July 2001. Mr. Miadich,
who left the Board of Directors in July 2001, was a member of the Audit
Committee prior to his departure and served as Chairman. The Audit Committee
reviews the independence and recommends to the Board the selection of the
independent auditors, and meets with the independent auditors to discuss the
Company's internal accounting controls, financial results, and both the quality
and acceptability of the Company's accounting principles. The Audit committee
met four times during 2001.
Compensation Committee. During 2001, the Compensation Committee was
comprised of Mr. Evans, Mr. House, and Mr. Howse (Chairman). Mr. Miadich, who
left the Board of Directors in July 2001, was a member of the Compensation
Committee prior to his departure. The Compensation Committee reviews and
recommends to the Board the compensation and benefits to be provided to the
Company's officers and reviews general policy matters relating to employee
compensation and benefits. The Compensation Committee generally meets during
regularly scheduled Board meetings, or as necessary. The Compensation Committee
met seven times in 2001 as a part of regularly scheduled Board meetings.
2
Nominees for Director
The following individuals, each of whom currently serves as a director of
the Company, have been nominated for re-election at the Annual Meeting:
Lary L. Evans, (age 62), was appointed a Director of the Company in February
2000. Mr. Evans retired in 1998 from Dell Computer Corporation, where he was
Vice President and General Manager of Dell's server business since 1996. Prior
to Dell, Mr. Evans worked from 1987 to 1995 for Sequent Computer Systems. His
Sequent positions included Vice President and General Manager of the Product
Division, Vice President of Engineering, and Vice President of Manufacturing.
Mr. Evans also held vice president or senior management positions at Culler
Scientific, Tandem Computers Incorporated, Diablo (a division of Xerox
Corporation), and Digital Equipment Corporation.
Charles H. House, (age 61), has served as a Director of the Company since
July 1998 and was appointed Chairman in January 2001. Mr. House presently
serves as Director of Societal Impact of Technology at Intel Corporation. Mr.
House previously served as Executive Vice President of Communications Research
at Dialogic Corp., which was acquired by Intel Corporation in 1999, and was
initially appointed to a similar position by Dialogic in November 1997. In
December 1995, Mr. House first joined Dialogic as President of its wholly owned
subsidiary, Spectron MicroSystems. From December 1993 to 1995, Mr. House served
as Senior Vice President and General Manager of the VISTA Division of Veritas
Software. Mr. House has also held various senior management positions at other
high-technology companies, including Senior Vice President of Product
Development and Management of Informix Software, and founder and General
Manager of Hewlett-Packard's Logic Systems division. He also served as
Hewlett-Packard's corporate Engineering Director and General Manager of its
Software Engineering Systems division. Mr. House is also a Director of
ExperTelligence, Inc.
Elwood D. Howse, Jr., (age 62) has served as a Director of the Company since
February 1992, and served as Chairman from April 2000 to January 2001. Mr.
Howse has served as President of Cable & Howse Ventures, a Northwest venture
capital management firm, since 1981, and as General Partner of the CH Partners
venture funds. Mr. Howse is also a Director of OrthoLogic Corporation and
ImageX, Inc., as well as several private companies.
Stephen J. Verleye, (age 46), joined Applied in April 1999 as its President
and Chief Executive Officer, and also joined the Company's Board of Directors
at that time. Beginning in 1993, Mr. Verleye served in various management
capacities at RadiSys Corporation, a designer and manufacturer of embedded
computing systems. At RadiSys, Mr. Verleye first served as its Vice President
of Marketing, and subsequently as the Company's Vice President of Business
Development. In May 1996 he was appointed Vice President and General Manager,
Commercial Equipment Division, and in October 1998 he was appointed joint
responsibility of the merged Automation Equipment Division. Prior to joining
RadiSys, Mr. Verleye held various marketing management roles at Sequent
Computer Systems, Inc., as well as various sales and marketing roles at Intel
Corporation.
3
VOTING SECURITIES AND PRINCIPAL HOLDERS
Ownership Information
The following table sets forth, as of January 31, 2002, except as otherwise
noted, certain information regarding beneficial ownership of the Company's
Common Stock by (a) each person known to the Company to be the beneficial owner
of more than five percent of the outstanding Common Stock, (b) each director
and nominee for director, (c) the Chief Executive Officer and the other
designated most highly compensated executive officers of the Company whose
total annual salary and bonus, for the fiscal year ended December 31, 2001,
exceeded $100,000 (collectively, the "Named Executive Officers"), and (d) by
all of the Company's executive officers and directors as a group. Unless
otherwise noted, the named beneficial owner has sole voting and investment
power.
Number of Shares of
Common Stock Percent of Common
Name and Address Beneficially Owned(1) Stock Outstanding
---------------- --------------------- -----------------
Orien II, L.P.(2).................................................. 1,307,149 18.2%
c/o Orien Ventures
300 Oswego Point Dr., Suite 100
Lake Oswego, OR 97034
Kopp Investment Advisors, Inc.(3).................................. 959,250 13.4%
7701 France Avenue South, Suite 500
Edina, MN 55435
Robert L. Deinhammer(4)............................................ 593,994 8.3%
21 Comistas Court
Walnut Creek, CA 94598
Dimensional Fund Advisors Inc.(5).................................. 456,600 6.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Charles H. House(6)................................................ 31,000 *
Stephen J. Verleye(7).............................................. 215,000 2.9%
Robert C. Bateman(8)............................................... 72,047 *
Mark C. Budzinski(9)............................................... 70,000 *
Alex A. Doumani.................................................... -- *
Lary L. Evans(10).................................................. 7,500 *
Elwood D. Howse, Jr.(11)........................................... 38,231 *
All executive officers and Directors as a group (7 individuals)(12) 433,778 5.7%
- --------
* Less than 1%.
(1) Except as otherwise indicated, the persons named in this table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property law
where applicable and to the information contained in the footnotes to this
table. The number of shares of Common Stock shown as beneficially owned by
the persons named in this table includes all shares of Common Stock
underlying options exercisable within 60 days of January 31, 2002. The
percentage of Common Stock outstanding is calculated on the basis of
7,182,262 shares of Common Stock outstanding as of January 31, 2002,
except that shares of Common Stock subject to options currently
exercisable, or exercisable within 60 days of January 31, 2002, are deemed
outstanding for computing the percentage ownership of the person holding
the options but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Anthony Miadich is a former member of the Company's Board of Directors and
retains certain vested stock options relating to his service, in
accordance with the stock option plan under which the options were
granted. Mr. Miadich is a Managing General Partner of Orien Ventures, the
general partner of Orien II, L.P., and shares voting and investment power
over shares held by Orien II, L.P. with George Kalan, a
4
General Partner of Orien Ventures. The beneficial ownership includes 12,500
shares issuable to Mr. Miadich upon the exercise of stock options that are
exercisable within 60 days of January 31, 2002.
(3) Based on Schedule 13G filed by Kopp Investment Advisors ("KIA") with the
Securities and Exchange Commission in January 2002. KIA is an investment
advisor registered under the Investment Advisors Act of 1940. KIA is
wholly owned by Kopp Holding Company ("KHC"), which is wholly owned by
LeRoy C. Kopp. Kopp Emerging Growth Fund is a registered investment
company that has an investment advisor agreement with KIA. Of the shares
beneficially owned by KIA, KHC, and Mr. Kopp, 789,250 are held in a
fiduciary or representative capacity.
(4) Based on Schedule 13G filed by Mr. Deinhammer with the Securities and
Exchange Commission in August 2001.
(5) Based on Schedule 13G filed by Dimensional Fund Advisors Inc.
("Dimensional") with the Securities and Exchange Commission in January
2002. Dimensional, an investment advisor registered under Section 203 of
the Investment Advisors Act of 1940, furnishes investment advice to four
investment companies registered under the Investment Company Act of 1940,
and serves as investment manager to certain other commingled group trusts
and separate accounts. These investment companies, trusts, and accounts
are the "Funds". In its role as investment advisor or manager, Dimensional
possesses voting and/or investment power over the shares of the Company
that are owned by the Funds. Dimensional disclaims beneficial ownership of
such shares.
(6) Includes 31,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of January 31, 2002. The Company retains
repurchase rights on 2,500 of these options, which repurchase rights
expire in 2002.
(7) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of January 31, 2002. The Company retains
repurchase rights on 107,500 of these options, which repurchase rights
expire annually through 2003. These repurchase rights do not apply in the
event of termination of employment on account of death or disability or
certain involuntary termination occurring following a change of control of
the Company.
(8) Includes 70,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of January 31, 2002. The Company retains
repurchase rights on 30,000 of these options, which repurchase rights
expire in varying amounts through 2003. These repurchase rights do not
apply in certain circumstances.
(9) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of January 31, 2002. The Company retains
repurchase rights on 30,000 of these options, which repurchase rights
expire in varying amounts through 2003. These repurchase rights do not
apply in certain circumstances.
(10) Consists of shares issuable upon the exercise of stock options that are
exercisable within 60 days of January 31, 2002.
(11) Includes 15,000 shares issuable upon the exercise of stock options that
are exercisable within 60 days of January 31, 2002.
(12) Includes 408,500 shares issuable upon the exercise of stock options that
are exercisable within 60 days of January 31, 2002. The Company retains
repurchase rights on 170,000 of these options; these repurchase rights do
not apply under certain circumstances, including death or disability or,
in certain cases, following a change of control of the Company.
5
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers, directors, and
persons who own more than ten percent of the Company's Common Stock to file
reports of ownership and changes of ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by SEC regulations to furnish
the Company with copies of all such reports they file.
Based solely on the Company's review of the copies of such reports received
from reporting persons and written representations by certain reporting persons
regarding their compliance with the applicable reporting requirements under
Section 16(a) of the Exchange Act, the Company believes that, with respect to
its fiscal year ended December 31, 2001, all filing requirements applicable to
the Company's executive officers, directors, and all of the persons known to
the Company to own more than ten percent of its Common Stock, were complied
with.
MANAGEMENT INFORMATION, COMPENSATION, AND BENEFITS
Executive Officers
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
shareholders. The following are the current executive officers of the Company,
and their ages as of March 31, 2002:
Name Age Position
---- --- --------
Stephen J. Verleye..... 46 President, Chief Executive Officer, and Director
Robert C. Bateman...... 39 Vice President, Chief Financial Officer, Corporate
Secretary, and Treasurer
Mark C. Budzinski...... 42 Vice President of Worldwide Sales
Alex A. Doumani........ 42 Vice President of Engineering
For information regarding Mr. Verleye, see "Nominees for Director."
Robert C. Bateman joined Applied in October 1999 as Vice President, Chief
Financial Officer, Corporate Secretary, and Treasurer. From March 1996 to
September 1999, Mr. Bateman held various management positions at NeoPath, Inc.,
a medical device company, including Corporate Controller, Corporate Secretary,
Treasurer, Vice President, and Chief Financial Officer. Prior to joining
NeoPath, Mr. Bateman was employed by Ernst & Young LLP.
Mark C. Budzinski joined Applied in September 1999 as Vice President of
Marketing, and now serves as Vice President of Sales and Marketing. From May
1996 to August 1999, Mr. Budzinski was Director of Marketing at RadiSys
Corporation. Prior to joining RadiSys, Mr. Budzinski held various marketing
positions at Sequent Computer Systems, Inc. and Intel Corporation.
Alex A. Doumani joined Applied in June 2001 as Vice President of
Engineering. Before joining Applied, Mr. Doumani spent more than a decade with
RadiSys Corporation, most recently as that company's Vice President of Central
Engineering. He also held responsibility for RadiSys' merger and acquisition
activities; served as the general manager of the embedded system software
operation; and established the company's European offices. Prior to RadiSys, he
worked at Tektronix, Inc., in a variety of software engineering management
positions.
6
Executive Officer Compensation
Compensation Summary. The following table sets forth information regarding
compensation earned during the Company's fiscal year ended December 31, 2001,
and during the two preceding fiscal years, by the Chief Executive Officer and
the other Named Executive Officers.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying
Fiscal Stock All Other
Name and Principal Position Year Salary Bonus(1) Options(#) Compensation(2)
- --------------------------- ------ -------- -------- ------------ ---------------
Stephen J. Verleye(3)..... 2001 $217,054 $19,688 45,000 $ 5,617
President and CEO 2000 224,617 3,656 -- 5,362
1999 154,649 24,188 215,000 41,854
Robert C. Bateman(4)...... 2001 $164,307 $14,963 30,000 $ 3,415
VP, CFO, Corporate 2000 153,462 2,503 20,000 3,370
Secretary, and Treasurer 1999 30,154 6,500 60,000 722
Mark C. Budzinski(5)...... 2001 $161,759 $ 7,350 30,000 $62,768
VP of Sales and 2000 160,000 32,600 20,000 12,758
Marketing 1999 45,538 10,000 60,000 1,088
Alex A. Doumani(6)........ 2001 $ 86,843 -- 90,000 $31,418
VP of Engineering
Douglas A. Fullaway(7).... 2001 $ 77,664 $15,435 -- $42,782
Former Executive Vice 2000 167,598 2,730 20,000 4,858
President, Business 1999 157,242 20,000 -- 3,795
Development
- --------
(1) Bonus amounts are reflected in the year they were earned, without regard to
when the amounts were received.
(2) Represents employer 401(k) matching contributions and term life insurance
premiums, except as otherwise noted.
(3) Mr. Verleye joined the Company on April 1, 1999. Mr. Verleye's "All Other
Compensation" in 1999 includes $39,125 for moving and relocation.
(4) Mr. Bateman joined the Company in October 1999.
(5) Mr. Budzinski joined the Company in September 1999. Mr. Budzinski's "All
Other Compensation" includes sales commissions of $58,022 in 2001 and
$8,005 in 2000.
(6) Mr. Doumani joined the Company in June 2001. Mr. Doumani's "All Other
Compensation" in 2001 includes $30,000 as a sign-on bonus.
(7) Mr. Fullaway left the Company in April, 2001. Mr. Fullaway's "All Other
Compensation" in 2001 included $40,029 in severance-related payments.
7
Option Grants. The following table shows information concerning option
grants to purchase Common Stock made to each of the Named Executive Officers
during the fiscal year ended December 31, 2001.
Option Grants in 2001
Individual Grants
------------------------------------------ Potential Realizable
Number of Percent of Value at Assumed
Securities Total Annual Rates of Stock
Underlying Options Price Appreciation for
Options Granted to Exercise Option Term(3)
Granted Employees Price Expiration ----------------------
Name (#)(1) in 2001 ($/Sh)(2) Date 5% 10%
---- ---------- ---------- --------- ---------- -------- --------
Stephen J. Verleye........... 45,000 6.6% $1.10 10/29/11 $ 31,130 $ 78,890
Robert C. Bateman............ 30,000 4.4% 1.10 10/29/11 20,754 52,594
Mark C. Budzinski............ 30,000 4.4% 1.10 10/29/11 20,754 52,594
Alex A. Doumani.............. 60,000 8.9% 4.34 6/1/11 163,764 415,011
Alex A. Doumani.............. 30,000 4.4% 1.10 10/29/11 20,754 52,594
Douglas A. Fullaway.......... -- -- -- -- -- --
- --------
(1) The options were granted under the Applied Microsystems Corporation 1992
Performance Stock Plan and the 2001 Stock Option Plan and vest over three
to four years.
(2) The exercise price of each option is the closing price of the Company's
Common Stock, as reported by the Nasdaq National Market, on the grant date.
(3) Potential gains are net of exercise price but before taxes associated with
the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of the
future price of the Common Stock. Actual gains, if any, on stock option
exercises are dependent on the future financial performance of the Company,
overall market conditions, and the option holders' continued employment
through the vesting periods. The actual value realized may be greater or
less than the potential realizable value set forth in the table.
Option Exercises. The following table shows information concerning stock
options exercised by the Named Executive Officers during the Company's fiscal
year ended December 31, 2001, including the aggregate value of any gains
realized on such exercise. The table also shows information regarding the
number and value of unexercised options held by the Named Executive Officers at
the end of that fiscal year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Year-End(#)(1) Fiscal Year-End(1)(2)
acquired on Value ------------------------- -------------------------
Name Exercise(#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
Stephen J. Verleye. -- -- 215,000 45,000 -- --
Robert C. Bateman.. -- -- 70,000 40,000 -- --
Mark C. Budzinski.. -- -- 70,000 40,000 -- --
Alex A. Doumani.... -- -- -- 90,000 -- --
Douglas A. Fullaway 14,000 $52,780 -- -- -- --
- --------
(1) The Company retains repurchase rights on certain of these stock options.
(2) Based on a fair market value of $1.05, the closing price of the Company's
Common Stock on December 31, 2001, of the shares of Common Stock subject to
outstanding in-the-money options, less the aggregate option exercise price.
8
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors is responsible for
setting and administering the policies governing annual compensation of the
executive officers, including the incentive compensation plan, and making
recommendations concerning such compensation to the Board of Directors. In
addition, the Committee is responsible for administering the Company's stock
option plans. The Committee is composed exclusively of directors who are
neither employees nor former employees of the Company, and who are not eligible
to participate in any of the Company's executive compensation programs.
The Committee's compensation philosophy is to provide base salary, incentive
compensation, and equity incentives to the Company's officers and other
employees through programs designed to attract and retain the best possible
personnel to allow the Company to achieve its goals. The Company seeks to
foster an environment that links the interests of officers and other personnel
to that of shareholders through equity incentives, and rewards superior
performance through appropriate incentive compensation.
Base Salary. The Committee periodically reviews the annual compensation
plan for the Company's executive officers. In making individual base salary
decisions, the Compensation Committee considers each officer's duties, the
quality of the individual's performance, the individual's potential, external
market compensation practices, and the contribution the officer has made to the
Company's overall performance. The Committee compares the salary of each
officer with other officers' salaries, taking into account the number of years
employed by the Company, the possibility of future promotions, and the extent
and frequency of prior salary adjustments. The Committee also consults
competitive survey data. In August 2001, in response to economic uncertainty
and reduced revenue streams, the Company implemented a restructuring plan
designed to reduce operating costs. This plan included a 10 percent reduction
in executive salaries and a suspension of the incentive compensation plan.
Incentive Compensation. The Company's incentive compensation plan is a
material element to the executives' target annual compensation. The
Compensation Committee believes that executives' performance is most
appropriately measured based on progress toward achieving operating goals that
are formulated to promote advancement of key aspects of the Company's business.
Company goals relate to such matters as achieving target sales and operating
results, forging strategic relationships, advancing the strategic directions of
the Company, meeting defined research and development objectives, staff
recruitment and development, and so forth. Under the plan in place prior to
August 2001, officers were eligible to receive incentive compensation
quarterly, based primarily on achieving targeted corporate operating results,
as well as other corporate-wide objectives. As a result of objectives achieved
in the first quarter of 2001, incentive compensation payments were made in
accordance with the provisions of the plan. As previously noted, the incentive
compensation plan was suspended in August 2001 as part of a cost-savings plan.
Equity Incentives. Equity incentives take the form of option awards under
the Company's stock option plan. The Compensation Committee believes that this
equity-based compensation ensures that the Company's executive officers have a
continuing stake in the long-term success of the Company. The Company's
practice is to grant stock options with an exercise price equal to the market
price of the Company's Common Stock on the date of grant. Accordingly, stock
options will have value only if the Company's stock price increases. Therefore,
the Committee believes that stock options serve to align the interests of
executive officers closely with the Company's shareholders because of the
direct benefit executive officers receive through improved stock performance.
In determining the amount of equity compensation to be awarded to executive
officers in any fiscal year, the Committee considers various factors, including
the officer's current option position, the frequency of prior option grants,
the impact of the officer's contribution on the Company's goals, the number of
years the officer has been employed by the Company, and the possibility of
future promotions. Stock options granted to executive officers vest over three
to four years and contain certain provisions that allow for accelerated vesting
(or lapsing of the Company's repurchase rights) in the event of a change of
control.
9
2001 Compensation for the Chief Executive Officer
The Committee reviews and establishes the Chief Executive Officer's base
salary based on a number of factors, including the above-described compensation
approach to executive officers, competitive survey data, a subjective
assessment by the Committee of Mr. Verleye's past performance, and expectations
as to his future contributions in leading the Company and its business. Based
primarily on reduced operating performance in 2001 and the cost-reduction plan
implemented by the Company that included a 10 percent reduction in executive
salaries, Mr. Verleye's base salary decreased three percent in 2001. The
Committee approved a stock option grant to Mr. Verleye in 2001, in line with
the above-described approach for equity incentives to executive officers,
structured to provide incentives aligned with the Company's shareholders to
improve stock performance.
As noted above, the Company's compensation policy is primarily based upon
the practice of pay-for-performance. Section 162(m) of the Internal Revenue
Code imposes a limitation on the deductibility of nonperformance-based
compensation in excess of $1 million paid to Named Executive Officers. No
executive officer of the Company has received, nor is it anticipated that any
executive officer will receive, any such compensation in excess of this limit.
Compensation Committee
Lary L. Evans
Charles H. House
Elwood D. Howse, Jr.
Employment Contracts and Change-In-Control Agreements
The Company entered into an employment agreement with Mr. Verleye effective
April 1, 1999. The agreement specifies that, in the event Mr. Verleye is
terminated in certain circumstances, he would be paid a severance of salary and
benefits for a period of six months following termination. In addition, in the
event of a change in control, a portion of Mr. Verleye's stock options would no
longer be subject to the Company's right to repurchase such options.
Stock option agreements with Mr. Bateman and Mr. Budzinski contain
provisions that, in the event of a change of control, limit the Company's right
to repurchase a portion of such stock options. In addition, in April 2001 the
Board of Directors approved a plan for vice president officers of the Company
that provides for payment of salary and benefits for a period of six months
following termination in the event of a change in control.
Audit Committee Report
The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. The Board of Directors, in its business
judgment, has determined that all members of the Committee are "independent,"
as required by the applicable listing standards of the Nasdaq National Market.
As set forth in the Committee's Charter, management has the primary
responsibility for the financial statements and the reporting process,
including the systems of internal controls and the selection, application and
disclosure of critical accounting policies. In fulfilling its oversight
responsibilities, the Committee reviewed the audited financial statements in
the Annual Report with management, including a discussion of the quality, not
just the acceptability, of the accounting principles and policies, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements.
The Committee reviewed with the independent auditors, who are responsible
for auditing the Company's financial statements and expressing an opinion on
the conformity of those audited financial statements with
10
generally accepted accounting principles, their judgments as to the quality,
not just the acceptability, of the Company's accounting principles and such
other matters as are required to be discussed with the Committee under
generally accepted auditing standards. In addition, the Committee has discussed
with the independent auditors the auditors' independence from management and
the Company. The Committee has received the written disclosures from the
auditors required by the Independence Standards Board and has considered the
compatibility of nonaudit services with the auditors' independence. During
2001, such nonaudit services totaled $14,000 relating primarily to
international tax preparation services.
The Committee discussed with the Company's independent auditors the overall
scope and plans for their respective audits. The Committee meets with the
independent auditors, with and without management present, to discuss the
results of their examinations, the adequacy and effectiveness of the accounting
and financial controls, and the overall quality of the Company's financial
reporting. The members of the Audit Committee are not professionally engaged in
the practice of auditing or accounting and are not experts in the fields of
accounting or auditing, including in respect of auditor independence. Members
of the Committee rely without independent verification on the information
provided to them and on the representations made by management and the
independent accountants. Accordingly, the Audit Committee's oversight does not
provide an independent basis to determine that management has maintained
appropriate accounting and financial reporting principles or appropriate
internal controls and procedures designed to assure compliance with accounting
standards and applicable laws and regulations. Furthermore, the Audit
Committee's considerations and discussions referred to above do not assure that
the audit of the Company's financial statements has been carried out in
accordance with generally accepted auditing standards, that the financial
statements are presented in accordance with generally accepted accounting
principles, or that the Company's auditors are in fact "independent."
In reliance on the reviews and discussions referred to above, and subject to
the limitations on the role and responsibilities of the Committee referred to
above and in the Charter, the Committee recommended to the Board of Directors
that the audited financial statements be included in the Annual Report on Form
10-K for the year ended December 31, 2001 for filing with the Securities and
Exchange Commission. The Committee and the Board have also recommended the
selection of the Company's independent auditors.
Audit Committee
Lary L. Evans
Charles H. House
Elwood D. Howse, Jr.
11
Comparative Performance Graph
Set forth below is a graph comparing the cumulative total return on the
Company's Common Stock with the cumulative total return of the Nasdaq Stock
Market (U.S. companies) ("Nasdaq Market Index") and the Nasdaq Computer and
Data Processing Index for the period beginning on December 31, 1996, and at the
end of 1997 through 2001. The graph assumes an investment of $100 in the
Company's Common Stock and in each index on December 31, 1996.
Comparison of Cumulative Total Return
Among Applied Microsystems Corporation,
the Nasdaq Market Index and
the Nasdaq Computer & DP Index
[GRAPH]
12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01
-------- -------- -------- -------- -------- --------
Applied Microsystems Corporation $100 $ 42 $ 29 $ 86 $ 33 $ 8
Nasdaq Market Index............. $100 $122 $173 $321 $193 $153
Nasdaq Computer & DP Index...... $100 $123 $219 $482 $222 $179
12
PROPOSAL 1--ELECTION OF DIRECTORS
Four Directors are to be elected at the Annual Meeting, to serve until the
2003 Annual Meeting of Shareholders or until their earlier retirement,
resignation, or removal. Lary L. Evans, Charles H. House, Elwood D. Howse, Jr.,
and Stephen J. Verleye, all of whom are currently Directors of the Company,
have been nominated by the Board of Directors for election at the Annual
Meeting. The accompanying proxy will be voted for these nominees, except where
authority to so vote is withheld. If any nominee should become unavailable for
any reason, it is intended that votes will be cast for a substitute nominee as
designated by the Company's Board of Directors. The Board of Directors has no
reason to believe that any of the nominees named will be unavailable to stand
for election.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NOMINEES NAMED IN
PROPOSAL 1.
PROPOSAL 2 - RATIFICATION OF INDEPENDENT AUDITORS
Subject to ratification by the shareholders, the Board of Directors has
reappointed Ernst & Young LLP as independent auditors to audit the financial
statements of the Company for the year ending December 31, 2002. Fees for 2001
were: annual audit - $165,500; audit-related services - $70,000; and all other
nonaudit services - $14,000.
If this proposal does not receive the affirmative approval of a majority of
the votes cast on the proposal, the Board of Directors will reconsider the
appointment. Representatives of Ernst & Young LLP are expected to be present at
the Annual Meeting, will have the opportunity to make a statement if they
desire to do so, and will be available to respond to appropriate questions from
shareholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE RATIFICATION
OF THE APPOINTMENT OF ERNST & YOUNG LLP.
SHAREHOLDER PROPOSALS FOR 2003 ANNUAL MEETING
An eligible shareholder who desires to have a qualified proposal considered
for inclusion in the proxy statement prepared in connection with the Company's
2003 Annual Meeting of Shareholders must deliver a copy of the proposal to the
Secretary of the Company, at the Company's principal executive offices, no
later than 120 calendar days in advance of the one year anniversary of the date
the Company's proxy statement was released to shareholders in connection with
the previous year's annual meeting of shareholders, and satisfy the conditions
established by the Securities and Exchange Commission.
The Company's Restated Bylaws outline procedures, including minimum notice
provisions, that govern the nomination of directors by shareholders and certain
other matters that a shareholder proposes to bring before the annual meeting. A
copy of the pertinent provisions of the Restated Bylaws is available upon
request to Robert C. Bateman, Corporate Secretary, Applied Microsystems
Corporation, 5020 148th Avenue N.E., Redmond, Washington 98052.
IT IS IMPORTANT THAT PROXIES ARE RETURNED PROMPTLY AND THAT YOUR SHARES ARE
REPRESENTED. SHAREHOLDERS ARE URGED TO MARK, SIGN AND DATE THE ENCLOSED PROXY
CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE.
APPLIED MICROSYSTEMS CORPORATION
April 12, 2002
Redmond, Washington
13
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Please mark [X]
your votes
WITHHOLD as indicated
AUTHORITY TO
VOTE FOR ALL
NOMINEES
FOR LISTED BELOW FOR AGAINST ABSTAIN
PROPOSAL 1: ELECTION OF DIRECTORS [_] [_] PROPOSAL 2: RATIFICATION OF APPOINTMENT OF [_] [_] [_]
INDEPENDENT AUDITORS
Nominees: 01. Lary L. Evans
02. Charles H. House
03. Elwood D. Howse, Jr.
04. Stephen J. Verleye
(INSTRUCTION: To withhold authority to vote FOR any individual
nominee, strike a line through the nominee's name in the list.)
PLEASE SIGN AND DATE THIS PROXY CARD AND RETURN
IT PROMPTLY IN THE ENCLOSED ENVELOPE.
SIGNATURE SIGNATURE DATE
------------------------------------------ ------------------------------------------- --------------
NOTE: Please sign as name appears hereon. Joint Owners should each sign. When signing as attorney, executor, administrator, trustee
or guardian, please give full title as such.
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x FOLD AND DETACH HERE x
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PROXY
APPLIED MICROSYSTEMS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned, having received the Notice of Annual Meeting of
Shareholders of Applied Microsystems Corporation (the "Company"), and the
related Proxy Statement dated April 12, 2002, hereby appoints Stephen J. Verleye
and Robert C. Bateman, and each of them, proxies for the undersigned, with full
power of substitution, and authorizes them to attend the Annual Meeting of
Shareholders of the Company on May 21, 2002, and any adjournments thereof, and
to vote thereat all shares of Common Stock of the Company that the undersigned
would be entitled to vote if personally present, such proxies being instructed
to vote as specified below, or to the extent not specified, to vote FOR the
election as directors of all nominees named below and FOR proposal 2 and to vote
in their discretion on any other matters presented at the meeting or any
adjournments thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER SPECIFIED
ON THE REVERSE BY THE UNDERSIGNED. EXCEPT AS OTHERWISE SPECIFIED, THIS PROXY
WILL BE VOTED FOR RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT AUDITORS.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
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x FOLD AND DETACH HERE x