<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities
and Exchange Commission. These securities may not be sold nor may offers to buy
be accepted prior to the time the registration statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such state.
<PAGE>
FILED PURSUANT TO RULE 424(a)
Registration No. 333-34039
PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 10, 1997
2,500,000 Shares
[LOGO]
Common Stock
------------------
Of the 2,500,000 shares of Common Stock, $0.001 par value ("Common Stock"),
of Advanced Energy Industries, Inc. ("Advanced Energy" or the "Company") offered
hereby, 1,000,000 shares are being offered by the Company and 1,500,000 shares
are being offered by certain stockholders of the Company (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of shares by the Selling Stockholders. See "Principal and Selling Stockholders."
The Common Stock is quoted on the Nasdaq National Market under the symbol
"AEIS." On September 9, 1997, the last reported sale price of the Common Stock
on the Nasdaq National Market was $29.50 per share. See "Price Range of Common
Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
<S> <C> <C> <C> <C>
Per Share...............
Total(3)................
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated expenses of the Offering payable by the Company,
estimated at $600,000.
(3) The Company and the Selling Stockholders have granted the Underwriters an
option, exercisable within 30 days from the date hereof, to purchase up to
375,000 additional shares of Common Stock on the same terms set forth above,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public will be $ , the Underwriting Discounts
and Commissions will be $ , the Proceeds to Company will be $ and
the Proceeds to Selling Stockholders will be $ . See "Underwriting."
------------------------
The shares of Common Stock are offered by the Underwriters, subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of the shares of Common Stock will be
made through the office of UBS Securities LLC, 299 Park Avenue, New York, New
York, on or about , 1997.
------------------------
UBS SECURITIES
LEHMAN BROTHERS
<PAGE>
PAINEWEBBER INCORPORATED
ROBERTSON STEPHENS & COMPANY
, 1997
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed with the Securities and Exchange
Commission (the "Commission") by Advanced Energy are hereby specifically
incorporated by reference into this Prospectus:
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1996;
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997;
(c) Current Report on Form 8-K dated August 15, 1997 (filed August 19,
1997), as amended on Form 8-K/A, filed September , 1997 (the "Form 8-K
Regarding Tower"); and
(d) The description of the Common Stock contained in Advanced Energy's
Registration Statement on Form 8-A filed on October 12, 1995, and any
amendment or report filed for the purpose of updating such description.
All reports and other documents subsequently filed by Advanced Energy with
the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after the date of this
Prospectus and prior to the termination of this Offering, shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
of such reports and other documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference in this Prospectus will be deemed to be modified or
superseded for the purposes of this Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes that
statement. Any statement so modified or superseded will not be deemed, except as
so modified or superseded, to constitute a part of this Prospectus.
ADVANCED ENERGY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, UPON WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF
ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE INTO SUCH DOCUMENT). REQUESTS FOR SUCH DOCUMENTS
SHOULD BE DIRECTED TO RICHARD P. BECK OF ADVANCED ENERGY, 1625 SHARP POINT
DRIVE, FORT COLLINS, COLORADO 80525; TELEPHONE NUMBER: (970) 221-4670.
------------------------
Advanced Energy, Microsweep, Sparc and Sparc-LE and the Advanced Energy logo
are registered trademarks of the Company. Arc-Check, Arc-Out, Astral,
Fixed-Match, GenCal, Matchless, Pinnacle, Sparc-VS and Starburst are
unregistered trademarks of the Company. Other brand names and trademarks
appearing in this Prospectus are the properties of their respective holders.
------------------------
In this Prospectus, unless the context otherwise requires (i) "Consolidated
Financial Statements" refers to the Company's audited consolidated financial
statements for the years ended December 31, 1996, 1995 and 1994, (ii) "Unaudited
Consolidated Financial Statements" refers to the Company's unaudited
consolidated financial statements for the quarters and six month periods ended
June 30, 1997 and 1996, and (iii) "Pro Forma Condensed Consolidated Balance
Sheet" refers to the Company's pro forma condensed consolidated balance sheet at
June 30, 1997, which gives pro forma effect to the Company's acquisition of
Tower Electronics, Inc. ("Tower"), the allocation of the purchase price therefor
and certain transactions occurring in connection therewith, including the
borrowing by the Company of $12 million under a term loan, as if all of such
transactions had occurred on June 30, 1997, all of which financial statements
are included elsewhere in this Prospectus. Except as otherwise noted herein,
financial and other information with respect to the Company in this Prospectus
does not include information with respect to Tower and assumes no exercise of
the Underwriters' over-allotment option.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND THE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS, APPEARING ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS (WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE EXCHANGE ACT), INCLUDING
ESTIMATES AND EXPECTATIONS AS TO FINANCIAL RESULTS AND BUSINESS OPERATIONS, THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS."
THE COMPANY
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 utilize
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, Eaton, Intevac, Multi-Arc, Novellus,
Singulus Technologies, Sputtered Films and ULVAC Technologies.
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 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 produced over 90,000 power conversion and
control systems. Approximately 61%, 64% and 65% of the Company's sales in 1995,
1996 and the first six months of 1997, respectively, were to customers in 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 to customers in Japan,
Korea, Australia, France, Hong Kong, Italy, Mexico, Singapore, Sweden and
Taiwan. International sales represented 29%, 24% and 24% of the Company's sales
in 1995, 1996 and the first six months of 1997, respectively. The Company
maintains sales and service offices in the United States in Fort Collins,
Colorado; Austin, Texas; Concord, Massachusetts; and Milpitas, California; and
outside the United States in Tokyo, Japan; Filderstadt, Germany; and Bicester,
United Kingdom.
3
<PAGE>
On August 15, 1997, the Company acquired all of the outstanding stock of
Tower Electronics, Inc., pursuant to a Share Purchase Agreement dated as of
August 11, 1997. Tower designs and manufactures custom, high performance
switchmode power supplies. Tower's principal customers are in the
telecommunications, medical and non-impact printing industries and include U.S.
Robotics (recently acquired by 3Com Corporation) and its contract manufacturer,
VideoJet Systems International, Medtronic and Intermedics. Tower had revenues of
$13.4 million for its fiscal year ended September 30, 1996. The purchase price
consisted of $16 million paid at closing plus an additional contingent payment
to be based on Tower's sales in 1998. The acquisition of Tower is a part of the
Company's strategy to diversify its product offerings and expand its customer
base.
The Company was incorporated in Colorado in 1981 and reincorporated in
Delaware in September 1995. As used in this Prospectus, references to "Advanced
Energy" or the "Company" refer to Advanced Energy Industries, Inc. and its
consolidated subsidiaries. The Company's executive offices are located at 1625
Sharp Point Drive, Fort Collins, Colorado 80525, and its telephone number is
(970) 221-4670.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company........................................ 1,000,000 shares
The Selling Stockholders........................... 1,500,000 shares
Total Common Stock offered....................... 2,500,000 shares
Common Stock to be outstanding after the Offering.... 22,414,575 shares (1)
Use of proceeds...................................... Repayment of debt and general
corporate purposes, including
working capital and potential
strategic acquisitions. See "Use of
Proceeds."
Nasdaq National Market Symbol........................ AEIS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales...................................... $23,950 $31,577 $51,857 $94,708 $98,852 $56,997 $53,358
Gross profit............................... 11,609 15,248 25,814 45,394 36,814 22,758 20,060
Income from operations..................... 575 3,701 10,003 21,478 8,211 7,229 6,641
Net income................................. $ 301 $ 3,417 $ 5,963 $13,281 $ 5,144 $ 4,335 $ 4,055
Net income per share (2)................... -- -- $ 0.32 $ 0.69 $ 0.24 $ 0.20 $ 0.19
Weighted average number of common and
common equivalent shares outstanding..... 17,315 17,894 18,605 19,310 21,666 21,657 21,906
</TABLE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------
Pro Forma
December 31, 1996 Actual Pro Forma (3) As Adjusted(3)(4)
----------------- --------- ------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 11,231 $ 11,183 $ 10,859 $
Working capital.................................. 35,179 40,757 39,481
Total assets..................................... 56,031 66,051 77,982
Total debt....................................... 2,051 1,534 14,923
Stockholders' equity............................. 46,496 50,625 47,545
</TABLE>
- --------------------------
(1) Based on the number of shares outstanding as of August 18, 1997. Excludes
1,343,114 shares of Common Stock issuable under the Company's 1995 Stock
Option Plan (the "Option Plan") at a weighted average exercise price of
approximately $6.52 per share; 25,000 shares issuable under the Company's
1995 Non-Employee Directors' Stock Option Plan (the "Director Plan") at a
weighted average exercise price of $12.59 per share; and 26,736 shares
issuable under the Company's 1995 Stock Purchase Plan (the "Purchase Plan").
(2) Prior to January 1, 1994, the Company was treated as an S corporation for
tax purposes and, accordingly, net income per share for the years ended
December 31, 1992 and 1993 has not been calculated. On a pro forma basis,
assuming federal, state and foreign income tax rates aggregating 40.0%, net
income and net income per share for the year ended December 31, 1992 would
have been $181,000 and $0.01, respectively, and for the year ended December
31, 1993 would have been $2,047,000 and $0.11, respectively.
(3) Gives pro forma effect to the Tower acquisition, allocation of the purchase
price therefor and certain transactions occurring in connection therewith,
including the borrowing by the Company of $12,000,000 under a term loan, as
if all of such transactions had occurred on June 30, 1997. See Pro Forma
Condensed Consolidated Balance Sheet. For additional information regarding
the Tower acquisition, see "Business--Recent Acquisition" and the Form 8-K
Regarding Tower.
(4) As adjusted to reflect the sale by the Company of 1,000,000 shares of Common
Stock offered hereby at the public offering price of $ per share, after
deduction of underwriting discounts and commissions and estimated expenses
payable by the Company, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
4
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY
AND ITS BUSINESS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW.
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. As a supplier of
subsystems to equipment manufacturers, the Company's sales often are subject to
its customers' production schedules. A substantial and increasing proportion of
the Company's shipments 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. Due to
the short time between receipt of orders and shipments, the Company operates
with a low level of backlog. Moreover, this backlog at any point in time is not
sufficient to meet the Company's revenue expectations for a particular quarter
and orders generally are subject to cancellation or delay at the customer's
option without penalty. As a result of these factors, it is difficult for the
Company to predict accurately the timing and level of revenues for a particular
quarter. The Company's quarterly revenues are also affected by a variety of
other factors, including specific economic conditions in the industries in which
the Company's customers operate, particularly the semiconductor industry; the
timing of the receipt of orders from major customers; customer cancellations or
shipment delays; pricing competition; component shortages resulting in
manufacturing delays; changes in customers' inventory management practices;
exchange rate fluctuations and the introduction of new products by the Company
or its competitors. In addition, electronics companies, including companies in
the semiconductor capital equipment industry, are subject to ongoing pressure to
reduce costs. This has in the past caused and is continuing to cause the
Company's current and prospective customers to exert pricing pressure and make
other demands on the Company, which could lead to significant changes in revenue
and operating margins from quarter to quarter.
The Company's gross profit and operating income in a particular quarter are
affected by a number of factors, including product mix, price changes,
outsourcing costs, manufacturing efficiencies and costs incurred to respond to
specific feature requests by customers. Generally, the Company's gross profit
and operating income have fluctuated significantly as a result of these factors
in the past, and such fluctuations are expected to continue. In particular, as
the Company expands manufacturing capacity, manufacturing overhead and other
costs may be incurred prior to full utilization of the additional facilities.
Further, production of the Company's systems, particularly new systems, often
requires long lead times, during which time the Company must expend substantial
funds and management effort. As a result, the Company may incur significant
development and other expenses without realizing corresponding revenue in the
same quarter. In addition, many of the Company's expenses, which are based in
part on expectations of future revenue, are fixed. Accordingly, if revenue
levels in a particular quarter do not meet expectations, operating results will
be disproportionately adversely affected. Currently, the Company is in the
process of rapidly increasing production and capacity to meet current and
anticipated demand for its products, which has involved substantial expenditures
and commitments by the Company. If the Company does not generate the revenue it
anticipated when it began these production and capacity increases, its operating
results will be adversely affected. This dynamic negatively impacted the Company
throughout 1996 and the first quarter of 1997. In late 1995, the Company was in
a growth mode similar to that which it is experiencing today, and when the
semiconductor capital equipment market went through the major downturn of 1996,
the Company's operating results were severely impacted, which in turn had a
material adverse effect on the market price of the Company's Common Stock.
Further fluctuations in operating results on a quarterly basis could have a
material adverse effect on the market price of the Common Stock. See "--The
Semiconductor and Semiconductor Equipment Industries Are Highly Volatile" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
5
<PAGE>
CURRENT QUARTER RESULTS AFFECTED BY WATER-RELATED DAMAGE AND ACQUISITION OF
TOWER
The Company sustained substantial water-related damage to its manufacturing
facilities and certain equipment and inventory during a severe rainstorm on July
29, 1997, which interrupted production and shipments. The Company was able to
resume some production within a few days and has been increasing production as
repairs are made and equipment and inventory are replaced. The Company expects
that its revenues and operating results in the current quarter ending September
30, 1997 will be affected by the production interruption. The Company is working
closely with suppliers to accelerate deliveries of key components which were
lost or damaged and are required to meet production schedules for the current
quarter. Actual results for the current quarter will depend on continued success
in increasing production and the ability to obtain in a timely manner the
necessary key components from suppliers to meet current production goals, as to
which there can be no assurance. The problem of inventory shortages has been
compounded by delays in shipments related to the recent UPS strike. The
Company's insurance policies may not cover any or all of the costs incurred by
the Company in connection with the rainstorm. As a result, the Company expects
that it will be required to record a one-time charge in the third quarter of
1997 for such losses, which charge is currently estimated to be between $2.5
million and $3.0 million. The final charge, which cannot presently be
determined, could be larger. In addition, the Company will record a one-time
charge of $3.1 million for in-process research and development costs in
connection with the acquisition of Tower. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--Recent
Acquisition."
THE SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES ARE HIGHLY VOLATILE
Approximately 61%, 64% and 65% of the Company's sales in 1995, 1996, and the
first six months of 1997, respectively, were made to customers in the
semiconductor equipment industry. The Company expects that its business will
continue to depend in significant part on the semiconductor 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 depend upon the current and anticipated market demand for
semiconductor devices and products utilizing such devices. The semiconductor
industry historically has been highly volatile and has experienced periods of
oversupply, resulting in significantly reduced demand for semiconductor
fabrication equipment. In 1996, the semiconductor industry experienced a
significant downturn, which caused a number of the Company's customers,
including Applied Materials and Lam Research, to drastically reduce and, in some
cases cancel, their orders from the Company. Applied Materials and Lam Research
together accounted for approximately 47% and 45% of the Company's revenues
during 1996 and the first six months of 1997, respectively. Because the Company
is a supplier of subsystems to equipment manufacturers and a substantial and
increasing proportion of the Company's shipments are made on a just-in-time
basis, events such as a rapid drop in demand for the Company's products from a
particular customer that may occur with limited advance notice can have an
adverse impact on the Company. Failure to respond promptly to such reductions in
revenue has had in the past and in the future could have a material adverse
effect on the Company's operating results. In addition, the Company has observed
that semiconductor capital equipment manufacturers and their suppliers have
often been more negatively affected by downturns in the semiconductor industry
than device manufacturers. Although there have been indications that the
semiconductor and semiconductor equipment industries have begun to recover from
the 1996 downturn, there can be no assurance that such industries will continue
to improve or that there will not be further downturns or slowdowns in any of
the markets that the Company serves, any or all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Markets, Applications and Customers."
SIGNIFICANT SALES ARE CONCENTRATED AMONG A FEW CUSTOMERS
The Company's sales generally are concentrated among a small number of
customers. Sales to the Company's ten largest customers accounted for
approximately 73% and 77% of the Company's sales in 1996 and the first six
months of 1997, respectively. Sales to Applied Materials and Lam Research, the
two leading domestic manufacturers of semiconductor fabrication equipment,
together accounted for approximately 47% and 45% of the Company's sales during
1996 and the first six months of 1997, respectively. The Company expects that
sales of its systems to Applied Materials and Lam Research will continue to
account for a high
6
<PAGE>
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 adverse effect on
the Company's business, financial condition and results of operations. None of
the Company's customers has entered into a long-term agreement requiring it to
purchase the Company's systems. Similarly, Tower's sales historically have been
concentrated among a small number of customers. Tower's sales to U.S. Robotics
(recently acquired by 3Com Corporation) and its contract manufacturer accounted
for approximately 74% of Tower's total sales in the nine months ended June 30,
1997. The success of the Company's acquisition of Tower will depend in large
part on retention of Tower's major customers, including U.S. Robotics and its
contract manufacturer, and the level of orders received from such customers. The
Company anticipates that Tower's sales to U.S. Robotics and its contract
manufacturer in the near term will be significantly lower than such sales had
been immediately prior to the acquisition. As a result, Tower's total sales, and
potentially its gross margins, through at least the end of 1997 are expected to
be significantly lower than in prior periods. The Company does not believe that
Tower's expected results through the end of 1997 will have a material adverse
effect on the Company's consolidated results of operations during such period.
See "--The Semiconductor and Semiconductor Equipment Industries Are Highly
Volatile," "--Risks Associated with Recent and Potential Future Acquisitions,"
"Business--Markets, Applications and Customers" and Note 14 to the Consolidated
Financial Statements. For additional information regarding the Tower
acquisition, see the Form 8-K Regarding Tower.
RISKS ASSOCIATED WITH MANUFACTURING FACILITY
All of the Company's manufacturing is conducted at its facility in Fort
Collins, Colorado. In July 1997, the Company sustained substantial damage to its
facilities and certain equipment and inventory due to excess surface water
caused by a severe rainstorm in Fort Collins. The Company was forced to cease
manufacturing temporarily and has not resumed full production capacity. The
Company's insurance policies may not cover any or all of the costs incurred by
the Company in connection with the rainstorm. As a result, the Company expects
that it will be required to record a one-time charge in the third quarter of
1997 for such losses, which charge is currently estimated to be between $2.5
million and $3.0 million. The final charge, which cannot presently be
determined, could be larger. Such charge will have a material adverse effect on
the Company's results for such quarter. Because all of the Company's
manufacturing is conducted in one location, there can be no assurance that
future natural or other occurrences, out of the Company's control, will not have
a material adverse effect on the Company's operations. Cessation of
manufacturing or the Company's inability to operate the Fort Collins facility at
full capacity for any extended period could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Manufacturing."
RISKS ASSOCIATED WITH RECENT AND POTENTIAL FUTURE ACQUISITIONS
The Company intends to expand its product offerings and customer base in
part by acquiring other businesses, products and technologies that are
complementary to those of the Company. In 1997, the Company acquired Tower and,
in a separate transaction, acquired all of the assets of MIK Physics, Inc.
("MIK"). The assets acquired from MIK consisted predominantly of inventory, and
the purchase price paid by the Company was immaterial. Tower designs and
manufactures custom, high performance switchmode power supplies for use
principally in the telecommunications, medical and non-impact printing
industries, and MIK has developed technology to design and manufacture high
power systems for certain industrial uses. The Company has limited experience in
the markets served by Tower and MIK, and there can be no assurance that the
Company will be able to compete in these markets successfully or that it will be
able to operate the acquired businesses profitably. Acquisitions generally
involve a number of risks related to integration, including difficulties
associated with assimilating the personnel and operations of an acquired
business, the Company's inability to achieve expected financial results or
strategic goals for an acquired business, the potential disruption of the
Company's ongoing business, the diversion of significant management and other
resources and the maintenance of uniform standards, controls, procedures and
policies. The Company intends to continue to operate Tower's business out of
Tower's existing facilities in Fridley, Minnesota, and, accordingly, will be
required to manage two geographically separated manufacturing locations. Failure
to integrate Tower and MIK, or any future acquisitions, without substantial
costs, delays or other operational or financial problems could have a material
adverse effect on the Company's business, financial condition and results of
7
<PAGE>
operations. Further, future acquisitions by the Company may result in dilutive
issuances of equity securities, the incurrence of debt, large one-time expenses
and the creation of goodwill or other intangible assets that could result in
significant amortization expense. In addition, there can be no assurance that
the Company will be able to identify, negotiate and consummate acquisitions that
it considers advantageous to its business plans. For additional information
regarding the Tower acquisition, see "Business--Recent Acquisition" and the Form
8-K Regarding Tower.
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. In early
1997, the Company began implementation of an integrated information management
system that incorporates substantially all of the Company's internal financial
and business systems, procedures and controls. The new system has been fully
implemented in the United States, but the Company has postponed implementation
of the new system at its international locations, due primarily to a shortage of
trained personnel and other resources. In addition, the Company intends to
continue to operate Tower's business out of Tower's existing facilities in
Fridley, Minnesota and has retained all of Tower's employees. The failure to
manage growth effectively, including delays or difficulties implementing new
systems, procedures and controls or integrating acquisitions 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.
The recent growth in many of the Company's product lines has required the
Company to invest in additional equipment, personnel, physical facilities and
other infrastructure to meet current and anticipated manufacturing demands. The
Company has hired, and expects that it will need to continue to hire, a
significant number of new employees, particularly personnel with technical
backgrounds for the Company's engineering and technical support staffs. The
market for such personnel has become increasingly competitive, particularly in
Northern Colorado where there has been a significant increase in the business
activities of other companies in the electronics and manufacturing sectors.
Because of this competition for qualified labor, the Company has occasionally
experienced delays in meeting its staffing requirements. There can be no
assurance that the Company will be able to recruit, train and retain a
sufficient number of technical employees. Protracted inability of the Company to
recruit and train adequate numbers of qualified personnel on a timely basis
could adversely affect the Company's ability to manufacture, sell and support
its systems. To expand its internal manufacturing capacity and to accommodate
the continuing expansion of its employee base, the Company increased its
physical facilities in Fort Collins, Colorado by approximately 31,000 square
feet in August 1997. The new facilities are expected to be in production in
October 1997. The Company also depends on outsourced suppliers for the
manufacturing of certain components and subassemblies of its systems. There can
be no assurance that the Company will be able to adequately increase its
manufacturing facilities and capacity to meet demand for its products or that,
in the event of a downturn or slowdown in such demand, the Company will be able
to reduce its production activities or absorb its increased overhead and
outsourcing costs. The Company expects that its operating expenses will continue
to increase. There can be no assurance that the Company's future sales will
increase in an amount necessary to cover planned increases in operating
expenses. Continued expansion of the Company could significantly strain the
Company's management, financial and other resources. The Company also may seek
to enhance its growth by acquiring other businesses, products and technologies
that are complementary to those of the Company. See "--Risks Associated with
Recent and Potential Future Acquisitions" and "Business--Recent Acquisition."
SUPPLY CONSTRAINTS AND DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS
Manufacture of the Company's power conversion and control systems requires
numerous electronic components. Dramatic growth in the electronics industry has
significantly increased demand for such components. This demand can result in
periodic shortages and allocations, which the Company has experienced from time
to time. The Company expects that shortages and allocations of electronic
components and subassemblies will continue in the foreseeable future and could
result in shipment delays. Such delays could damage the
8
<PAGE>
Company's relationships with current and prospective customers, which in turn
could have a material adverse effect on the Company's business, financial
condition and results of operations. In this regard, the Company's revenues and
operating results in the current quarter ending September 30, 1997 will be
affected by the Company's ability to accelerate deliveries of, and obtain in a
timely manner, certain key components needed to replace inventory lost in the
water-related damage to the Company's manufacturing facilities in late July
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Quarterly Results of Operations."
The Company relies on sole and limited source suppliers for certain parts
and subassemblies. Such reliance involves several risks, including a potential
inability to obtain an adequate supply of required components, reduced control
over pricing and timing of delivery of components and suppliers' potential
inability to develop technologically advanced products to support the Company's
growth and development of new systems. The Company believes that alternative
sources could be obtained and qualified, if necessary, for most 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. This could damage the Company's
relationships with current and potential customers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Manufacturing."
DEPENDENCE ON DESIGN WINS; BARRIERS TO OBTAINING NEW CUSTOMERS; HIGH LEVEL OF
CUSTOMIZED SYSTEMS
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. The Company also
believes that equipment manufacturers often select their suppliers based on
factors such as long-term relationships. Accordingly, the Company may be at a
disadvantage in achieving design wins from equipment manufacturers who are not
currently customers. There can be no assurance that the Company's systems will
be selected by existing or potential customers for new products.
In order to achieve design wins, the Company typically must customize its
systems for use in particular equipment and for particular customers. Such
customization increases the Company's research and development expenses and can
strain its engineering and management resources. In addition, there can be no
assurance that such investment will result in design wins for the Company.
Because a substantial proportion of the Company's business involves the
just-in-time shipment of systems, the Company must keep a relatively large
number and variety of customized systems in inventory. As the Company develops
new systems and as its customers develop new products, systems in inventory may
become obsolete. There can be no assurance that such inventory obsolescence will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Strategy."
RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW SYSTEM INTRODUCTIONS
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 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
9
<PAGE>
have a material adverse effect on the Company's business, financial condition
and results of operations, as well as on its customer relationships. See
"Business--Technology" and "Business--Products."
COMPETITION
The Company faces substantial competition, primarily from established
companies, some of which have greater financial, marketing and technical
resources than the Company. The trend toward consolidation in the semiconductor
equipment industry has made it increasingly important to have the resources
necessary to compete effectively across a broad range of product offerings, to
fund customer service and support on a worldwide basis and to invest in research
and development. 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. In addition, electronics companies,
including companies in the semiconductor capital equipment industry, have been
characterized by ongoing pressure to reduce costs. This has in the past caused
and is continuing to cause the Company's current and prospective customers to
exert pricing pressure and make other demands on the Company, which could lead
to significant changes in revenue and operating margins from quarter to quarter.
Failure to adequately respond to such pressure and demands could result in loss
of customers, which could have a material adverse effect on the Company. See
"Business--Competition."
DEPENDENCE ON THE JAPANESE MARKET AND JAPANESE DISTRIBUTOR
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 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. Because the Company's success in a market depends on having its
products designed into existing and future equipment, the Company believes that
it may be at a competitive disadvantage with respect to its Japanese competitors
who have had the opportunity to develop strong relationships with Japanese
equipment manufacturers and whose systems are currently designed into such
potential customers' equipment. The Company also believes that its future
performance will depend on its non-Japanese customers' ability to compete
successfully in the Japanese market. The Company's non-Japanese customers
compete directly with Japanese equipment manufacturers who may have a
competitive advantage over such customers for the same reasons that Japanese
manufacturers of power conversion and control systems may have a competitive
advantage over the Company. 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 sells its systems in Japan both directly and through a single
distributor, Landmark Technology Corporation. Sales in Japan through Landmark
Technology Corporation represented approximately 3% and 2% of the Company's
total sales in 1996 and the first six months of 1997. Although the Company
believes that it maintains a good relationship with Landmark Technology
Corporation, there can be no assurance that the relationship will continue.
Termination of such relationship or a reduction of sales through Landmark
Technology Corporation could have a material adverse effect on the Company's
ability to compete in the Japanese market. See "Business--Competition" and Note
12 to the Consolidated Financial Statements.
RISKS ASSOCIATED WITH INTERNATIONAL SALES
The markets in which the Company competes are becoming increasingly
globalized. As a result, the Company's customers increasingly require service
and support on a worldwide basis. The Company has
10
<PAGE>
invested substantial financial and management resources to develop an
international infrastructure to meet the needs of its customers worldwide. The
Company maintains sales and service offices outside the United States in Tokyo,
Japan; Filderstadt, Germany; and Bicester, United Kingdom. The Company also
plans to open offices in Seoul, South Korea and Taiwan. There can be no
assurance that the Company's investments will enable it to compete successfully
in the international market or to meet the service and support needs of such
customers. Approximately 29%, 24% and 24% of the Company's sales in 1995, 1996
and the first six months of 1997, respectively, were attributable to customers
outside the United States. The Company expects sales outside the United States
to continue to represent a significant portion of future sales. Sales to
customers outside the United States are subject to various 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 Company's international activities are also subject to the difficulties of
managing overseas distributors and representatives, and difficulties of staffing
and managing foreign subsidiary operations.
The Company's systems are subject to numerous foreign government standards
and regulations that are continually being amended. For example, the Company has
invested significant resources to re-design its systems to meet European
standards for electromagnetic compatibility which came into effect in 1996 and
for safety that came into effect in 1997. Although the Company endeavors to meet
foreign technical and regulatory standards, there can be no assurance that the
Company's products will continue to comply with foreign government standards and
regulations, or changes thereto, or that it will be cost effective for the
Company to redesign its products to comply with such standards and regulations.
The inability of the Company to design or redesign products to comply with
foreign standards or any significant or prolonged decline in the Company's
international operations could have a material adverse effect on the Company's
business, financial condition and results of operations.
INTELLECTUAL PROPERTY RIGHTS
The Company's success depends in large part on the technical innovation of
its products. While the Company attempts to protect its intellectual property
rights through patents and non-disclosure agreements, it believes that its
success will depend to a greater degree upon innovation, technological expertise
and its ability to adapt its products to new technology. There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States. 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. See
"Business--Intellectual Property."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the efforts and
abilities of Douglas S. Schatz, President and Chief Executive Officer, and other
key managerial and technical employees. Although the Company recently has made
significant additions to its management team, the loss of Mr. Schatz or other
key employees could have a material adverse effect on the Company's business,
financial condition and results of
11
<PAGE>
operations. Furthermore, the Company does not maintain key-man life insurance on
Mr. Schatz or any other employee. The Company has not entered, and in the
foreseeable future does not intend to enter, into written employment agreements,
other than confidentiality and non-compete agreements, with any of its
employees. In addition, the Company's future operating results depend in part
upon its ability to attract and retain qualified employees, particularly
highly-skilled engineers for the development of new systems and products. The
competition for such personnel is intense. There can be no assurance that the
Company will be successful in attracting and retaining qualified engineers and
other employees. See "--Management of Growth" and "Management."
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, all of the officers and directors of the
Company as a group, and Douglas S. Schatz individually, will hold or will be
deemed to beneficially own approximately 68.6% and 54.2% of the outstanding
Common Stock of the Company, respectively (67.1% and 53.1% if the Underwriters'
over-allotment option is exercised in full). Accordingly, existing management
will continue to hold sufficient voting power to enable it to elect all of the
directors and to continue to control the business and affairs of the Company for
the foreseeable future. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company. In
addition, substantially all of the facilities leased by the Company are owned by
entities in which certain of the Company's officers and directors have a
financial interest. See "Management" and "Principal and Selling Stockholders."
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and By-laws
could have the effect of making it more difficult for a third party to acquire,
or of discouraging a third party from attempting to acquire, control of the
Company. Such provisions could limit the price that certain investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions (i) allow the Company to issue Preferred Stock with rights
senior to those of the Common Stock without any further vote or action by the
stockholders, (ii) limit the right of the stockholders to call a special meeting
of stockholders, and (iii) allow the Company to impose various procedural and
other requirements that could make it more difficult for stockholders to effect
certain corporate actions. See "Description of Capital Stock."
VOLATILITY OF MARKET PRICE OF COMMON STOCK
The stock market generally, and the market for technology stocks in
particular, have experienced significant price and volume fluctuations, which
have often been unrelated or disproportionate to the operating performance of
such companies. From the initial public offering of the Common Stock in November
1995 through September 9, 1997, the closing price of the Common Stock on the
Nasdaq National Market has ranged from $3.50 to $33.375. There can be no
assurance that the market for the Common Stock will not be subject to similar
fluctuations. Many factors, including future announcements concerning the
Company or its competitors, variations in operating results, announcements of
technological innovations, the introduction of new products or changes in
product pricing policies by the Company or its competitors, changes in earnings
estimates by securities analysts and general stock market trends, could cause
the market price of the Common Stock to fluctuate substantially. See "Price
Range of Common Stock."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$ ($ if the Underwriters' over-allotment option is exercised in full),
after deduction of underwriting discounts and commissions and estimated expenses
payable by the Company in connection with the Offering. The Company will not
receive any of the proceeds from the sale of the shares of Common Stock offered
by the Selling Stockholders.
The Company intends to use approximately $12 million of the proceeds to
fully repay indebtedness under a term loan obtained in August 1997 from Silicon
Valley Bank and the Bank of Hawaii in connection with the Tower acquisition (the
"Term Loan"). The Term Loan matures in August 2002 and bears interest at the
Prime Rate (8.5% at August 15, 1997) less 0.25%, adjustable to the Prime Rate
minus 0.50% if certain financial ratios are achieved. Prepayment of the Term
Loan prior to August 1998 will result in a penalty of 0.75% of the amount
prepaid, or approximately $90,000, which amount also will be paid with a portion
of the net proceeds from this Offering. The Company intends to use the remainder
of the proceeds for general corporate purposes, including working capital. The
Company intends to expand its product offerings and customer base in part by
acquiring other businesses, products and technologies that are complementary to
those of the Company. Accordingly, a portion of the net proceeds may be used for
acquisitions, although the Company has no present agreements or commitments with
respect to any such transaction. Pending such uses, the Company will invest the
net proceeds in short-term, investment-grade, interest-bearing marketable
securities.
DIVIDEND POLICY
The Company intends to retain future earnings to finance its business.
Accordingly, the Company does not anticipate paying cash or other dividends on
the Common Stock in the foreseeable future. Furthermore, the Company's credit
facilities prohibit the declaration or payment of any cash dividends on the
Common Stock.
PRICE RANGE OF COMMON STOCK
The Common Stock was approved for quotation on the Nasdaq National Market
beginning November 22, 1995 under the symbol "AEIS." The following table sets
forth, for the periods indicated, the range of intra-day high and low sales
prices, as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1995
Fourth Quarter (beginning November 22)......................... $11 $8 1/4
1996
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
1997
First Quarter.................................................. 8 3/8 5 1/4
Second Quarter................................................. 15 3/8 7 1/8
Third Quarter (through September 9)............................ 33 3/8 14 1/2
</TABLE>
On September 9, 1997, the last reported sale price for the Common Stock, as
reported by the Nasdaq National Market, was $29.50. As of September 9, 1997, the
Company had approximately 450 holders of record of the Common Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 and as adjusted as of such date to reflect the sale of the Common Stock
offered by the Company hereby and application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
June 30, 1997
---------------------------------------
Pro Forma
Pro Forma As Adjusted
Actual (1) (1)(2)
--------- ----------- ---------------
(in thousands)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term debt)........... $ 745 $ 4,534 $ 2,134
--------- ----------- -------
--------- ----------- -------
Long-term debt (excluding current portion).............................. $ 789 $ 10,389 $ 789
--------- ----------- -------
Stockholders' equity:
Preferred stock, $0.001 par value, 1,000,000 shares authorized; none
issued and outstanding.............................................. -- -- --
Common stock, $0.001 par value, 30,000,000 shares authorized;
21,289,962 shares issued and outstanding and pro forma; and
22,414,575 shares issued and outstanding pro forma as adjusted (3).. 21 21 22
Additional paid-in capital.............................................. 23,102 23,102
Retained earnings....................................................... 29,120 26,040 27,120
Stockholders' notes receivable.......................................... (1,083) (1,083) (1,083)
Deferred compensation................................................... (58) (58) (58)
Cumulative translation adjustment....................................... (477) (477) (477)
--------- ----------- -------
Total stockholders' equity............................................ 50,625 47,545
--------- ----------- -------
Total capitalization................................................ $ 52,159 $ 62,468 $
--------- ----------- -------
--------- ----------- -------
</TABLE>
- ------------------------------
(1) Gives pro forma effect to the Tower acquisition, allocation of the purchase
price therefor and transactions occurring in connection therewith, including
the borrowing by the Company of $12,000,000 under the Term Loan, as if all
of such transactions had occurred on June 30, 1997. See the Pro Forma
Condensed Consolidated Balance Sheet. For additional information regarding
the Tower acquisition, see "Business--Recent Acquisition" and the Form 8-K
Regarding Tower.
(2) As adjusted to reflect the sale by the Company of 1,000,000 shares of Common
Stock offered hereby at the public offering price of $ per share, after
deduction of underwriting discounts and commissions and estimated expenses
payable by the Company, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
(3) Includes 31,500 shares issued and outstanding pro forma as adjusted to be
acquired by certain Selling Stockholders pursuant to the exercise of stock
options and sold in the Offering by such Selling Stockholders. See
"Principal and Selling Stockholders." Excludes 1,343,114 shares of Common
Stock issuable under the Option Plan at a weighted average exercise price of
approximately $6.52 per share; 25,000 shares issuable under the Director
Plan at a weighted average exercise price of $12.59 per share; and 26,736
shares issuable under the Purchase Plan. Options to purchase an additional
262,251 shares and 25,000 shares are eligible to be granted under the Option
Plan and the Director Plan, respectively.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL STATEMENTS
The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with the Consolidated Financial Statements
and Notes to Consolidated Financial Statements and the discussion thereof
included elsewhere in this Prospectus. The selected consolidated financial data
as of and for each of the years in the five-year period ended December 31, 1996,
are derived from consolidated financial statements that have been audited by
Arthur Andersen LLP, independent accountants, whose report with respect thereto
is included elsewhere in this Prospectus. The data for the six months ended June
30, 1997 and 1996 are derived from the Unaudited Consolidated Financial
Statements, which have been prepared on the same basis as the audited
Consolidated Financial Statements and, in the opinion of the Company, include
all adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of the results for the unaudited periods. Operating results for
the six months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the entire year ending December 31, 1997.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $ 23,950 $ 31,577 $ 51,857 $ 94,708 $ 98,852 $ 56,997 $ 53,358
Cost of sales...................... 12,341 16,329 26,043 49,314 62,038 34,239 33,298
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 11,609 15,248 25,814 45,394 36,814 22,758 20,060
--------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development......... 3,606 4,716 5,849 10,522 13,760 7,143 6,334
Sales and marketing.............. 3,258 3,414 4,658 6,201 8,590 4,331 4,135
General and administrative....... 4,170 3,417 5,304 7,193 6,253 4,055 2,950
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses........... 11,034 11,547 15,811 23,916 28,603 15,529 13,419
--------- --------- --------- --------- --------- --------- ---------
Income from operations............. 575 3,701 10,003 21,478 8,211 7,229 6,641
Other income (expense)............. (270) (278) (300) (393) 93 (236) (101)
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes......... 305 3,423 9,703 21,085 8,304 6,993 6,540
Provision for income taxes......... 4 6 3,740 7,804 3,160 2,658 2,485
--------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 301 $ 3,417 $ 5,963 $ 13,281 $ 5,144 $ 4,335 $ 4,055
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share (1)........... -- -- $ 0.32 $ 0.69 $ 0.24 $ 0.20 $ 0.19
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding.... 17,315 17,894 18,605 19,310 21,666 21,657 21,906
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------- June 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 346 $ 378 $ 368 $ 13,332 $ 11,231 $ 11,183
Working capital................................ 2,849 3,587 7,773 33,749 35,179 40,757
Total assets................................... 9,310 13,389 23,149 55,319 56,031 66,051
Total debt..................................... 2,680 8,459 9,946 2,484 2,051 1,534
Stockholders' equity........................... 4,025 1,011 7,218 41,087 46,496 50,625
</TABLE>
- ------------------------------
(1) Prior to January 1, 1994, the Company was treated as an S corporation for
tax purposes and, accordingly, net income per share for the years ended
December 31, 1992 and 1993 has not been calculated. On a pro forma basis,
assuming federal, state and foreign income tax rates aggregating 40.0%, net
income and net income per share for the year ended December 31, 1992 would
have been $181,000 and $0.01, respectively, and for the year ended December
31, 1993 would have been $2,047,000 and $0.11, respectively.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY VARY SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
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 61%, 64%
and 65% of the Company's sales in 1995, 1996 and the first six months of 1997,
respectively. The Company had benefited from strong growth in the semiconductor
industry until the downturn in the semiconductor and semiconductor equipment
industries in 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. See "Risk Factors--The
Semiconductor and Semiconductor Industries Are Highly Volatile" and "Risk
Factors--Dependence on Design Wins; Barriers to Obtaining New Customers; High
Level of Customized Systems."
The Company sustained substantial water-related damage to its manufacturing
facilities and certain equipment and inventory during a severe rainstorm on July
29, 1997, which interrupted production and shipments. The Company was able to
resume some production within a few days and has been increasing production as
repairs are made and equipment and inventory are replaced. The Company expects
that its revenues and operating results in the current quarter ending September
30, 1997 will be affected by the production interruption. Actual results for the
current quarter will depend on continued success in increasing production and
the ability to obtain in a timely manner the necessary key components from
suppliers to meet current production goals, as to which there can be no
assurance. The Company expects that it will record a one-time charge of $2.5
million to $3.0 million in the third quarter of 1997 for losses incurred as a
result of the water-related damage. The final charge, which cannot presently be
determined, could be larger. The extent of insurance coverage, if any, is
unresolved. In addition, the Company will record a one-time charge of $3.1
million for in-process research and development costs in connection with the
acquisition of Tower. See "Risk Factors--Current Quarter Results Affected by
Water-Related Damage and Acquisition of Tower."
RECENT ACQUISITION
In August 1997, the Company acquired Tower Electronics, Inc., a designer and
manufacturer of custom, high performance switchmode power supplies. Tower's
power supplies have an average selling price of approximately $350 and are used
principally in the telecommunications, medical and non-impact printing
industries. Its principal customers include U.S. Robotics (recently acquired by
3Com Corporation) and its contract manufacturer, VideoJet Systems International,
Medtronic and Intermedics. Tower had revenues of $13.4 million for its fiscal
year ended September 30, 1996. The purchase price consisted of $14.5 million in
cash, which was financed in part by the $12.0 million Term Loan, and a
promissory note to the seller in the
16
<PAGE>
original principal amount of $1.5 million, which were delivered by the Company
at closing, as well as an earn out provision, pursuant to which the seller will
be entitled to additional consideration if Tower's sales achieve certain levels
in 1998. The promissory note matures in August 1998 and is non-interest bearing.
The acquisition will be accounted for using the purchase method of accounting.
The Company will record a one-time charge of $3.1 million in the third quarter
of 1997 for in-process research and development costs in connection with the
acquisition. The Company currently estimates that its depreciation and
amortization expense will increase by approximately $1.3 million annually for
the next several years. See the Form 8-K Regarding Tower, the Pro Forma
Condensed Consolidated Balance Sheet and "Risk Factors--Current Quarter Results
Affected by Water-Related Damage and Acquisition of Tower."
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of sales:
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................ 50.2 52.1 62.8 60.1 62.4
----- ----- ----- ----- -----
Gross margin................................................. 49.8 47.9 37.2 39.9 37.6
----- ----- ----- ----- -----
Operating expenses:
Research and development................................... 11.3 11.1 13.9 12.5 11.9
Sales and marketing........................................ 9.0 6.5 8.7 7.6 7.7
General and administrative................................. 10.2 7.6 6.3 7.1 5.5
----- ----- ----- ----- -----
Total operating expenses..................................... 30.5 25.2 28.9 27.2 25.1
----- ----- ----- ----- -----
Income from operations....................................... 19.3 22.7 8.3 12.7 12.5
Other income (expense)....................................... (0.6) (0.4) 0.1 (0.4) (0.2)
----- ----- ----- ----- -----
Income before income taxes................................... 18.7 22.3 8.4 12.3 12.3
Provision for income taxes................................... 7.2 8.3 3.2 4.7 4.7
----- ----- ----- ----- -----
Net income................................................... 11.5% 14.0% 5.2% 7.6% 7.6%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
SIX MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
SALES. Sales for the first six months of 1997 were $53.4 million, a
decrease of 6.0% from sales of $57.0 million in the comparable period in 1996.
The Company's decrease in sales between the periods presented has resulted from
decreased unit sales of the Company's systems. A significant part of the sales
decrease is attributable to decreased demand by domestic semiconductor equipment
customers, primarily the Company's two largest customers, reflecting the
downturn in the entire semiconductor equipment industry that affected the
Company's results throughout 1996 and during the first quarter of 1997.
Partially offsetting these decreases, sales in Japan were up 156% from the
comparable period in 1996 due to increased unit sales.
GROSS MARGIN. The Company's gross margin for the first six months of 1997
was 37.6%, down from 39.9% in the comparable period in 1996. The 2.3% decline in
gross margin between the periods was due primarily to underabsorption of
manufacturing overhead costs resulting from the lower sales base.
RESEARCH AND DEVELOPMENT. Research and development expenses for the first
six months of 1997 were $6.3 million, down from $7.1 million in the comparable
period of 1996, representing a decrease of 11%. This decrease resulted from a
reduction in allocation of infrastructure costs to research and development. As
a percentage of sales, research and development expenses decreased to 11.9% in
the first six months of 1997 from 12.5% in the comparable period in 1996.
The Company believes that continued research and development investment is
essential to ongoing development of new products. Since inception, all research
and development costs have been internally funded and expensed.
17
<PAGE>
SALES AND MARKETING. Sales and marketing expenses for the first six months
of 1997 were $4.1 million, down from $4.3 million in the comparable period in
1996, representing a decrease of 5%. As a percentage of sales, sales and
marketing expenses increased to 7.7% in the first six months of 1997 from 7.6%
in the comparable period in 1996.
The Company is in the process of reorganizing its sales and marketing team
to better address the specific needs of its customers. In March 1996, the
Company hired a vice president of sales, marketing and customer support. The
Company intends to open a new support office in South Korea in 1997. As a result
of these and other factors, sales and marketing expenses are expected to
continue to increase in future periods.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for the
first six months of 1997 were $3.0 million, down from $4.1 million in the
comparable period in 1996, representing a decrease of 27%. This decrease was
primarily a reduction in payroll and benefits expenses. As a percentage of
sales, general and administrative expenses decreased to 5.5% in the first six
months of 1997 from 7.1% in the comparable period in 1996.
OTHER INCOME (EXPENSE). Other expense was $0.1 million for the first six
months of 1997, compared to other expense of $0.2 million in the comparable
period in 1996.
PROVISION FOR INCOME TAXES. The income tax provision of $2.5 million for
the first six months of 1997 represented an estimated effective rate of 38.0%.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
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 resulted from the increased unit sales of the Company's systems. 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. The relatively slow sales growth from
1995 to 1996 was primarily attributable to the downturn in the semiconductor
equipment industry in 1996.
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.
GROSS MARGIN. The Company's gross margin was 49.8%, 47.9% and 37.2% in
1994, 1995 and 1996, respectively. The decreases in gross margin from 1994 to
1995 and to a much greater extent from 1995 to 1996 were generally due to higher
material costs and other costs associated with the Company's outsourcing
efforts. In addition, gross margin in 1996 was negatively affected due to
underabsorption of manufacturing overhead as a result of substantially lower
sales in the second half of 1996. Further, gross margin was negatively impacted
throughout 1996 by a shift in product mix toward products with higher materials
cost as a percentage of sales and by customer service costs which increased as a
percentage of sales due to the lower sales base.
From 1994 to 1996, the average selling price per unit has remained
relatively constant. Historically, price competition has not had a material
effect on margins. However, competitive pressures on the Company and its
customers 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
18
<PAGE>
13.9% in 1996. The increase in expenses from 1995 to 1996 is 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. Since inception, all research and development
costs have been internally funded and expensed.
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.
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.
OTHER INCOME (EXPENSE). Other income consists primarily of foreign exchange
gains and losses and other miscellaneous income and expense items. The majority
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 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 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.
19
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results in dollars and as a
percentage of sales for the eight quarters ended June 30, 1997. 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.
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
1995 1995 1996 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................................. $ 25,554 $ 26,170 $ 27,166 $ 29,831 $ 21,639 $ 20,216 $ 20,667 $ 32,690
Cost of sales......................... 12,734 14,842 17,035 17,204 15,047 12,752 13,158 20,139
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 12,820 11,328 10,131 12,627 6,592 7,464 7,509 12,551
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............ 2,711 3,416 3,498 3,645 3,349 3,268 2,821 3,513
Sales and marketing................. 1,571 1,908 2,083 2,248 2,201 2,058 1,799 2,336
General and administrative.......... 1,801 1,778 1,725 2,330 933 1,265 1,248 1,702
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 6,083 7,102 7,306 8,223 6,483 6,591 5,868 7,551
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ 6,737 4,226 2,825 4,404 109 873 1,641 5,000
Other income (expense)................ (562) 73 (170) (66) 97 232 (387) 286
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 6,175 4,299 2,655 4,338 206 1,105 1,254 5,286
Provision for income taxes............ 2,116 1,583 982 1,676 83 419 489 1,996
--------- --------- --------- --------- --------- --------- --------- ---------
Net income............................ $ 4,059 $ 2,716 $ 1,673 $ 2,662 $ 123 $ 686 $ 765 $ 3,290
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income per share.................. $ 0.21 $ 0.13 $ 0.08 $ 0.12 $ 0.01 $ 0.03 $ 0.04 $ 0.15
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding....... 19,170 20,577 21,794 21,653 21,622 21,728 21,821 21,991
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------------------------
Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30
1995 1995 1996 1996 1996 1996 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<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......................... 49.8 56.7 62.7 57.7 69.5 63.1 63.7 61.6
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit.......................... 50.2 43.3 37.3 42.3 30.5 36.9 36.3 38.4
--------- --------- --------- --------- --------- --------- --------- ---------
Operating expenses:
Research and development............ 10.6 13.1 12.9 12.2 15.5 16.2 13.6 10.8
Sales and marketing................. 6.1 7.3 7.7 7.5 10.2 10.2 8.7 7.1
General and administrative.......... 7.0 6.8 6.3 7.8 4.3 6.2 6.0 5.2
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 23.7 27.2 26.9 27.5 30.0 32.6 28.3 23.1
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations................ 26.5 16.1 10.4 14.8 0.5 4.3 8.0 15.3
Other income (expense)................ (2.3) .3 (0.6) (0.3) 0.5 1.2 (1.9) 0.9
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 24.2 16.4 9.8 14.5 1.0 5.5 6.1 16.2
Provision for income taxes............ 8.3 6.0 3.6 5.6 0.4 2.1 2.4 6.1
--------- --------- --------- --------- --------- --------- --------- ---------
Net income............................ 15.9% 10.4% 6.2% 8.9% 0.6% 3.4% 3.7% 10.1%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</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
20
<PAGE>
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,
pricing pressures exerted by the Company's customers, the timing of research and
development expenditures, and expenses related to acquisitions, strategic
alliances, and the further development of marketing and service capabilities.
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 level
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, 1996 and 1997 to
date 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. Demand from the semiconductor equipment companies, reflecting an overall
industry slowdown, dropped significantly in the third and fourth quarters of
1996 and the first quarter of 1997, 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. Additionally, sales to the
flat panel display industry, primarily in Japan, were significantly lower
throughout 1996 compared to 1995.
The Company's gross margin fluctuated significantly on a quarterly basis in
1995, 1996 and 1997 to date, primarily reflecting utilization of manufacturing
capacity. While average selling prices remained relatively constant throughout
the periods presented, beginning in the fourth quarter 1995 gross margins were
significantly lower than historical levels due primarily to the substantial drop
in unit shipments that resulted from the semiconductor downturn. Additionally,
gross margin in the fourth quarter of 1995 was negatively impacted by 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 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. Gross
margin remained relatively stable during the first quarter of 1997, when
compared to the fourth quarter of 1996. The improvement of gross margin to 38.4%
in the second quarter of 1997 was primarily attributable to more favorable
absorption of manufacturing overhead resulting from a 58% increase in sales
compared to the first quarter of 1997.
21
<PAGE>
The Company's operating expenses increased on a quarterly basis 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 1998 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 company-wide
restructuring and the implementation of cost containment measures in the third
quarter. In general, operating expenses as a percentage of sales have declined
during periods of rapid sales growth, when sales have increased at a rate faster
than the Company's ability to add personnel and facilities to support the
growth. At the same time, operating expenses as a percentage of sales has
increased during periods of flat or declining sales, when the Company has
invested in operating infrastructure to support anticipated future growth. This
was essentially the case from the fourth quarter of 1995 through the fourth
quarter of 1996, when the Company continued to invest in research and
development, sales and marketing and general and administrative functions
despite experiencing the slow to declining sales growth during the capital
equipment industry slowdown. Operating expenses in the first quarter of 1997
decreased in dollars and as a percentage of sales as a result of cost
containment measures instituted in response to relatively flat sales growth
resulting from the downturn. In the second quarter of 1997, operating expenses
increased in anticipation of increased sales to semiconductor equipment
manufacturing customers and decreased as a percentage of sales as a result of
the 58% increase in sales during that quarter.
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 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 $1.2 million for the first six months of
1997 compared to $0.2 million for the same period in 1996. Cash provided in the
first six months of 1997 was primarily a result of net income and increases in
accounts payable offset by increases in accounts receivable and inventories.
Cash provided in the comparable period in 1996 was primarily a result of net
income offset by increases in accounts receivable and inventories and decreases
in accounts payable.
Investing activities, consisting primarily of equipment acquisitions, used
cash of $0.8 million in the first six months of 1997, versus $4.4 million in the
comparable period in 1996. In the first quarter of 1996 the Company equipped and
moved into a new 56,000 square foot building. Financing activities in the first
six months of 1997 used cash of $0.5 million and consisted primarily of
repayment of notes payable and capital lease obligations. In the comparable
period in 1996, financing activities used cash of $0.4 million and consisted
primarily of repayment of notes payable and capital lease obligations, partially
offset by proceeds from the sale of Common Stock. The Company has updated its
capital spending outlook and plans to spend approximately $5.0 million through
the remainder of 1997 for the acquisition of manufacturing and test equipment
and furnishings.
As of June 30, 1997, the Company had working capital of $40.8 million. The
Company's principal sources of liquidity consisted of $11.2 million of cash and
cash equivalents and $10.0 million available under a $10.0 million revolving
line of credit (the "Prior Line of Credit") that bore interest at the Prime
Rate. In August 1997, the Company entered into a new credit facility consisting
of (i) a $10.0 million revolving line of credit which replaces the Prior Line of
Credit, (ii) the $12.0 million Term Loan and (iii) a $4.0 million line of credit
to acquire or refinance borrowings for equipment. Advances under the new
revolving line of credit bear interest at either the Prime Rate (8.5% at August
15, 1997) minus 0.75% or the LIBOR Rate (6.0% at August 15, 1997) plus 175 basis
points, at the Company's option. All advances under the revolving line of credit
will be due and payable in August 1999. The Term Loan bears interest at the
Prime Rate minus 0.25%, adjustable to the Prime Rate minus 0.50% if certain
financial ratios are achieved, with principal due in 20 equal quarterly
installments commencing October 1, 1997. Mandatory annual prepayments are
required on the Term Loan based on the lesser of $3 million or the amount by
which fiscal earnings before interest, taxes, debt and amortization exceeds $20
million. The Company will repay the Term Loan with a portion of the net proceeds
from this Offering, which will cause the Company to incur a prepayment penalty
of 0.75% of the
22
<PAGE>
amount of the prepayment, or approximately $90,000, which amount also will be
paid with a portion of the net proceeds from this Offering. Advances under the
equipment line of credit bear interest at the Prime Rate minus 0.5% and interest
will be payable monthly through August 1998 and quarterly thereafter until fully
paid. The Company also has a pre-existing term loan, under which the Company had
borrowed approximately $1.5 million in October 1996, for equipment financing for
its United States operations. At August 15, 1997, approximately $1.1 million was
outstanding under such term loan, which bears interest at the Prime Rate minus
0.25%, and will be due and payable in November 1999.
The Company believes that its cash and cash equivalents, cash flow from
operations, available borrowings and the proceeds of this Offering will be
sufficient to meet the Company's working capital needs through mid-1998. After
that time, the Company may require additional equity or debt financing to
address its working capital, capital equipment or expansion needs. In addition,
any significant acquisitions by the Company may require additional equity or
debt financings to fund the purchase price, if paid in cash. 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.
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BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY VARY SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS."
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 utilize
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, Eaton, Intevac, Multi-Arc, Novellus,
Singulus Technologies, Sputtered Films and ULVAC Technologies.
Since inception, the Company has produced over 90,000 power conversion and
control systems. Approximately 61%, 64% and 65% of the Company's sales in 1995,
1996 and the first six months of 1997, respectively, were to customers in 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 to customers in Japan,
Korea, Australia, France, Hong Kong, Italy, Mexico, Singapore, Sweden and
Taiwan. International sales represented 29%, 24% and 24% of the Company's sales
in 1995, 1996 and the first six months of 1997, respectively. The Company
maintains sales and service offices in the United States in Fort Collins,
Colorado; Austin, Texas; Concord, Massachusetts; and Milpitas, California; and
outside the United States in Tokyo, Japan; Filderstadt, Germany; and Bicester,
United Kingdom.
BACKGROUND
THE MARKET FOR PLASMA-BASED THIN FILM PRODUCTION PROCESSES
Manufacturing processes in use today employ thin film technology to deposit,
etch and modify thin layers of materials on substrates such as silicon, glass
and metals. 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 in films
that are less than a hundredth of a micron in thickness. By using modern thin
film production processes, manufacturers are able to control and alter the
electrical, magnetic, optical and mechanical characteristics of materials. The
ongoing demand for improvements in the performance, capacity and speed of
products produced by thin film processing, such as integrated circuits, flat
panel displays, and magnetic media, is driving the development of more advanced
thin film technology to permit the production of increasingly thinner, more
consistent and more precise layers of film.
Thin film production processes are now used in a broad and rapidly growing
range of industrial manufacturing processes. Thin film processes have been
employed most extensively in the semiconductor industry. In the fabrication of
integrated circuits, multiple thin film layers of insulating or conductive
materials, each becoming an integral part of microscopic device and circuitry
features, are deposited on a wafer or substrate. For example, the current
generation dynamic random access memory chips (DRAMs) are manufactured with ten
to thirty layers of film and an overall thickness of no more than 0.5 microns.
Thin film manufacturing processes similar to those employed in the semiconductor
industry are increasingly being used in the production of flat panel displays
such as the monitors in portable computers. Such processes are also used
extensively in the data storage industry in the production of compact discs,
video discs and computer hard disks. Thin film processes for data storage
products are employed to create the optical and magnetic storage mediums, as
well as to deposit protective wear surfaces on the finished products. In
addition, industrial
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manufacturers have begun to use thin film processes to apply coatings or films
to a wide range of products, including solar panels, architectural glass,
eyeglasses, tools, bar-code readers, lenses, automotive parts, front surface
mirrors, decorative wrappings and food product packaging.
The primary applications for thin film manufacturing include deposition (in
which a layer of material is deposited on a surface) and etch (in which unneeded
portions of a layer are removed). Thin film production was initially
accomplished with liquid chemical (wet chemistry processing) or thermal
processes. Over time, those processes became inadequate for many applications as
the demand for products requiring thinner, more precise films increased.
Plasma-based process technology was developed to address the limitations of wet
chemistry and thermal technologies in certain applications and to enable new
applications.
Today plasma processing is broadly used by thin film manufacturers. A plasma
is commonly created by applying enough electrical force to a gas at reduced
pressure to separate electrons from their parent atoms. Although the distance of
separation is small, the atom is transformed to a highly energetic state. In
plasma-based thin film processing, the material to be altered (the substrate)
and one or more specific gases are inserted into a vacuum chamber. The plasma
created from the gases is then manipulated by electrical forces to alter the
molecular characteristics of the substrate surface. Due to its electrical
character, plasma is an inherently more controllable and accurate production
process for many applications than thermal or wet chemistry processes. Using
electrical forces it is possible to more precisely control the arrival rate,
angle and energy of molecules at the surface being modified. Because of the
precision provided by plasma's electrical character, plasma process technology
is expected to continue evolving to meet the worldwide growth in demand for
smaller, more versatile electronics, finer visual resolution products and denser
data storage mediums.
Below is an illustration of a plasma-based production process:
[Illustration titled "Plasma Process Illustration" depicting in diagram form the
flow of utility power to a power conversion and control system, with arrows
identifying the plasma, ions, electric field and substrate in the vacuum process
system.]
POWER CONVERSION AND CONTROL SYSTEM REQUIREMENTS
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.
A power conversion and control system used in a plasma process must 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 thin films of unvarying thickness on a mass scale. Instability of
electrical forces in the plasma may damage or destroy the substrate under
production, as well as the power conversion and control system. To avoid
instabilities, a power conversion and control system must react within
microseconds (millionths of a second) to changes in the level of the utility
supplied power, the electrical characteristics of the plasma and process control
settings. The key requirements for plasma processing power conversion and
control systems are:
CONVERSION AND CONTROL OF HIGH POWER. Plasma production requires the
generation of extremely high levels of electrical power, usually in the range of
500 to 25,000 watts. In contrast, the power level required to operate most home
and office electrical equipment is generally far below 500 watts. A power
conversion and control system must include the ability to properly convert the
externally supplied power, and must also make accurate and fast measurements so
the system can be dynamically controlled. These measurements are difficult
because of the strong electrical fields and electrical noise that result from
the high power concentration and the
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<PAGE>
nature of the plasma itself. Additionally, a power conversion and control system
must meet the small footprint requirements of a clean room environment while
minimizing the impact of the concentration of electrical radiation and heat
caused by tightly packed high power circuitry.
CONTROL OVER A WIDE RANGE OF POWER LEVELS. Power conversion and control
systems for plasma processes must operate over a wide range of power levels in
order to support a variety of plasma processes and applications. For example, a
power conversion and control system may need to operate at power levels which
vary by a factor of one thousand. In contrast, the power supplies used in most
home and office electrical equipment generally only need to operate at power
levels which vary by no more than a factor of two. One of the most challenging
requirements for plasma process power conversion and control systems is the need
for system instrumentation to make rapid measurements, at both low and high
levels of power, of many electrical characteristics, including current, voltage,
power and impedance levels, with precision, speed and accuracy at every level.
CONTROL OF UTILITY INSTABILITIES. Incoming power from a utility supplier is
subject to brownouts, surges, voltage transients and general voltage variations.
A power conversion and control system must serve as a buffer from the
variability of raw utility power sources. Under normal operating conditions
(excluding brownouts), voltage from the utility source may vary by as much as +/
- -10%. In comparison, even a 1% variance in the power supply to a plasma chamber
may cause significant defects in the film under production.
CONTROL OF ARCS. One of the most critical problems that arise from a
failure to control power in a plasma process is arcing, intense localized
electrical discharges which act like lightning. Arcs often cause serious damage
to both the substrate and the power conversion and control equipment. A power
conversion and control system must not only be rugged enough to withstand the
impact of abrupt electrical changes in the plasma, but must also contain
circuitry to extinguish arcs as they occur. In order to effectively control
arcs, the power system must act to control the power levels within less than a
microsecond.
CONTROL OF SYSTEM INSTABILITIES. In some advanced plasma processes using
exotic gases and electrode arrangements, the current and voltage in the plasma
may fluctuate causing system instabilities. The power conversion and control
system must promptly detect the changing electrical characteristics of the
plasma and adjust the power supply to prevent such instabilities. If such system
instabilities are not properly controlled, the thin films will lack uniformity,
which may seriously impair the yield and performance of the products being
manufactured.
CHARACTERISTICS OF THE POWER CONVERSION AND CONTROL SYSTEM MARKET
The plasma processing industry requires a wide range of power frequencies
for plasma-based thin film processes, from zero frequency direct current (DC) to
alternating current (AC) at frequencies of several gigahertz. Frequency
influences the type of physical and chemical activity which will occur in the
plasma. Power conversion and control systems change the frequency of raw utility
power, as required for particular applications. For example, DC is typically
used in physical vapor deposition (PVD) processes, including sputtering, while
high frequency AC such as radio frequencies (RF) are typically used in etch and
chemical vapor deposition (CVD) processes.
Power conversion and control systems for plasma processes often need to be
highly customized to meet application and customer requirements. This
customization involves developing unique design and component configurations to
permit specific variations in power, voltage, current and frequency levels,
modification for interfacing with customer equipment, and adjustments to
controls and external packaging requirements. The long term challenge facing
manufacturers of power conversion and control systems is to efficiently produce
these complex, highly customized systems in a cost effective manner. Moreover,
power conversion and control systems must be continuously adapted to address the
requirements of the growing number of applications using thin film production
processes.
THE ADVANCED ENERGY SOLUTION
Advanced Energy has been a pioneer in the development of power conversion
and control systems for advanced plasma production processes. The Company
believes that it introduced the first switchmode sputtering power conversion and
control system for PVD applications, the first switchmode based AC power
conversion and control system for plasma-enhanced chemical vapor deposition
(PECVD) and the first compact general switchmode radio frequency system for
plasma applications. In addition, the Company was the first to introduce
products incorporating active arc prevention capability, the first ultra-compact
high power radio frequency switchmode power conversion and control systems for
semiconductor etch applications, and the first Matchless RF power conversion and
control system eliminating the need for a tuner or matching network.
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The following diagram provides a representation of the architecture
incorporated in Advanced Energy's power conversion and control systems. The
specific example below illustrates the architecture of the Company's DC systems.
Although the Company's AC systems differ slightly in certain respects, the
architecture pictured in the diagram is generally representative of all of the
Company's AC power conversion and control systems.
[Block diagram titled "AE Product Architecture" depicting the flow of utility
power to a plasma through a DC power conversion and control system. The diagram
of the power conversion and control system consists of seven blocks: Rectifier
AC-->DC, Inverter DC-->AC, Output Filter, Controls, Customer Interface,
Instrumentation and Logic.]
Key elements of the Advanced Energy solution include:
KNOWLEDGE OF PLASMA PROCESSES. Since its inception, the Company has built a
large base of expertise in the interaction between plasma processes and power
conversion and control systems. This knowledge allows the Company to develop
systems that optimize the customer's plasma processes and applications, and to
assist customers in developing new process applications. A core competency of
the Company is its ability to advise customers of design advantages which may be
achieved in both plasma production processes for specific applications and in
the power conversion and control systems. The Company has placed Company
scientists and engineers within customer sites to support customers in their
process development. The Company believes this application of knowledge and
resources is unique in the industry and represents a key competitive strength.
UTILIZATION OF SWITCHMODE TECHNOLOGY. The Company believes that it
developed the first switchmode power conversion and control systems for plasma
processing. Switchmode power conversion is a digitally based solution to power
conversion that represents an improvement over previously employed alternatives.
Switchmode based systems are smaller, lighter and faster due to the use of high
speed switching. Switchmode technology also enables rapid control of the high
power required in plasma production processes and improves the response time to
random variables in the system. In addition, switchmode has the benefit of
significantly reducing the stored energy in a system, a major cause of arcing.
The Company's first switchmode PVD system, the MDX, introduced in 1983, reduced
the amount of stored energy by a factor of 100 to 1,000 times compared to the
technology then in use and fostered the development and widespread use of PVD
sputtering processes.
MEASUREMENT AND CONTROL SOLUTIONS. The Company has designed its systems to
incorporate high speed, highly precise electronic measurement and system
controls. Multiple sensors continually measure current, voltage and other
electrical properties of the plasma. These measurements are converted into
signals, processed with digital signal processors, and the results then
converted to input signals for the power conversion and control systems. The
Company's power conversion and control systems thus dynamically control the flow
of
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<PAGE>
power delivered, minimize stored energy, make precise system adjustments,
compensate for random variabilities and notify the user of out-of-range
conditions. These dynamic in-system controls enable the Company's systems to
prevent or eliminate arc and other system or utility related instabilities.
STRATEGY
The Company is a leading provider of power conversion and control systems
for plasma processing equipment. The Company's initial focus has been on
building a leadership position in the semiconductor, flat panel display and data
storage markets, which presently constitute the predominant markets for
plasma-based thin film processing equipment. To continue its penetration of
these markets and to pursue opportunities in a broad range of emerging
industrial markets, the Company has adopted the following strategies:
PROVIDE UNIQUE SOLUTION FOR CUSTOMERS. The Company pursues a product
development strategy based on providing solutions optimized to meet specific
application and customer requirements. The Company works closely with its
customer's present and future power conversion and control needs. The Company
intends to continue investing to enhance its applications expertise. By offering
customized power conversion and control solutions early in the customer's
development process and then making the solutions available on a timely basis,
the Company increases its chances of obtaining design wins necessary for volume
production.
OFFER COMPREHENSIVE PRODUCT PORTFOLIO. The Company offers products in all
of the major frequencies used in plasma processes and in the full spectrum of
required power levels. The Company offers products or technologies which address
the power conversion and control requirements for all of the predominant plasma-
based processes employed in the semiconductor industry, and for the PVD
sputtering requirements of the flat panel, data storage and industrial markets.
The Company also has products for non-plasma semiconductor processes such as ion
implantation. By offering a full range of systems, the Company seeks to provide
responsive and comprehensive solutions for all of a customer's power conversion
and control needs.
UTILIZE REUSABLE ENGINEERING AND MODULAR DESIGN METHODOLOGY. The Company's
strategy is to provide customers with fast-time-to-market solutions through
"reusable engineering" and modular design approaches. By utilizing reusable
engineering and programmable software based architectures, the Company is able
to modify its basic platforms to create solutions that are tailored for specific
applications and customer requirements. The Company achieves efficiencies by
designing its products to have an open architecture and common features,
standard components and interfaces across a variety of processes. As a result,
the Company believes it has the capability to deliver a broad range of
customized products within short lead times and on a competitively priced basis.
TARGET EMERGING INDUSTRIAL OPPORTUNITIES. The Company is focusing its
marketing activities to capitalize on emerging industrial applications having
the potential to use plasma-based production processes. Some of these new
applications require power levels significantly greater than those required in
the semiconductor, flat panel display and data storage markets. The Company has
been making increasing investments in technologies for these very high power
levels, including development of new DC and AC power systems and high power
pulsed systems. The emerging industrial opportunities include applications in
the manufacturing of automobiles, tools, architectural glass and other products
where thin film sputtering processes are now being adopted.
DIVERSIFY MARKETS AND PRODUCT OFFERINGS. The Company's power conversion and
control systems generally range in price from $3,000 to $100,000, with an
average price of approximately $9,000, and are sold principally to semiconductor
equipment manufacturers. The Company intends to diversify its markets and
product offerings through research and development, as well as through
acquisitions of other businesses, products and technologies. The Tower and MIK
acquisitions provide the Company with additional product lines and entry into
other markets, such as telecommunications, medical and non-impact printing.
TECHNOLOGY
The Company believes it has developed particular expertise in the following
technologies which distinguish its power conversion and control systems.
SWITCHMODE TECHNOLOGY. All of the Company's power conversion and control
systems utilize switchmode power conversion technology. Switchmode power
conversion is a technique which takes the raw utility power supply (AC power),
and first converts the AC current to direct current (DC) by a rectifier. Special
high speed semiconductor switches then convert the uncontrolled direct current
power to increased frequency power which is much higher (1,000 to 20,000 times
greater) than the frequency of raw utility power. The high
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<PAGE>
frequency power is passed through a transformer to electrically isolate the
system from the raw utility power, and for impedance matching to the plasma
impedance requirements. The AC power is then reconverted to DC power by a second
high speed rectifier. The converted DC power is used to ignite and manipulate
the plasma. Instrumentation circuits measure the output, and this information is
fed back to control circuits which vary the switch elements to maintain the
inputs to the plasma at the level requested by the user, regardless of the
incoming line voltage. The higher frequency voltage produced by the switchmode
action can be transformed and further processed with components that are tens to
hundreds of times smaller than competing "linear" and "line frequency" designs.
The switchmode technique has been extensively used in low power applications
such as personal computers, but the power levels required by plasmas are much
greater and require significantly different techniques and components. In
addition, the unstable nature of the plasma places unusually harsh demands on
the fragile high speed semiconductor switches used for switchmode operation.
ARC PREVENTION TECHNOLOGY. Even though a plasma is electrically neutral,
the momentarily separated ions and electrons in a plasma may not be uniformly
distributed. This uneven distribution can produce miniature lightning bolts,
known as arcs, which slow down the throughput of a plasma process, and may even
destroy the substrate or the power conversion and control system. The Company
has introduced several products that actually prevent the formation of arcs by
controlling the distribution of electrons. For the many situations where arcs
cannot be prevented, the Company's systems contain circuitry that detects the
onset of an arc, controls the extinguishing of the arc and then reapplies power
in a manner that avoids damage or delays in the plasma production process. The
system responses for the prevention and suppression of arcs are initiated in
less than a microsecond.
MINIMIZATION OF STORED ENERGY. Stored energy is the amount of energy in a
power conversion and control system that is available to flow into the plasma
during an arc, and cannot be stopped without diversion or interruption
circuitry. Stored energy must be minimized for advanced plasma processes,
because the desired characteristics of the thin film can be ruined by
uncontrolled energy within the plasma. One of the Company's first switchmode
products, the MDX, which was introduced in 1983, reduced the amount of stored
energy by a factor of 100 to 1,000 times compared to existing power conversion
and control systems. In 1995 the Company introduced the MDX-Pinnacle system
which incorporates new proprietary technology that allows a further dramatic
reduction in stored energy (by as much as 1,000 times) over other systems
currently in use.
DIGITAL DESIGNS. The Company's products contain sophisticated sensor
technology and high speed digital circuitry, including embedded
microcontrollers, general and programmable array logic elements, field
programmable gate arrays and digital signal processors. A substantial portion of
the intelligence of the Company's power conversion and control systems is
incorporated in Company-designed software that runs on digital circuitry. The
use of industry standard components and proprietary software has provided the
Company with faster and more stable operation of feedback loops in the products,
greater flexibility in its manufacturing processes, as well as greater product
reliability.
HYBRID DESIGN TECHNOLOGY. The Company has developed substantial internal
hybrid microelectronic design expertise that has enabled it to develop
components that are smaller, more rugged, more reliable and create less heat
than commercially available components. Hybrid microcircuits involve the
packaging of integrated circuits and other electrical circuitry on a smaller
substrate than is possible with printed circuit boards. Using its expertise with
hybrid microelectronics, the Company pioneered the use of printed inductors and
hybrid-based high frequency switches in plasma-based power conversion and
control systems, which allowed significant improvements in the precision and
performance of the Company's measurement instrumentation.
PULSING TECHNOLOGY. The Company is incorporating pulsed power technology in
an increasing number of its systems for use in certain industrial applications.
In these applications, the power is momentarily interrupted and then reapplied.
Pulsed power is now used with frequencies ranging from 10Hz to 250Khz. In
certain applications, pulsed power is allowing substantial improvements in
process capability, including significant improvements in arc prevention.
Pulsing technology requires complex techniques that require skills in a broad
range of power conversion and control technologies.
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
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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 1990s, 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 products generally range in
price from $3,000 to $100,000, with an average price of approximately $9,000.
The following chart sets forth the Company's principal product lines and
related basic information:
<TABLE>
<S> <C> <C> <C> <C>
PRODUCT DESCRIPTION POWER/CURRENT MAJOR PROCESS
PLATFORM LEVEL APPLICATIONS
Direct MDX Power Control 500W-80kW PVD
Current and conversion - Metal sputtering
Products system - Reactive sputtering
MDX-II Power control 15kW-120kW PVD
and conversion - Metal sputtering
system - Reactive sputtering
Pinnacle Power control 6kW-120kW PVD
and conversion - Metal sputtering
system
Sparc-LE Arc management 1kW-60kW For use with MDX systems
accessory
Low and Mid PE Low frequency 1.25kW-30kW CVD
Frequency power control PVD
Products and conversion - Reactive sputtering
system Surface modification
PD Mid frequency 1.25kW-3.5kW CVD
power control PVD
and conversion - Reactive sputtering
system Surface modification
Radio RFX Power control 600W General R&D
Frequency and conversion
system
RFG Power control 600W-5.5kW Etch
and conversion CVD
system
RFXII Power control 600W-5.5kW Etch
and conversion CVD
system
ID Ion-beam 500W-5kW Ion-beam deposition
conversion and Ion implantation
control system Ion-beam etching/milling
AZX Tuner 100W-5kW Impedance matching network
RFZ Probe 50W-5kW Impedance measurement tool
</TABLE>
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<PAGE>
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.
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.
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 vendors' 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.
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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, APPLICATIONS AND CUSTOMERS
MARKETS
Approximately 61%, 64% and 65% of the Company's sales in 1995, 1996 and the
first six months of 1997, respectively, were made to customers in 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 reduced 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 notebook 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.
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.
32
<PAGE>
APPLICATIONS
The Company's products have been sold for use in connection with the
following processes and applications:
<TABLE>
<CAPTION>
Semiconductor Data Storage Flat Panel Display Industrial/Research
- ------------------- -------------------- --------------------- -------------------------
<S> <C> <C> <C>
PVD (Metal) Thin film heads Liquid crystal Optical coatings
Etch CD-ROMs displays Automobile coatings
PECVD (Metal) Audio discs Active matrix LCDs Food package coatings
Ion implantation Recordable CDs Digital micro-mirror Glass coatings
CVD Hard disk magnetic Plasma displays Consumer products
PECVD (dielectrics) layers Large flat panel coatings
Magnet field Hard disk carbon displays Circuit board etch-back
controls wear Field emission and de-smear
Photo resist coatings displays Photo voltaics
stripping Magneto-optic CDs LCD projection Medical applications
Megasonic cleaning Digital video discs Superconductors
Etch (DVD) Diamond-like coatings
(post-treatment) Chemical, physical and
Electrostatic Chuck materials research
Epitaxy Cutting tool hard
coatings
</TABLE>
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
produced more than 90,000 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 1996 and
the first six months of 1997 together accounted for approximately 47% and 45% of
the Company's 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. Following is a
representative list of the Company's customers, each of which generated at least
$250,000 in revenues for the Company in the first six months of 1997:
<TABLE>
<S> <C>
Applied Materials Multi-Arc
Balzers/Leybold Novellus
Eaton Corporation Shibaura
Fujitsu Singulus Technologies
Intevac Sputtered Films
Komag ULVAC Technologies
Lam Research VERTEQ
</TABLE>
RECENT ACQUISITION
In August 1997, the Company acquired Tower Electronics, Inc., a designer and
manufacturer of custom, high performance switchmode power supplies. Tower's
principal customers are in the telecommunications, medical and non-impact
printing industries and include U.S. Robotics, a subsidiary of 3Com Corporation,
VideoJet Systems International, Medtronic and Intermedics. Tower had revenues of
approximately $13.4 million for its fiscal year ended September 30, 1996. The
purchase price consisted of $16 million paid at closing plus an additional
contingent payment to be based on Tower's sales in 1998. The acquisition of
Tower is part of the Company's strategy to diversify its product offerings and
expand its customer base. See the Form 8-K Regarding Tower and the Pro Forma
Condensed Consolidated Balance Sheet.
The Company intends to retain Tower as a direct subsidiary and to continue
Tower's manufacturing operations out of Tower's existing facilities, which
consist of approximately 21,000 square feet of leased space in Fridley,
Minnesota. The Company also has retained all of Tower's approximately 85
full-time employees. See "Risk Factors--Risks Associated with Recent and
Potential Future Acquisitions."
33
<PAGE>
MARKETING, SALES AND SERVICE
The Company sells its systems primarily through direct sales personnel to
customers in the United States, Japan and Europe. In the United States, the
Company's sales personnel are located at the Company's headquarters in Fort
Collins, Colorado, and in regional sales offices in Austin, Texas; Concord,
Massachusetts; and Milpitas, California. To serve customers in Asia and Europe,
the Company has sales offices in Tokyo, Japan; Bicester, United Kingdom; and
Filderstadt, Germany which have primary responsibility for sales 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, Singapore, Sweden, Taiwan and Hong Kong.
Sales outside the United States represented approximately 29%, 24% and 24%
of the Company's total sales during 1995, 1996 and the first six months of 1997,
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 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 service
offices in the United States in Fort Collins, Colorado; Austin, Texas; and
Milpitas, California; and outside the United States in Tokyo, Japan;
Filderstadt, Germany; and Bicester, United Kingdom.
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.
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 $13.8 million and $6.3
million in 1996 and the first six months of 1997, respectively. These amounts
represented 14% and 12% of total sales for those periods. From 1994 to 1996, the
Company introduced more than sixty-five new products. The Company believes that
34
<PAGE>
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.
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, and some products are subjected to a highly accelerated stress screen
(HASS) test. 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 sustained substantial water-related damage to its manufacturing
facilities, equipment and inventory in late July 1997, which interrupted
production and shipments. The Company was able to resume some production within
a few days and has been increasing production as repairs are made and equipment
and inventory are replaced. See "Risk Factors--Risks Associated with
Manufacturing Facility."
The Company relies on sole and limited source suppliers for certain parts
and subassemblies. Such reliance involves several risks, including a potential
inability to obtain an adequate supply of required components, reduced control
over pricing and timing of delivery of components and suppliers' potential
inability to develop technologically advanced products to support the Company's
growth and development of new systems. The Company believes that alternative
sources could be obtained and qualified, if necessary, for most 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. This could damage the Company's
relationships with current and potential customers. See "Risk Factors--Supply
Constraints and Dependence on Sole and Limited Source Suppliers."
INTELLECTUAL PROPERTY
The Company's success depends in large part on the technical innovation of
its products. While the Company attempts to protect its intellectual property
rights through patents and non-disclosure agreements, it believes that its
success will depend to a greater degree upon innovation, technological expertise
and its ability to adapt its products to new technology. There can be no
assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property to the same extent as do the laws of the United States. 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.
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. See "Risk Factors--Intellectual Property Rights."
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 support. The Company believes that it currently competes
35
<PAGE>
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, RF Power Products, Huttinger, Shindingen, Kyosan,
Comdel and Daihen. In addition, the Company from time to time faces competition
from smaller companies for specific products. 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. See "Risk Factors--Competition."
EMPLOYEES
At August 15, 1997, the Company had a total of 883 employees, of whom 672
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.
FACILITIES
The Company's headquarters are located in Fort Collins, Colorado, in
approximately 170,000 square feet of leased space. The Company believes that
additional space will be available if necessary for expansion. The Company
maintains sales and service offices in the United States in Fort Collins,
Colorado; Austin, Texas; Concord, Massachusetts; and Milpitas, California; and
outside the United States in Tokyo, Japan; Filderstadt, Germany; and Bicester,
United Kingdom. All of the Company's facilities are leased.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of the
date of this Prospectus are as follows:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Douglas S. Schatz.......... 51 President, Chief Executive Officer and Chairman of the Board
Hollis L. Caswell.......... 66 Chief Operating Officer and Director
G. Brent Backman........... 56 Vice President, Special Projects, Assistant Secretary and Director
Eric A. Balzer............. 48 Vice President, Operations
Richard P. Beck............ 64 Vice President, Chief Financial Officer and Director
James F. Gentilcore........ 45 Vice President, Sales and Marketing
Timothy A. Kerr............ 36 Vice President, Engineering
Susan C. Schell............ 48 Vice President, Human Resources and Corporate Quality
Richard A. Scholl.......... 58 Vice President and Chief Technology Officer
Elwood Spedden (1)(2)...... 60 Director
Arthur A. Noeth (1)(2)..... 61 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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.
HOLLIS L. CASWELL joined Advanced Energy in February 1997 as a Director and,
in June 1997, became Chief Operating Officer of the Company. From February 1990
to January 1994, Dr. Caswell was Chairman of the Board and Chief Executive
Officer of HYPRES, Inc., a manufacturer of superconducting electronics. From
1984 to 1990, Dr. Caswell served as Senior Vice President of Unisys Corporation
and President of such company's Computer Systems Group. Dr. Caswell has been a
director of Thomas Group, Inc., a publicly-held consulting company, since August
1991.
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 Computer, Inc., a privately-held computer rental company.
JAMES F. GENTILCORE joined the Company in March 1996 as Vice President,
Sales and Marketing. From April 1990 to March 1996, Mr. Gentilcore was Vice
President, Corporate Marketing at MKS Instruments, Inc.
TIMOTHY A. KERR joined the Company in 1987 as an engineer in the DC products
group. In 1995, Mr. Kerr became Director of Engineering and became Vice
President, Engineering in August 1996. 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.
37
<PAGE>
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.
ELWOOD SPEDDEN joined the Board of Directors of Advanced Energy in September
1995. Mr. Spedden has been a Senior Vice President of Tencor Instruments, a
manufacturer of automatic test equipment used in the fabrication of
semiconductors, since July 1996. From 1990 through March 1996, Mr. Spedden held
various management positions, including President, Chief Executive Officer and
Vice-Chairman of the Board of Directors, at Credence Systems Corporation, also a
manufacturer of automatic test equipment. Mr. Spedden has also held various
marketing and management positions at Teradyne, Inc., an automatic test
equipment manufacturer.
ARTHUR NOETH joined the Board of Directors of Advanced Energy in August
1997. Mr. Noeth has been Chief Executive Officer of Implant Center, Inc., an ion
implantation services company, since April 1996. Prior to that time, Mr. Noeth
was a consultant to several companies in the semiconductor equipment industry,
including Implant Center, Inc.
38
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 18, 1997, and as adjusted
as of such date, to reflect the sale by the Company and the Selling Stockholders
of the shares offered hereby (i) by each person who is known by the Company to
own beneficially more than five percent (5%) of the outstanding shares of Common
Stock, (ii) by each of the Company's directors, (iii) by each of the executive
officers, (iv) by all directors and executive officers as a group, and (v) by
the other Selling Stockholders. Except as otherwise indicated, the Company
believes that the beneficial owners of the Common Stock listed below, based on
information provided by such owners, have sole investment and voting power with
respect to the Common Stock shown below as being beneficially owned by them,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
Shares Beneficially
Owned Shares Beneficially
Prior to Offering Owned
(2)(3)(4) Shares to After Offering (2)(3)(4)
------------------------- be Sold -------------------------
Name (1) Number Percent (3)(4) Number Percent
- ---------------------------------------- ------------ ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Douglas S. Schatz (5)................... 13,162,300 61.6 1,022,500 12,139,800 54.2
Hollis L. Caswell....................... 52,500 * 27,500 25,000 *
G. Brent Backman (5)(6)................. 2,383,000 11.1 146,000 2,237,000 10.0
Eric A. Balzer.......................... 260,238 1.2 -- 260,238 1.2
Richard P. Beck......................... 313,285 1.5 150,000 163,285 *
Susan C. Schell......................... 208,354 1.0 50,000 158,354 *
Richard A. Scholl (7)................... 520,159 2.4 100,000 420,159 1.9
Timothy A. Kerr......................... 4,987 * 4,000 987 *
Elwood Spedden.......................... 5,000 * -- 5,000 *
Arthur A. Noeth......................... 2,500 * -- 2,500 *
All directors and executive officers as
a group (10 persons) (5)(6)(7)........ 16,912,323 78.7 1,500,000 15,412,323 68.6
</TABLE>
- ------------------------
(1) The following is a list of the positions, offices or other material
relationships which the Selling Stockholders have held with the Company in
the past three years: Mr. Schatz--co-founder of the Company, President,
Chief Executive Officer and director; Mr. Caswell-- Chief Operating Officer
and director; Mr. Backman--co-founder of the Company, Vice President,
Special Projects and director; Mr. Beck--Vice President, Chief Financial
Officer and director; Ms. Schell--Vice President, Human Resources and
Corporate Quality; Mr. Scholl--Vice President, Engineering, Chief Technology
Officer; Mr. Kerr--Vice President, Engineering.
(2) Shares of Common Stock that a person has the right to acquire within 60 days
of August 18, 1997 are deemed to be beneficially owned by such persons as of
such date. The number of shares of Common Stock that the directors and
executive officers of the Company have the right to acquire within 60 days
of August 18, 1997 are as follows: Mr. Caswell--52,500; Mr. Beck--27,184;
Mr. Scholl--4,687 (held by his wife, Brenda Scholl); Mr. Kerr--4,687; Mr.
Spedden--5,000; Mr. Noeth--2,500; all directors and executive officers as a
group--96,558.
(3) Based on 21,383,075 shares of voting Common Stock outstanding as of August
18, 1997 and 22,414,575 shares of voting Common Stock outstanding after the
Offering. Shares of Common Stock that a person has the right to acquire
within 60 days of August 18, 1997 are deemed outstanding for purposes of
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage ownership of any
other person, except with respect to the percentage ownership of all
directors and executive officers as a group.
(4) Assumes no exercise of the Underwriters' over-allotment option. If the
over-allotment is exercised in full, Mr. Schatz, Mr. Caswell, Mr. Backman,
Mr. Beck, Ms. Schell, Mr. Scholl and Mr. Kerr will sell an additional
153,375, 4,125, 21,900, 22,500, 7,500, 15,000 and 600 shares of Common
Stock, respectively.
(5) Messrs. Schatz and Backman, 1625 Sharp Point Drive, Fort Collins, Colorado
80525, are 5% stockholders.
(6) Includes 546,000 shares held by his wife, Karen Backman. Excludes 108,000
shares held in two trusts, each with an independent third-party trustee, for
the benefit of Mr. Backman's two sons who are both at the age of majority.
(7) Includes 300 shares held by Mrs. Scholl and 4,687 shares that she has the
right to acquire within 60 days of August 18, 1997. Mrs. Scholl is a
business unit manager for the Company.
* Less than one percent.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will have authorized capital
stock of shares consisting of 30,000,000 shares of Common Stock, $0.001 par
value, and 1,000,000 shares of Preferred Stock, $0.001 par value. As of August
18, 1997, 21,383,075 shares of Common Stock were outstanding, held by
approximately 445 holders of record, and no shares of Preferred Stock were
outstanding. In addition, 1,605,365 shares, 50,000 shares and 26,736 shares,
were reserved for issuance at that date under the Option Plan, Director Plan and
Purchase Plan, respectively.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders, except that upon
giving the legally required notice, stockholders may cumulate their votes in the
election of directors. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock that may be issued, the holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
the payment of dividends. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights or rights to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are fully paid and non-assessable, and the shares of Common Stock to be
issued upon completion of this offering will be fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue up to 1,000,000 shares of Preferred Stock
in one or more series and to designate the dividend rate, voting rights and
other rights, preferences and restrictions of each series any or all of which
may be greater than the rights of the Common Stock. It is not possible to state
the actual effect of the issuance of any shares of Preferred Stock upon the
rights of holders of the Common Stock until the Board of Directors determines
the specific rights of the holders of such Preferred Stock. However, the effects
might include, among other things, restricting dividends on the Common Stock,
diluting the voting power of the Common Stock, impairing the liquidation rights
of the Common Stock and delaying or preventing a change in control of the
Company without further action by the stockholders. The Company has no present
plans to issue any shares of Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, Section 203 of the Delaware Law prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the board of directors and of the holders of at least two-thirds of the
outstanding shares of voting stock not owned by the interested stockholder. The
existence of this provision would be expected to have an anti-takeover effect,
including attempts that might result in a premium over the market price for the
shares of Common Stock held by stockholders.
The Company's Certificate of Incorporation and By-laws include certain
provisions that (i) allow the Company to issue Preferred Stock with rights
senior to those of the Common Stock without any further vote or action by the
stockholders, (ii) limit the right of the stockholders to call a special meeting
of stockholders, and (iii) allow the Company to impose various procedural and
other requirements that could make it more difficult for stockholders to effect
certain corporate actions. Such provisions could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors might be willing to pay in the future for
shares of the Company's Common Stock. See "Risk Factors--Anti-takeover
Provisions."
TRANSFER AGENT
The Company's transfer agent and registrar for its Common Stock is Bank of
Boston.
40
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters") have agreed to purchase from the
Company and the Selling Stockholders the following respective number of shares
of Common Stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ------------------------------------------------------------------------------- -----------
<S> <C>
UBS Securities LLC.............................................................
Lehman Brothers Inc............................................................
PaineWebber Incorporated.......................................................
Robertson, Stephens & Company LLC..............................................
-----------
Total...................................................................... 2,500,000
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations are
subject to certain conditions precedent, including the absence of any material
adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The nature
of the Underwriters' obligation is such that they are committed to purchase all
shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any of such shares are purchased.
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock directly to the public at the offering price set forth on
the cover page of this Prospectus and to certain dealers at such price less a
commission not exceeding per share. The Underwriters may allow, and such
dealers may reallow, a concession not in excess of per share to certain
other dealers. After the Offering, the offering price and other selling terms
may be changed by the Underwriters.
The Company and the Selling Stockholders have granted to the Underwriters an
option, exercisable no later than 30 days after the date of this Prospectus, to
purchase up to 375,000 additional shares of Common Stock to cover
over-allotments, if any, at the public offering price set forth on the cover
page of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. The Company and the Selling
Stockholders will each be obligated, pursuant to the option, to sell such shares
to the Underwriters to the extent the option is exercised.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), and to contribute to
payments the Underwriters may be required to make in respect thereof.
All executive officers and directors of the Company and all Selling
Stockholders have entered into lock-up agreements (the "Lock-Up Agreements")
pursuant to which they have agreed not to sell, offer or agree to sell, contract
to sell, grant any option to purchase, make any short sale or otherwise dispose
of any shares of Common Stock, or any securities convertible into or exercisable
or exchangeable for Common Stock, for a period of 90 days after the date of this
Prospectus without the prior written consent of UBS Securities LLC, except for
(i) transfers as a BONA FIDE gift or gifts, provided that the donee or donees
thereof agree to be bound by the restrictions set forth in the Lock-Up Agreement
and (ii) transfers without value by a shareholder to one or more trusts
established for the benefit of the shareholder or members of such shareholder's
immediate family. In addition, the Company has agreed that it will not, until 90
days following the date of this Prospectus, without the prior written consent of
UBS Securities LLC, issue, sell, offer or agree to sell, grant, distribute or
otherwise dispose of, directly or indirectly, any shares of Common Stock, except
that the Company may grant additional options and issue stock under the stock
option and stock purchase plans in effect on the date of this Prospectus or
issue shares of Common Stock upon the exercise of outstanding stock options and
warrants.
The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in the Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market.
41
<PAGE>
A "stabilizing bid" is a bid for the purchase of Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of the
Common Stock on behalf of the Underwriters to reduce a short position incurred
by the Underwriters in connection with the Offering. A "penalty bid" is an
arrangement permitting UBS Securities LLC, as managing underwriter, to reclaim
the selling concession otherwise accruing to a syndicate member in connection
with the Offering if the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction and has therefore not been
effectively placed by such syndicate member. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Thelen, Marrin, Johnson & Bridges LLP,
San Francisco, California, who have acted as counsel to the Company and the
Selling Stockholders in connection with the Offering. Certain legal matters in
connection with the Offering will be passed upon for the Underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, 1995 and 1994, included elsewhere in this Prospectus, have been included
in reliance on the report of Arthur Andersen LLP, independent accountants, given
on the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-3 under the
Securities Act, with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed to
be qualified in its entirety by such reference.
Advanced Energy is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by Advanced Energy may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of such material can be obtained by mail from the
Public Reference section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
statements and other information that Advanced Energy files with the Commission
electronically are contained in the Internet Web site maintained by the
Commission. The Commission's Web sit address is http://www.sec.gov. The Common
Stock is quoted on the Nasdaq National Market. Reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006.
42
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUDITED PAGE
- ------------------------------------------------------------------------------------------------------------ ---
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995................................................ F-3
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994...................... F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994........ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994.................. F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
<TABLE>
<CAPTION>
UNAUDITED
- ------------------------------------------------------------------------------------------------------------
<S> <C>
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996....................................... F-19
Consolidated Statements of Operations for the Three Months and Six Months Ended
June 30, 1997 and 1996.................................................................................... F-20
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996....................... F-21
Notes to Consolidated Financial Statements.................................................................. F-22
Pro Forma Condensed Consolidated Balance Sheet at June 30, 1997............................................. F-24
</TABLE>
F-1
<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.
Arthur Andersen LLP
Denver, Colorado
January 31, 1997
F-2
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
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
--------- ---------
--------- ---------
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.
F-3
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
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 income (expense):
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)
--------- --------- ---------
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-4
<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>
<CAPTION>
COMMON STOCK ADDITIONAL STOCKHOLDERS' CUMULATIVE
---------------------- PAID-IN RETAINED NOTES DEFERRED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION ADJUSTMENT
--------- ----------- ----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1993........ 17,091 $ 17 $ 119 $ 805 $ -- $ -- $ 70
Election of C corporation
status......................... -- -- 58 (58) -- -- --
Warrants issued.................. -- -- 1 -- -- -- --
Exercise of stock options for
cash........................... 202 -- 167 -- -- -- --
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- 124
Acquisition of minority
interest....................... -- -- 22 (70) -- -- --
Net income....................... -- -- -- 5,963 -- -- --
--
--------- ----------- ----------- ------------- ----- -----
BALANCES, December 31, 1994........ 17,293 17 367 6,640 -- -- 194
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- (761)
Exercise of stock options for
cash........................... 140 1 124 -- -- -- --
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 --
Sale of common stock through
public offering, net of
approximately $2,790 of
expenses....................... 2,400 2 21,210 -- -- -- --
Net income....................... -- -- -- 13,281 -- -- --
--
--------- ----------- ----------- ------------- ----- -----
BALANCES, December 31, 1995........ 21,069 21 22,925 19,921 (1,083) (130) (567)
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- 67
Exercise of stock options for
cash........................... 199 -- 150 -- -- -- --
Amortization of deferred
compensation................... -- -- -- -- -- 48 --
Net income....................... -- -- -- 5,144 -- -- --
--
--------- ----------- ----------- ------------- ----- -----
BALANCES, December 31, 1996........ 21,268 $ 21 $ 23,075 $ 25,065 $ (1,083) $ (82) $ (500)
--
--
--------- ----------- ----------- ------------- ----- -----
--------- ----------- ----------- ------------- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
BALANCES, December 31, 1993........ $ 1,011
Election of C corporation
status......................... --
Warrants issued.................. 1
Exercise of stock options for
cash........................... 167
Equity adjustment from foreign
currency translation........... 124
Acquisition of minority
interest....................... (48)
Net income....................... 5,963
---------
BALANCES, December 31, 1994........ 7,218
Equity adjustment from foreign
currency translation........... (761)
Exercise of stock options for
cash........................... 125
Exercise of stock options in
exchange for stockholders'
notes receivable............... --
Deferred compensation on stock
options issued................. --
Amortization of deferred
compensation................... 12
Sale of common stock through
public offering, net of
approximately $2,790 of
expenses....................... 21,212
Net income....................... 13,281
---------
BALANCES, December 31, 1995........ 41,087
Equity adjustment from foreign
currency translation........... 67
Exercise of stock options for
cash........................... 150
Amortization of deferred
compensation................... 48
Net income....................... 5,144
---------
BALANCES, December 31, 1996........ $ 46,496
---------
---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
F-5
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE CONSOLIDATED STATEMENTS.
F-6
<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.
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.
F-7
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(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.
F-8
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Domestic................................................................ $ 9,944 $ 8,825
Foreign................................................................. 5,585 4,925
Allowance for doubtful accounts......................................... (242) (210)
--------- ---------
$ 15,287 $ 13,540
--------- ---------
--------- ---------
</TABLE>
(5) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
F-9
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PROPERTY AND EQUIPMENT (CONTINUED)
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:
<TABLE>
<CAPTION>
December 31,
--------------------
1996 1995
--------- ---------
(in thousands)
<S> <C> <C>
Machinery and equipment...................................................... $ 243 $ 426
Computers and communication.................................................. 62 245
Furniture and fixtures....................................................... 14 29
--- ---
$ 319 $ 700
--- ---
--- ---
</TABLE>
Depreciation of assets acquired under capitalized leases is included in
depreciation expense.
(7) NOTES PAYABLE
<TABLE>
<CAPTION>
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%.
F-10
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) NOTES PAYABLE (CONTINUED)
Annual maturities of notes payable outstanding at December 31, 1996,
described above are as follows:
<TABLE>
<CAPTION>
(in
thousands)
<S> <C>
Years ended December 31 --
1997........................................................................... $ 609
1998........................................................................... 500
1999........................................................................... 458
------
$ 1,567
------
------
</TABLE>
(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.
The provision (benefit) for income taxes for the years ended December 31,
1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) INCOME TAXES (CONTINUED)
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
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
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's deferred income taxes are summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 Change 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:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Domestic........................................................ $ 8,255 $ 18,969 $ 8,920
Foreign......................................................... 49 2,116 783
--------- --------- ---------
$ 8,304 $ 21,085 $ 9,703
--------- --------- ---------
--------- --------- ---------
</TABLE>
(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
F-12
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) RETIREMENT PLAN (CONTINUED)
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:
<TABLE>
<CAPTION>
(in
thousands)
<S> <C>
1997............................................................................. $ 344
1998............................................................................. 154
1999............................................................................. 24
-----
Total minimum lease payments................................................... 522
Less -- amount representing interest........................................... (38)
Less -- current portion........................................................ (315)
-----
$ 169
-----
-----
</TABLE>
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:
<TABLE>
<CAPTION>
(in
thousands)
<S> <C>
1997............................................................................. $ 1,776
1998............................................................................. 1,620
1999............................................................................. 1,562
2000............................................................................. 1,406
2001............................................................................. 1,341
Thereafter....................................................................... 8,766
-----------
$ 16,471
-----------
-----------
</TABLE>
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.
F-13
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
<CAPTION>
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.
F-14
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(13) RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Customer A.............................................................. 27% 24% 21%
Customer B.............................................................. 20% 17% 17%
--- --- ---
47% 41% 38%
--- --- ---
--- --- ---
</TABLE>
(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.
F-15
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCK PLANS (CONTINUED)
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 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.
F-16
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCK PLANS (CONTINUED)
The following summarizes the activity relating to options and warrants for
the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ------------ --------- ------------ ---------
(in thousands, except per share amounts)
<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>
F-17
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) STOCK PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(in thousands,
except
per share data)
<S> <C> <C>
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
</TABLE>
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>
<CAPTION>
Options Outstanding
----------------------------------
Weighted-Average Options Exercisable
Remaining ------------------------------
Year Range of Number Contractual Weighted-Average Number Weighted-Average
Granted Exercise Prices Outstanding Life Exercise Price Exercisable Exercise 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>
F-18
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $ 11,183 $ 11,231
Accounts receivable..................................................... 26,154 16,116
Inventories............................................................. 16,169 13,976
Prepaid expenses and other current assets............................... 637 1,013
Deferred income tax benefit............................................. 1,223 1,223
----------- ------------
Total current assets................................................ 55,366 43,559
----------- ------------
Property and equipment, net............................................... 9,028 9,500
Other assets.............................................................. 1,657 2,972
----------- ------------
Total assets.......................................................... $ 66,051 $ 56,031
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................ $ 6,296 $ 2,253
Accrued payroll and employee benefits................................... 3,687 2,396
Other accrued expenses.................................................. 764 1,156
Customer deposits....................................................... 1,071 166
Accrued income tax payable.............................................. 2,046 1,485
Current portion of long-term debt....................................... 745 924
----------- ------------
Total current liabilities........................................... 14,609 8,380
----------- ------------
Long-term debt............................................................ 789 1,127
Deferred income tax liability............................................. 28 28
----------- ------------
Total liabilities..................................................... 15,426 9,535
----------- ------------
Stockholders' equity...................................................... 50,625 46,496
----------- ------------
Total liabilities and stockholders' equity............................ $ 66,051 $ 56,031
----------- ------------
----------- ------------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-19
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Sales....................................................................... $ 32,690 $ 29,831
Cost of sales............................................................... 20,139 17,204
----------- -----------
Gross profit................................................................ 12,551 12,627
----------- -----------
Operating expenses:
Research and development.................................................. 3,513 3,645
Sales and marketing....................................................... 2,336 2,248
General and administrative................................................ 1,702 2,330
----------- -----------
Income from operations...................................................... 5,000 4,404
----------- -----------
Other income (expense), net................................................. 286 (66)
----------- -----------
Income before income taxes.................................................. 5,286 4,338
Provision for income taxes.................................................. 1,996 1,676
----------- -----------
Net income.................................................................. $ 3,290 $ 2,662
----------- -----------
----------- -----------
Net income per share........................................................ $ 0.15 $ 0.12
----------- -----------
----------- -----------
Weighted average common and common equivalent shares outstanding............ 21,991 21,653
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Sales....................................................................... $ 53,358 $ 56,997
Cost of sales............................................................... 33,298 34,239
----------- -----------
Gross profit................................................................ 20,060 22,758
----------- -----------
Operating expenses:
Research and development.................................................. 6,334 7,143
Sales and marketing....................................................... 4,135 4,331
General and administrative................................................ 2,950 4,055
----------- -----------
Income from operations...................................................... 6,641 7,229
----------- -----------
Other expense, net.......................................................... (101) (236)
----------- -----------
Income before income taxes.................................................. 6,540 6,993
Provision for income taxes.................................................. 2,485 2,658
----------- -----------
Net income.................................................................. $ 4,055 $ 4,335
----------- -----------
----------- -----------
Net income per share........................................................ $ 0.19 $ 0.20
----------- -----------
----------- -----------
Weighted average common and common equivalent shares outstanding............ 21,906 21,657
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-20
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
1997 1996
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................ $ 4,055 $ 4,335
Adjustments to reconcile net income to net cash provided by operating
activities --
Depreciation and amortization........................................... 1,673 1,146
Amortization of deferred compensation................................. 24 24
Loss on disposal of property and equipment............................ -- 20
Changes in operating assets and liabilities --
Accounts receivable, trade.......................................... (8,854) (3,203)
Related parties and other receivables............................... (1,184) (209)
Inventories......................................................... (2,193) (1,062)
Income taxes........................................................ 561 1,041
Other current assets................................................ 376 83
Deposits and other.................................................. 634 34
Demonstration and customer service equipment........................ 250 (411)
Accounts payable.................................................... 4,043 (2,172)
Accrued payroll and employee benefits............................... 1,291 677
Customer deposits and other accrued expenses........................ 513 (126)
----------- -----------
Net cash provided by operating activities........................ 1,189 177
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net................................... (770) (4,352)
----------- -----------
Net cash used in investing activities............................ (770) (4,352)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of notes payable and capital lease obligations.................. (517) (492)
Proceeds from sale of common stock........................................ 27 118
----------- -----------
Net cash used in financing activities............................ (490) (374)
----------- -----------
EFFECT OF CUMULATIVE TRANSLATION ADJUSTMENT................................. 23 (19)
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS....................................... (48) (4,568)
CASH AND CASH EQUIVALENTS, beginning of period.............................. 11,231 13,332
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................................... $ 11,183 $ 8,764
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................................... $ 76 $ 100
----------- -----------
----------- -----------
Cash paid for income taxes................................................ $ 905 $ 1,697
----------- -----------
----------- -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-21
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION AND MANAGEMENT OPINION
In the opinion of management, the accompanying unaudited consolidated
balance sheets and statements of operations and cash flows contain all
adjustments, consisting only of normal recurring items, necessary to present
fairly the financial position of Advanced Energy Industries, Inc., a Delaware
corporation, and its wholly owned subsidiaries (the "Company") at June 30, 1997,
and the results of their operations and cash flows for the three and six month
periods ended June 30, 1997 and June 30, 1996.
(2) 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.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Domestic............................................... $ 14,404 $ 9,944
Foreign................................................ 9,979 5,585
Allowance for doubtful accounts........................ (242) (242)
----------- ------------
Trade accounts receivable.............................. $ 24,141 $ 15,287
Related parties........................................ 1,218 541
Other.................................................. 795 288
----------- ------------
Total accounts receivable.......................... $ 26,154 $ 16,116
----------- ------------
----------- ------------
</TABLE>
(4) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
Parts and raw materials................................ $ 11,361 $ 11,149
Work in process........................................ 1,859 1,122
Finished goods......................................... 2,949 1,705
----------- ------------
$ 16,169 $ 13,976
----------- ------------
----------- ------------
</TABLE>
(5) NET INCOME PER COMMON SHARE
Net income per share is computed based on results of operations attributable
to common stock and weighted average number of common and common equivalent
shares outstanding during each of the periods. Earnings per share are calculated
by dividing the net earnings by the weighted average of common and common
equivalent shares outstanding during each of the periods.
F-22
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) STOCKHOLDERS' EQUITY
Stockholders' equity consisted of the following:
<TABLE>
<CAPTION>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
(IN THOUSANDS,
EXCEPT PAR VALUE)
<S> <C> <C>
Common stock, $0.001 par value, 30,000 shares
authorized; 21,290 and 21,268 shares issued and
outstanding.......................................... $ 21 $ 21
Additional paid-in capital........................... 23,102 23,075
Retained earnings.................................... 29,120 25,065
Stockholders' notes receivable....................... (1,083) (1,083)
Deferred compensation................................ (58) (82)
Cumulative translation adjustment.................... (477) (500)
----------- ------------
Total stockholders' equity......................... $ 50,625 $ 46,496
----------- ------------
----------- ------------
</TABLE>
(7) SUBSEQUENT EVENT
The Company sustained substantial water-related damage to its manufacturing
facilities and certain equipment and inventory during a severe rainstorm on July
29, 1997, which interrupted production and shipments. The Company was able to
resume some production within a few days and has been increasing production as
repairs are made and equipment and inventory are replaced. The Company expects
that its revenues and operating results in the quarter ending September 30, 1997
will be affected by the production interruption. Actual results for the third
quarter will depend on continued success in increasing production and the
ability to obtain in a timely manner the necessary key components from suppliers
to meet current production goals, as to which there can be no assurance. The
Company expects that it will record a one-time charge of $2.5 million to $3.0
million in the third quarter of 1997 for losses incurred as a result of the
water-related damage. The final charge, which cannot presently be determined,
could be larger. The extent of insurance coverage, if any, is unresolved. Any
recoveries from insurance will be recorded when received.
F-23
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited Pro Forma Condensed Consolidated Balance Sheet as of
June 30, 1997 is based on the unaudited historical financial data of the Company
and has been prepared as if the acquisition of Tower had occurred on June 30,
1997. The estimated fair values presented for the assets acquired pursuant to
the terms of the acquisition are based upon an independent appraisal. The pro
forma information is not necessarily indicative of what the Company's financial
position would have been had the acquisition of Tower occurred on June 30, 1997,
nor does it purport to project the Company's financial position at any future
date.
On August 15, 1997, the Company acquired Tower pursuant to a Share Purchase
Agreement dated as of August 11, 1997. Tower is a designer and manufacturer of
custom, high performance switchmode power supplies that are used principally in
the telecommunications, medical and non-impact printing industries. Tower had
revenues of $13.4 million for its fiscal year ended September 30, 1996. The
purchase price consisted of $14.5 million in cash and a promissory note to the
seller in the original principal amount of $1.5 million, which were delivered by
the Company at closing, as well as an earn out provision, pursuant to which the
seller will be entitled to additional consideration if Tower's sales achieve
certain levels in 1998. The promissory note matures in August 1998 and is
non-interest bearing. The acquisition will be accounted for using the purchase
method of accounting. The Company will record a one-time charge of $3.1 million
in the third quarter of 1997 for in-process research and development costs in
connection with the acquisition. The Company currently estimates that its
depreciation and amortization expense will increase by approximately $1.3
million annually for the next several years. The following unaudited Pro Forma
Condensed Consolidated Balance Sheet gives pro forma effect to the Tower
acquisition, the allocation of the purchase price therefor and certain
transactions occurring in connection therewith, including the borrowing by the
Company of $12 million under a term loan, as if all of such transactions had
occurred on June 30, 1997.
F-24
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------------------------------------------
ADVANCED
ENERGY TOWER PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUSTMENTS PRO FORMA
----------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................ $ 11,183 $ 1,971 $ (2,295)(A) $ 10,859
Accounts receivable, net................................. 26,154 1,876 (212)(A) 27,818
Inventories.............................................. 16,169 2,737 -- 18,906
Other current assets..................................... 1,860 58 -- 1,918
----------- ----------- ------- -----------
Total current assets............................... 55,366 6,642 (2,507) 59,501
----------- ----------- ------- -----------
PROPERTY AND EQUIPMENT, net................................ 9,028 292 -- 9,320
OTHER ASSETS............................................... 1,657 7 7,497(B) 9,161
----------- ----------- ------- -----------
Total Assets........................................... $ 66,051 $ 6,941 $ 4,990 $ 77,982
----------- ----------- ------- -----------
----------- ----------- ------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable......................................... $ 6,296 $ 1,252 $ -- $ 7,548
Accrued liabilities and expenses......................... 7,568 370 -- 7,938
Current portion of long-term debt........................ 745 -- 3,789(C) 4,534
----------- ----------- ------- -----------
Total current liabilities.......................... 14,609 1,622 3,789 20,020
----------- ----------- ------- -----------
LONG-TERM DEBT............................................. 789 9,600(C) 10,389
DEFERRED INCOME TAXES AND OTHER............................ 28 77 (77)(D) 28
----------- ----------- ------- -----------
Total liabilities...................................... 15,426 1,699 13,312 30,437
----------- ----------- ------- -----------
----------- ----------- ------- -----------
STOCKHOLDERS' EQUITY
Common stock............................................. 21 1 (1)(E) 21
Additional paid-in capital............................... 23,102 9 (9)(E) 23,102
Retained earnings........................................ 29,120 5,232 (8,312)(E)(F) 26,040
Other.................................................... (1,618) -- -- (1,618)
----------- ----------- ------- -----------
Total stockholders' equity............................. 50,625 5,242 (8,322) 47,545
----------- ----------- ------- -----------
----------- ----------- ------- -----------
Total liabilities and stockholders' equity............. $ 66,051 $ 6,941 $ 4,990 $ 77,982
----------- ----------- ------- -----------
----------- ----------- ------- -----------
</TABLE>
- ------------------------
(A) Reflects $2,500,000 cash paid to the selling stockholder of Tower and
$205,000 cash received from the selling stockholder of Tower in connection
with certain transactions concurrent with the acquisition, including the
collection of certain amounts due from the selling stockholder and the sale
of Tower's wholly owned subsidiary, Hertel Aviation.
(B) Adjusted to reflect the excess of purchase price over the fair value of net
assets acquired, or goodwill, of $7,497,000.
(C) Reflects a $1,500,000 non-interest bearing promissory note to the selling
stockholder of Tower less imputed interest of $111,000 and a $12,000,000
term loan borrowed by the Company to effect the acquisition.
(D) Adjusted to reflect the disposition of Hertel Aviation's net assets
(liability) concurrent with the acquisition transaction.
(E) Adjusted to eliminate the historical stockholder's equity of Tower.
(F) Represents $3,080,000 of purchased research and development in process which
is expensed immediately for book purposes.
F-25
<PAGE>
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NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
COMMON STOCK OFFERED HEREBY, TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Incorporation of Certain Information by Reference... 2
Prospectus Summary.................................. 3
Risk Factors........................................ 5
Use of Proceeds..................................... 13
Dividend Policy..................................... 13
Price Range of Common Stock......................... 13
Capitalization...................................... 14
Selected Consolidated Financial Statements.......... 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............... 16
Business............................................ 24
Management.......................................... 37
Principal and Selling Stockholders.................. 39
Description of Capital Stock........................ 40
Underwriting........................................ 41
Legal Matters....................................... 42
Experts............................................. 42
Available Information............................... 42
Index to Consolidated Financial Statements.......... F-1
</TABLE>
2,500,000 SHARES
[LOGO]
COMMON STOCK
------------------
PROSPECTUS
, 1997
------------------------
UBS SECURITIES
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
ROBERTSON STEPHENS & COMPANY
- ----------------------------------------------
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