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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED).
For the fiscal year ended December 31, 1996.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________.
Commission file number: 0-26966
ADVANCED ENERGY INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0846841
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1625 SHARP POINT DRIVE, FORT COLLINS, CO 80525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (970) 221-4670
Securities registered pursuant to Section 12(b) of the Act:
None
Securities pursuant to section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X].
As of January 31, 1997, there were 21,268,708 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such stock held by
non-affiliates of the Registrant was $42,550,560 (based on the closing price
on the NASDAQ Stock Market).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31, 1996,
are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the Company's definitive proxy statement for the annual shareholders
meeting to be held May 15, 1997, are incorporated by reference into Part III of
this Form 10-K.
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ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 4
EXECUTIVE OFFICERS OF THE REGISTRANT 18
ITEM 2. PROPERTIES 19
ITEM 3. LEGAL PROCEEDINGS 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 19
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 20
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 32
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 50
ITEM 11. EXECUTIVE COMPENSATION 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 51
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PART I
ITEM 1. BUSINESS
GENERAL
Advanced Energy is a leading supplier of power conversion and control
systems incorporated in plasma-based thin film production equipment. The
Company's systems are key elements of semiconductor, data storage, flat panel
display, and a range of other industrial manufacturing equipment that
utilizes gaseous plasmas to deposit or etch thin film layers on materials or
substrates such as silicon, glass and metals. The effectiveness of
plasma-based production processes depends in large part on the quality of the
electrical power used to ignite and manipulate the plasma. The Company's
power conversion and control systems refine, modify and control the raw power
from a utility and produce power which is uniform, predictable and precisely
repeatable to permit the production of identical films of unvarying thickness
on a mass scale. The Company's systems are used in an array of thin film
processes such as physical vapor deposition, etch, chemical vapor deposition,
plasma enhanced chemical vapor deposition and ion implantation, as well as a
broad range of thin film applications such as the production of
semiconductors, magnetic hard disks, CD-ROMs, audio and video discs, thin
film heads, liquid crystal displays and optical, glass and automobile
coatings. The Company's customers include Applied Materials, Lam Research,
Balzers/Leybold, Materials Research, Multi-Arc and Ulvac.
In recent years, significant technological advances in thin film processes
have enabled the manipulation of materials on the atomic and molecular level.
Manufacturers can now both deposit and etch layers of materials that are less
than one hundredth of a micron in thickness. By using modern thin film
production processes, manufacturers are better able to control and alter the
electrical, magnetic, optical and mechanical characteristics of materials. Thin
film processes have been employed most extensively in the semiconductor
industry, where multiple thin film layers of insulating or conductive material
are deposited on a wafer or substrate. These processes are now used in a growing
range of diverse industries. Thin film production was initially accomplished
using either liquid chemical or thermal processes. Plasma-based process
technology was developed to address the limitations of wet chemistry and thermal
technologies in certain applications requiring thinner, more precise film, and
to enable new applications.
The Company has achieved its market leadership position by providing
systems which convert externally supplied power, operate over a wide range of
power levels, control utility instabilities such as brownouts and surges
created by raw utility power sources, control intense localized electrical
discharges known as arcs and control system instabilities which arise from
the use of exotic gases and inherently unstable electrode arrangements. All
of the Company's products employ sophisticated switchmode technology that
affords plasma-based systems a greater ability to prevent arcs, which can
slow down the throughput of a plasma process and may even destroy the
substrate or the
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power conversion and control system. The Company believes the combination of
its in-depth knowledge of plasma physics, its unique approach to product
customization and its reusable engineering product design methodology have
enabled it to develop the widest range of power conversion and control
systems in the industry.
Since inception, the Company has sold over 58,000 power conversion and
control systems. Approximately 60% of the Company's sales in 1995 and 61% in
1996 were to the semiconductor equipment industry. Advanced Energy sells its
systems primarily through direct sales personnel to customers in the United
States, Japan and Europe. The Company also sells through distributors in
Japan, France, Italy, Israel, Korea, and Taiwan. International sales
represented 29% and 24% of the Company's sales in 1995 and 1996,
respectively.
DEVELOPMENT OF COMPANY BUSINESS
Advanced Energy was incorporated in Colorado in 1981 and reincorporated in
Delaware in September 1995. Advanced Energy filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
pursuant to the Securities Exchange Act of 1934, as amended, with respect to
Advanced Energy's initial public offering of its common stock, $0.001 par value
("Common Stock"). The registration statement was declared effective by the
Commission in November 1995. As used in this Form 10-K, references to "Advanced
Energy" refer to Advanced Energy Industries, Inc. and references to the
"Company" refer to Advanced Energy and its consolidated subsidiaries. The
Company's principal executive offices are located at 1625 Sharp Point Drive,
Fort Collins, Colorado 80525, and its telephone number is (970) 221-4670.
PRODUCTS
The Company's use of switchmode power conversion and control technology
has enabled it to develop a line of products which has permitted the
development of new plasma processing applications. In 1982, the Company
introduced its first low frequency switchmode power conversion and control
system specifically designed for use in plasma processes. In 1983, the
Company introduced its first DC system designed for use in PVD sputtering
applications. This DC based system is a compact, cost-effective power
solution, which greatly reduced stored energy, a major limitation in the use
of PVD systems. In the early 1990's the Company introduced the first fully
switchmode radio frequency (RF) power conversion and control systems for use
in semiconductor etch applications. This product achieved significant design
wins because of its smaller size and precise control attributes. The Company
has recently introduced a family of accessories which provide major
improvements in arc prevention and suppression. The Company is currently
extending the power range of its systems to much higher power levels to
enable it to supply products for emerging industrial applications. The
Company's
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products currently range in price from $2,880 to $80,000, with an average price
of approximately $10,000.
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The following chart sets forth the Company's principal product lines and related
basic information:
<TABLE>
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PRODUCT POWER/CURRENT MAJOR PROCESS
PLATFORM DESCRIPTION LEVEL APPLICATIONS
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<S> <C> <C> <C> <C>
MDX Power control and 500W-80kW PVD
conversion system - Metal sputtering
- Reactive sputtering
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DIRECT MDX-II Power control and 15kW-120kW PVD
conversion system - Metal sputtering
CURRENT - Reactive sputtering
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Pinnacle Power control and 6kW-120kW PVD
PRODUCTS conversion system - Metal sputtering
- Reactive sputtering
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SPARC-LE Arc management 1kW-60kW For use with MDX
accessory systems
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PE Low frequency 1.25kW-30kW CVD
LOW AND MID power control and PVD
conversion system - Reactive sputtering
FREQUENCY Surface modifications
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PD Mid frequency 1.25kW-3.5kW CVD
PRODUCTS power control and PVD
conversion system - Reactive sputtering
Surface modifications
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RFX Power control and 600W General R&D
conversion system
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RFG Power control and 600W-5.5kW Etch
conversion system CVD
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RADIO RFXII Power control and 600W-5.5kW Etch
conversion system CVD
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FREQUENCY ID Ion-beam 500W-5kW Ion-beam deposition
conversion and Ion implantation
PRODUCTS control system Ion-beam
etching/milling
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AZX Tuner 100W-5kW Impedance matching
network
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RFZ Probe 50W-5kW Impedance measurement
tool
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</TABLE>
DIRECT CURRENT PRODUCTS
THE MDX SERIES. The Company's MDX series of products was introduced in
1983. These products are most commonly used as DC power supplies for PVD
sputtering where precise control, superior arc prevention and suppression and
low stored energy characteristics are required. They are also used as bias
supplies for RF sputtering, tool coating and some etching systems. The MDX
series consists of six different product lines that provide a range of power
levels from 500 W to 120 kW. The Company's second generation product, the MDX
II, was introduced in 1991 to support higher power levels and to meet strict
European regulatory requirements. A lower cost model in the MDX series, the
MDX-L, was introduced in 1992.
THE PINNACLE SERIES. The Pinnacle series, introduced in 1995, is the
most recent product line in the MDX series. Pinnacle was developed primarily
for use in DC PVD sputtering processes and provides substantial improvements
in arc prevention, arc suppression capability, reduced size, higher precision
and expanded control capability.
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SPARC-LE ACCESSORIES. The Company's SPARC-LE line of DC accessories,
introduced in 1993, is designed both to reduce the number of arcs that occur
in plasma-based processes and to reduce the arc energy if arcs do occur. The
SPARC-LE accessories are especially effective in applications involving the
deposition of insulative materials where the reaction between the plasma and
target is likely to produce more severe arc conditions. The SPARC-LE
accessories are most commonly used with the MDX product lines. The SPARC-LE
arc prevention and suppression technology has been incorporated directly into
the Pinnacle systems.
LOW AND MID-FREQUENCY PRODUCTS
THE PE AND PD SERIES. The PE low frequency power systems were
introduced in 1982. The PE series systems are air cooled and primarily
intended for use in certain PVD, CVD and industrial surface modification
applications, including dual cathode sputtering and printed circuit board
de-smearing. The PE series systems range in frequency from 25kHz to 100kHz.
The low frequency PE systems and the PD series of mid-frequency power
conversion and control systems, introduced in 1990, represented significant
technological advancements by applying switchmode techniques to higher
frequencies. The water-cooled PD systems are used primarily in semiconductor
etch and CVD applications. The PD series range in frequency from 275kHz to
400kHz. Both the PE and PD series systems have single-stage power generation,
and include systems that incorporate pulsed power technology.
RADIO FREQUENCY PRODUCTS
THE RF SERIES. The RFX system is a 13.56MHz, 600W, air-cooled platform
introduced in 1985. This system is used primarily in research and development
applications. The RFG and RFXII, introduced in 1991 and 1992, respectively,
are water-cooled power conversion and control systems utilizing a new
hybrid-based switchmode technology. The RFG and RFXII systems operate at
frequencies ranging from 4MHz to 13.56MHz. These systems were the first
entirely switchmode-based RF designs. The RF systems are most commonly used
in semiconductor processes, including RF sputtering, plasma
etching/deposition, and reactive ion etching applications. The RFXII is a
compact system which incorporates new impedance matching technology. This
technology eliminates certain previously required motors, gear trains,
variable capacitors and inductors and servomechanism circuitry, which results
in cost savings and improvements in reliability.
THE ID SERIES. The ID power conversion and control systems, introduced
in 1981, were the first products designed by the Company. These systems were
specifically designed to power broad beam ion-sources. ID series systems are
composed of a coordinated set of multiple special purpose power supplies that
are used for ion-beam deposition and sputtering, ion implantation and
ion-beam etching and milling.
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THE AZX SERIES. The AZX series tuners are RF matching networks designed
as accessories to match the complex electrical characteristics of a plasma to
the requirements of the Company's RF series of power conversion and control
systems. AZX tuners, introduced in 1989, are also sold separately for
incorporation into other vendor's power conversion and control systems. The
AZX tuners typically operate at a 13.56MHz frequency range. The need for
these tuner products is reduced with the advent of the Matchless technology
designed into the RFXII system.
THE RFZ IMPEDANCE PROBE. The RF impedance probe, introduced in 1993, is
used for measuring the RF properties of a plasma. The sensing technology
incorporated in the RF impedance probe allows accurate, real-time measurement
of power, voltage, current and impedance levels under actual powered process
conditions.
MARKETS AND CUSTOMERS
MARKETS
Approximately 60% of the Company's sales in 1995 and 61% in 1996 were to
the semiconductor equipment industry. Increasingly, the Company's power
conversion and control systems are also being used in other markets,
including flat panel display, data storage and various industrial
applications. The following is a discussion of the major markets for the
Company's systems:
SEMICONDUCTOR MANUFACTURING EQUIPMENT MARKET. The Company's products
are sold primarily to semiconductor equipment manufacturers for incorporation
into equipment used to make integrated circuits. The Company's products are
currently employed in a variety of applications, including deposition, etch,
ion implantation and megasonic cleaning. The precision control over plasma
processes afforded by the use of the Company's power conversion and control
systems allows its customers to manufacture semiconductor fabrication systems
that produce integrated circuits with reduction feature size and increased
speed and performance. The Company anticipates that the semiconductor
industry will continue to be a substantial part of its business for the
foreseeable future.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT MARKET. The Company also
sells its systems to manufacturers of flat panel displays (FPDs) and flat
panel projection devices (FPPs), both of which have fabrication processes
similar to those employed in manufacturing integrated circuits. FPDs produce
bright, sharp, large, color-rich images on flat, lightweight screens, such as
portable computer monitors. Currently, there are three major types of FPDs:
liquid crystal displays, field emitter displays and gas plasma displays. Two
types of FPP, another emerging display technology, are currently in
production: liquid crystal projection and digital micro-mirror displays. The
Company sells its products to all three of the active FPD markets, as well as
to each of the FPP markets.
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DATA STORAGE MANUFACTURING EQUIPMENT MARKETS. The Company's products
are sold both to data storage equipment manufacturers and to data storage
device manufacturers for use in producing a variety of products, including
compact discs, computer hard disks (both media and thin film heads), CD-ROMs
and digital video discs. These products use a PVD sputtering process to
produce optical and magnetic thin film layers, as well as a protective wear
layer. In this market the trend towards higher recording densities is driving
the demand for increasingly dense, thinner and more precise films. The use of
equipment incorporating magnetic media to store analog and digital data
continues to expand with the growth of the laptop, desktop, and workstation
computer markets.
INDUSTRIAL MARKETS. The Company sells its products to both OEMs and
producers of end products in a variety of industrial markets. Thin films for
optical purposes are used in the manufacture of many industrial products,
including solar panels, architectural glass, eyeglasses, lens coatings,
bar-code readers and front surface mirrors. Thin films of diamond coatings
and other materials are now being applied to products in plasma-based
processes to strengthen and harden surfaces on such diverse products as
tools, automotive parts and hip joint replacements. A variety of industrial
packaging applications, such as decorative wrapping and food packaging, are
also enabled by thin film processes utilizing the Company's products. The
advanced thin film production processes allow precise control of various
optical and physical properties, including color, transparency and electrical
and thermal conductivity. The improved adhesion and high film quality
resulting from plasma processing makes it the preferred method of applying
the thin films. Many of these industrial applications require power levels
substantially greater than those used in the Company's other markets.
APPLICATIONS
The Company's products have been sold for use in connection with the
following processes and applications:
<TABLE>
SEMICONDUCTOR DATA STORAGE FLAT PANEL DISPLAY INDUSTRIAL/RESEARCH
- ------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
PVD (Metal) Thin film heads Liquid crystal displays Optical coatings
Etch CD-ROMs Active matrix LCDs Automobile coatings
PECVD (Metal) Audio discs Digital micro-mirror Food package coatings
Ion implantation Recordable CDs Plasma displays Glass coatings
CVD Hard disk magnetic Large flat panel displays Consumer products coatings
layers
PECVD (dielectrics) Field emission displays Circuit board etch-back
Hard disk carbon wear and de-smear
Magnet field controls coatings LCD projection
Photo voltaics
Photo resist stripping Magneto-optic CDs
Medical applications
Megasonic cleaning Digital video discs
Superconductors
Etch (post-treatment) Diamond coatings
Chemical, physical and
materials research
</TABLE>
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CUSTOMERS
The Company has sold its systems worldwide to more than 100 OEMs and
directly to more than 500 end-user customers. Since inception, the Company
has sold more than 58,000 power conversion and control systems. The Company's
largest customers are involved principally in the semiconductor market. The
Company also has significant customers in the data storage, flat panel
display and industrial markets. Sales to Applied Materials and Lam Research
in 1994, 1995 and 1996 accounted in the aggregate for approximately 38%, 41%
and 47% of total sales, respectively. The Company expects that sales of its
products to Applied Materials and Lam Research will continue to account for a
high percentage of its sales in the foreseeable future. Representative
customers of the Company include:
Applied Materials Lam Research
Balzers/Leybold Materials Research
CVC Products Motorola
First Light Technology Novellus
Fujitsu Optical Coating Laboratory
Hewlett Packard Sony
IBM Sputtered Films
Intevac Texas Instruments
Komag Ulvac
Verteq
MARKETING, SALES AND SERVICE
The Company sells its systems primarily through direct sales personnel to
customers in the United States, Japan and Europe. The Company's sales personnel
are located at the Company's headquarters in Fort Collins, Colorado, and in
regional sales offices in Milpitas, California; Concord, Massachusetts; and
Austin, Texas. To serve customers in Asia and Europe, the Company has offices in
Tokyo, Japan; Bicester, United Kingdom; and Filderstadt, Germany; which have
primary responsibility for sales and service in their respective markets. The
Company also sells to customers in Japan through Landmark Technology Corporation
and has distributors and sales representatives in France, Italy, Israel, Korea
and Taiwan.
Sales outside the United States represented approximately 32%, 29% and
24% of the Company's total sales during 1994, 1995 and 1996, respectively.
The Company expects sales outside the United States to continue to represent
a significant portion of future sales. Although the Company has not
experienced any significant difficulties in connection with its international
sales, such sales are subject to certain risks, including exposure to
currency fluctuations, the imposition of governmental controls, political and
economic instability, trade restrictions, changes in tariffs and taxes, and
longer payment cycles typically associated with international sales. The
future performance of the Company will depend, in part, upon its ability to
compete successfully in Japan, one of the largest markets for semiconductor
fabrication equipment and flat panel display
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equipment, and a major market for data storage and other industrial equipment
utilizing the Company's systems. The Japanese market has historically been
difficult for non-Japanese companies to penetrate. Although the Company and a
number of its significant non-Japanese customers have begun to establish
operations in Japan, there can be no assurance that the Company or its
customers will be able to maintain or improve their competitive positions in
Japan.
The Company believes that customer service and technical support are
important competitive factors and are essential to building and maintaining
close, long-term relationships with its customers. The Company maintains
customer service offices in Fort Collins, Colorado; Milpitas, California;
Tokyo, Japan; Seoul, South Korea; and Filderstadt, Germany.
The Company offers warranty coverage for its systems for periods ranging
from 12 to 24 months after shipment against defects in design, materials and
workmanship.
BACKLOG
A substantial and increasing portion of the Company's shipments are made
on a "just-in-time" basis, which requires the shipment of systems by the
Company within a few days or hours after an order is received. The Company
schedules production for "just-in-time" customers based on forecasts
provided by such customers. Due to the short time between the receipt of
orders from such "just-in-time" customers and shipments, the Company operates
with a level of backlog which is not at any point in time sufficient to meet
the Company's revenue expectations for a particular quarter. In addition,
orders from the Company's other customers are subject to cancellation or
delay by the customer without penalty. Due to these factors, the Company does
not believe that backlog is a meaningful or accurate indicator of its future
sales and performance.
MANUFACTURING
The Company's manufacturing facility is located in Fort Collins,
Colorado. The Company's manufacturing activities consist of the assembly and
testing of components and subassemblies which are then integrated into final
products. Once final testing of all electrical and electro-mechanical
subassemblies is completed, the final product is tested in a burn-in process
to identify product failures. The Company purchases a wide range of
electronic, mechanical, and electrical components, some of which are designed
to the Company's specifications. The Company does outsource some of its
subassembly work.
The Company relies on sole and limited source suppliers for certain
parts and subassemblies. This reliance creates a potential inability to
obtain an adequate supply of required components, and reduced control over
pricing and time of delivery of components. An inability to obtain adequate
deliveries or other circumstances that would
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require the Company to seek alternative sources of supply or to manufacture
such components or subassemblies internally, either of which might require
the Company to redesign its systems to accommodate the different components
or subassemblies, could prevent the Company from shipping its systems to its
customers on a timely basis. The Company believes that alternative sources
could be obtained and qualified, if necessary, for sole and limited source
parts. However, if the Company were forced to seek alternative sources of
supply or to manufacture such components or subassemblies internally, it may
be required to redesign its systems, which could prevent the Company from
shipping its systems to its customers on a timely basis.
INTELLECTUAL PROPERTY
The Company has a policy of seeking patents on inventions governing new
products or technologies as part of its ongoing research, development, and
manufacturing activities. The Company holds ten United States patents
covering various aspects of its products, and has applied for patents in
Europe and Japan. The Company believes the duration of its patents generally
exceeds the life cycles of the technologies disclosed and claimed therein. No
assurance can be given that the Company's patents will be sufficiently broad
to protect the Company's technology, nor that any existing or future patents
will not be challenged, invalidated or circumvented, or that the rights
granted thereunder will provide meaningful competitive advantages to the
Company. Any of such events could have a material adverse effect on the
Company's business, financial condition and results of operations.
Although the Company is not aware of any infringement by its products of
any patents or proprietary rights of others, there can be no assurance that
such infringements do not exist or will not occur in the future. Litigation
may be necessary in the future to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
scope and validity of the proprietary rights of others. Any such litigation
could result in substantial cost and diversion of effort by the Company,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent
the Company from manufacturing or selling its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The markets the Company serves are highly competitive and characterized
by rapidly evolving technology. Significant competitive factors in the
Company's markets include product performance, price, quality and reliability
and level of customer service and
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support. The Company believes that it currently competes effectively with
respect to these factors, although there can be no assurance that the Company
will be able to compete effectively in the future.
The markets in which the Company competes have seen an increase in
global competition, especially from Japanese-based and European-based
equipment vendors. The Company has several foreign and domestic competitors
for each of the DC, low-frequency and mid-frequency AC, and radio frequency
AC lines of products. Some of these competitors are larger and have greater
resources than the Company. The Company's ability to continue to compete
successfully in these markets will depend upon its ability to introduce
product enhancements and new products on a timely basis. The Company's
primary competitors are ENI, a subsidiary of Astec (BSR) PLC, Huttinger,
Shindingen, Kyosan, RF Power Products, Comdel and Daihen. The Company's
competitors in each product area are expected to continue to improve the
design and performance of their systems and to introduce new systems with
competitive performance characteristics. To remain competitive, the Company
believes it will be required to maintain a high level of investment in
research and development and sales and marketing. No assurance can be given
that the Company will continue to be competitive in the future.
INDUSTRY SEGMENTS
The Company operates entirely within one industry sector.
RESEARCH AND DEVELOPMENT
The market for power conversion and control systems and related
accessories is characterized by rapid technological changes. The Company
believes that continued and timely development of new products and
enhancements to existing products to support OEM requirements is necessary
for the Company to maintain a competitive position in the markets the Company
serves. Accordingly, the Company devotes a significant portion of its
personnel and financial resources to research and development projects and
seeks to maintain close relationships with its customers and other industry
leaders to remain responsive to their product requirements.
Research and development expenses were approximately $5.8 million, $10.5
million and $13.8 million in fiscal 1994, 1995 and 1996, respectively. These
amounts represented 11.3%, 11.1% and 13.9% of total sales for those periods.
From 1994 to 1996, the Company introduced more than sixty-five new products.
The Company believes that continued research and development investment is
essential to ongoing development of new products and does not expect any
significant decline in spending as a percentage of sales.
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NUMBER OF EMPLOYEES
At December 31, 1996, the Company had a total of 630 employees, of whom
600 are full-time continuous employees. None of the Company's employees is
represented by a union, and the Company has never experienced a work
stoppage. The Company utilizes temporary employees as a means to provide
additional staff while reviewing the performance of the temporary employee.
The Company considers its employee relations to be good.
EFFECTS OF ENVIRONMENTAL LAWS
The Company is subject to federal, state and local environmental laws and
regulations. The Company is in compliance with all such laws and regulations.
CAUTIONARY STATEMENTS - RISK FACTORS
In the interest of providing the Company's shareholders and potential
investors with certain Company information, including management's assessment
of the Company's future potential, certain statements set forth herein
contain or are based on projections of revenue, income, earnings per share
and other financial items or relate to management's future plans and
objectives or to the Company's future economic performance. Such statements
are "forward-looking statements" within the meaning of Section 27A(i) of the
Securities Act of 1933, as amended, and in Section 21E(i) of the Securities
Exchange Act of 1934, as amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with
absolute certainty. Accordingly, shareholders and potential investors are
hereby cautioned that certain events or circumstances could cause actual
results to differ materially from those projected or predicted herein. In
addition, the forward-looking statements herein are based on management's
knowledge and judgment as of the date hereof, and the Company does not
intend to update any forward-looking statements to reflect events occurring
or circumstances existing hereafter.
In particular, the Company believes that the following factors could
impact forward-looking statements made herein or in future written or oral
releases and by hindsight, prove such statements to be overly optimistic and
unachievable.
VOLATILITY OF THE SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES
Approximately 60% of the Company's sales in 1995 and 61% in 1996 were
made to OEMs and other customers in the semiconductor equipment industry. The
Company expects that its business will continue to depend in significant part
on the semiconductor
15
<PAGE>
and semiconductor equipment industries for the foreseeable future. The
Company's business depends in large part upon capital expenditures by
manufacturers of semiconductor devices, which in turn depends upon the
current and anticipated market demand for semiconductor devices and products
utilizing such devices. The semiconductor industry historically has been
volatile and has experienced periods of oversupply, resulting in
significantly reduced demand for semiconductor fabrication equipment. There
can be no assurance that the growth in the semiconductor and semiconductor
equipment industries, or the resulting growth in the Company's business, can
be sustained or that there will not be a downturn or slowdown in any of such
markets which could have a material adverse effect on the Company's business,
financial condition and results of operations.
CUSTOMER CONCENTRATION
Sales to Applied Materials and Lam Research, the two leading domestic
manufacturers of semiconductor fabrication equipment, together accounted for
approximately 41% and 47% of the Company's revenues during 1995 and 1996,
respectively. The Company expects that sales of its systems to Applied
Materials and Lam Research will continue to account for a high percentage of
its sales in the foreseeable future. The loss of any of its major customers,
particularly Applied Materials or Lam Research, or a reduction in orders from
any of such customers, including reductions caused by changes in a customer's
competitive position or economic conditions in the industries in which the
Company's customers compete, could have a material effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON DESIGN WINS
The Company believes that design wins are critical to retaining existing
customers and to obtaining new customers. Generally an equipment manufacturer
selects a power conversion and control system for each of its systems and
products. Because power conversion and control systems vary in
characteristics such as power, dimensions and modes of interfacing with the
customer's equipment, once a power conversion and control system is selected
for use in a particular system or product, it is unlikely that it will be
displaced during the life of that system or product. As a result, the
Company's failure to achieve design wins for semiconductor fabrication and
other equipment could have a material and prolonged adverse effect on the
Company's sales and growth.
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW SYSTEM INTRODUCTION
The market for power conversion and control systems is characterized by
ongoing technological developments and changing customer requirements. The
markets in which the Company's customers compete are also characterized by
continually evolving technology. The Company's success depends upon its
ability to continue to improve existing systems and to develop and introduce
new systems that keep pace with technological advances and adapt to support
its customers' changing needs. There can be no assurance that the Company
will continue to be able to improve its existing systems or
16
<PAGE>
develop new systems that will adequately address the changing needs of its
customers and the marketplace. Even if the Company is able to develop
improved or new systems, there can be no assurance that such systems will be
cost-effective or introduced in a timely manner. Development and introduction
of new systems may involve significant costs that are difficult to forecast.
Failure of the Company to develop or introduce improved systems and new
systems in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations, as well as
on its customer relationships.
COMPETITION
The Company faces substantial competition, primarily from established
companies, some of which have greater financial, marketing and technical
resources than the Company. The Company expects its competitors to continue
to develop new products aimed at applications currently served by the
Company, to continue to improve the design and performance of their systems,
and to introduce new systems with competitive performance characteristics. To
remain competitive, the Company believes it will be required to maintain a
high level of investment in research and development and sales and marketing.
There can be no assurance that the Company will have sufficient resources to
continue to make such investments or that the Company will be able to make
the technological advances necessary to maintain its competitive position. In
addition, new products developed by competitors could make pricing more
competitive, which may necessitate significant price reductions by the
Company or result in lost orders, either of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
MANAGEMENT OF GROWTH
The Company is experiencing a period of rapid growth and expansion, which
has placed, and is expected to continue to place, significant demands on the
Company's resources. The management of such growth will require the Company
to continue to improve and expand its management, operational and financial
systems, procedures and controls, including accounting and other internal
management systems, quality control, delivery and service capabilities. To
accommodate its recent growth, the Company expects to implement in 1997 a new
integrated information management system that will incorporate substantially
all of the Company's internal financial and business systems, procedures and
controls. Any failure to manage growth effectively, including delays or
difficulties implementing the new systems, procedures and controls in a
timely manner and without disruption of the Company's operations, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
17
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of February 28,
1997 are as follows:
NAME AGE POSITION
---- --- --------
Douglas S. Schatz 51 President, Chief Executive Officer and
Chairman of the Board
G. Brent Backman 56 Vice President, Special Projects,
Assistant Secretary and Director
Eric A. Balzer 48 Vice President, Operations
Richard P. Beck 63 Vice President, Chief Financial Officer
and Director
James F. Gentilcore 44 Vice President, Sales and Marketing
Timothy A. Kerr 36 Vice President, Engineering
Susan C. Schell 47 Vice President, Human Resources and
Corporate Quality
Richard A. Scholl 57 Vice President and Chief Technology
Officer
- ----------------------
Douglas S. Schatz is a co-founder of the Company and has been its
President and Chief Executive Officer and a director since its incorporation
in 1981. Mr. Schatz also co-founded Energy Research Associates, Inc. and
served as its Vice President of Engineering from 1977 through 1980. Prior to
co-founding Energy Research Associates, Mr. Schatz held various engineering
and management positions at Applied Materials.
G. Brent Backman is a co-founder of the Company and has been a Vice
President and a director of the Company since its incorporation in 1981. Mr.
Backman became Vice President, Special Projects in 1994. Prior to co-founding
Advanced Energy, Mr. Backman was a Business Manager at Ion Tech, Inc. and a
Laboratory Administrator at Hughes Aircraft Company.
Eric A. Balzer joined Advanced Energy in 1990 as Vice President,
Operations. Prior to joining the Company, Mr. Balzer was Materials and
Manufacturing Manager for the Systems Technology Division of IBM Corporation.
Richard P. Beck joined Advanced Energy in 1992 as Vice President and
Chief Financial Officer. He became a director of the Company in 1995. From
1987 to 1992, Mr. Beck served as Executive Vice President and Chief Financial
Officer of Cimage Corporation, a computer software company. Mr. Beck is also
a director of Target Financial, Inc., a privately-held financial services
company.
James F. Gentilcore joined the Company in 1996 as Vice President, Sales
and Marketing. Prior to joining the Company, Mr. Gentilcore was Vice
President, Marketing at MKS Instruments.
18
<PAGE>
Timothy A. Kerr joined the Company in 1987 as an engineer in the DC
products group and in 1995 became Director of Engineering. Prior to joining
the Company, Mr. Kerr was a member of the technical staff at Hughes Aircraft
Company.
Susan C. Schell joined Advanced Energy in 1984 as Human Resources Manager
and became Vice President, Human Resources and Corporate Quality in 1991.
Prior to joining the Company, Ms. Schell was a Management Advisory Services
Consultant with Cady and Company, P.C.
Richard A. Scholl joined Advanced Energy in 1988 as Vice President,
Engineering. Mr. Scholl became Chief Technology Officer of the Company in
1995. Prior to joining the Company, Mr. Scholl was General Manager, Vacuum
Products Division at Varian Associates, Inc.
ITEM 2. PROPERTIES
The Company's headquarters are located in Fort Collins, Colorado, in
approximately 135,000 square feet of leased space. The Company also maintains
sales and service offices in Milpitas, California; Tokyo, Japan; Filderstadt,
Germany; and Seoul, South Korea; and sales offices in Concord, Massachusetts;
Austin, Texas; and Bicester, United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings in the ordinary
course of its business to the best of its knowledge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
19
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
Prior to November 17, 1995, there had been no public market for the
Company's Common Stock. The Common Stock was approved for quotation on the
NASDAQ Stock Market under the symbol AEIS, beginning November 17, 1995. At
January 31, 1997, the number of common stockholders of record was 509.
The range of high and low bid quotations for the Company's Common Stock
as quoted (without retail markup or markdown and without commissions) on the
NASDAQ Stock Market since its initial public offering is provided below.
They do not necessarily represent actual transactions:
High Bid Low Bid
-------- -------
1995 Fiscal Year
----------------
Fourth Quarter
(from November 17) 11 8 1/4
1996 Fiscal Year
----------------
First Quarter 10 6 1/2
Second Quarter 9 1/8 5 3/4
Third Quarter 7 3/4 4 1/2
Fourth Quarter 7 1/4 2 7/8
The Company has not declared or paid any cash dividends on its capital
stock since it terminated its election to be treated as an S corporation for
tax purposes, effective January 1, 1994. The Company currently intends to
retain all future earnings to finance its business. Accordingly, the Company
does not anticipate paying cash or other dividends on its Common Stock in the
foreseeable future. Furthermore, the Company's revolving credit facility
prohibits the declaration or payment of any cash dividends on the Common
Stock.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, the Company's 1996
Consolidated Financial Statements and notes thereto and the discussion
thereof included elsewhere in this Form 10-K. The selected consolidated
statements of operations for the years ended December 31, 1994, 1995 and 1996
and the related consolidated balance sheet data as of and for the years ended
December 31, 1995 and 1996 derived from consolidated financial statements
have been audited by Arthur Andersen LLP, independent accountants, whose
report with respect thereto is included elsewhere in this Form 10-K. The
selected consolidated statements of operations data for the years ended
December 31, 1992 and 1993, and the related consolidated balance sheet data
as of December 31, 1992, 1993 and 1994 have been derived from audited
consolidated financial statements of the Company not included in this Form
10-K.
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.......................... $98,852 $94,708 $51,857 $31,577 $23,950
Gross profit................... 36,814 45,394 25,814 15,248 11,609
Total operating expenses....... 28,603 23,916 15,811 11,547 11,034
Income from operations......... 8,211 21,478 10,003 3,701 575
Net income..................... $ 5,144 $13,281 $ 5,963 $ 3,417 $ 301
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income per share........... $ 0.24 $ 0.69 $ 0.32
Pro forma net income(1)........ $ 2,054 $ 183
------- -------
------- -------
DECEMBER 31,
-----------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital................ $35,179 $33,749 $ 7,773 $ 3,587 $ 2,849
Total assets................... 56,031 55,319 23,149 13,389 9,310
Total debt..................... 2,051 2,484 9,946 8,459 2,680
Stockholders' equity........... 46,496 41,087 7,218 1,011 4,025
- ---------------
(1) In 1992 and 1993, the Company was treated as an S corporation for tax
purposes. The Company terminated its election to be treated as an
S corporation effective as of January 1, 1994. Pro forma information
assumes federal, state and foreign income tax rates aggregating 40.0%.
See Note 9 of Notes to Consolidated Financial Statements.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company designs, manufactures, markets and supports power conversion
and control systems used in industrial processes. The Company's systems are
key elements in products that utilize gaseous plasmas to deposit or etch thin
film layers on materials or substrates such as silicon, glass and metals. The
Company commenced operations in 1981 and has been profitable each year since
its inception. The Company markets and sells its systems primarily to
original equipment manufacturers (OEMs) of semiconductor, flat panel display,
data storage and other industrial thin film manufacturing equipment. A
substantial and increasing proportion of the Company's sales are made on a
"just-in-time" basis in which the shipment of systems occurs within a few
days or hours after an order is received. The Company recognizes revenues,
which are derived from the sales of power conversion and control systems,
upon shipment of its systems.
The semiconductor equipment industry accounted for approximately 60% of
the Company's sales in 1995 and 61% in 1996. The Company has benefited from
strong growth in the semiconductor industry in recent years until the
industry growth slowed in mid-1996. The two largest customers of the Company
are also the largest domestic semiconductor equipment manufacturers. The
Company has also experienced growth in sales to the other industries it
serves during the last three years, with the exception of a decline in sales
to the flat panel display industry in 1996, primarily in Japan. The future
success of the Company depends on continued growth of the semiconductor
equipment industry, data storage industry, flat panel display industry, and
other industries requiring thin film manufacturing processes. To date, the
Company has been successful in achieving a number of "design wins" which have
resulted in the Company obtaining new customers and solidifying relationships
with its existing customers. The Company believes that its ability to
continue to achieve design wins with existing and new customers will be
critical to its future success.
In response to the high rate of growth in 1994 and 1995 and anticipated
growth during 1996, the Company made substantial investments in
infrastructure such as information technology, facilities, sales and support
worldwide in 1996, which caused operating expenses to increase. This,
combined with the slower growth in the semiconductor industry, resulted in
reduced operating margins in 1996. Margins are not expected to improve until
the semiconductor equipment industry rebounds and returns to growth more in
line with historical experience.
During the third quarter, the Company announced cost containment
measures in response to recent declines in orders to the semiconductor
capital equipment market. As part of these measures, the Company reduced
headcount by 7%, reduced leased facilities
22
<PAGE>
by 7%, initiated a 10% decrease in senior management salaries and reevaluated
inventories for excess and obsolete parts. These efforts resulted in
additional charges of $350,000 related to severance pay, charges associated
with subleasing facilities and an increased provision for excess inventories.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of sales:
YEARS ENDED DECEMBER 31,
----------------------------
1996 1995 1994
------ ------ ------
Sales................................... 100.0% 100.0% 100.0%
Cost of sales........................... 62.8 52.1 50.2
------ ------ ------
Gross margin............................ 37.2 47.9 49.8
------ ------ ------
Operating expenses:
Research and development.............. 13.9 11.1 11.3
Sales and marketing................... 8.7 6.5 9.0
General and administrative ........... 6.3 7.6 10.2
------ ------ ------
Total operating expenses................ 28.9 25.2 30.5
------ ------ ------
Income from operations.................. 8.3 22.7 19.3
Other income (expense).................. 0.1 (0.4) (0.6)
------ ------ ------
Income before income taxes.............. 8.4 22.3 18.7
Provision for income taxes.............. 3.2 8.3 7.2
------ ------ ------
Net income.............................. 5.2% 14.0% 11.5%
------ ------ ------
------ ------ ------
SALES
Sales were $51.9 million, $94.7 million and $98.9 million in 1994, 1995
and 1996, respectively, representing an increase of 82% from 1994 to 1995 and
4% from 1995 to 1996. The Company's sales growth during all periods presented
has resulted from the increased unit sales of the Company's systems. A
significant part of this growth during 1996 is attributable to increased
sales to domestic customers and to customers in Europe, offset by a 46%
decrease in Japan sales when compared to 1995. In 1995 the Company sold
subsystems in Japan to replace subsystems originally provided by competitors.
That retrofit program was completed in 1995. A substantial portion of the
Company's sales growth since 1994 is attributable to higher system sales to
the Company's two largest customers, both of whom are primarily semiconductor
equipment OEMs.
Sales to international customers, primarily in Japan, Asia and Europe,
were approximately $16.7 million, $27.3 million, and $24.0 million in 1994,
1995 and 1996, respectively. These amounts represented 32%, 29% and 24% of
sales for those periods. During these periods, sales in Japan were primarily
to flat panel display and data storage equipment manufacturers and sales in
Europe were primarily to data storage equipment manufacturers.
23
<PAGE>
GROSS MARGIN
The Company's gross margins during the periods presented have varied in
the range of 37.2% to 49.8%. Gross margin of 49.8% in 1994 and 47.9% in 1995
decreased to 37.2% in 1996. Major factors causing the decrease in gross
margin from 1995 to 1996 were generally higher material costs and other costs
associated with continued outsourcing efforts in the first half of 1996, and
underabsorption of manufacturing overhead due to lower sales in the second
half of 1996. Sales for the first six months of 1996 were $57.0 million
versus sales of $43.0 million in the comparable period in 1995, an increase
of 33%, while sales in the last six months of 1996 were $41.9 million versus
sales of $51.7 million for the comparable period in 1995, a decrease of 19%.
Additionally, gross margin was negatively impacted throughout 1996 by a shift
in product mix toward products on which material costs increased as a
percentage of sales and by increased customer service costs, which increased
as a percentage of sales, as a result of the lower sales base.
During the periods presented, the average selling price per unit has
remained relatively constant. Historically, price competition has not had a
material effect on margins. However, competitive pressures may produce a
decline in average selling prices for certain products. Any material decline
in average selling prices not offset by reduced costs could result in a
material decline in the Company's gross margins.
The Company provides warranty coverage for its systems ranging from 12
to 24 months. The Company estimates the anticipated costs of repairing its
systems under such warranties based on the historical average costs of the
repairs. To date, the Company has not experienced significant warranty costs
in excess of its recorded reserves.
RESEARCH AND DEVELOPMENT
The Company's research and development costs are associated with
researching new technologies, developing new products and improving existing
product designs. Research and development expenses were $5.8 million, $10.5
million and $13.8 million for 1994, 1995 and 1996, respectively, representing
an increase of 81% from 1994 to 1995 and 31% from 1995 to 1996. As a
percentage of sales, research and development expenses decreased from 11.3%
in 1994 to 11.1% in 1995 and increased to 13.9% in 1996. The increase in
expenses from 1995 to 1996 are primarily associated with increases in payroll
costs and outside service costs incurred to support new product development
and standards compliance certification.
The Company believes that continued research and development investment
is essential to ongoing development of new products and does not expect any
significant decline in spending as a percentage of sales. Since inception,
all research and development costs have been internally funded and expensed.
24
<PAGE>
SALES AND MARKETING
Sales and marketing expenses support domestic and international sales
and marketing activities which include personnel, trade shows, advertising,
and other marketing activities. Sales and marketing expenses were $4.7
million, $6.2 million and $8.6 million for 1994, 1995 and 1996, respectively.
This represented a 32% increase from 1994 to 1995 and a 39% increase from
1995 to 1996. The increases are attributable to increases in payroll,
promotional materials, advertising, commissions and travel costs associated
with expansion to support the increase in sales volume. As a percentage of
sales, these expenses decreased from 9.0% in 1994 to 6.5% in 1995 and
increased to 8.7% in 1996. The increase of sales and marketing as a
percentage of sales during 1996 was attributed to a lower than anticipated
sales base achieved during the period.
The Company is reorganizing its sales and marketing team to better
address the specific needs of its customers. To accomplish this, the Company
hired a vice president of sales, marketing and customer support, and opened a
new support office in South Korea. As a result, sales and marketing expenses
may continue to increase as a percentage of sales in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses support the worldwide financial,
administrative, information systems and human resources functions of the
Company. General and administrative expenses were $5.3 million, $7.2 million
and $6.3 million which represented 10.2%, 7.6% and 6.3% of sales for 1994,
1995 and 1996, respectively. The overall decrease as a percentage of sales
from 1994 to 1996 is attributable to the Company's effort to maintain a level
of general and administrative costs that do not increase at the same rate as
sales. Most of the decreases in these costs were recognized in payroll,
recruitment fees, and travel.
The Company is currently implementing information management system
software which will replace existing systems to support its growth. The
Company expects that significant charges related to training and
implementation of the new software will occur during 1997.
OTHER INCOME (EXPENSE)
Other income consists primarily of foreign exchange gains and losses and
other miscellaneous income and expense items. Approximately 60% of the
Company's foreign sales are denominated in local currencies. The Company
recognized a foreign exchange gain of $0.4 million in 1994, primarily due to
increases in the values of both the German Deutsch Mark and the Japanese Yen.
An increase in the value of the Deutsch Mark of 7% and a decrease in the
value of the Yen of 4% resulted in essentially no foreign exchange gain or
loss in 1995. During 1996 the Company recorded a net foreign
25
<PAGE>
exchange loss of $0.4 million primarily as a result of a 12% decrease in the
value of the Yen. During the second half of 1996 the Company entered into
various forward foreign exchange contracts to mitigate the effect of
depreciation in the Japanese Yen. The Company continues to evaluate various
policies to minimize the effect of currency fluctuations.
Interest expense consists principally of borrowings under the Company's
bank credit and capital lease facilities and was approximately $0.6 million,
$0.6 million and $0.2 million for the years 1994, 1995 and 1996,
respectively. Interest expense decreased from 1995 to 1996 primarily as a
result of repayments of equipment loans and less borrowing due to the
availability of working capital provided from the proceeds of the Company's
initial public offering in November 1995.
Interest income was approximately $0.1 million, $0.1 million and $0.5
million for the years 1994, 1995 and 1996, respectively. The increase in 1996
was due primarily to earnings on investments made from the proceeds of the
initial public offering in November 1995.
PROVISION FOR INCOME TAXES
The income tax provision of $7.8 million in 1995 represented a 37.0%
effective tax rate. The income tax provision of $3.2 million for 1996
represented an effective rate of 38.1%. The increase in the Company's tax
rate from 1995 to 1996 is primarily attributed to a higher effective state
tax rate resulting from a larger proportion of the Company's sales being
shipped to higher tax rate jurisdictions, particularly California. Changes
in the relative earnings of the Company and its foreign subsidiaries affect
the Company's consolidated effective tax rate. To the extent that a larger
percentage of taxable earnings are derived from the Company's foreign
subsidiaries whose tax rates are higher than domestic tax rates, the Company
could experience a higher consolidated effective tax rate.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results in dollars and
as a percentage of sales for the eight quarters ended December 31, 1996. The
Company believes that all necessary adjustments, consisting only of normal
recurring adjustments, have been included in the amounts stated below to
present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
26
<PAGE>
<TABLE>
QUARTERS ENDED
--------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1995 1995 1995 1995
-------- -------- --------- -------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........................... $27,166 $29,831 $21,639 $20,216 $18,039 $24,945 $25,554 $26,170
Cost of sales................... 17,035 17,204 15,047 12,752 9,684 12,055 12,734 14,842
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 10,131 12,627 6,592 7,464 8,355 12,890 12,820 11,328
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 3,498 3,645 3,349 3,268 2,064 2,330 2,711 3,416
Sales and marketing........... 2,083 2,248 2,201 2,058 1,307 1,415 1,571 1,908
General and administrative.... 1,725 2,330 933 1,265 1,652 1,962 1,801 1,778
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 7,306 8,223 6,483 6,591 5,023 5,707 6,083 7,102
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.......... 2,825 4,404 109 873 3,332 7,183 6,737 4,226
Other (expense) income.......... (170) (66) 97 232 (103) 199 (562) 73
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes...... 2,655 4,338 206 1,105 3,229 7,382 6,175 4,299
Provision for income taxes...... 982 1,676 83 419 1,232 2,873 2,116 1,583
------- ------- ------- ------- ------- ------- ------- -------
Net income...................... $ 1,673 $ 2,662 $ 123 $ 686 $ 1,997 $ 4,509 $ 4,059 $ 2,716
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net income per share............ $ 0.08 $ 0.12 $ 0.01 $ 0.03 $ 0.11 $ 0.24 $ 0.21 $ 0.13
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Weighted average number of
shares and share equivalents.. 21,794 21,653 21,622 21,728 18,724 19,046 19,170 20,577
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
QUARTERS ENDED
--------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1995 1995 1995 1995
-------- -------- --------- -------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF SALES:
Sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................. 62.7 57.7 69.5 63.1 53.7 48.3 49.8 56.7
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.................. 37.3 42.3 30.5 36.9 46.3 51.7 50.2 43.3
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development.... 12.9 12.2 15.5 16.2 11.4 9.3 10.6 13.1
Sales and marketing......... 7.7 7.5 10.2 10.2 7.2 5.7 6.1 7.3
General and administrative.. 6.3 7.8 4.3 6.2 9.2 7.9 7.0 6.8
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 26.9 27.5 30.0 32.6 27.8 22.9 23.7 27.2
------- ------- ------- ------- ------- ------- ------- -------
Income from operations........ 10.4 14.8 0.5 4.3 18.5 28.8 26.5 16.1
Other (expense) income........ (0.6) (0.3) 0.5 1.2 (0.6) 0.8 (2.3) 0.3
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes.... 9.8 14.5 1.0 5.5 17.9 29.6 24.2 16.4
Provision for income taxes.... 3.6 5.6 0.4 2.1 6.8 11.5 8.3 6.0
------- ------- ------- ------- ------- ------- ------- -------
Net income.................... 6.2% 8.9% 0.6% 3.4% 11.1% 18.1% 15.9% 10.4%
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. The Company's
expense levels are based, in part, on expectations of future revenues. If
revenue levels in a particular quarter do not meet expectations, operating
results may be adversely affected. A variety of factors have an influence on
the level of the Company's revenues in a particular quarter. These factors
include general economic conditions, specific economic conditions in the
industries the Company serves, the timing of the receipt of orders from major
customers, customer cancellations or delay of shipments, specific feature
requests by customers, production delays or manufacturing inefficiencies,
exchange rate fluctuations, management decisions to commence or discontinue
product lines, the Company's ability to design, introduce and manufacture new
products on a cost effective and timely basis, the introduction of new
products by the Company or its competitors, the timing of research and
development expenditures, and expenses related to acquisitions, strategic
alliances, and the further development of marketing and service capabilities.
27
<PAGE>
A substantial portion of the Company's shipments are made on a
"just-in-time" basis in which shipment of systems occurs within a few days or
hours after an order is received. The Company's backlog is not meaningful
because of the importance of "just-in-time" shipments. The Company is
dependent on obtaining orders for shipment in a particular quarter to achieve
its revenue objectives for that quarter. Accordingly, it is difficult for the
Company to predict accurately the timing and level of sales in a particular
quarter. Due to its "just-in-time" program, the Company anticipates quarterly
fluctuations in sales will continue to occur.
The Company's quarterly operating results in 1995 and 1996 reflect
primarily the changing demand for the Company's products during this period,
principally from manufacturers of semiconductor equipment, and the Company's
ability to quickly adjust its manufacturing capacity to meet this demand.
Total sales for the Company increased sequentially from the first quarter of
1995 through the second quarter of 1996, representing increased demands from
semiconductor equipment companies. Demand from the semiconductor equipment
companies, reflecting an overall industry slowdown, dropped significantly in
the third and fourth quarters of 1996, and demand from the data storage
market dropped in the fourth quarter of 1996. Segments of the data storage
industry are cyclical as new manufacturing lines are installed. Both
slowdowns negatively impacted the revenues of the Company in the second half
of 1996. Additionally, sales to the flat panel display industry, primarily in
Japan, were significantly lower throughout 1996 from their 1995 level.
The Company's gross margin fluctuated significantly on a quarterly basis
in 1995 and 1996, primarily reflecting utilization of manufacturing capacity.
Average selling prices remained relatively constant throughout the periods
presented. The Company's gross margin of 46.3% in the first quarter of 1995
was attributable to increased hiring of manufacturing personnel in
anticipation of additional manufacturing capacity becoming available in 1995,
and to costs associated with outsourcing of subassemblies to further increase
manufacturing capacity. In the second and third quarters of 1995, the
Company's gross margin improved to 51.7% and 50.2%, respectively, as the
Company utilized its additional manufacturing capacity. In the fourth quarter
of 1995, the gross margin decreased substantially to 43.3%. This resulted
from increased costs associated with small quantity purchases for parts
required for a design change required by the Company's customers selling to
European users; an increase in personnel to support anticipated demand;
increased costs for outsourced subassemblies; an increase in the
manufacturing organizations' portion of facilities and information systems;
and increased costs associated with the expansion of the customer service
organization. The decrease of gross margin to 37.3% in the first quarter of
1996 was primarily attributable to higher costs associated with outsourcing
assemblies, changes in product mix, and costs associated with expanding into
additional manufacturing facilities. The increase in gross margin to 42.3% in
the second quarter of 1996 resulted from price reductions achieved through
negotiations with the Company's supplier base, a reduction in consigned labor
outsourcing, lower pricing as a result of purchasing negotiations, and a
decision to produce high labor content printed circuit boards in-house.
Additionally, gross margin
28
<PAGE>
was positively impacted by higher revenues than in the first quarter which
resulted in more favorable absorption of manufacturing overhead. The
reduction in gross margin to 30.5% in the third quarter of 1996 was primarily
the result of underabsorbed fixed manufacturing costs from reduced revenue,
as revenues in the third quarter of 1996 were $8.2 million lower than in the
second quarter of 1996, and from higher fixed overhead expenses from expanded
physical capacity. Additionally, gross margin was negatively impacted by a
shift in product mix toward products on which material costs as a percentage
of sales were higher than the previous quarter. Increased customer service
costs, as a percentage of sales also contributed to the lower gross margin.
The improvement of gross margin to 36.9% in the fourth quarter of 1996 was
attributable to a favorable product mix, decreased direct material costs and
decreased customer service costs, each of which decreased as a percentage of
sales, and favorable adjustments resulting from a review of inventory
reserves for excess, obsolete, and revaluation.
The Company's operating expenses increased on a quarterly basis
throughout 1995 and through the first half of 1996. Since the fourth quarter
of 1995, operating expenses have included additional legal and administrative
expenses as a result of being a publicly held company. Additionally, the
Company has expensed costs incurred for consultants used in the
implementation of a new information management system software. The Company
expects expenses related to the implementation of the software to continue
through 1997 as additional phases are implemented, including integration of
the information systems of the Company's international subsidiaries.
Decreases in the second half of 1996 reflect a companywide restructuring and
the implementation of cost containment measures in the third quarter. As a
percentage of sales, operating expenses have declined during periods of rapid
sales growth, when sales increased at a rate faster than the Company's
ability to add personnel and facilities to support the growth, and increased
during periods of flat or decreased sales, when the Company infrastructure is
retained to support anticipated future growth. During the four quarters of
1995 and the first two quarters of 1996, during periods of growth, operating
expenses varied between 23% and 28% of sales. In contrast, operating expenses
as a percentage of sales were 30% and 33%, respectively, for the last two
quarters of 1996, when sales were lower than in the previous five quarters.
Other income (expense) consists primarily of interest income and expense
and foreign currency gain and loss. Net foreign exchange losses of
approximately $0.5 million in the last half of 1995 offset the foreign
exchange gains recognized in the previous two quarters. The net foreign
exchange loss of $0.4 million in 1996 was recognized during the first and
fourth quarters of 1996, with essentially no gain or loss in the second and
third quarter. The Company's provision for income taxes has remained
relatively stable in 1995 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations, acquired
equipment and met its working capital requirements through borrowings under
its revolving line of
29
<PAGE>
credit, long-term loans secured by property and equipment and cash flow from
operations, and, from November 1995, proceeds from its initial public
offering.
Cash provided by operations totaled $3.7 million in 1995, and $3.3
million in 1996. In 1995, substantial increases in inventory and accounts
receivable were more than offset by net income, depreciation and
amortization, and increases in accounts payable, accrued liabilities and
income taxes payable. Major factors contributing to cash provided by
operations in 1996 were net income, depreciation and amortization and
decreases in inventory, partially offset by increases in accounts receivable
and decreases in accounts payable. The Company's accounts receivable
increased from $15.2 million at December 31, 1995 to $16.1 million at
December 31, 1996, reflecting the Company's increased sales during this
period. Inventory decreased from $16.1 million to $14.0 million during the
same period, reflecting the Company's emphasis on improving inventory
management and additions to certain reserves for potentially excess and
obsolete inventory. The Company expects future receivable and inventory
balances to fluctuate with net sales. The Company provides "just-in-time"
deliveries to certain of its customers and may be required to maintain
substantial levels of inventory to satisfy its customers' delivery
requirements.
Investing activities, consisting primarily of equipment acquisitions,
used cash of $3.8 million and $5.1 million in 1995 and 1996, respectively.
Financing activities in 1995, consisting primarily of net proceeds raised of
$21.2 million from the initial public offering, offset by note and loan
repayments, provided cash of $13.9 million in 1995. In 1996, financing
activities consisted primarily of net proceeds of notes payable to finance
equipment of $1.6 million, offset by repayments of notes payable and capital
lease obligations and used cash of $0.3 million. Long-term loans secured by
property and equipment were $1.6 million in 1995 and $1.5 million in 1996.
The Company plans to spend approximately $3.0 million through 1997 for
the acquisition of equipment and integrated information management system
software, leasehold improvements and furnishings.
As of December 31, 1996, the Company had working capital of $35.2
million. The Company's principal sources of liquidity consisted of $11.2
million of cash and cash equivalents, $10.0 million available under a $10.0
million revolving line of credit that bears interest at prime rate (8.25% at
January 31, 1997) or LIBOR plus 250 basis points. The Company has the option
to convert up to $3.0 million of its revolving line of credit to a 36-month
term loan that would bear interest at prime plus 0.50%. Covenants under the
new line of credit include a minimum ratio of quick assets to current
liabilities of 1.75; a minimum debt service ratio of 2.0; a ratio of debt to
net worth not to exceed 1.0; a minimum tangible net worth of $38 million; and
profitability on a quarterly basis with an allowance for one quarterly loss
up to $0.5 million. In addition, payment of dividends will be prohibited
without the prior written consent of the bank.
30
<PAGE>
The Company entered into an agreement effective October 31, 1996, that
will provide the Company with a $2.5 million line of credit to purchase
equipment, of which $1.5 million was advanced to refinance previous equipment
loans. At December 31, 1996, $1.5 million was outstanding under the term
loan, which bears interest at prime rate plus 0.25% and is due November 5,
1999.
The Company believes that its cash and cash equivalents, cash flow from
operations, and available borrowings will be sufficient to meet the Company's
working capital needs through at least the end of 1997. After that time, the
Company may require additional equity or debt financing to address its
working capital, capital equipment, or expansion needs. There can be no
assurance that additional funding will be available when required or that it
will be available on terms acceptable to the Company.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants.......... 33
Consolidated Balance Sheets as of December 31, 1996 and 1995........... 34
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 and 1994................................................... 36
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995 and 1994...................................... 37
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994................................................... 38
Notes to Consolidated Financial Statements............................. 39
Schedule II -- Valuation and Qualifying Accounts....................... 49
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Advanced Energy Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced
Energy Industries, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 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 financial position of Advanced
Energy Industries, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of
the consolidated financial statements is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Denver, Colorado ARTHUR ANDERSEN LLP
January 31, 1997.
33
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................................... $11,231 $13,332
Accounts receivable --
Trade (less allowances for doubtful accounts of approximately
$242 and $210 at December 31, 1996 and 1995, respectively)..... 15,287 13,540
Related parties................................................. 541 979
Other........................................................... 288 653
Inventories....................................................... 13,976 16,104
Other current assets.............................................. 1,013 663
Deferred income tax assets, net current........................... 1,223 1,031
------- -------
Total current assets.......................................... 43,559 46,302
------- -------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $5,779 and $3,634 at December 31,
1996 and 1995, respectively....................................... 9,500 6,639
------- -------
OTHER ASSETS:
Deposits and other................................................ 1,139 815
Demonstration and customer service equipment, net of
accumulated depreciation of $1,276 and $902 at December 31,
1996 and 1995, respectively...................................... 1,833 1,563
------- -------
2,972 2,378
------- -------
Total assets.................................................. $56,031 $55,319
------- -------
------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
34
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable --
Trade.......................................................... $ 2,253 $ 6,665
Accrued payroll and employee benefits............................. 2,396 2,763
Other accrued expenses............................................ 1,156 749
Customer deposits................................................. 166 113
Accrued income taxes payable...................................... 1,485 1,336
Capital lease obligations, current portion........................ 315 363
Notes payable, current portion.................................... 609 564
------- -------
Total current liabilities....................................... 8,380 12,553
------- -------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion................. 169 494
Notes payable, net of current portion............................. 958 1,063
Deferred income taxes............................................. 28 122
------- -------
1,155 1,679
------- -------
Total liabilities............................................... 9,535 14,232
------- -------
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' EQUITY (Note 1):
Preferred stock, $0.001 par value, 1,000 shares
authorized, none issued and outstanding.......................... -- --
Common stock, $0.001 par value, 30,000 shares authorized;
21,268 and 21,069 shares issued and outstanding, respectively.... 21 21
Additional paid-in capital........................................ 23,075 22,925
Retained earnings................................................. 25,065 19,921
Stockholders' notes receivable.................................... (1,083) (1,083)
Deferred compensation............................................. (82) (130)
Cumulative translation adjustment................................. (500) (567)
------- -------
Total stockholders' equity...................................... 46,496 41,087
------- -------
Total liabilities and stockholders' equity...................... $56,031 $55,319
------- -------
------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
35
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
SALES........................................ $98,852 $94,708 $51,857
COST OF SALES................................ 62,038 49,314 26,043
------- ------- -------
Gross profit............................... 36,814 45,394 25,814
------- ------- -------
OPERATING EXPENSES:
Research and development................... 13,760 10,522 5,849
Sales and marketing........................ 8,590 6,201 4,658
General and administrative................. 6,253 7,193 5,304
------- ------- -------
Total operating expenses................. 28,603 23,916 15,811
------- ------- -------
INCOME FROM OPERATIONS....................... 8,211 21,478 10,003
------- ------- -------
OTHER (EXPENSE) INCOME:
Interest income............................ 455 71 86
Interest expense........................... (168) (612) (643)
Foreign currency (loss) gain............... (351) (7) 389
Other income (expense), net................ 157 155 (132)
------- ------- -------
93 (393) (300)
------- ------- -------
Net income before income taxes........... 8,304 21,085 9,703
PROVISION FOR INCOME TAXES................... 3,160 7,804 3,740
------- ------- -------
NET INCOME................................... $ 5,144 $13,281 $ 5,963
------- ------- -------
------- ------- -------
NET INCOME PER SHARE......................... $ 0.24 $ 0.69 $ 0.32
------- ------- -------
------- ------- -------
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING........ 21,666 19,310 18,605
------- ------- -------
------- ------- -------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
36
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
COMMON STOCK ADDITIONAL STOCKHOLDERS' CUMULATIVE
--------------- PAID-IN RETAINED NOTES DEFERRED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION ADJUSTMENT TOTAL
------ ------ ------- ------- ---------- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993 17,091 $17 $ 119 $ 805 $ -- $ -- $ 70 $ 1,011
Election of C corporation status.... -- -- 58 (58) -- -- -- --
Warrants issued..................... -- -- 1 -- -- -- -- 1
Exercise of stock options for cash.. 202 -- 167 -- -- -- -- 167
Equity adjustment from foreign
currency translation............... -- -- -- -- -- -- 124 124
Acquisition of minority interest.... -- -- 22 (70) -- -- -- (48)
Net income.......................... -- -- -- 5,963 -- -- -- 5,963
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1994........... 17,293 17 367 6,640 -- -- 194 7,218
Equity adjustment from foreign
currency translation............... -- -- -- -- -- -- (761) (761)
Exercise of stock options for cash.. 140 1 124 -- -- -- -- 125
Exercise of stock options in
exchange for stockholders' notes
receivable......................... 1,236 1 1,082 -- (1,083) -- -- --
Deferred compensation on stock
options issued..................... -- -- 142 -- -- (142) -- --
Amortization of deferred
compensation....................... -- -- -- -- -- 12 -- 12
Sale of common stock through
public offering, net of
approximately $2,790 of expenses... 2,400 2 21,210 -- -- -- -- 21,212
Net income.......................... -- -- -- 13,281 -- -- -- 13,281
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1995........... 21,069 21 22,925 19,921 (1,083) (130) (567) 41,087
Equity adjustment from foreign
currency translation............... -- -- -- -- -- -- 67 67
Exercise of stock options for cash.. 199 -- 150 -- -- -- -- 150
Amortization of deferred
compensation....................... -- -- -- -- -- 48 -- 48
Net income.......................... -- -- -- 5,144 -- -- -- 5,144
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1996........... 21,268 $21 $23,075 $25,065 $(1,083) $ (82) $(500) $46,496
------ --- ------- ------- ------- ----- ----- -------
------ --- ------- ------- ------- ----- ----- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
37
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 5,144 $ 13,281 $ 5,963
Adjustments to reconcile net income to
net cash provided by operating activities--
Depreciation and amortization.............. 2,609 1,543 1,052
Provision for deferred income taxes........ (286) (252) (657)
Amortization of deferred compensation...... 48 12 --
Minority interest.......................... -- -- (15)
Loss on disposal of property and
equipment................................. 41 66 113
Changes in operating assets and
liabilities--
Accounts receivable-trade, net........... (1,747) (5,477) (3,291)
Related parties and other receivables.... 803 (889) 147
Inventories.............................. 2,128 (8,907) (3,419)
Other current assets..................... (350) (371) (149)
Deposits and other....................... (324) (225) (316)
Demonstration and customer service
equipment............................... (644) (937) (154)
Accounts payable, trade.................. (4,412) 3,568 1,210
Accrued payroll and employee benefits.... (367) 725 937
Customer deposits and other accrued
expenses................................ 460 149 275
Income taxes payable..................... 149 1,388 (52)
Accrued payments to S corporation
stockholders for income taxes........... -- -- (477)
------- -------- --------
Net cash provided by operating
activities........................... 3,252 3,674 1,167
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net....... (5,137) (3,824) (2,763)
------- -------- --------
Net cash used in investing
activities........................... (5,137) (3,824) (2,763)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable................... 1,606 31,179 23,185
Repayment of notes payable and capital lease
obligations.................................. (2,039) (34,103) (21,581)
Repayment of subordinated notes to
stockholders................................. -- (4,538) (262)
Sale of common stock, net of expenses......... -- 21,212 --
Proceeds from exercise of stock options and
warrants..................................... 150 125 168
Acquisition of minority interest.............. -- -- (48)
------- -------- --------
Net cash (used in) provided by financing
activities................................ (283) 13,875 1,462
------- -------- --------
EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENT..... 67 (761) 124
------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS.................................... (2,101) 12,964 (10)
CASH AND CASH EQUIVALENTS, beginning of period.. 13,332 368 378
------- -------- --------
CASH AND CASH EQUIVALENTS, end of period........ $11,231 $ 13,332 $ 368
------- -------- --------
------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Deferred compensation on stock options
issued..................................... $ -- $ 142 $ --
------- -------- --------
------- -------- --------
Assets acquired with capital lease.......... $ -- $ -- $ 145
-------- -------- --------
-------- -------- --------
Exercise of stock options in exchange for
stockholders' notes receivable............. $ -- $ 1,083 $ --
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................ $ 168 $ 604 $ 618
-------- -------- --------
-------- -------- --------
Cash paid for income taxes.................... $ 3,940 $ 6,668 $ 4,415
-------- -------- --------
-------- -------- --------
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
38
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Advanced Energy Industries, Inc. (the "Company") was incorporated in Colorado
in 1981 and reincorporated in Delaware in 1995. The Company is primarily engaged
in the development and production of power conversion and control systems which
are used by manufacturers of semiconductors and in industrial thin film
manufacturing processes. The Company owns 100% of each of the following
subsidiaries: Advanced Energy Japan, K.K. ("AE-Japan"), Advanced Energy, GmbH
("AE-Germany") and Advanced Energy U.K. Limited ("AE-UK"). Effective January 1,
1994, the Company converted its tax status from being an S corporation to a C
corporation, and acquired the remaining minority interest in each of these
subsidiaries. Additionally, the Company formed Advanced Energy Industries, FSC
("AE-FSC") in 1994.
In September 1995, the Company reincorporated in Delaware with an authorized
capitalization of 30,000,000 shares of common stock, $0.001 par value. Also in
September 1995, the Company approved a three for one share common stock split.
All share and per share data have been retroactively adjusted in the
accompanying consolidated financial statements for the effect of the stock
split. Additionally, the Company also authorized 1,000,000 shares of $0.001 par
value preferred stock.
The Company continues to be subject to certain risks similar to other
companies in its industry. These risks include the volatility of the
semiconductor industry, customer concentration within the industry,
technological changes, dependence on the Japanese market, foreign currency risk
and competition. A significant change in any of these risk factors could have a
material impact on the Company's business.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- For cash flow purposes, the Company considers all
cash and investments with an original maturity of 90 days or less to be cash and
cash equivalents.
INVENTORIES -- Inventories include costs of materials, direct labor and
manufacturing overhead. Inventories are valued at the lower of cost or market,
computed on a first-in, first-out basis.
DEMONSTRATION AND CUSTOMER SERVICE EQUIPMENT -- Demonstration and customer
service equipment are manufactured products utilized for sales demonstration and
evaluation purposes. The Company also utilizes this equipment in its customer
service function as replacement and loaner equipment to existing customers. All
equipment is held for sale.
The Company depreciates the equipment based on its estimated useful life in
the sales and customer service functions. The depreciation is computed based
upon a 3-year life.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost. Additions,
improvements, and major renewals are capitalized. Maintenance, repairs, and
minor renewals are expensed as incurred.
39
<PAGE>
Depreciation is provided using straight-line and accelerated methods over
three to ten years for machinery and equipment. Amortization of leasehold
improvements and leased equipment is provided using the straight-line method
over the life of the lease term or the life of the assets, whichever is shorter.
CONCENTRATIONS OF CREDIT RISK -- The Company's revenues generally are
concentrated among a small number of customers, the majority of which are in the
semiconductor industry. The Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
WARRANTY POLICY -- The Company estimates the anticipated costs of repairing
products under warranty based on the historical average cost of the repairs. The
Company offers warranty coverage for its systems for periods ranging from 12 to
24 months after shipment.
CUMULATIVE TRANSLATION ADJUSTMENT -- The functional currency for the Company's
foreign operations is the applicable local currency.
The Company records a cumulative translation adjustment from translation of
the financial statements of AE-Japan, AE-Germany and AE-UK. This equity account
includes the results of translating all balance sheet assets and liabilities at
current exchange rates as of the balance sheet date, and the statements of
operations at the average exchange rates during the respective year.
The Company recognizes gain or loss on foreign currency transactions which are
not considered to be of a long-term investment nature. The Company recognized a
(loss) gain on foreign currency transactions of $(351,000), $(7,000) and
$389,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
REVENUE RECOGNITION -- The Company recognizes revenue when products are
shipped.
INCOME TAXES -- The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes." In accordance with SFAS No. 109, deferred tax assets and
liabilities are recognized for temporary differences between the tax basis and
financial reporting basis of assets and liabilities, computed at current tax
rates.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE -- Net income per share is
computed based on net income attributable to common stock and the weighted
average number of common and common equivalent shares outstanding during each of
the periods since the Company became a C corporation.
All share and income per share data have been adjusted for all periods to
reflect the three for one split of common shares approved by the Company's
stockholders in September 1995 (Note 1).
ESTIMATES AND ASSUMPTIONS -- The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that affect
the amounts reported and disclosed in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
ACCOUNTING PRONOUNCEMENT -- In March 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of SFAS No. 121 in 1996 did not have a significant impact on the
Company's consolidated financial condition and results of operations.
40
<PAGE>
(3) INITIAL PUBLIC OFFERING
In November 1995, the Company closed on the initial public offering of its
common stock. In connection with the offering, 2,400,000 shares of previously
unissued common shares were sold at a price of $10 per share, providing gross
proceeds of $24,000,000, less $2,790,000 in offering costs.
(4) ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade consisted of the following:
DECEMBER 31,
----------------------
1996 1995
(IN THOUSANDS)
Domestic......................... $ 9,944 $ 8,825
Foreign.......................... 5,585 4,925
Allowance for doubtful accounts.. (242) (210)
------- -------
$15,287 $13,540
------- -------
------- -------
(5) INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
----------------------
1996 1995
------- -------
(IN THOUSANDS)
Parts and raw materials........... $11,149 $11,104
Work in process................... 1,122 1,936
Finished goods.................... 1,705 3,064
------- -------
$13,976 $16,104
------- -------
------- -------
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
----------------------
1996 1995
------- -------
(IN THOUSANDS)
Machinery and equipment........... $ 5,708 $ 3,974
Computers and communication....... 4,793 3,693
Furniture and fixtures............ 1,996 1,211
Vehicles.......................... 140 154
Leasehold improvements............ 2,642 1,241
------- -------
15,279 10,273
Less -- accumulated depreciation.. (5,779) (3,634)
------- -------
$ 9,500 $ 6,639
------- -------
------- -------
Included in the cost of property and equipment above is equipment obtained
through capitalized leases. The net book value of capitalized leased equipment
included in property and equipment above was as follows at December 31, 1996 and
1995:
DECEMBER 31,
----------------------
1996 1995
------- -------
(IN THOUSANDS)
Machinery and equipment............ $243 $426
Computers and communication........ 62 245
Furniture and fixtures............. 14 29
---- ----
$319 $700
---- ----
---- ----
Depreciation of assets acquired under capitalized leases is included in
depreciation expense.
41
<PAGE>
(7) NOTES PAYABLE
<TABLE>
DECEMBER 31,
----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Term loan of $1,500,000, commencing December 5, 1996, principal
is due monthly in thirty-six equal payments of $41,667 plus accrued
interest at bank's prime rate plus 0.25% (8.5% at December 31,
1996). Collateralized by all corporate fixed assets except those
leased. (a)............................................................. $1,458 $ --
Revolving line of credit of $10,000,000, maturing November 5, 1997.
Interest at bank's prime rate or the LIBOR rate plus 0.25%. Loan
covenants provide certain financial restrictions related to working
capital, leverage, net worth and profitability. (b)..................... -- --
Line of credit to purchase equipment of $2,000,000. Interest was due
monthly at the bank's prime rate plus 0.75% (9.25% at December 31,
1995). The final draw period for this line expired on July 31, 1995..... -- 1,560
Other.................................................................... 109 67
------ ------
1,567 1,627
Less -- current portion.................................................. (609) (564)
------ ------
$ 958 $1,063
------ ------
------ ------
</TABLE>
(a) The Company entered into an agreement effective October 31, 1996,
providing a $2.5 million line of credit to purchase equipment. The
Company has the option to convert borrowings to a three year term loan
bearing interest at the bank's prime rate plus 0.25%. During 1996,
the Company borrowed $1,500,000 under the line of credit and converted
this amount to a term loan with a balance of $1,458,000 as of December
31, 1996.
(b) The Company has the option to convert up to $3 million of borrowings
under its $10 million line of credit to a three year term loan bearing
interest at prime plus 0.5%.
Annual maturities of notes payable outstanding at December 31, 1996, described
above are as follows:
(IN THOUSANDS)
Years ended December 31 --
1997.................................. $ 609
1998.................................. 500
1999.................................. 458
------
$1,567
------
------
(8) SUBORDINATED NOTES PAYABLE TO STOCKHOLDERS
Effective December 31, 1993, the Company distributed $4,800,000 of accumulated
earnings of the Company to its majority stockholders in the form of notes
payable. During 1995, the Company repaid the subordinated notes payable through
proceeds received from its initial public offering (Note 3).
(9) INCOME TAXES
Effective January 1, 1994, the Company terminated its status as an S
corporation, electing to be taxed as a C corporation. As of that date, the
Company was required to recognize in income from continuing operations the net
deferred tax assets and liabilities for temporary differences at the date it
became a taxable enterprise. The resulting net deferred tax asset recognized in
income from continuing operations as part of the provision for income taxes for
1994 in the accompanying consolidated financial statements at January 1, 1994
was approximately $446,000.
For the years ended December 31, 1996 and 1995, the provision for income taxes
consists of an amount for taxes currently payable and a provision for taxes
deferred to future periods.
42
<PAGE>
The provision (benefit) for income taxes for the years ended December
31, 1996, 1995 and 1994, is as follows:
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Federal.................................. $2,744 $5,827 $2,534
State and local.......................... 568 918 646
Foreign taxes............................ (152) 1,059 560
------ ------ ------
$3,160 $7,804 $3,740
------ ------ ------
------ ------ ------
Current.................................. $3,446 $8,056 $4,397
Deferred................................. (286) (252) (657)
------ ------ ------
$3,160 $7,804 $3,740
------ ------ ------
------ ------ ------
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1996, 1995 and 1994:
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
Income tax expense per federal statutory rate.. $2,823 $7,397 $3,299
State income taxes, net of federal deduction... 375 596 427
Foreign sales corporation...................... (108) (208) (23)
Nondeductible expenses......................... 77 49 43
Effect of foreign taxes........................ (168) 316 444
Change in tax status from S to C corporation... -- -- (446)
Tax credits.................................... (182) (260) --
Other.......................................... 343 (86) (4)
------ ------ ------
$3,160 $7,804 $3,740
------ ------ ------
------ ------ ------
The Company's deferred income taxes are summarized as follows:
<TABLE>
DECEMBER 31, 1996 CHANGE DECEMBER 31, 1995
----------------- ------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Employee bonuses.................... $ - $(218) $ 218
Warranty reserve.................... 175 98 77
Bad debt reserve.................... 75 17 58
Vacation accrual.................... 326 (34) 360
Obsolete and excess inventory....... 574 270 304
Other............................... 73 59 14
------ ----- ------
1,223 192 1,031
------ ----- ------
Deferred tax liabilities:
Accumulated depreciation............ (28) 94 (122)
------ ----- ------
Net deferred income tax assets........ $1,195 $ 286 $ 909
------ ----- ------
------ ----- ------
</TABLE>
The domestic versus foreign component of the Company's net income before
income taxes at December 31, 1996, 1995 and 1994, was as follows:
DECEMBER 31,
--------------------------
1996 1995 1994
------ ------- ------
(IN THOUSANDS)
Domestic................................. $8,255 $18,969 $8,920
Foreign.................................. 49 2,116 783
------ ------- ------
$8,304 $21,085 $9,703
------ ------- ------
------ ------- ------
43
<PAGE>
(10) RETIREMENT PLAN
The Company has a 401(k) Profit Sharing Plan which covers all full-time
employees who have completed six months of full-time continuous service and
are age eighteen or older. Participants may defer up to 20% of their gross
pay up to a maximum limit determined by law ($9,500 during 1996).
Participants are immediately vested in their contributions.
The Company may make discretionary contributions based on corporate
financial results for the fiscal year. The Company may also make
discretionary matching contributions to employee accounts up to $100 per
employee annually. The Company's total contributions to the plan were
approximately $45,000, $537,000 and $325,000 for the years ended December 31,
1996, 1995 and 1994, respectively. Vesting in the profit sharing contribution
account (company contribution) is based on years of service, with a
participant fully vested after five years of credited service.
(11) COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company finances a substantial portion of its property and equipment
(Note 6) under capital lease obligations at interest rates ranging from 7.63%
to 8.66%. The future minimum lease payments under capitalized lease
obligations as of December 31, 1996, are as follows:
(IN THOUSANDS)
1997................................................. $ 344
1998................................................. 154
1999................................................. 24
-----
Total minimum lease payments..................... 522
Less -- amount representing interest............. (38)
Less -- current portion.......................... (315)
-----
$ 169
-----
-----
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and
office and production space (Note 13). Lease expense under operating leases
was approximately $1,788,000, $1,184,000 and $858,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The future minimum rental payments required under noncancelable
operating leases as of December 31, 1996, are as follows:
(IN THOUSANDS)
1997................................................. $ 1,776
1998................................................. 1,620
1999................................................. 1,562
2000................................................. 1,406
2001................................................. 1,341
Thereafter........................................... 8,766
-------
$16,471
-------
-------
GUARANTEE
In September 1996, the Company extended a guarantee for a $1,000,000
bank term loan for an additional year, entered into by an entity that serves
as a supplier to the Company. An officer of the Company serves as a director
of such entity.
44
<PAGE>
(12) FOREIGN OPERATIONS
The Company operates in a single industry segment with operations in the
U.S., Japan and Europe. The following is a summary of the Company's foreign
operations:
<TABLE>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
-------- --------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Originating in Japan to unaffiliated customers...................... $ 6,467 $ 11,997 $ 7,803
Originating in Europe to unaffiliated customers..................... 8,023 6,237 3,950
Originating in U.S. and sold to unaffiliated foreign customers...... 9,506 9,018 5,467
Originating in U.S. and sold to domestic customers.................. 74,856 67,456 34,637
Transfers between geographic areas.................................. 10,496 11,524 8,226
Intercompany eliminations........................................... (10,496) (11,524) (8,226)
-------- -------- -------
$ 98,852 $ 94,708 $51,857
-------- -------- -------
-------- -------- -------
Income (loss) from operations:
Japan............................................................... $ (920) $ 1,094 $ 554
Europe.............................................................. 1,056 953 (51)
U.S. ............................................................... 8,383 19,448 10,075
Intercompany eliminations........................................... (308) (17) (575)
-------- -------- -------
$ 8,211 $ 21,478 $10,003
-------- -------- -------
-------- -------- -------
Identifiable assets:
Japan............................................................... $ 6,445 $ 6,342 $ 4,286
Europe.............................................................. 3,788 2,502 1,813
U.S. ............................................................... 54,736 54,415 22,984
Intercompany eliminations........................................... (8,938) (7,940) (5,934)
-------- -------- -------
$ 56,031 $ 55,319 $23,149
-------- -------- -------
-------- -------- -------
</TABLE>
Intercompany sales among the Company's geographic areas are recorded on
the basis of intercompany prices established by the Company.
(13) RELATED PARTY TRANSACTIONS
During 1994, a limited liability partnership consisting of certain
officers of the Company and other individuals entered into an agreement to
purchase an office and manufacturing facility. The partnership remodeled the
office and manufacturing facility and leased the facility to the Company
under an operating lease. During 1994, the Company provided "bridge"
financing in the amount of $3,000,000 to the partnership to purchase and
remodel the building. The Company moved into this facility during 1994. The
Company recognized $86,000 of interest income related to this transaction
during 1994. The partnership repaid the bridge loan in the third quarter 1994
when it obtained permanent financing for the facility. This lease expires in
2009 with a monthly payment of approximately $39,000. In September 1995, the
Company entered into a new lease agreement with this partnership for a
building being constructed adjacent to the Company's executive offices. The
lease relating to this facility expires in February 2011 with monthly rent
expense of approximately $46,000.
The Company also leases other office and production space from another
limited liability partnership consisting of certain officers of the Company
and other individuals. The lease relating to this space expires in 2002 with
a monthly payment of approximately $23,000.
Approximately $1,364,000, $800,000 and $600,000 was charged to rent
expense attributable to these leases for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company leases, for business purposes, a condominium owned by a
partnership of certain stockholders. The Company paid the partnership $36,000
for each of the years ended December 31, 1996, 1995 and 1994, relating to
this lease.
45
<PAGE>
Included in AE-Japan's accounts receivable at December 31, 1996, 1995
and 1994, is approximately $394,000, $953,000 and $500,000, respectively, due
from an entity that is controlled by the president of AE-Japan. This entity
also accounted for approximately 3%, 3% and 4% of consolidated sales during
1996, 1995 and 1994, respectively.
On June 29, 1995, certain stockholders of the Company exercised options
to purchase shares of the Company's common stock for an aggregate exercise
price of $1,083,000. In exchange for the stock the Company received notes
receivable in the amount of the exercise price. These notes receivable bear
interest at 6.83% which is payable annually and the principal balance is due
in June 2000. As of December 31, 1996, the Company has approximately
$110,000 of accrued interest income related to these notes included in
receivables from related parties.
(14) MAJOR CUSTOMERS
The Company's sales to major customers (purchases in excess of 10% of
total sales) are to entities which are primarily manufacturers of
semiconductor equipment and, for the years ended December 31, 1996, 1995 and
1994 are as follows:
DECEMBER 31,
--------------------
1996 1995 1994
---- ---- ----
Customer A........................... 27% 24% 21%
Customer B.......................... 20% 17% 17%
-- -- --
47% 41% 38%
-- -- --
-- -- --
(15) STOCK PLANS
EMPLOYEE STOCK OPTION PLAN -- During 1993, the Company adopted an
Employee Stock Option Plan (the "Employee Option Plan") which was amended and
restated in January and September 1995. The Employee Option Plan allows
issuance of incentive stock options, nonstatutory options, and stock purchase
rights. The exercise price of incentive stock options shall not be less than
100% of the stock's fair market value on the date of grant. The exercise
price of nonstatutory stock options shall not be less than 50% of the stock's
fair market value on the date of grant. Options issued in 1996, 1995 and 1994
were issued at 100% of fair market value, as determined by the Company, with
typical vesting of one-third at the end of one year, and quarterly thereafter
until fully vested after three years. Under the Employee Option Plan, the
Company has the discretion to accelerate the vesting period. The options are
exercisable for ten years from the date of grant. The Company has reserved
3,500,000 shares of common stock for the issuance of stock under the Employee
Option Plan which terminates in June 2003.
In connection with the grant of certain stock options on June 30, 1995,
the Company recorded $142,000 of deferred compensation for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Company at the date of grant. This amount is presented as a
reduction of stockholders' equity and will be amortized over the 3 year
vesting period of the related stock options.
In addition, the Company offered to employees the right to purchase
11,000 warrants for approximately $0.02 each in fiscal 1994. Each warrant
permitted employees to purchase one share of common stock at fair market
value, as determined by the Company, at the time the warrant was granted. The
warrants were exercised during 1994. There are no warrants outstanding as of
December 31, 1996 and 1995.
EMPLOYEE STOCK PURCHASE PLAN -- In September 1995, stockholders approved
an Employee Stock Purchase Plan (the "Stock Purchase Plan") covering an
aggregate of 200,000 shares of common stock. Employees are eligible to
participate in the Stock Purchase Plan if employed by the Company for at
least 20 hours per week during at least five months per calendar year.
Participating employees may have up to 15% (subject to a 5% limitation set by
the Company's board of directors for fiscal 1996) of their earnings
46
<PAGE>
or a maximum of $1,250 per six month period withheld pursuant to the Stock
Purchase Plan. Common stock purchased under the Stock Purchase Plan will be
equal to 85% of the lower of the fair market value on the commencement date
of each offering period or the relevant purchase date. During 1996, employees
purchased an aggregate of 11,572 shares under the Stock Purchase Plan and the
Company recognized approximately $11,000 in compensation expense.
OUTSIDE DIRECTOR STOCK OPTION PLAN -- In September 1995, the Company
adopted the 1995 Non-Employee Directors Stock Option Plan (the "Directors
Plan") covering 50,000 shares of common stock. The Directors Plan provides
for automatic grants of nonstatutory stock options to directors of the
Company who are not employees of the Company ("Outside Directors"). Pursuant
to the Directors Plan, upon becoming a director of the Company, each Outside
Director will be granted an option to purchase 7,500 shares of common stock.
Such options will be immediately exercisable as to 2,500 shares of common
stock, and will vest as to 2,500 shares of common stock on each of the second
and third anniversaries of the grant date. On each anniversary of the date on
which a person became an Outside Director, an option for an additional 2,500
shares is granted. Such additional options vest on the third anniversary of
the date of grant. Options will expire ten years after the grant date, and
the exercise price of the options will be equal to the fair market value of
the common stock on the grant date. The Directors Plan terminates September
2005.
The following summarizes the activity relating to options and warrants for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
1996 1995 1994
----------------------- ---------------------- ----------------------
(In thousands, except per share amounts)
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Stock options:
Incentive stock options --
Options outstanding at beginning of
period...................................... 729 $ 2.62 1,904 $ 0.95 1,778 $0.83
Granted...................................... 751 5.10 212 6.40 138 2.36
Exercised.................................... (199) 8.51 (1,371) 3.53 (3) 2.23
Terminated................................... (440) 6.92 (16) 1.69 (9) 0.99
---- ------ -----
Options outstanding at end of period......... 841 3.02 729 2.62 1,904 0.95
---- ------ -----
---- ------ -----
Options exercisable at end of period......... 326 1.51 391 0.88 1,616 0.83
---- ------ -----
---- ------ -----
Weighted-average fair value of
options granted during the period........... $3.14 $ 1.84 N/A
---- ------ -----
---- ------ -----
Price range of outstanding options........... $0.83 - $11.05 $0.83 - $11.05 $0.83 - $2.53
-------------- --------------- -------------
-------------- --------------- -------------
Price range of options terminated............ $0.83 - $11.05 $0.83 - $ 3.11 $0.83 - $2.19
-------------- --------------- -------------
-------------- --------------- -------------
Outside directors stock options--
Options outstanding at beginning of period... 15 $11.05 -- $ -- -- $ --
-- -- --
-- -- --
Granted...................................... 5 6.13 15 11.05 -- --
-- -- --
-- -- --
Options outstanding at end of period......... 20 9.82 15 11.05 -- --
-- -- --
-- -- --
Options exercisable at end of period......... 5 11.05 5 11.05 -- --
-- -- --
-- -- --
Weighted-average fair value of options
granted during the period................... $4.68 $ 3.19 N/A
----- ------ ---
----- ------ ---
Price range of outstanding options........... $6.13 - $11.05 $11.05 --
-------------- --------------- -------------
-------------- --------------- -------------
Warrants--
Warrants outstanding at beginning of
period...................................... 7 $ 3.48 200 $0.83
Granted...................................... -- -- -- 11 2.22
Exercised.................................... -- (6) 2.27 (198) 1.82
Terminated................................... -- (1) 3.99 (6) 0.88
--- -- ----
Warrants outstanding at end of period........ -- -- -- 7 3.48
--- -- ----
--- -- ----
Price range of stock issuable under
warrants.................................... $-- $ -- $0.83 - $2.53
Price range of warrants terminated........... $-- $1.41 - $ 2.53 $0.83 - $2.19
--- --------------- --------------
--- --------------- --------------
</TABLE>
47
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), defines a fair value based method
of accounting for employee stock options or similar equity instruments.
However, SFAS No. 123 allows the continued measurement of compensation cost
for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
provided that pro forma disclosures are made of net income or loss and net
income or loss per share, assuming the fair value based method of SFAS No.
123 had been applied. The Company has elected to account for stock-based
compensation plans under APB No. 25, under which no compensation expense is
recognized.
For SFAS No. 123 purposes, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions:
1996 1995
------- -------
Risk-free interest rates 6.57% 6.16%
Expected dividend yield rates 0.00% 0.00%
Expected lives 4 years 4 years
Expected volatility 110.16% 22.57%
The total fair value of options granted was computed to be approximately
$1,317,000 and $420,000 for the years ended December 31, 1996 and 1995,
respectively. These amounts are amortized ratably over the vesting period of
the options. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is
adjusted as a reduction of pro forma compensation expense in the period of
forfeiture. Pro forma stock-based compensation, net of the effect of
forfeitures and tax, was approximately $47,000 and $19,000 for 1996 and 1995,
respectively.
Had compensation cost for these plans been determined consistent with
SFAS No 123, the Company's net income would have been reduced to the
following pro forma amounts:
1996 1995
------ -------
(In thousands, except
per share data)
Net Income:
As reported $5,144 $13,281
Pro forma 5,097 13,262
Earnings Per Share:
As reported $ 0.24 $ 0.69
Pro forma 0.24 0.69
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
The following table summarizes information about the stock options
outstanding at December 31, 1996:
<TABLE>
Options Outstanding Options Exercisable
------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Year Range of Number Contractual Exercise Number Exercise
Granted Exercise Prices Outstanding Life Price Exercisable Price
- ----------- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1993 - 1994 $0.83 to $ 2.53 320,000 6.9 years $1.30 279,000 $1.13
1995 $2.57 to $11.05 108,000 8.5 years $5.03 51,000 $4.54
1996 $3.88 to $ 8.75 433,000 9.8 years $4.11 1,000 $3.88
------- --------- ----- ------- -----
861,000 8.5 years $3.18 331,000 $1.66
------- --------- ----- ------- -----
------- --------- ----- ------- -----
</TABLE>
48
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
BALANCE AT
BEGINNING OF ADDITIONS CHARGED BALANCE AT
PERIOD TO EXPENSE DEDUCTIONS END OF PERIOD
------------ ----------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Inventory obsolescence reserve......... $700 $ 164 $ 140 $ 724
Allowance for doubtful accounts........ 118 69 53 134
---- ------ ------ ------
$818 $ 233 $ 193 $ 858
---- ------ ------ ------
---- ------ ------ ------
Year ended December 31, 1995:
Inventory obsolescence reserve......... $724 $ 185 $ 120 $ 789
Allowance for doubtful accounts........ 134 76 -- 210
---- ------ ------ ------
$858 $ 261 $ 120 $ 999
---- ------ ------ ------
---- ------ ------ ------
Year ended December 31, 1996:
Inventory obsolescence reserve......... $789 $2,702 $1,966 $1,525
Allowance for doubtful accounts........ 210 35 3 242
---- ------ ------ ------
$999 $2,737 $1,969 $1,767
---- ------ ------ ------
---- ------ ------ ------
</TABLE>
49
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3), the information required by
this item (with the exception of certain information pertaining to executive
officers, which is included in Part I hereof) has been omitted and is
incorporated by reference to the Registrant's definitive Proxy Statement (the
"Proxy Statement") relating to its 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement will be filed not later than 120 days after the end
of the fiscal year with the Securities and Exchange Commission. The
information set forth therein under "Executive Compensation and Other
Information" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Certain Transactions" in
the Proxy Statement and is incorporated herein by reference.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (i) Financial Statements:
Report of Independent Public Accountants 33
Consolidated Financial Statements:
Balance Sheets at December 31, 1996 and 1995 34
Statements of Income for each of the three years
in the period ended December 31, 1996 36
Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1996 37
Statements of Cash Flows for each of the three years
in the period ended December 31, 1996 38
Notes to Consolidated Financial Statements 39
(ii) Financial Statement Schedules for each of the three years
in the period ended December 31, 1996
Schedule II--Valuation and Qualifying Accounts 49
(iii) Exhibits:
The Registrant's Restated Certificate of Incorporation (1)
The Registrant's By-laws (1)
Form of Specimen Certificate for Registrant's Common
Stock (1)
Master Purchase Order and Sales Agreement between Applied
Materials, Inc. and Registrant effective January 1,
1990 (1) **
Purchase Order and Sales Agreement between Lam Research
Corporation and Registrant effective July 1, 1993, as
amended on September 16, 1995 (1) **
Purchase Agreement between Eaton Corporation and Registrant
effective November 1, 1995 **
1995 Stock Option Plan, as amended and restated on September
20, 1995 (1) *
Employee Stock Purchase Plan
1995 Non-employee Directors' Stock Option Plan (1)
Lease dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and Registrant for property in Fort
Collins, Colorado (1)
Lease dated May 19, 1995 between Sharp Point Properties,
L.L.C., and Registrant for a building under construction in
Fort Collins, Colorado (1)
Lease dated June 12, 1984, as amended on June 11, 1992,
between Prospect Park East Partnership, a Colorado General
Partnership and Registrant for property in Fort Collins,
Colorado (1)
Silicon Valley Bank Business Loan Agreement dated May 19,
1992, as amended, between Silicon Valley Bank and
Registrant (1)
Amended and Restated Loan and Security Agreement, effective as
of November 17, 1995 by and between Silicon Valley Bank and
Registrant (1)
Equipment Line of Credit dated July 11, 1994 between Silicon
Valley Bank and Registrant (1)
Master equipment lease dated July 15, 1993, as amended, between
KeyCorp Leasing Ltd. and Registrant (1)
Master Lease Purchase Agreement dated January 20, 1989, as
amended, between MetLife Capital Corporation and Registrant (1)
Lease Purchase Agreement dated June 11, 1992 between MetLife
Capital Corporation and Registrant (1)
51
<PAGE>
Form of Indemnification Agreement (1)
Letter re change in certifying accountant (1)
Subsidiaries of the Registrant (1)
Consent of Arthur Andersen LLP, Independent Accountants
(b) No reports on Form 8-K were required to be filed by the Registrant
during the fourth quarter of the year ended December 31, 1996.
* Compensatory plan
** Portions of these documents have been omitted in accordance with an
order by the Commission granting confidential treatment. Such omitted material
has been filed separately with the Commission.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-97188) filed with the Commission on September 20, 1995, as
amended.
52
<PAGE>
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.
ADVANCED ENERGY INDUSTRIES, INC.
---------------------------------------
(Registrant)
/s/ DOUGLAS S. SCHATZ
---------------------------------------
Douglas S. Schatz
President
Each person whose signature appears below hereby appoints Douglas S. Schatz
and Richard P. Beck, and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K necessary or advisable
to enable the registrant to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission in respect thereof, which amendments may make such other
changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact
deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Douglas S. Schatz Chairman of the Board, March 6, 1997
- -------------------------------- President and Chief
Douglas S. Schatz Executive Officer (Principal
Executive Officer)
/s/ Richard P. Beck Vice President, Chief March 6, 1997
- -------------------------------- Financial Officer, Assistant
Richard P. Beck Secretary and Director
(Principal Financial Officer
and Principal Accounting
Officer)
/s/ G. Brent Backman Vice President, Special March 9, 1997
- -------------------------------- Projects, Assistant Secretary
G. Brent Backman and Director
/s/ Elwood Spedden Director March 6, 1997
- --------------------------------
Elwood Spedden
- -------------------------------- Director March _, 1997
Hollis J. Caswell
53
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