<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 20, 1997
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ADVANCED ENERGY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 84-0846841
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
--------------------------
1625 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(970) 221-4670
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
RICHARD P. BECK
ADVANCED ENERGY INDUSTRIES, INC.
1625 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(970) 221-4670
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
WITH COPIES TO:
JAY L. MARGULIES BARRY E. TAYLOR
CARISSA C. W. COZE ARMANDO CASTRO
DAVID O. HIGLEY ROBERT G. O'CONNOR
THELEN, MARRIN, JOHNSON & BRIDGES LLP WILSON SONSINI GOODRICH & ROSATI
TWO EMBARCADERO CENTER, SUITE 2100 PROFESSIONAL CORPORATION
SAN FRANCISCO, CALIFORNIA 94111-3995 650 PAGE MILL ROAD
PALO ALTO, CA 94304-1050
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
- ----------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ----------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) PRICE(1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value............. 2,875,000 shares $27.6875 $79,601,562.50 $24,121.69
</TABLE>
(1) Includes 375,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended.
The above calculation is based on the average of the reported high and low
prices of the Common Stock on the Nasdaq National Market on August 19, 1997.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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>
PROSPECTUS SUBJECT TO COMPLETION, DATED AUGUST 20, 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 August 19, 1997, the last reported sale price of the Common Stock on
the Nasdaq National Market was $27.50 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
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; 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 WHICH 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, a subsidiary of 3Com Corporation, 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 79,152
Total debt....................................... 2,051 1,534 14,923
Stockholders' equity............................. 46,496 50,625 48,715
</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 a description of the Tower
acquisition, see "Business--Recent Acquisition."
(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; 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
accounted for approximately 78% of Tower's total sales in the first six months
of 1997. Accordingly, the success of the Company's acquisition of Tower will
depend in large part on retention of Tower's customers, particularly U.S.
Robotics. 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.
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
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. See "Business--Recent
Acquisition."
7
<PAGE>
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 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."
8
<PAGE>
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 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
9
<PAGE>
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 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
10
<PAGE>
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 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."
11
<PAGE>
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 August 19, 1997, the closing price of the Common Stock on the
Nasdaq National Market has ranged from $3.50 to $32.25. 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 August 19)............................... 32 5/8 14 1/2
</TABLE>
On August 19, 1997, the last reported sale price for the Common Stock, as
reported by the Nasdaq National Market, was $27.50. As of August 19, 1997, the
Company had approximately 445 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 27,210 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 48,715
--------- ----------- -------
Total capitalization................................................ $ 52,159 $ 63,638 $
--------- ----------- -------
--------- ----------- -------
</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 a description of the Tower
acquisition, see "Business--Recent Acquisition."
(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, a subsidiary of 3Com
Corporation, 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 original
principal amount of $1.5 million,
16
<PAGE>
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 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
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<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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<PAGE>
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 form 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 of the 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
25
<PAGE>
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.
26
<PAGE>
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 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
27
<PAGE>
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 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
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<PAGE>
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 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
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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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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.
31
<PAGE>
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.
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<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 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 95
full-time and approximately 25 temporary 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 shipment. 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 is 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 1996 as Vice President, Sales and
Marketing. Prior to joining the Company, Mr. Gentilcore was Vice President,
Marketing at MKS Instruments.
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 product
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
-----------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
--------- ----------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 11,183 $ (324)(A) $ 10,859
Accounts receivable......................................................... 26,154 1,664(B) 27,818
Inventories................................................................. 16,169 2,737(B) 18,906
Other current assets........................................................ 1,860 58(B) 1,918
--------- ----------- -----------
Total current assets...................................................... 55,366 4,135 59,501
PROPERTY AND EQUIPMENT, net................................................... 9,028 292(B) 9,320
OTHER ASSETS.................................................................. 1,657 8,674(C) 10,331
--------- ----------- -----------
Total assets.............................................................. $ 66,051 $ 13,101 $ 79,152
--------- ----------- -----------
--------- ----------- -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Accounts payable............................................................ $ 6,296 $ 1,252(B) $ 7,548
Accrued liabilities and expenses............................................ 7,568 370(B) 7,938
Current portion of long-term debt........................................... 745 3,789(D) 4,534
--------- ----------- -----------
Total current liabilities................................................. 14,609 5,411 20,020
LONG-TERM DEBT................................................................ 789 9,600(D) 10,389
DEFERRED INCOME TAXES......................................................... 28 -- 28
--------- ----------- -----------
Total liabilities......................................................... 15,426 15,011 30,437
--------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock................................................................ 21 -- 21
Additional paid-in capital.................................................. 23,102 -- 23,102
Retained earnings........................................................... 29,120 (1,910)(E) 27,210
Other....................................................................... (1,618) -- (1,618)
--------- ----------- -----------
Total stockholders' equity................................................ 50,625 (1,910) 48,715
--------- ----------- -----------
Total liabilities and stockholders' equity................................ $ 66,051 $ 13,101 $ 79,152
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- --------------------------
(A) Reflects $2,500,000 cash paid to the selling stockholder of Tower,
$1,971,000 cash acquired from Tower, and $205,000 cash received from the
selling stockholder of Tower in connection with certain transactions
concurrent with the acquisition.
(B) Represents assets or liabilities aquired from Tower.
(C) Adjusted to reflect $7,000 in assets acquired from Tower, the excess of
purchase price over the fair value of net assets acquired, or goodwill, of
$7,497,000, and a $1,170,000 deferred tax asset established for purchased
research and development in process of $3,080,000 and expensed immediately
for book purposes.
(D) Reflects a $1,500,000 non-interest bearing promissory note to the selling
stockholder of Tower less imputed interest at $111,000, and a $12,000,000
term loan borrowed by the Company to effect the acquisition.
(E) Represents $3,080,000 of purchased research and development in process which
is expensed immediately with a related deferred tax benefit of $1,170,000.
F-25
<PAGE>
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
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
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company and the Selling
Stockholders in connection with the sale of the Common Stock being registered.
All amounts are estimates except the SEC registration fee, the NASD filing fee
and the Nasdaq listing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID
-------------
<S> <C>
SEC Registration Fee................................................ $ 24,121.69
NASD Filing Fee..................................................... 8,460.16
Nasdaq Listing Fee.................................................. 17,500.00
Printing............................................................ 125,000.00
Legal Fees and Expenses............................................. 175,000.00
Accounting Fees and Expenses........................................ 40,000.00
Blue Sky Fees and Expenses.......................................... 5,000.00
Transfer Agent and Registrar Fees................................... 10,000.00
Miscellaneous....................................................... 194,918.15
-------------
Total....................................................... $ 600,000.00
-------------
-------------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the Delaware General Corporation Law ("GCL"), the Company's
Certificate of Incorporation and the amendments to the Company's Certificate of
Incorporation (collectively, the "Certificate") provide that no Director shall
be personally liable to the Company or any stockholder for monetary damages for
breach of fiduciary duty as a Director, except for liability: (i) for any breach
of the duty of loyalty to the Company or its stockholders; (ii) for acts or
omissions not in good faith or involving intentional misconduct or a knowing
violation of the law; (iii) arising from payment of dividends or approval of a
stock purchase in violation of Section 174 of the GCL; or (iv) for any action
from which the Director derived an improper personal benefit. While the
Certificate provides protection from awards for monetary damages for breaches of
the duty of care, it does not eliminate the Director's duty of care.
Accordingly, the Certificate will not affect the availability of equitable
remedies, such as an injunction, based on a Director's breach of the duty of
care. The provisions of the Certificate described above apply to officers of the
Company only if they are Directors of the Company and are acting in their
capacity as Directors, and does not apply to officers of the Company who are not
Directors.
In addition, the Company's By-laws provide that the Company shall indemnify
its Executive Officers (as defined in Rule 3b-7 promulgated under the Exchange
Act) and Directors, and any employee who serves as an Executive Officer or
Director of any corporation at the Company's request, to the fullest extent
permitted under and in accordance with the GCL; provided, however, that the
Company may modify the extent of such indemnification by individual contracts
with its Executive Officers and Directors; and, provided further, that the
Company shall not be required to indemnify any Executive Officer or Director in
connection with any proceeding (or part thereof) initiated by such person
unless: (i) such indemnification is expressly required to be made by law; (ii)
the proceeding was authorized by the Directors of the Company; (iii) such
indemnification is provided by the Company, in its sole discretion, pursuant to
the powers vested in the Company under the GCL; or (iv) such indemnification is
required to be made under Article XI, Section 43, Subsection (d) of the By-Laws.
Under the GCL, directors and officers as well as employees and individuals may
be indemnified against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement in connection with specified actions, suits or
proceedings, whether civil, criminal, administrative or investigative (other
than an action by or in the right of the corporation as a derivative action) if
they acted in good faith and in a manner they reasonably believed to be in or
not opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful.
II-1
<PAGE>
The Registrant maintains a policy of directors' and officers' liability
insurance that insures the Registrant's directors and officers against the cost
of defense, settlement or payment of a judgement under certain circumstances.
Reference is made to Section 10 of the Underwriting Agreement between the
Company and the Representatives (filed as Exhibit 1.1 to this Registration
Statement), which provides for indemnification of the Company's officers,
directors and controlling persons by the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1 Share Purchase Agreement, dated as of August 11, 1997, among the Company,
Roger C. Hertel and Tower Electronics, Inc.(1)
3.1 The Registrant's Restated Certificate of Incorporation(2)
3.2 The Registrant's By-laws(2)
4.1 Form of Specimen Certificate for Registrant's Common Stock(2)
4.2 The Registrant hereby agrees to furnish to the Commission, upon request a
copy of the instruments which define the rights of holders of long-term
debt of the Company. None of such instruments not included as exhibits
herein represents long-term debt in excess of 10% of the consolidated
total assets of the Registrant
5.1 Opinion of Thelen, Marrin, Johnson & Bridges LLP regarding the legality of
the securities being issued
10.1 Master Purchase Order and Sales Agreement, dated January 1, 1990, between
Applied Materials Inc. and Registrant(2)+
10.2 Purchase Order and Sales Agreement, dated July 1, 1993, amended September
16, 1995 between Lam Research Corporation and Registrant(2)+
10.3 Purchase Agreement, dated November 1, 1995, between Eaton Corporation and
Registrant(3)+
10.4 Silicon Valley Bank Business Loan Agreement, dated May 19, 1992, as
amended, between Silicon Valley Bank and Registrant(2)
10.5 Amended and Restated Loan and Security Agreement, dated as of November 17,
1995, between Silicon Valley Bank and Registrant(2)
10.6 Loan and Security Agreement, dated August 15, 1997, among Silicon Valley
Bank, Bank of Hawaii and Registrant
10.7 Equipment Line of Credit, dated July 11, 1994, between Silicon Valley Bank
and Registrant(2)
10.8 Form of Indemnification Agreement(2)
10.9 Lease, dated June 12, 1984, amended June 11, 1992, between Prospect Park
East Partnership and Registrant for property in Fort Collins,
Colorado(2)
10.10 Master Lease Purchase Agreement, dated January 20, 1989, as amended,
between MetLife Capital Corporation and Registrant(2)
10.11 Lease Purchase Agreement, dated June 11, 1992, between MetLife Capital
Corporation and Registrant(2)
10.12 Master Equipment Lease, dated July 15, 1993, as amended, between KeyCorp
Leasing Ltd. and Registrant(2)
10.13 Lease, dated March 14, 1994, as amended, between Sharp Point Properties,
L.L.C., and Registrant for property in Fort Collins, Colorado(2)
10.14 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C. and
Registrant for a building in Fort Collins, Colorado(2)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.15 1995 Stock Option Plan, as amended and restated on September 20, 1995(2)
10.16 Employee Stock Purchase Plan(2)
10.17 1995 Non-Employee Directors' Stock Option Plan(2)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP, Independent Accountants
23.2 Consent of Thelen, Marrin, Johnson & Bridges LLP (included in Exhibit 5.1)
24.1 Power of attorney (See Page II-4)
</TABLE>
- ------------------------
+ Confidential treatment has been granted for portions of this agreement
(1) Incorporated by reference to Registrant's Current Report on Form 8-K (File
No. 0-26966), dated August 15, 1997, filed August 19, 1997
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 33-97188), filed September 20, 1995, as amended
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K (File
No. 0-26966), for the period ended December 31, 1996
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fort Collins, State of Colorado, on the 19th day of
August, 1997.
<TABLE>
<S> <C> <C>
Advanced Energy Industries, Inc.,
a Delaware corporation
By: /s/ DOUGLAS S. SCHATZ
---------------------------------------
Name: Douglas S. Schatz
---------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below hereby appoints Douglas S. Schatz
and Richard P. Beck, and each of them severally, acting alone and without the
other, as his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments (including without limitation post-effective amendments)
to this Registration Statement necessary or advisable to enable the Registrant
to comply with the Securities Act and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such changes in this Registration Statement as the aforesaid
attorney-in-fact deems appropriate, and to so execute and file a registration
statement and any post-effective amendment thereto for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
August 19, 1997 /s/ DOUGLAS S. SCHATZ
- -------------------- ----------------------------------------
Date Douglas S. Schatz
President and Chief Executive Officer
and Director
(Principal Executive Officer)
August 19, 1997 /s/ RICHARD P. BECK
- -------------------- ----------------------------------------
Date Richard P. Beck
Vice President and Chief Financial
Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
August 19, 1997 /s/ HOLLIS CASWELL
- -------------------- ----------------------------------------
Date Hollis Caswell
Chief Operating Officer and Director
- -------------------- ----------------------------------------
Date G. Brent Backman
Vice President, Special Projects and
Director
- -------------------- ----------------------------------------
Date Arthur Noeth
Director
August 19, 1997 /s/ ELWOOD SPEDDEN
- -------------------- ----------------------------------------
Date Elwood Spedden
Director
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
- ------ -------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement............................................
2.1 Share Purchase Agreement, dated August 11, 1997, among Roger C. Hertel,
Tower Electronics, Inc. and Registrant(1)...............................
3.1 The Registrant's Restated Certificate of Incorporation(2).................
3.2 The Registrant's By-laws(2)...............................................
4.1 Form of Specimen Certificate for Registrant's Common Stock(2).............
4.2 The Registrant hereby agrees to furnish to the Commission, upon request, a
copy of the instruments which define the rights of holders of long-term
debt of the Company. None of such instruments not included as exhibits
herein represents long-term debt in excess of 10% of the consolidated
total assets of the Registrant..........................................
5.1 Opinion of Thelen, Marrin, Johnson & Bridges LLP regarding the legality of
the securities being issued.............................................
10.1 Master Purchase Order and Sales Agreement, dated January 1, 1990, between
Applied Materials Inc. and Registrant(2)+...............................
10.2 Purchase Order and Sales Agreement, dated July 1, 1993, amended September
16, 1995 between Lam Research Corporation and Registrant(2)+............
10.3 Purchase Agreement, dated November 1, 1995, between Eaton Corporation and
Registrant(3)+..........................................................
10.4 Silicon Valley Bank Business Loan Agreement, dated May 19, 1992, as
amended, between Silicon Valley Bank and Registrant(2)..................
10.5 Amended and Restated Loan and Security Agreement, dated as of November 17,
1995, between Silicon Valley Bank and Registrant(2).....................
10.6 Loan and Security Agreement, dated August 15, 1997, among Silicon Valley
Bank, Bank of Hawaii and Registrant.....................................
10.7 Equipment Line of Credit, dated July 11, 1994, between Silicon Valley Bank
and Registrant(2).......................................................
10.8 Form of Indemnification Agreement(2)......................................
10.9 Lease, dated June 12, 1984, amended June 11, 1992, between Prospect Park
East Partnership and Registrant for property in Fort Collins,
Colorado(2).............................................................
10.10 Master Lease Purchase Agreement, dated January 20, 1989, as amended,
between MetLife Capital Corporation and Registrant(2)...................
10.11 Lease Purchase Agreement, dated June 11, 1992, between MetLife Capital
Corporation and Registrant(2)...........................................
10.12 Master Equipment Lease, dated July 15, 1993, as amended, between KeyCorp
Leasing Ltd. and Registrant(2)..........................................
10.13 Lease, dated March 14, 1994, as amended, between Sharp Point Properties,
L.L.C., and Registrant for property in Fort Collins, Colorado(2)........
10.14 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C. and
Registrant for a building in Fort Collins, Colorado(2)..................
10.15 1995 Stock Option Plan, as amended and restated on September 20, 1995(2)..
10.16 Employee Stock Purchase Plan(2)...........................................
10.17 1995 Non-Employee Directors' Stock Option Plan(2).........................
21.1 Subsidiaries of the Registrant............................................
23.1 Consent of Arthur Andersen LLP, Independent Accountants...................
23.2 Consent of Thelen, Marrin, Johnson & Bridges LLP (included in Exhibit
5.1)....................................................................
24.1 Power of attorney (See Page II-4).........................................
</TABLE>
- ------------------------
+ Confidential treatment has been granted for portions of this agreement
(1) Incorporated by reference to Registrant's Current Report on Form 8-K (File
No. 0-26966), dated August 15, 1997, filed August 19, 1997
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 33-97188), filed September 20, 1995, as amended
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K (File
No. 0-26966), for the period ended December 31, 1996
<PAGE>
EXHIBIT 1.1
2,500,000 Shares
ADVANCED ENERGY INDUSTRIES, INC.
Common Stock
FORM OF UNDERWRITING AGREEMENT
------------------------------
September ___, 1997
UBS Securities LLC
Lehman Brothers Inc.
PaineWebber Incorporated
Robertson Stephens & Company LLC
C/O UBS SECURITIES LLC
299 Park Avenue
New York, NY 10171
Ladies and Gentlemen:
Advanced Energy Industries, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell 1,000,000 shares of Advanced Energy Industries, Inc.
authorized but unissued Common Stock, $0.001 par value per share (the "Common
Stock"), and the stockholders of the Company listed on Schedule B hereto
(collectively the "Selling Securityholders") propose to sell an aggregate of
1,500,000 shares of Common Stock (collectively, such 2,500,000 shares of Common
Stock are hereinafter referred to as the "Firm Shares") to the several
underwriters listed on SCHEDULE A to this Agreement (collectively, the
"Underwriters"). The Company and the Selling Securityholders also propose to
grant to the Underwriters an option to purchase up to 375,000 additional shares
(the "Option Shares") of Common Stock on the terms and for the purposes set
forth in Section 3(c). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
The Company and the Selling Securityholders severally wish to confirm as
follows their agreements with you (the "Representatives") and the other
Underwriters on whose behalf you are acting in connection with the several
purchases by the Underwriters of the Shares.
1. REGISTRATION STATEMENT. A registration statement on Form S-3 (File
No. 333-[ ]) including a prospectus relating to the Shares and each amendment
thereto has been prepared by the Company in conformity with the requirements of
the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission
<PAGE>
(the "Commission") thereunder, and has been filed with the Commission. There
have been delivered to you three signed copies of such registration statement
and amendments, together with three copies of each exhibit filed therewith.
Copies of such registration statement and amendments (but without exhibits) and
of the related preliminary prospectus have been delivered to you in such
reasonable quantities as you have requested for each of the Underwriters. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly by
the Company with the Commission. If such registration statement has become
effective, a final prospectus containing all Rule 430A Information (as
hereinafter defined) will be filed by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations on or before the second
business day after the date hereof (or such earlier time as may be required by
the Rules and Regulations).
The term "Registration Statement" as used in this Agreement shall mean
such registration statement (including all exhibits and financial statements and
all documents incorporated by reference therein) at the time such registration
statement becomes or became effective and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined), shall also mean such registration statement as so amended; provided,
however, that such term shall include all Rule 430A Information deemed to be
included in such registration statement at the time such registration statement
becomes effective as provided by Rule 430A of the Rules and Regulations and
shall also mean any registration statement filed pursuant to Rule 462(b) of the
Rules and Regulations with respect to the Shares. The term "Preliminary
Prospectus" shall mean any preliminary prospectus referred to in the preceding
paragraph and any preliminary prospectus included in the Registration Statement
at the time it becomes effective that omits Rule 430A Information. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares in the form in which it is first filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations or, if no filing pursuant to Rule
424(b) of the Rules and Regulations is required, shall mean the form of final
prospectus included in the Registration Statement at the time such registration
statement becomes effective. The term "Rule 430A Information" means information
with respect to the Shares and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule 430A of
the Rules and Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
SECURITYHOLDERS.
(a) The Company and Douglas S. Schatz jointly and severally hereby
represent and warrant as follows:
(i) The Company has not received, and has no notice of, any
order of the Commission preventing or suspending the use of any Preliminary
Prospectus, or instituted proceedings for that purpose, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material respects to
the requirements of the Act and the Rules and Regulations. When the
Registration Statement became or becomes, as the case may be, effective (the
"Effective Date") and at all times subsequent thereto up to and at the Closing
Date (as hereinafter defined), any later date on which Option Shares are
-3-
<PAGE>
to be purchased (the "Option Closing Date") and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, (i) the Registration
Statement and Prospectus, and any amendments or supplements thereto, will
contain all statements which are required to be stated therein by, and will
comply with the requirements of, the Act and the Rules and Regulations, and
(ii) neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading. The foregoing representations and
warranties in this section 2(a)(i) do not apply to any statements or omissions
made in reliance on and in conformity with the information contained in third
and seventh paragraphs under the section of the Prospectus entitled
"Underwriting" and the information in the last paragraph on the front cover
page of the Prospectus. The Company has not distributed any offering material
in connection with the offering or sale of the Shares other than the
Registration Statement, the Preliminary Prospectus, the Prospectus or any other
materials, if any, permitted by the Act.
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own, lease and operate its
properties and conduct its business as described in the Registration Statement.
The Company is duly qualified to do business as a foreign corporation in good
standing in each jurisdiction where the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to so qualify would not have a material adverse effect on the business,
properties, financial condition or results of operations of the Company and its
Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse
Effect"). The Company has no subsidiaries (as defined in the Rules and
Regulations) other than ____________, _____________, _____________ and
____________ (collectively, the "Subsidiaries"). The Company owns 100% of the
outstanding capital stock of each of the Subsidiaries. Other than the
Subsidiaries, the Company does not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation or
have any equity interest in any firm, partnership, joint venture, association or
other entity. Complete and correct copies of the certificates of incorporation
and of the bylaws of the Company and the Subsidiaries and all amendments thereto
have been delivered to the Representatives, and except as set forth in the
exhibits to the Registration Statement no changes therein will be made
subsequent to the date hereof and prior to the Closing Date or, if later, the
Option Closing Date. Each Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Registration Statement. Each Subsidiary is duly qualified to do business as a
foreign corporation in good standing in each jurisdiction where the ownership or
leasing of the properties or the conduct of its business requires such
qualification, except where the failure to so qualify would not have a Material
Adverse Effect. All of the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
non-assessable and (except as otherwise described in this Section 2(a)) are
owned by the Company subject to no security interest, other encumbrance or
adverse claims. No options, warrants or other rights to purchase, agreements or
other obligation to issue
-3-
<PAGE>
or other rights to convert any obligation into shares of capital stock or
ownership interests in the Subsidiaries are outstanding.
(iii) The Company has full power and authority (corporate and
otherwise) to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement on the part of the
Company, enforceable against the Company in accordance with its terms, except as
rights to indemnity and contribution hereunder may be limited by applicable laws
or equitable principles and except as enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws relating
to or affecting creditors' rights generally or by general equitable principles.
The performance of this Agreement by the Company and the consummation by the
Company of the transactions herein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any indenture, mortgage, deed of trust, loan agreement, bond, debenture,
note agreement or other evidence of indebtedness, or any lease, contract or
other agreement or instrument to which the Company or any Subsidiary is a party
or by which its properties are bound, or (ii) the certificate of incorporation
or bylaws of the Company or any Subsidiary or (iii) any law, order, rule,
regulation, writ, injunction or decree of any court or governmental agency or
body to which the Company or any Subsidiary is subject. The Company is not
required to obtain or make (as the case may be) any consent, approval,
authorization, order, designation or filing by or with any court or regulatory,
administrative or other governmental agency or body as a requirement for the
consummation by the Company of the transactions herein contemplated, except such
as may be required under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act") or under state securities or blue sky ("Blue Sky")
laws or under the rules and regulations of the National Association of
Securities Dealers, Inc. ("NASD").
(iv) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim, proceeding or investigation against the
Company or its Subsidiaries or any of their respective officers or any of their
respective properties, assets or rights before any court or governmental agency
or body or otherwise which might result in a Material Adverse Effect or have a
material adverse effect on the Company's properties, assets or rights, or
prevent consummation of the transactions contemplated hereby. There are no
statutes, rules, regulations, agreements, contracts, leases or documents that
are required to be described in the Prospectus, or to be filed as exhibits to
the Registration Statement by the Act or by the Rules and Regulations that have
not been accurately described in all material respects in the Prospectus or
filed as exhibits to the Registration Statement.
(v) All outstanding shares of capital stock of the Company have
been duly authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all federal and state securities laws, were
not issued in violation of any preemptive right, resale right, right of first
refusal or similar right. The authorized and outstanding capital stock of the
Company conforms in all material respects to the description thereof contained
in the Registration Statement and the Prospectus (and such description correctly
states the substance of the provisions of the instruments defining the capital
stock of the Company).
-4-
<PAGE>
(vi) The Shares to be sold by the Company have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable. The Shares to be sold by the Selling
Securityholders are duly authorized, are duly and validly issued, fully paid and
nonassessable. The Shares conform to the description thereof in the Prospectus.
Except as set forth in the Prospectus, no preemptive right, co-sale right, right
of first refusal or other similar rights of securityholders exists with respect
to any of the Shares or the issue and sale thereof other than those that have
been expressly waived prior to the date hereof. With the exception of the
Selling Securityholders,] no holder of securities of the Company has the right
to cause the Company to include such holder's securities in the Registration
Statement. No further approval or authorization of any security holder, the
Board of Directors or any duly appointed committee thereof or others is required
for the issuance and sale or transfer of the Shares, either by the Company or
the Selling Securityholders, except as may be required under the Act, the
Exchange Act or under state securities or Blue Sky laws. Except as disclosed in
or contemplated by the Prospectus and the financial statements of the Company,
and the related notes thereto, included in the Prospectus the Company does not
have outstanding any options or warrants to purchase, or any preemptive rights
or other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations. The description of the Company's stock option and other plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus accurately and fairly presents, in all material
respects, the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) The Shares to be sold by the Selling Securityholders and
the Shares to be issued and sold by the Company have been approved for quotation
on the Nasdaq National Market.
(viii) Arthur Andersen LLP (the "Accountants") who have examined
the financial statements, together with the related schedules and notes, of the
Company filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent public accountants within the
meaning of the Act and the Rules and Regulations. The financial statements of
the Company, together with the related schedules and notes, forming part of the
Registration Statement and the Prospectus, fairly present the financial position
and the results of operations of the Company at the respective dates and for the
respective periods to which they apply. All financial statements, together with
the related schedules and notes, filed with the Commission as part of the
Registration Statement have been prepared in accordance with generally accepted
accounting principles as in effect in the United States consistently applied
throughout the periods involved except as may be otherwise stated in the
Registration Statement. The selected and summary financial and statistical data
included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the financial
statements presented therein. No other financial statements or schedules are
required by the Act or the Rules and Regulations to be included in the
Registration Statement.
-5-
<PAGE>
(ix) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
(i) any material adverse change, or any development which, in the Company's
reasonable judgment, is likely to cause a material adverse change, in the
business, properties or assets described or referred to in the Registration
Statement, or the results of operations, condition (financial or otherwise),
business or operations of the Company and its Subsidiaries taken as a whole,
(ii) any transaction which is material to the Company or its Subsidiaries,
except transactions in the ordinary course of business, (iii) any obligation,
direct or contingent, which is material to the Company and its Subsidiaries
taken as a whole, incurred by the Company or its Subsidiaries, except
obligations incurred in the ordinary course of business, (iv) any change in the
capital stock or outstanding indebtedness of the Company or its Subsidiaries or
(v) any dividend or distribution of any kind declared, paid or made on the
capital stock of the Company. Neither the Company nor its Subsidiaries has any
material contingent obligation which is not disclosed in the Registration
Statement.
(x) Except as set forth in the Prospectus, (i) the Company and
each Subsidiary have good and marketable title to all material properties and
assets described in the Prospectus as owned by them, free and clear of any
pledge, lien, security interest, charge, encumbrance, claim, equitable
interest, or restriction, (ii) the agreements to which the Company or any
Subsidiary is a party described in the Prospectus are valid agreements,
enforceable against the Company or such Subsidiary in accordance with their
terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles, and,
to the Company's knowledge, the other contracting party or parties thereto are
not in material breach or default under any of such agreements and (iii) the
Company and each Subsidiary have valid and enforceable leases for the properties
described in the Prospectus as leased by it, and such leases conform in all
material respects to the description thereof, if any, set forth in the
Registration Statement.
(xi) The Company and each Subsidiary now hold and at the
Closing Date and any later Option Closing Date, as the case may be, will hold,
all licenses, certificates, approvals and permits from all state, United States,
foreign and other regulatory authorities, that are material to the conduct of
the business of the Company (as such business is currently conducted), except
for such licenses, certificates, approvals and permits the failure of which to
hold would not have a Material Adverse Effect), all of which are valid and in
full force and effect (and there is no proceeding pending or, to the knowledge
of the Company, threatened which may cause any such license, certificate,
approval or permit to be withdrawn, cancelled, suspended or not renewed).
Neither the Company nor any Subsidiary is in violation of its certificate of
incorporation or bylaws, or, except for defaults or violations which would not
have a Material Adverse Effect, in default in the performance or observance of
any obligation, agreement, covenant or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any contract, indenture,
mortgage, loan agreement, joint venture or other agreement or instrument to
which it is a party or by which it or any of its properties are bound, or in
violation of any law, order, rule, regulation, writ, injunction or decree of any
court or governmental agency or body.
(xii) The Company and each Subsidiary have filed on a timely
basis all necessary federal, state and foreign income, franchise and other tax
returns and has paid all taxes shown
-6-
<PAGE>
thereon as due, and the Company has no knowledge of any tax deficiency which has
been or might be asserted against the Company or any Subsidiary which might have
a Material Adverse Effect. All material tax liabilities are adequately provided
for within the financial statements of the Company.
(xiii) The Company and its Subsidiaries maintain insurance of
the types and in the amounts adequate for their business and consistent with
insurance coverage maintained by similar companies in similar businesses,
including, but not limited to, insurance covering product liability and real and
personal property owned or leased against theft, damage, destruction, acts of
vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
(xiv) Neither the Company nor its Subsidiaries are involved in
any labor dispute or disturbance nor, to the knowledge of the Company, is any
such dispute or disturbance threatened.
(xv) Except as described in the Prospectus, the Company and
each Subsidiary own or possess adequate licenses or other rights to use all
patents, patent applications, trademarks, trademark applications, service marks,
service mark applications, trade names, copyrights, manufacturing processes,
formulae, trade secrets, know-how, franchises, and other material intangible
property and assets (collectively, "Intellectual Property") necessary to the
conduct of their businesses as conducted and as proposed to be conducted as
described in the Prospectus. The Company has no knowledge of any facts which
would preclude it from having rights to its patent applications referenced in
the Prospectus. The Company has no knowledge that it or any Subsidiary lacks or
will be unable to obtain any rights or licenses to use any of the Intellectual
Property necessary to conduct the business now conducted or proposed to be
conducted by it as described in the Prospectus, except as described in the
Prospectus. The Prospectus fairly and accurately describes the Company's rights
with respect to the Intellectual Property. The Company has not received any
notice of infringement or of conflict with rights or claims of others with
respect to any Intellectual Property. The Company is not aware of any patents
of others which are infringed upon by potential products or processes referred
to in the Prospectus in such a manner as to materially and adversely affect the
Company and its Subsidiaries taken as a whole, except as described in the
Prospectus.
(xvi) The Company and each Subsidiary are conducting their
businesses in compliance with all of the laws, rules and regulations of the
jurisdictions in which it is conducting business, except for such laws, rules
and regulations with respect to which the failure to be in compliance not have
a Material Adverse Effect.
(xvii) The Company is not an "investment company," or a
"promoter" or "principal underwriter" for a registered investment company, as
such terms are defined in the Investment Company Act of 1940, as amended.
(xviii) Neither the Company nor any of its Subsidiaries has
incurred any liability for a fee, commission, or other compensation on account
of the employment of a broker or finder in connection with the transactions
contemplated by this Agreement other than the underwriting discounts and
commissions contemplated hereby.
-7-
<PAGE>
(xix) The Company and each of its Subsidiaries is (i) in
compliance with any and all applicable United States, state and local
environmental laws, rules, regulations, treaties, statutes and codes promulgated
by any and all governmental authorities relating to the protection of human
health and safety, the environment or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business as currently conducted, and (iii) is in compliance with all terms
and conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permit
licenses or other approvals would not, individually or in the aggregate, have a
Material Adverse Effect. No action, proceeding, revocation proceeding, writ,
injunction or claim is pending or threatened relating to the Environmental Laws
or to the Company's or its Subsidiaries' activities involving Hazardous
Materials. "Hazardous Materials" means any material or substance (i) that is
prohibited or regulated by any environmental law, rule, regulation, order,
treaty, statute or code promulgated by any governmental authority, or any
amendment or modification thereto, or (ii) that has been designated or regulated
by any governmental authority as radioactive, toxic, hazardous or otherwise a
danger to health, reproduction or the environment.
(xx) Neither the Company nor any of its Subsidiaries has
engaged in the generation, use, manufacture, transportation or storage of any
Hazardous Materials on any of the Company's or its Subsidiaries' properties or
former properties, except where such use, manufacture, transportation or storage
is in compliance with Environmental Laws. No Hazardous Materials have been
treated or disposed of on any of the Company's or its Subsidiaries' properties
or on properties formerly owned or leased by the Company or any Subsidiary
during the time of such ownership or lease, except in compliance with
Environmental Laws. No spills, discharges, releases, deposits, emplacements,
leaks or disposal of any Hazardous Materials have occurred on or under or have
emanated from any of the Company's or its Subsidiaries' properties or former
properties.
(xxi) Neither the Company nor any of its Subsidiaries has at
any time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any foreign, United States or
state governmental officer or official, or other person charged with similar
public of quasi-public duties, other than payments required or permitted by the
laws of the United States.
(xxii) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act. The Shares have been duly authorized for quotation on the
National Association of Securities Dealers, Inc. Automated Quotation System
National Market ("Nasdaq National Market"). The Company has taken no action
designed to, or likely to have the effect of, terminating the registration of
the Common Stock under the Exchange Act or delisting the Common Stock from the
Nasdaq National Market, nor has the Company received any notification that the
Commission or the Nasdaq National Market is contemplating terminating such
registration or listing.
(xxiii) Neither the Company nor any of the Company's officers,
directors or affiliates has taken, and at the Closing Date and at any later
Option Closing Date, neither the Company nor any of the Company's officers,
directors or affiliates will have taken, directly or indirectly, any action
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which has constituted, or might reasonably be expected to constitute, the
stabilization or manipulation of the price of sale or resale of the Shares.
(xxiv) The Company has timely and properly filed with the
Commission all reports and other documents required to have been filed by it
with the Commission pursuant to the Act and the Rules and Regulations. True and
complete copies of all such reports and other documents have been delivered to
you.
(b) Each of the Selling Securityholders hereby represents and
warrants as follows:
(i) Such Selling Securityholder has good and marketable title
to all of the Shares to be sold by such Selling Securityholder hereunder, free
and clear of all liens, encumbrances, equities, security interests and claims
whatsoever, with full right and authority to deliver the same hereunder,
subject, in the case of each Selling Securityholder, to the rights of The First
National Bank of Boston, as Custodian (herein called the Custodian), and that
upon the delivery of and payment for such Shares hereunder, the several
Underwriters will receive good and marketable title thereto, free and clear of
all liens, encumbrances, equities, security interests and claims whatsoever.
(ii) Certificates in negotiable form for the Shares to be sold
by such Selling Securityholder have been placed in custody under a Custody
Agreement for delivery under this Agreement with the Custodian; such Selling
Securityholder specifically agrees that the Shares represented by the
certificates so held in custody for such Selling Securityholder are subject to
the interests of the several Underwriters and the Company, that the arrangements
made by such Selling Securityholder for such custody, including the Power of
Attorney provided for in such Custody Agreement, are to that extent irrevocable,
and that the obligations of such Selling Securityholder shall not be terminated
by any act of such Selling Securityholder or by operation of law, whether by the
death or incapacity of such Selling Securityholder (or, in the case of a Selling
Securityholder that is not an individual, the dissolution or liquidation of such
Selling Securityholder) or the occurrence of any other event; if any such death,
incapacity, dissolution, liquidation or other such event should occur before the
delivery of such Shares hereunder, certificates for such Shares shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death, incapacity, dissolution, liquidation or other event
had not occurred, regardless of whether the Custodian shall have received notice
of such death, incapacity, dissolution, liquidation or other event.
(iii) Such Selling Securityholder has reviewed the Registration
Statement and Prospectus and, although such Selling Securityholder has not
independently verified the accuracy or completeness of all the information
contained therein, nothing has come to the attention of such Selling
Securityholder that would lead such Selling Securityholder to believe that (i)
on the Effective Date, the Registration Statement contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading or
(ii) on the Effective Date the Prospectus contained and, on the Closing Date and
any later date on which Option Stock is to be purchased, contains any untrue
statement of a material fact or omitted or omits to
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state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(iv) The Selling Securityholders have no reason to believe that
the representations and warranties contained in Section 2(a) hereof are not
materially true and correct, are familiar with the Registration Statement (as
amended or supplemented) and have no knowledge of any material fact, condition
or information not disclosed in the Registration Statement, as of the Effective
Date (or any amendment or supplement thereto), as of the applicable filing date,
which has adversely affected or may adversely affect the business of the Company
and is not prompted to sell shares of Common Stock by any information concerning
the Company which is not set forth in the Registration Statement.
(v) The Selling Securityholders have not taken and will not
take, directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
3. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
the Firm Shares to the several Underwriters, each Selling Securityholder agrees
to sell to the several Underwriters the number of Firm Shares set forth in
Schedule B opposite the name of such Selling Securityholder, and each of the
Underwriters agrees to purchase from the Company and the Selling Securityholders
the respective aggregate number of Firm Shares set forth opposite its name on
SCHEDULE A, plus such additional number of Firm Shares which such Underwriter
may become obligated to purchase pursuant to Section 3(b) hereof. The price at
which such Firm Shares shall be sold by the Company and the Selling
Securityholders and purchased by the several Underwriters shall be $_____ per
share. The obligation of each Underwriter to the Company and each of the
Selling Securityholders shall be to purchase from the Company and the Selling
Securityholders that number of the Firm Shares which represents the same
proportion of the total number of the Firm Shares to be sold by each of the
Company and the Selling Securityholders pursuant to this Agreement as the number
of the Firm Shares set forth opposite the name of such Underwriter in Schedule A
hereto represents of the total number of the Firm Shares to be purchased by all
Underwriters pursuant to this Agreement, as adjusted by you in such manner as
you deem advisable to avoid fractional shares. In making this Agreement, each
Underwriter is contracting severally and not jointly; except as provided in
paragraphs (b) and (c) of this Section 3, the agreement of each Underwriter is
to purchase only the respective number of Firm Shares specified on SCHEDULE A.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 11 hereof) to purchase and pay
for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company or the Selling Securityholders shall immediately give
notice thereof to you and the non-defaulting Underwriters shall have the right
within twenty-four (24) hours after such
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default to purchase, or procure one or more other Underwriters to purchase, in
such proportions as may be agreed upon between you and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, all or any part
of the Shares which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such arrangements
with respect to all such Shares and portion, the number of Shares which each
non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis (as adjusted by
you in such manner as you deem advisable to avoid fractional shares) to absorb
the remaining shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares and portion which the
defaulting Underwriter or Underwriters agreed to purchase if the aggregate
number of such Shares exceeds 10% of the total number of Shares which all
Underwriters agreed to purchase hereunder. If the total number of Shares which
the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company and the Selling Securityholders shall have the right, within twenty-four
(24) hours next succeeding the 24-hour period referred to above, to make
arrangements with other underwriters or purchasers reasonably satisfactory to
you for purchase of such Shares and portion on the terms herein set forth. In
any such case, either you or the Company and the Selling Securityholders shall
have the right to postpone the Closing Date determined as provided in Section 5
hereof for not more than seven business days after the date originally fixed as
the Closing Date pursuant to said Section 5 in order that any necessary changes
in the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If the aggregate number of Shares which the
defaulting Underwriter or Underwriters agreed to purchase exceeds 10% of the
total number of Shares which all Underwriters agreed to purchase hereunder, and
if neither the non-defaulting Underwriters nor the Company and the Selling
Securityholders shall make arrangements within the 24-hour periods stated above
for the purchase of all the Shares which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be terminated
without further act or deed and without any liability on the part of the Company
or the Selling Securityholders to any non-defaulting Underwriter and without any
liability on the part of any non-defaulting Underwriter to the Company or the
Selling Securityholders. Nothing in this paragraph (b), and no action taken
hereunder, shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company and the Selling Securityholders grant an option to the several
Underwriters to purchase all or any portion of the Option Shares from the
Company and the Selling Securityholders at the same price per share as the
Underwriters shall pay for the Firm Shares. Said option may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters and
may be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of this Agreement upon written or telegraphic
notice by you to the Company setting forth the aggregate number of the Option
Shares as to which the several Underwriters are exercising the option. Delivery
of certificates for the Option Shares, and payment therefor, shall be made as
provided in Section 5 hereof. Each Underwriter will purchase such percentage of
the Option Shares from the Company and the Selling Securityholders as is equal
to the percentage of Firm Shares that such Underwriter is purchasing from the
Company and the Selling Securityholders,
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the exact number of shares to be adjusted by you in such manner as you deem
advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering of the Shares by the
Underwriters shall be as set forth in the Prospectus. The Underwriters may
from time to time change the public offering price after the closing of the
public offering and increase or decrease the concessions and discounts to
dealers as they may determine.
(b) You, on behalf of the Underwriters, represent and warrant that
(i) the information set forth in the last paragraph on the front cover page and
the third and seventh paragraphs under the caption "Underwriting" in the
Registration Statement, any Preliminary Prospectus and the Prospectus relating
to the Shares (insofar as such information relates to the Underwriters)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in the Registration Statement, any Preliminary Prospectus, and the
Prospectus, and that the statements made therein are correct and do not omit to
state any material fact required to be stated therein or necessary to make the
statements made therein in light of the circumstances under which they were made
not misleading, and (ii) the Underwriters have not distributed and will not
distribute prior to the Closing Date or on any Option Closing Date, as the case
may be, any of offering material in connection with the offering and sale of the
shares other than the Preliminary Prospectus, the Prospectus, the Registration
Statement and other materials permitted by the Act.
5. DELIVERY OF AND PAYMENT FOR THE SHARES.
(a) Delivery of certificates for the Firm Shares and the Option
Shares (if the option granted pursuant to Section 3(c) hereof shall have been
exercised not later than 1:00 p.m., New York time, on the date at least two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Thelen, Marrin, Johnson & Bridges LLP, counsel to the Company,
Two Embarcadero Center, Suite 2100, San Francisco, California 94111 at 9:00
a.m., New York time, on the fourth business day after the date of this
Agreement, or at such time on such other day, not later than seven full business
days after such fourth business day, as shall be agreed upon in writing by the
Company, the Selling Securityholders and you (the "Closing Date").
(b) If the option granted pursuant to Section 3(c) hereof shall be
exercised after 1:00 p.m., New York time, on the date two business days
preceding the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the Option Shares, and payment therefor,
shall be made at the office of Thelen, Marrin, Johnson & Bridges LLP, counsel to
the Company, Two Embarcadero Center, Suite 2100, San Francisco, California 94111
at 9:00 a.m., New York time, on the third business day after the exercise of
such option.
(c) Payment for the Shares purchased from the Company shall be
made to the Company or its order and payment for the Shares purchased from
the Selling Securityholders shall be
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made to the Custodian, for the account of the Selling Securityholders, in
each case by wire transfer or other same day funds. Such payment shall be
made upon delivery of certificates for the Shares to you for the respective
accounts of the several Underwriters against receipt therefor signed by you.
Certificates for the Shares to be delivered to you shall be registered in
such name or names and shall be in such denominations as you may request at
least three business days before the Closing Date, in the case of Firm
Shares, and at least two business days prior to the Option Closing Date, in
the case of the Option Shares. Such certificates will be made available to
the Underwriters for inspection, checking and packaging at a location in New
York, New York, designated by the Underwriters not less than one full
business day prior to the Closing Date or, in the case of the Option Shares,
by 3:00 p.m., New York time, on the business day preceding the Option Closing
Date.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
and the Selling Securityholders for shares to be purchased by any Underwriter
whose funds shall not have been received by you on the Closing Date or any later
Option Closing Date. Any such payment by you shall not relieve such Underwriter
from any of its obligations hereunder.
6. FURTHER AGREEMENTS OF THE COMPANY AND THE SELLING SECURITYHOLDERS.
Each of the Company and the Selling Securityholders respectively covenants and
agrees as follows:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed. If the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission. If for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, it
will prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
to the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters.
The Company will promptly prepare and file with the Commission, and promptly
notify you of the filing of, any amendments or supplements to the Registration
Statement or Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the
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Shares is required to be delivered under the Act, any event shall have occurred
as a result of which the Prospectus or any other prospectus relating to the
Shares as then in effect would include an untrue statement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. In case
any Underwriter is required to deliver a prospectus within the nine-month period
referred to in Section 10(a)(3) of the Act in connection with the sale of the
Shares, the Company will prepare promptly upon request, but at the expense of
such Underwriter, such amendment or amendments to the Registration Statement and
such prospectus or prospectuses as may be necessary to permit compliance with
the requirements of Section 10(a)(3) of the Act. The Company will file no
amendment or supplement to the Registration Statement or Prospectus that shall
not previously have been submitted to you a reasonable time prior to the
proposed filing thereof or to which you shall reasonably object in writing or
which is not in compliance with the Act and Rules and Regulations or the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge thereof of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or the use
of the Prospectus or of the initiation or threat of any proceeding for that
purpose; and the Company and the Selling Securityholders will promptly use their
best efforts to prevent the issuance of any such stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will cooperate with you in endeavoring to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation, or to execute a general consent to service
of process in any jurisdiction, or to make any undertaking with respect to the
conduct of its business. In each jurisdiction in which the Shares shall have
been qualified, the Company will make and file such statements, reports and
other documents in each year as are or may be reasonably required by the laws of
such jurisdictions so as to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares, or as
otherwise may be required by law.
(d) The Company will furnish to you, as soon as available, copies of
the Registration Statement (three of which will be signed and which will include
all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request.
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than the 45th day following the
end of the fiscal quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings statement (which will
be in reasonable detail but need not be audited) complying with the provisions
of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and
covering a twelve-month period beginning after the effective date of the
Registration Statement, and will advise you in writing when such statement has
been made available.
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(f) During a period of five years after the date hereof, the Company,
as soon as practicable after the end of each respective period, will furnish to
its stockholders annual reports (including financial statements audited by
independent certified public accountants) and will furnish to its stockholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will, upon request, furnish to you and the other several
Underwriters hereunder (i) concurrently with making such reports available to
its stockholders, statements of operations of the Company for each of the first
three quarters in the form made available to the Company's stockholders; (ii)
concurrently with the furnishing thereof to its stockholders, a balance sheet of
the Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity and of cash flow of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National Market
by the Company (except for documents for which confidential treatment is
requested); and (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or prepared for general release by the Company. During such five-
year period, if the Company shall have any active Subsidiaries, the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company are consolidated with any Subsidiaries, and shall be
accompanied by similar financial statements for any significant Subsidiary that
is not so consolidated.
(g) Prior to or simultaneously with the execution and delivery of
this Agreement, the Company will obtain agreement from each of the Company's
executive officers and directors of the Company listed on SCHEDULE C to this
Agreement providing that such person will not, for a period of 90 days after the
date of the Prospectus, without the prior written consent of UBS Securities LLC,
directly or indirectly, offer to sell, sell, hypothecate, contract to sell,
grant any option to purchase, or otherwise dispose of, any shares of Common
Stock beneficially owned as of the date such lockup agreement is executed
(including, without limitation, shares of Common Stock which may be deemed to be
beneficially owned in accordance with the Rules and Regulations and shares of
Common Stock which may be issued upon exercise of a stock option or warrant) or
any securities convertible into or exercisable or exchangeable for such Common
Stock except for transfers (a) as a BONA FIDE gift or gifts to any person or
other entity which agrees in writing to be bound by the restrictions set forth
in such lock-up agreement, or (b) to any trust for the direct or indirect
benefit of immediately family and the trustee of such trust agrees in writing
to be bound by the restrictions set forth in such lock-up agreement. Each such
person or entity shall also agree and consent to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of shares of
Common Stock held by such person or entity, except in compliance with the
foregoing restriction.
(h) The Company shall not, during the 90 days following the effective
date of the Registration Statement, except with your prior written consent as
Representatives, file a registration statement covering any of its shares of
capital stock, except that one or more registration statements on Form S-8 may
be filed at any time following the effective date of the Registration Statement.
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(i) Neither the Company nor any Selling Securityholder (except for
such Selling Securityholders who are executive officers or directors of the
Company and who enter into lock-up agreements as provided in Section 6(g) above)
shall, during the 90 days following the effective date of the Registration
Statement, except with your prior written consent as Representatives, issue,
sell, offer or agree to sell, grant, distribute or otherwise dispose of,
directly or indirectly, any shares of Common Stock, or any options, rights or
warrants with respect to shares of Common Stock, or any securities convertible
into or exchangeable for Common Stock, other than (i) the sale of Shares
hereunder, (ii) the grant of options or the issuance of shares of Common Stock
under the Company's stock option plans or stock purchase plan, as the case may
be, existing on the date hereof, (iii) the issuance of shares of Common Stock
upon exercise of the currently outstanding options or warrants described in the
Registration Statement.
(j) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(k) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(l) The Company will use its best efforts to maintain listing of its
shares of Common Stock on the Nasdaq National Market.
(m) The Company is familiar with the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder, and has in the past
conducted its affairs, and will in the future conduct its affairs, in such a
manner so as to ensure that the Company was not and will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(n) If at any time during the 90-day period after the Registration
Statement becomes effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your reasonable
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth above
consult with you in good faith regarding the necessity of disseminating a press
release or other public statement responding to or commenting on such rumor,
publication or event and, if the Company in its reasonable judgment determines
that such a press release or other public statement is appropriate, the
substance of any press release or other public statement.
7. EXPENSES. The Company and the Selling Securityholders agree with each
Underwriter that:
(a) The Company and, unless otherwise paid by the Company the Selling
Securityholders will pay and bear all costs, fees and expenses in connection
with the preparation,
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printing and filing of the Registration Statement (including financial
statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus
and any amendments or supplements thereto; the reproduction of this Agreement,
the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Memoranda and any Supplemental Blue Sky Memoranda and any instruments
related to any of the foregoing; the issuance and delivery of the Shares
hereunder to the several Underwriters, including transfer taxes, if any; the
cost of all stock certificates re presenting the Shares and Transfer Agents' and
Registrars' fees; the fees and disbursements of corporate, patent and regulatory
counsel for the Company; all fees and other charges of the Company's independent
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectuses and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and expenses incident to securing any required
review and the cost of qualifying the Shares under the laws of such
jurisdictions within the United States as you may designate (including filing
fees and fees and disbursements of Underwriters' Counsel in connection with such
NASD filings and Blue Sky qualifications); listing application fees of the
Nasdaq National Market; and all other expenses directly incurred by the Company
or the Selling Securityholders in connection with the performance of their
obligations hereunder. The Selling Securityholders will pay any transfer taxes
incident to the transfer to the Underwriters of the Shares being sold by the
Selling Securityholders.
(b) If the transactions contemplated hereby are not consummated by
reason of any failure, refusal or inability on the part of the Company or the
Selling Securityholders to perform any agreement on either of their part to be
performed hereunder or to fulfill any condition of the Underwriters' obligations
hereunder, the Company or, unless otherwise paid by the Company, the Selling
Securityholders will, in addition to paying the expenses described in clause (a)
above, reimburse the several Underwriters for all out-of-pocket expenses
(including reasonable fees and disbursements of Underwriters' Counsel) incurred
by the Underwriters in reviewing the Registration Statement and the Prospectus
and in otherwise investigating, preparing to market or marketing the Shares.
Neither the Company nor the Selling Securityholders will in any event be liable
to any of the several Underwriters for any loss of anticipated profits from the
sale by them of the Shares.
(c) The provisions of paragraphs (a) and (b) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company and the Selling Securityholders hereby agree to pay and shall
not affect any agreement which the Company and the Selling Securityholders make,
or may have made, for the sharing of any such expenses and costs.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares, as provided herein,
shall be subject to the accuracy, as of the date hereof and the Closing Date and
any later Option Closing Date, as the case may be, of the representations and
warranties of the Company and the Selling Securityholders herein, to the
performance by the Company and the Selling Securityholders of their obligations
hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 9:00 a.m., New York City time, on the date following the date of this
Agreement, or such later time or date as shall
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be consented to in writing by you. If the filing of the Prospectus, or any
supplement thereto, is required pursuant to Rule 424(b) and Rule 430A of the
Rules and Regulations, the Prospectus shall have been filed in the manner and
within the time period required by Rule 424(b) and Rule 430A of the Rules and
Regulations. No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceeding for that purpose shall have
been initiated or, to the knowledge of the Company, the Selling Securityholders
or any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares shall
have been reasonably satisfactory to Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this subsection.
(c) You shall have received, at no cost to you, on the Closing Date
and on any later Option Closing Date, as the case may be, the opinion of Thelen,
Marrin, Johnson & Bridges LLP, corporate counsel to the Company and the Selling
Securityholders, dated the Closing Date or such later Option Closing Date, in
the forms attached hereto on APPENDIX A, addressed to the Underwriters and with
reproduced copies of signed counterparts thereof for each of the
Representatives.
(d) You shall have received from Wilson Sonsini Goodrich & Rosati,
Underwriters' Counsel, an opinion or opinions, dated the Closing Date or on any
later Option Closing Date, as the case may be, in form and substance reasonably
satisfactory to you, with respect to the sufficiency of all corporate
proceedings undertaken by the Company and other legal matters relating to this
Agreement and the transactions contemplated hereby as you may reasonably
require, and the Company shall have furnished to such counsel such documents as
it may have reasonably requested for the purpose of enabling it to pass upon
such matters.
(e) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a letter from the Accountants addressed
to the Company and the Underwriters, dated the Closing Date or such later Option
Closing Date, as the case may be, confirming that it is an independent certified
public accountant with respect to the Company within the meaning of the Act and
the Rules and Regulations thereunder and based upon the procedures described in
its letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three days prior to the Closing Date or any such later Option Closing Date, as
the case may be, (i) confirming that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later Option
Closing Date, as the case may be; and (ii) setting forth any revisions and
additions to the statements and conclusions set forth in the Original Letter
that are necessary to reflect any changes in the facts described in the Original
Letter since the date of such letter, or to reflect the availability of more
recent financial statements, data or information. The letter shall not disclose
any change, or any development involving a prospective change, in or affecting
the business or properties of the Company which, in your reasonable judgment,
makes it impracticable or
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inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. In addition, you shall have received from the Accountants a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent it deemed necessary in establishing the scope
of its latest examination of the Company's financial statements, did not
disclose any weaknesses in internal controls that it considered to be material
weaknesses. All such letters shall be in a form reasonably satisfactory to the
Representatives and their counsel.
(f) You shall have received on the Closing Date and on any later
Option Closing Date, as the case may be, a certificate of the President and the
Chief Financial Officer of the Company, dated the Closing Date or such later
date, to the effect that as of such date (and you shall be satisfied that as of
such date):
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date or any
later Option Closing Date, as the case may be; and the Company has complied with
all of the agreements and satisfied all of the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later Option
Closing Date, as the case may be;
(ii) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration Statement
or preventing or suspending the use of the Prospectus has been issued, and no
proceedings for that purpose have been instituted or are pending or, to the best
of their knowledge, threatened under the Act;
(iii) They have carefully reviewed the Registration Statement
and the Prospectus; and, when the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus and any amendments or supplements
thereto contained all statements and information required to be included therein
or necessary to make the statements therein not misleading; and when the
Registration Statement became effective, and at all times subsequent thereto up
to the delivery of such certificate, none of the Registration Statement, the
Prospectus or any amendment or supplement thereto included any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading; and, since
the effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus that has not
been so set forth; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there has not been
(A) any material adverse change in the properties or assets described or
referred to in the Registration Statement and the Prospectus or in the condition
(financial or otherwise), operations, business or prospects of the Company and
its Subsidiaries, (B) any transaction which is material to the Company and its
Subsidiaries, except transactions entered into in the ordinary course of
business, (C) any obligation, direct or contingent, incurred by the Company or
its Subsidiaries, which is material to the Company and its Subsidiaries taken as
a whole,
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(D) any change in the capital stock or outstanding indebtedness of the Company
or its Subsidiaries which is material to the Company and its Subsidiaries taken
as a whole or (E) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company.
(g) The Company and the Selling Securityholders shall have furnished
to you such further certificates and documents as you shall reasonably request
as to the accuracy of the representations and warranties of the Company and the
Selling Securityholders herein, as to the performance by the Company and the
Selling Securityholders of their obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
(h) The Firm Shares and the Option Shares, if any, shall have been
approved for quotation on the Nasdaq National Market.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company or the Selling Securityholders, as the
case may be, will furnish you with such number of conformed copies of such
opinions, certificates, letters and documents as you shall reasonably request.
In case any of the conditions specified in this Section 8 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company and to the Selling Securityholders. Any such termination shall be
without liability of the Company or the Selling Securityholders to the
Underwriters and without liability of the Underwriters to the Company or the
Selling Securityholders; provided, however, that (i) in the event of such
termination, the Company and the Selling Securityholders agree to indemnify and
hold harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company and the Selling Securityholders
under this Agreement, and (ii) if this Agreement is terminated by you because of
any refusal, inability or failure on the part of the Company or the Selling
Securityholders to perform any agreement herein, to fulfill any of the
conditions herein, or to comply with any provision hereof other than by reason
of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the transactions contemplated hereby.
9. CONDITIONS OF THE OBLIGATION OF THE COMPANY AND THE SELLING
SECURITYHOLDERS. The obligation of the Company and the Selling Securityholders
to deliver the Shares shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 9 shall not
be fulfilled, this Agreement may be terminated by the Company and the Selling
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Securityholders by giving notice to you. Any such termination shall be without
liability of the Company and the Selling Securityholders to the Underwriters and
without liability of the Underwriters to the Company or the Selling
Securityholders; PROVIDED, HOWEVER, that in the event of any such termination
the Company and the Selling Securityholders jointly and severally agree to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company and the Selling
Securityholders under this Agreement.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) Subject to the provisions of paragraph (g) below, (i) the
Company and Douglas S. Schatz (the "Principal Selling Securityholder"), jointly
and severally, and the Selling Securityholders (other than the Principal
Selling Securityholder), severally in proportion to the number of Shares to be
sold by each of them, and not jointly, agree to indemnify and hold harmless
each Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Act from and
against any and all losses, claims, damages or liabilities, joint or several, to
which such indemnified parties or any of them may become subject under the Act,
the Exchange Act, or the common law or otherwise, and (ii) the Company and the
Principal Selling Securityholder, jointly and severally, and the Selling
Securityholders (other than the Principal Selling Securityholder), severally in
proportion to the number of Shares to be sold by each of them, and not jointly,
agree to reimburse each such Underwriter and controlling person for any legal or
other out-of-pocket expenses (including, except as otherwise hereinafter
provided, reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against any such
losses, claims, damages or liabilities or in connection with any investigation
or inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case of clause (i) and (ii) above, arising out of
or based upon (A) any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement (including the Prospectus as part
thereof and any 462(b) registration statement) or any post-effective amendment
thereto (including any 462(b) registration statement), or the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, (B) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (C) with respect to
the Company and the Principal Selling Securityholder, any facts or events that
would constitute a breach of any of the representations or warranties set forth
in Section 2(a) hereof, and with respect to the Selling Securityholders, any
facts or events that would constitute a breach of any of the representations or
warranties of such Selling Securityholders set forth in Section 2(b) hereof;
provided, however, that (1) the indemnity agreements of the Company and the
Selling Securityholders contained in this paragraph (a) shall not apply to any
such losses, claims, damages, liabilities or expenses if such statement or
omission is contained in the third and seventh paragraphs under section of the
Prospectus entitled "Underwriting" or the last paragraph of text on the cover
page of the Prospectus, (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Shares which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or
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supplemented) was not sent or delivered to such person (excluding any documents
incorporated therein by reference) and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in the
Prospectus (or the Prospectus as amended or supplemented) unless the failure is
the result of noncompliance by the Company with paragraph (a) of Section 6
hereof, and (3) each Selling Securityholder shall not be liable under this
paragraph with respect to (A) information pertaining to other Selling
Securityholders furnished by or on behalf of such other Selling Securityholders
expressly for use in any Preliminary Prospectus or the Registration Statement or
the Prospectus or any such amendment thereof or supplement thereto or
(B) breaches of any representation or warranty set forth in Section 2(b) hereof
by other Selling Securityholders. The indemnity agreements of the Company and
the Selling Securityholders contained in this paragraph (a) and the
representations and warranties of the Company and the Selling Securityholders
contained in Section 2 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of any payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its executive officers, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Act, and the Selling Securityholders from and against any and all
losses, claims, damages or liabilities, joint or several, to which such
indemnified parties or any of them may become subject under the Act, the
Exchange Act, or the common law or otherwise and to reimburse each of them for
any legal or other expenses including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any 462(b) registration statement) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that in the cases of clauses (i) and (ii) above, such statement or omission is
contained in the Section of the Prospectus entitled "Underwriting" or the last
paragraph on the cover page of the Prospectus. The indemnity agreement of each
Underwriter contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 10 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
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investigation or inquiry of, or proceeding against it, in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (a "Notice") of such service or
notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to whom
such Notice was not given was unaware of the action, suit, investigation,
inquiry or proceeding to which the Notice would have related and was prejudiced
by the failure to give the Notice, but the omission so to notify such
indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled, at its or their own expense to have counsel chosen by such indemnified
party or parties participate in, but not conduct, the defense. It is understood
that the indemnifying parties shall not, in respect of the legal defenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for (a) the fees and expenses of more than one
separate firm (in addition to any local counsel) for all of the Underwriters and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act, and (b) the fees and expenses of more than one separate firm (in
addition to any local counsel) for the Company, its directors, its officers who
sign the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 10 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action, suit,
investigation, inquiry or proceeding, except that (A) the indemnifying party or
parties shall bear the legal and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the indemnifying party or parties shall bear such
other expenses as it or they have authorized to be incurred by the indemnified
party or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party or
parties in connection
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with the defense of the action, suit, investigation, inquiry or proceeding. The
indemnifying party or parties shall not be liable for any settlement of any
proceeding effected without its or their written consent, provided such consent
has not been unreasonably withheld.
(d) If the indemnification provided for in this Section 10 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 10, then each indemnifying party shall, in
lieu of indemnifying such indemnified party, contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 10 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Securityholders, on the one hand, and the Underwriters,
on the other, shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Shares received by the Company and
the Selling Securityholders and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Shares. Relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if
contributions pursuant to this paragraph (d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this paragraph
(d). The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations in this paragraph (d) to contribute are several in
proportion to their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall
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not relieve the party from whom contribution may be sought from any obligation
it may have hereunder or otherwise (except as specifically provided in paragraph
(c) of this Section 10).
(e) Neither Company nor the Selling Securityholders will, without the
prior written consent of each Underwriter, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not such Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to
such claim, action, suit or proceeding) unless such settlement, compromise or
consent includes an unconditional release of such Underwriter and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including without limitation the
provisions of this Section 10 and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 10 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
(g) The liability of each Selling Securityholder under such Selling
Securityholder's representations and warranties contained in Section 2 hereof
and under the indemnity and reimbursement agreements contained in the provisions
of this Section 10 and Section 12 hereof shall (i) be limited to an amount equal
to the net proceeds of the Shares sold by such Selling Securityholder to the
Underwriters and, (ii) no Selling Securityholder shall be required to provide
indemnification to an Underwriter until such person seeking indemnification
shall have first made a demand on the Company with respect to such loss, claim
damage, liability or expense, and the Company shall have either rejected such
demand or failed to make such requested payment within 60 days after receipt of
such demand. The Company and the Selling Securityholders may agree, as among
themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
11. TERMINATION. This Agreement may be terminated by you at any time on
or prior to the Closing Date or on or prior to any later Option Closing Date, as
the case may be, by giving written notice to the Company and the Selling
Securityholders (i) if the Company or the Selling Securityholders shall have
failed, refused or been unable, at or prior to the Closing Date, or on or prior
to any later Option Closing Date, as the case may be, to perform any agreement
on its part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Company or the Selling
Securityholders is not fulfilled, or (ii) if trading on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges for prices for securities shall have been required on the New
York Stock Exchange, the American Stock Exchange or the Nasdaq National Market,
by such trading exchanges or by order of the Commission or any other
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governmental authority having jurisdiction, or if a banking moratorium shall
have been declared by federal or New York authorities, or (iii) if the Company
shall have sustained a loss by strike, fire, flood, accident or other calamity
of such character as to have a Material Adverse Effect regardless of whether or
not such loss shall have been insured, or (iv) if there shall have been a
material adverse change in the general political or economic conditions or
financial markets in the United States as in the judgment of the
Representatives makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have occurred
an outbreak or escalation of hostilities between the United States and any
foreign power or of any other insurrection or armed conflict involving the
United States or other national or international calamity, hostilities or crisis
or the declaration by the United States of a national emergency which, in the
judgment of the Representatives, adversely affects the marketability of the
Shares, or (vi) if since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there shall have occurred any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company or the business affairs, management, or business prospects of the
Company, whether or not arising in the ordinary course of business, or (vii) if
any foreign, federal or state statute, regulation, rule or order of any court or
other governmental authority shall have been enacted, published, decreed or
otherwise promulgated which in the judgment of the Representatives materially
and adversely affects or will materially and adversely affect the business or
operations of the Company, or trading in the Common Stock shall have been
suspended, or (viii) there shall have occurred a material adverse decline in the
value of securities generally on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market or (ix) action shall be taken by any
foreign, federal, state or local government or agency in respect of its monetary
or fiscal affairs which, in the judgment of the Representatives, has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated in accordance with this Section 11, there shall be
no liability of the Company or the Selling Securityholders to the Underwriters
and no liability of the Underwriters to the Company or the Selling
Securityholders; provided, however, that in the event of any such termination
the Company and the Selling Securityholders agree to indemnify and hold harmless
the Underwriters from all costs or expenses incident to the performance of the
obligations of the Company and the Selling Securityholders under this Agreement,
including all costs and expenses referred to in Section 7.
If you elect to terminate this Agreement as provided in this Section 11,
the Company shall be notified promptly by you by telephone, telecopy or
telegram, confirmed by letter.
12. REIMBURSEMENT OF CERTAIN EXPENSES.
(a) In addition to their other obligations under Section 10 of this
Agreement (and subject, in the case of Selling Securityholders, to the
provisions of paragraph (g) of Section 10), the Company and the Selling
Securityholders hereby jointly and severally agree to reimburse on a quarterly
basis the Underwriters for all reasonable legal and other expenses incurred in
connection with investigating or defending any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in paragraph (a) of
Section 10 of this Agreement, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the obligations under
this Section 12 and the possibility that such
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payments might later be held to be improper; provided, however, that (i) to the
extent any such payment is ultimately held to be improper, the persons receiving
such payments shall promptly refund them and (ii) such persons shall provide to
the Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
(b) In addition to their other obligations under Section 10 of this
Agreement, the Underwriters hereby agree to reimburse on a quarterly basis the
Company and the Selling Securityholders for all reasonable legal and other
expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (b) of Section 10 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
obligations under this Section 12 and the possibility that such payments might
later be held to be improper; provided, however, that (i) to the extent any such
payment is ultimately held to be improper, the Company and the Selling
Securityholders shall promptly refund it and (ii) the Company and the Selling
Securityholders shall provide to the Underwriter, upon request, reasonable
assurances of its ability to effect any refund, when and if due.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company, the Selling Securityholders and the several
Underwriters and, with respect to the provisions of Section 10 hereof, the
several parties (in addition to the Company, the Selling Securityholders and the
several Underwriters) indemnified under the provisions of said Section 10, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision herein contained. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Shares from any of the several Underwriters.
14. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to UBS Securities LLC, 299 Park Avenue, New
York, NY 10171, Attention: Mr. Richard Messina; and if to the Company or to the
Selling Securityholders, shall be mailed, telegraphed or delivered to it at its
office, 1625 Sharp Point Drive, Fort Collins, Colorado 80525 Attention: Richard
P. Beck. All notices given by telegraph shall be promptly confirmed by letter.
15. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(i) any investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or the Selling Securityholders
or the Company's respective directors or officers, and (ii) delivery of and
payment for the Shares under this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
-27-
<PAGE>
You will act as Representatives of the several Underwriters in all dealings
with the Company under this Agreement, and any action under or in respect of
this Agreement taken by you jointly or by UBS Securities LLC, as
Representatives, will be binding upon all of the Underwriters.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of New York.
[INTENTIONALLY LEFT BLANK]
-28-
<PAGE>
Please sign and return to the Company and to the Selling Securityholders in
care of the Company the enclosed duplicates of this letter, whereupon this
letter will become a binding agreement among the Company, the Selling
Securityholders and the several Underwriters in accordance with its terms.
Very truly yours,
ADVANCED ENERGY INDUSTRIES, INC.
By:
---------------------------------
Douglas S. Schatz,
President and Chief Executive
Officer
SELLING SECURITYHOLDERS
The Selling Securityholders named in
Schedule B to this Agreement
By:
------------------------------
Attorney-In-Fact
The foregoing Agreement is hereby confirmed
and accepted as of the datefirst above written.
UBS SECURITIES LLC
LEHMAN BROTHERS, INC.
PAINE WEBBER INCORPORATED
ROBERTSON STEPHENS & COMPANY LLC
By: UBS SECURITIES LLC
By:
------------------------------
Title:
Acting on behalf of the several
Underwriters, including themselves,
named on SCHEDULE A hereto.
<PAGE>
[LETTERHEAD OF THELEN, MARRIN, JOHNSON & BRIDGES LLP]
August 20, 1997
Advanced Energy Industries, Inc.
1625 Sharp Point Drive
Fort Collins, CO 80525
Dear Sirs:
We have acted as counsel for Advanced Energy Industries, Inc., a Delaware
corporation (the "Company"), in connection with the preparation and filing with
the Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-3 (as same may be amended or supplemented from time to time,
the "Registration Statement"). The Registration Statement relates to the offer
and sale by the Company and certain stockholders of the Company (the "Selling
Stockholders") of up to 2,875,000 shares of the Company's Common Stock, par
value of $0.001 per share (collectively, the "Shares"). We understand that up
to 1,150,000 of the Shares are being offered and sold by the Company and that up
to 1,725,000 of the Shares are being offered and sold by the Selling
Stockholders. We further understand that 31,500 of the Shares being offered and
sold by the Selling Stockholders are not currently outstanding, but will be
acquired by certain Selling Stockholders, pursuant to the exercise of currently
outstanding options, prior to such Selling Stockholders' sales of such Shares.
In this capacity, we have examined the Registration Statement, the
Company's Certificate of Incorporation and Bylaws, as in effect as of the date
hereof, and such other documents, records, certificates of officers of the
Company, certificates of public officials and other instruments as we have
deemed necessary or appropriate under the circumstances for purpose of giving
the opinion expressed herein. In making such examinations, we have assumed (i)
the genuineness of all signatures; (ii) the authenticity of all documents
submitted to us as originals; (iii) the conformity to original documents of all
documents submitted to us as certified copies or photocopies; and (iv) the
identity and capacity of all individuals acting or purporting to act as public
officials.
<PAGE>
Based on the foregoing, we are of the opinion that the Shares, when issued
and sold in accordance with the Registration Statement and the related
Prospectus, will be validly issued, fully paid and nonassessable.
We are members of the bar of the State of California and we express no
opinion as to the laws of any state or jurisidiction other than the State of
California, the United States and the General Corporation Law of the State of
Delaware.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We further consent to the use of our
name under the heading "Legal Matters" in the Prospectus filed with the
Commission as a part of the Registration Statement.
Very truly yours,
/s/ Thelen, Marrin, Johnson & Bridges LLP
THELEN, MARRIN, JOHNSON & BRIDGES LLP
JLM/DM
<PAGE>
- --------------------------------------------------------------------------------
ADVANCED ENERGY INDUSTRIES, INC.
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . 7
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Advances. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Foreign Exchange Contract; Foreign Exchange Settlements . . . 10
2.3 Acquisition Term Facility . . . . . . . . . . . . . . . . . . 11
2.4 Equipment Advances. . . . . . . . . . . . . . . . . . . . . . 11
2.5 Existing Term Loan. . . . . . . . . . . . . . . . . . . . . . 12
2.6 Overadvances. . . . . . . . . . . . . . . . . . . . . . . . . 13
2.7 Interest Rates, Payments, and Calculations. . . . . . . . . . 13
2.8 Crediting Payments. . . . . . . . . . . . . . . . . . . . . . 13
2.9 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . 14
2.10 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . 14
2.11 Conversion/Continuation of Advances . . . . . . . . . . . . . 14
2.12 Additional Requirements/Provisions Regarding LIBOR Rate
Advances or Optional Currency Rate Advances.. . . . . . . . . 15
2.13 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3. CONDITIONS OF LOANS . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.1 Conditions Precedent to Initial Advance . . . . . . . . . . . 17
3.2 Conditions Precedent to all Advances. . . . . . . . . . . . . 17
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . 18
4.1 Grant of Security Interest. . . . . . . . . . . . . . . . . . 18
4.2 Delivery of Additional Documentation Required . . . . . . . . 18
4.3 Right to Inspect. . . . . . . . . . . . . . . . . . . . . . . 18
4.4 Stock Pledge. . . . . . . . . . . . . . . . . . . . . . . . . 18
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . 19
5.1 Due Organization and Qualification. . . . . . . . . . . . . . 19
5.2 Due Authorization; No Conflict. . . . . . . . . . . . . . . . 19
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . 19
5.4 Merchantable Inventory. . . . . . . . . . . . . . . . . . . . 19
5.5 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.6 Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.7 No Material Adverse Change in Financial Statements. . . . . . 20
5.8 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
5.9 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . 20
5.10 Environmental Condition . . . . . . . . . . . . . . . . . . . 20
5.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
5.12 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . 21
5.13 Government Consents . . . . . . . . . . . . . . . . . . . . . 21
5.14 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . 21
6. AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . 21
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . 21
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . 21
6.3 Financial Statements, Reports, Certificates . . . . . . . . . 21
6.4 Inventory; Returns. . . . . . . . . . . . . . . . . . . . . . 22
6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.6 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.7 Quick Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 22
6.8 Debt-Tangible Net Worth Ratio . . . . . . . . . . . . . . . . 22
6.9 Tangible Net Worth. . . . . . . . . . . . . . . . . . . . . . 23
6.10 Profitability . . . . . . . . . . . . . . . . . . . . . . . . 23
6.11 Debt Service Coverage . . . . . . . . . . . . . . . . . . . . 23
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6.12 Further Assurances. . . . . . . . . . . . . . . . . . . . . . 23
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 23
7.1 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . 23
7.2 Change in Business or Control . . . . . . . . . . . . . . . . 23
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . 23
7.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . 23
7.5 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . 23
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . 24
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . 24
7.8 Transactions with Affiliates. . . . . . . . . . . . . . . . . 24
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . 24
7.10 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . 24
8. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . 24
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . 24
8.2 Covenant Default. . . . . . . . . . . . . . . . . . . . . . . 24
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . 25
8.4 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.5 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.6 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . 25
8.7 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . 25
8.8 Misrepresentations. . . . . . . . . . . . . . . . . . . . . . 25
9. BANKS' RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . 25
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . 25
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . 27
9.3 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . 27
9.4 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . 27
9.5 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . 27
10. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. . . . . . . . . . . . . . 28
12. INTERCREDITOR PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 28
12.1 Proportionate Interests . . . . . . . . . . . . . . . . . . . 28
12.2 Designation of Service Agent. . . . . . . . . . . . . . . . . 29
12.3 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.4 Servicing Agent as Bank . . . . . . . . . . . . . . . . . . . 29
12.5 No Agency . . . . . . . . . . . . . . . . . . . . . . . . . . 29
12.6 No Reliance . . . . . . . . . . . . . . . . . . . . . . . . . 29
13. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.1 Successors and Assigns. . . . . . . . . . . . . . . . . . . . 29
13.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 29
13.4 Waivers of Notice . . . . . . . . . . . . . . . . . . . . . . 30
13.5 Subrogation Defenses. . . . . . . . . . . . . . . . . . . . . 30
13.6 Right to Settle, Release. . . . . . . . . . . . . . . . . . . 30
13.7 Primary Obligation. . . . . . . . . . . . . . . . . . . . . . 31
13.8 Subordination . . . . . . . . . . . . . . . . . . . . . . . . 31
13.9 Enforcement of Rights . . . . . . . . . . . . . . . . . . . . 31
13.10 AEI as Agent. . . . . . . . . . . . . . . . . . . . . . . . . 31
13.11 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . 31
13.12 Severability of Provisions. . . . . . . . . . . . . . . . . . 31
13.13 Amendments in Writing, Integration. . . . . . . . . . . . . . 31
13.14 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . 32
13.15 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
13.16 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . 32
13.17 Optional Currency Rate Instruments. . . . . . . . . . . . . . 32
ii
<PAGE>
This LOAN AGREEMENT is entered into as of August 15, 1997 by and among
SILICON VALLEY BANK ("SVB") as Servicing Agent and a Bank and BANK OF HAWAII
("BofH;" SVB and BofH are referred to individually herein as a "Bank," and
collectively as the "Banks") and ADVANCED ENERGY INDUSTRIES, INC., a Delaware
corporation ("AEI") and Tower Electronics Inc., a Minnesota corporation
("Tower") (individually a "Borrower" and collectively, the "Borrowers").
RECITALS
Borrowers wish to obtain credit from time to time from Banks, and Banks
desire to advance credit to Borrowers. This Agreement sets forth the terms on
which Banks will lend to Borrowers, and Borrowers will repay the advances to
Banks.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Acquisition" means the acquisition by AEI of all of the issued
and outstanding capital stock of Tower pursuant to that certain Stock Purchase
Agreement dated as of August 15, 1997.
"Advance" or "Advances" means a cash advance under the Revolving
Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and each Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of each Borrower's books and records
relating to its property.
"Business Day" means a day of the year (a) that is not a
Saturday, Sunday or other day on which banks in the States of California or
Hawaii or the City of London are authorized or required to close and (b) on
which dealings are carried on in the interbank market in which Bank customarily
participates and, (c) with respect to Advances and payments in an Optional
Currency or any requests or notices related thereto, that is not a day on which
the BofH branch or other banks in the country of such Optional Currency are
authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on attached EXHIBIT A.
"Committed Line" means Ten Million Dollars ($10,000,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that
1
<PAGE>
Person; and (iii) all obligations arising under any interest rate, currency or
commodity swap agreement, interest rate cap agreement, interest rate collar
agreement, or other agreement or arrangement designated to protect a Person
against fluctuation in interest rates, currency exchange rates or commodity
prices; provided, however, that the term "Contingent Obligation" shall not
include endorsements for collection or deposit in the ordinary course of
business. The amount of any Contingent Obligation shall be deemed to be an
amount equal to the stated or determined amount of the primary obligation in
respect of which such Contingent Obligation is made or, if not stated or
determinable, the maximum reasonably anticipated liability in respect thereof as
determined by such Person in good faith; provided, however, that such amount
shall not in any event exceed the maximum amount of the obligations under the
guarantee or other support arrangement.
"Credit Extension" mean an Advance, a Letter of Credit or a
Foreign Exchange Contract.
"Current Liabilities" means, as of any applicable date, all
amounts that should, in accordance with GAAP, be included as current liabilities
on the consolidated balance sheet of Borrower and its Subsidiaries, excluding
all outstanding Advances made under Section 2.1 hereof, but including all other
Indebtedness that is payable upon demand or within one year from the date of
determination thereof unless such Indebtedness is renewable or extendable at the
option of Borrower or any Subsidiary to a date more than one year from the date
of determination.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"EBITDA" means, for any period, earnings before interest expense,
taxes, depreciation and amortization.
"Equipment" means machinery, equipment, tenant improvements,
furniture, fixtures, vehicles, tools, parts and attachments.
"Equivalent Amount" means the equivalent in United States Dollars
of an Optional Currency, calculated at the spot rate for the purchase of such
Optional Currency by BofH.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, extension generally with all or
substantially all creditors, or proceedings seeking general reorganization,
arrangement, or other relief.
"Interest Period" means for each LIBOR Rate Advance, a period of
approximately one, three or six months as Borrower may elect, PROVIDED that the
last day of an Interest Period for a LIBOR Rate Advance shall be determined in
accordance with the practices, of the LIBOR interbank market as from time to
time in effect, PROVIDED, FURTHER, in all cases such period shall expire not
later than the applicable Revolving Maturity Date.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
2
<PAGE>
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Issuing Bank" means the Bank issuing a Letter of Credit pursuant
to Section 2.1.1. SVB shall be the issuing bank, except that BofH shall be the
Issuing Bank if (i) SVB is unable to issue a Letter of Credit or (ii) a Letter
of Credit issued by SVB would require confirmation by another bank under
circumstances in which a Letter of Credit issued by BofH would not require
confirmation.
"Letter of Credit" means a Letter of Credit issued pursuant to
Section 2.1.1.
"LIBOR Base Rate" means, for any Interest Period for a LIBOR Rate
Advance, the rate of interest per annum determined by SVB to be the per annum
rate of interest at which deposits in United States Dollars are offered to SVB
in the London interbank market in which SVB customarily participates at
11:00 A.M. (local time in such interbank market) three (3) Business Days before
the first day of such Interest Period for a period approximately equal to such
Interest Period and in an amount approximately equal to the amount of such
Advance.
"LIBOR Rate" shall mean, for any Interest Period for a LIBOR Rate
Advance, a rate per annum (rounded upwards, if necessary, to the nearest 1/16 of
1%) equal to (i) the LIBOR Base Rate for such Interest Period divided by (ii) 1
minus the Reserve Requirement for such Interest Period.
"LIBOR Rate Advances" means any Advances made or a portion
thereof on which interest is payable based on the LIBOR Rate in accordance with
the terms hereof.
"Lien" means any mortgage, lien, deed of trust, security interest
or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower, and any other agreement entered into between
Borrower and Banks in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on (i)
the business operations or financial condition of Borrower and its Subsidiaries
taken as a whole or (ii) the ability of Borrowers, taken as a whole, to repay
the Obligations.
"Maturity Date" means August 14, 2002.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank Expenses
and other amounts owed to the Banks by Borrower pursuant to this Agreement,
whether absolute or contingent, due or to become due (including any interest
accruing after the commencement of an Insolvency Proceeding and any interest
that would have accrued but for the commencement of an Insolvency Proceeding),
now existing or hereafter arising.
"Operating Loss" means an operating loss under GAAP, specifically
excluding non-cash losses arising from business-combination activities.
"Optional Currency" means the lawful currency of Japan.
"Optional Currency Rate Advance" means an Advance in an Optional
Currency, made pursuant to and in accordance with Section 2.1(c).
"Optional Currency Rate" means, with respect to Advances in
Japanese Yen, the Japanese Short Term Prime Rate, as quoted by the office of
BofH located in Japan.
"Optional Currency Rate Instruments" means the promissory notes
and other agreements and instruments requested by Banks as a condition to making
Optional Currency Rate Advances.
3
<PAGE>
"Percentage Share" means, as to each Bank, the percentage
calculated in accordance with Section 12.1 hereof.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to either
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and such Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Banks arising under
this Agreement or any other Loan Document;
(b) Subordinated Debt;
(c) Capital leases or indebtedness incurred solely to purchase
equipment, which is secured in accordance with clause (c) of "Permitted Liens"
below and is not in excess of the lesser of the purchase price of such equipment
or the fair market value of such equipment on the date of acquisition, provided
the outstanding principal balance of such Indebtedness incurred in any fiscal
year shall not exceed Two Million Five Hundred Thousand Dollars ($2,500,000);
(d) Indebtedness to trade creditors incurred in the ordinary
course of business;
(e) Indebtedness set forth on the Schedule;
(f) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby), and Indebtedness consisting of
Investments that are "Permitted Investments" under clause (l) of the definition
of Permitted Investments;
(g) Indebtedness secured by Permitted Liens;
(h) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a), (b), (c), (e) and
(g) above, PROVIDED that the principal amount thereof is not increased or the
terms thereof are not modified to impose more burdensome terms upon Borrower or
its Subsidiaries, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed on the
Schedule;
(b) Investments made or obtained through either Bank that
consist of (i) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc.,
(iii) certificates of deposit maturing no more than one (1) year from the date
of investment therein issued by either Bank or (iv) that are permitted by
Borrower's investment policy, as amended from time to time by its board of
directors, provided that such investment policy (and any such amendment thereto)
has been approved by the Banks, which approval shall not be unreasonably
withheld; and
(c) Investments made in connection with the merger or
consolidation with another Person or the acquisition of all or substantially all
of the capital stock or property of another Person where the sole consideration
paid by Borrower or any Subsidiary consists of Borrower's equity securities and
cash and the aggregate value of such equity securities and cash paid after the
date hereof does not exceed Fifteen Percent (15%) of Borrower's Tangible Net
Worth immediately prior to the date such Investment is made.
"Permitted Liens" means the following:
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(a) Any liens existing as of the date hereof and disclosed on
the Schedule;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of Banks'
security interests;
(c) Liens (i) upon or in any equipment acquired by Borrower or
any of its Subsidiaries after the date hereof to secure the purchase price of
such equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, PROVIDED that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not constituting a Material Adverse Effect;
(e) Liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c), and (d) above, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, public benefit corporation, firm, joint stock company, estate,
entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum, most
recently announced by SVB as its "prime rate," or BofH as its "base rate," as
applicable to the Advances made hereunder by each such Bank, whether or not such
announced rate is the lowest rate available from such Bank.
"Prime Rate Advances" means any Advances made or a portion
thereof on which interest is payable based on the Prime Rate in accordance with
the terms hereof.
"Quick Assets" means, at any date as of which the amount thereof
shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments, with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Regulatory Change" means, with respect to Bank, any change on or
after the date of this Agreement in United States federal, state or foreign laws
or regulations, including Regulation D, or the adoption or making on or after
such date of any written interpretations, directives or requests applying to a
class of lenders including Bank of or under any United States federal or state,
or any foreign, laws or regulations (whether or not having the force of law) by
any court or governmental or monetary authority charged with the interpretation
or administration thereof.
"Reserve Requirement" means, for any Interest Period, the average
maximum rate at which reserves (including any marginal, supplemental or
emergency reserves) are required to be maintained during such Interest Period
under Regulation D against "Eurocurrency liabilities" (as such term is used in
Regulation D) by member banks of the Federal Reserve System. Without limiting
the effect of the foregoing, the Reserve Requirement shall reflect any other
reserves required to be maintained by Bank by reason of any Regulatory Change
against (i) any category of liabilities which includes deposits by reference to
which the LIBOR Rate is to be determined as provided in the definition of "LIBOR
Base Rate" or (ii) any category of extensions of credit or other assets which
include Advances.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer, the Treasurer and the Controller of AEI.
"Revolving Facility" means the facility under which a Borrower
may request Bank to issue cash advances, as specified in Section 2.1 hereof.
"Revolving Maturity Date" means the day before the second
anniversary of the Closing Date.
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"Schedule" means the schedule of exceptions attached hereto.
"Servicing Agent" means SVB or such entity as may succeed to such
position.
"Shares" means the shares of capital stock of Tower.
"Subordinated Debt" means any debt incurred by a Borrower that is
subordinated to the Obligations under this Agreement on terms reasonably
acceptable to Banks.
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of which
by the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity shall, at the time as of which any
determination is being made, is owned by Borrower, either directly or through an
Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrowers MINUS,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, AND (ii) Total Liabilities.
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of
Borrowers, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 ADVANCES. Subject to the terms and conditions of this Agreement,
each Bank severally will make Advances to Borrowers as set forth herein. BofH
shall make all of the Advances made in an Optional Currency. Each Bank
severally will make its Percentage Share of Advances such that the aggregate
amount of each Bank's Advances (including Optional Rate Advances) under this
Agreement shall not exceed such Bank's Percentage Share of the Committed Line
minus the face amount of the outstanding Letters of Credit minus the Foreign
Exchange Reserve, provided that the aggregate outstanding Advances in an
Optional Currency shall not exceed Five Million Dollars ($5,000,000). Subject
to the terms and conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time prior to the Revolving
Maturity Date.
(a) REQUESTS FOR ADVANCES. Whenever Borrowers desire an
Advance, AEI will notify Servicing Agent by facsimile transmission or telephone
no later than 11:00 a.m. California time on the Business Day that a Prime Rate
Advance is to be made, noon California time on the Business Day that is two (2)
Business Days in the country of the Optional Currency prior to the Business Day
on which an Optional Currency Rate Advance is to be made, and noon California
time on the Business Day that is three (3) Business Days prior to the Business
Day on which a LIBOR Rate Advance is to be made. Servicing Agent shall promptly
deliver such notice to the Banks. Each Bank may make Advances under this
Agreement, based upon instructions received by Servicing Agent from a
Responsible Officer, or without instructions if in Servicing Agent's discretion
such Advances are necessary to meet Obligations under this Agreement which have
become due and remain unpaid. Each Bank shall be entitled to rely on any notice
by telephone or otherwise given by a person who Servicing Agent reasonably
believes to be a Responsible Officer, and Borrowers shall indemnify and hold
such Bank harmless for any damages or loss suffered by such Bank as a result of
such reliance. Such Bank will wire or credit, as appropriate, the amount of
Advances in United States Dollars made under this Section 2.1 to a Borrower's
deposit account held by Servicing Agent, as specified by AEI, or, as to an
Advance in an Optional Currency, to a Borrower's deposit account held by BofH in
the respective branch office in the country of the Optional Currency.
Each such notice shall specify:
(i) the date such Advance is to be made, which shall be
a Business Day;
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(ii) the amount of such Advance;
(iii) whether such Advance is to be a Prime Rate Advance, an
Optional Currency Rate Advance, or a LIBOR Rate Advance;
(iv) if the Advance is to be a LIBOR Rate Advance, the
Interest Period for such Advance; and
(v) if the Advance is to be in an Optional Currency, the
type of currency.
Each written request for an Advance, and each confirmation of a telephone
request for such an Advance, shall be in the form of a Borrowing Certificate in
the form of EXHIBIT B executed by AEI on behalf of Borrowers.
(b) PRIME RATE ADVANCES. Each Prime Rate Advance shall be in an
amount not less than Twenty Five Thousand Dollars ($25,000). The outstanding
principal balance of each Prime Rate Advance shall bear interest until principal
is due (computed daily on the basis of a 360 day year and actual days elapsed),
at a rate per annum equal to the Prime Rate minus Three Quarters of One Percent
(0.75%). Borrower shall pay the entire outstanding principal amount of each
Prime Rate Advance on the Revolving Maturity Date.
(c) OPTIONAL CURRENCY RATE ADVANCES. Each Optional Currency
Rate Advance shall be in an Equivalent Amount of not less than Fifty Thousand
Dollars ($50,000). The outstanding principal balance of each Optional Currency
Rate Advance shall bear interest until principal is due (computed daily on the
basis of a 360 day year and actual days elapsed or, where required by any law or
is customary in the country of the Optional Currency, a 365 day year) at a rate
per annum equal to the Optional Currency Rate plus 100 basis points for such
Optional Currency Rate Advance. The Optional Currency Rate Advances shall be
evidenced by this Agreement and by the Optional Currency Rate Instruments.
Borrower shall pay the entire outstanding principal amount of each Optional
Currency Rate Advance on the Revolving Maturity Date.
(d) LIBOR RATE ADVANCES. Each LIBOR Rate Advance shall be in an
amount or an Equivalent Amount of not less than Five Hundred Thousand Dollars
($500,000). The outstanding principal balance of each LIBOR Rate Advance shall
bear interest until principal is due (computed daily on the basis of a 360 day
year and actual days elapsed) at a rate per annum equal to the LIBOR Rate plus
175 basis points for such LIBOR Rate Advance. The entire outstanding principal
amount of each LIBOR Rate Advance shall be due and payable on the last day of
the LIBOR Rate Interest Period for such LIBOR Rate Advance and on the Revolving
Maturity Date.
(e) PREPAYMENT OF THE ADVANCES. Borrowers may at any time
prepay any Prime Rate Advance, any Optional Currency Rate Advance, or any LIBOR
Rate Advance, in full or in part. Each partial prepayment for a LIBOR Rate
Advance shall be in an amount not less than Two Hundred Fifty Thousand Dollars
($250,000). Each prepayment shall be made upon the irrevocable written or
telephone notice of Borrowers received by Servicing Agent not later than
10:00 a.m. California time on the date of the prepayment of a Prime Rate
Advance, not less than two Business Days in the country of the Optional Currency
prior to the date of the prepayment of an Optional Currency Rate Advance, and
not less than three (3) Business Days prior to the date of the prepayment of a
LIBOR Rate Advance. The notice of prepayment shall specify the date of the
prepayment, the amount of the prepayment, and the Advance or Advances to be
prepaid. Each prepayment of an Optional Currency Rate Advance for which the
term and interest rate have been fixed or LIBOR Rate Advance shall be
accompanied by the payment of accrued interest on the amount prepaid and any
amount required by Section 2.12.
(f) FEES. Borrower shall pay Servicing Agent a facility fee of
Twelve Thousand Five Hundred Dollars ($12,500) on the Closing Date. On each
anniversary of the Closing Date, Borrower shall pay SVB a non-usage fee equal to
One Fourth of One Percent (0.25%) of the difference between the Committed Line
and the average Daily Balance during the prior year.
(g) TERM. The Revolving Facility shall terminate on the
Revolving Maturity Date, at which time all Advances under this Section 2.1 shall
be immediately due and payable.
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2.1.1 LETTERS OF CREDIT.
(a) At AEI's written request, Issuing Bank shall issue
Letters of Credit for Borrowers' account. Each Bank severally agrees to
participate in Letters of Credit, in accordance with such Bank's Percentage
Share.
(b) Issuing Bank shall issue the Letter of Credit upon
receipt of a Borrower's written request and Issuing Bank's standard form of
application, stating (a) the date such Borrower wishes to receive the Letter of
Credit (which shall be a Business Day); (b) the requested amount of such Letter
of Credit; (c) the aggregate amount of all Advances and Letters of Credit then
outstanding; (d) if appropriate, the conditions requested by Borrower under
which the Letter of Credit may be drawn upon; and (e) any other information
Issuing Bank might need to issue the Letter of Credit. Issuing Bank shall
promptly notify all of the Banks upon receipt of a request for a Letter of
Credit.
(c) The maximum aggregate obligation at any one time for
undrawn and drawn but unreimbursed Letters of Credit shall be One Million Five
Hundred Thousand Dollars ($1,500,000). Each Letter of Credit shall be issued
pursuant to the terms and conditions of this Agreement and of the Issuing Bank's
standard form of application and security agreement for letters of credit. Each
Letter of Credit shall (a) expire no later than the Revolving Maturity Date; and
(b) be otherwise in form and substance satisfactory to Issuing Bank. Upon
issuing a Letter of Credit, the Issuing Bank shall immediately notify the other
Bank of such issuance and shall, on a continuing basis, keep the other Bank
informed of the drawn and undrawn but unreimbursed amount of each Letter of
Credit for so long as such Letter of Credit is outstanding. Borrower shall pay
Issuing Bank its standard fees on account of each Letter of Credit issued
hereunder, which shall be shared by Banks in accordance with their agreement.
On the day on which Issuing Bank honors any drawing made by the beneficiary of a
Letter of Credit, Borrowers shall pay to Issuing Bank the full amount of the
drawing so honored, or at Borrowers' option, shall treat the amount of such
drawing as an Advance under Section 2.1. The obligation to reimburse Issuing
Bank for the amount of such drawing is absolute, unconditional, and irrevocable.
(d) Borrowers may request that Issuing Bank issue a
Letter of Credit payable in a currency other than United States Dollars. If a
demand for payment is made under any such Letter of Credit, Issuing Bank shall
treat such demand as an advance to Borrowers of the Equivalent Amount thereof.
Upon the issuance of any Letter of Credit payable in a currency other than
United States Dollars, Banks shall create a reserve under the Committed Line for
letters of credit against fluctuations in currency exchange rates, in an amount
equal to ten percent (10%) of the face amount of such Letter of Credit. The
amount of such reserve may be amended by Banks from time to time to account for
fluctuations in the exchange rate. The availability of funds under the
Committed Line shall be reduced by the amount of such reserve for so long as
such Letter of Credit remains outstanding.
2.2 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE SETTLEMENTS.
(a) Subject to the terms of this Agreement, Borrowers may
utilize up to Five Million Dollars ($5,000,000) for Exchange Contracts, pursuant
to which a Bank shall sell to or purchase from Borrower foreign currency on a
spot or future basis. All Exchange Contracts must provide for delivery of
settlement on or before the Maturity Date. The limit available at any time
shall be reduced by the following amounts (the "Foreign Exchange Reserve") on
each day (the "Determination Date"): (i) on all outstanding Exchange Contracts
on which delivery is to be effected or settlement allowed more than two business
days from the Determination Date, 10% of the gross amount of the Exchange
Contracts. In lieu of the Foreign Exchange Reserve for 100% of the gross amount
of any Exchange Contract, Borrowers may request that Banks treat such amount as
an Advance under the Committed Line.
(b) Banks may, in their discretion, terminate the Exchange
Contracts at any time (a) that an Event of Default occurs or (b) that there is
no sufficient availability under the Committed Line and Borrower does not have
available funds in its bank account to satisfy the Foreign Exchange Reserve. If
Banks terminate the Exchange Contracts, and without limitation of any applicable
indemnities, Borrowers shall reimburse Banks for any and all fees, costs and
expenses relating thereto or arising in connection therewith.
(c) Borrowers shall not permit the total gross amount of all
Exchange Contracts on which delivery is to be effected and settlement allowed in
any two business day period to be more than Five Million Dollars ($5,000,000)
nor shall Borrowers permit the total gross amount of all Exchange Contracts to
which a Borrower is a party, outstanding at any one time, to exceed Five Million
Dollars ($5,000,000).
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(d) As a condition to requesting any Exchange Contracts,
Borrowers shall execute all standard form applications and agreements of Banks
in connection with the Exchange Contracts and, without limiting any of the terms
of such applications and agreements, Borrowers will pay all standard fees and
charges of Banks in connection with the Exchange Contracts.
2.3 ACQUISITION TERM FACILITY.
(a) TERM ADVANCE. Subject to and upon the terms and conditions
of this Agreement, and provided that Borrowers are in compliance with this
Agreement, Borrowers may make one request on or prior to August 19, 1997 for a
Term Advance in an aggregate principal amount of up to Twelve Million Dollars
($12,000,000).
(b) PROCEDURE. To request the Term Advance on a date other than
the Closing Date, AEI shall complete, execute and deliver a Loan Payment Advance
Request Form to Servicing Agent on the Business Day of the requested Term
Advance.
(c) INTEREST AND PRINCIPAL. Interest shall accrue from the date
of the Term Advance at a floating rate equal to the Prime Rate minus One Quarter
of One Percent (0.25%) or a fixed rate equal to Two and One Half (2.5)
percentage points above the yield of 60 month Treasury Notes as reported in the
Western Edition of THE WALL STREET JOURNAL on the date that is one (1) Business
Day before the effective date of the Term Advance. Borrowers shall give
Servicing Agent written notice of their interest rate election at the time
Borrowers request the Term Advance. If Servicing Agent does not timely receive
such notice, then the applicable rate shall be the floating rate specified in
the first sentence of this section. Notwithstanding the foregoing, beginning
the fiscal quarter immediately following Borrowers' achieving two (2)
consecutive fiscal quarters of Indebtedness to EBITDA of not more than 0.50 to
1.00, the floating interest rate shall be the Prime Rate minus One Half of One
Percent (0.5%), and the fixed rate shall be Two and Thirty-five Hundredths
(2.35) percentage points above the yield of 60 month Treasury Notes in effect on
the effective date of the Term Advance. Borrower shall repay the Term Advance
in Twenty (20) equal quarterly installments, plus accrued interest, beginning
the first day of the fiscal quarter following the fiscal quarter in which the
Term Advance was made, and continuing on the first day of each fiscal quarter
thereafter. The Term Facility shall terminate on the Term Maturity Date, at
which time all Obligations owing under this Section 2.3, and all other amounts
under this Agreement, shall be immediately due and payable.
(d) PREPAYMENT. Borrower may prepay all or any portion of the Term
Advance, provided that any prepayment made before the first anniversary of the
Closing Date shall be accompanied by a prepayment fee equal to Three Quarters of
One Percent (0.75%) of the amount of the prepayment, any prepayment made after
the first anniversary but before the second anniversary of the Closing Date
shall be accompanied by a prepayment fee equal to One Half of One Percent
(0.50%) of the amount of the prepayment, and any prepayment made after the
second anniversary but before the third anniversary of the Closing Date shall be
accompanied by a prepayment fee equal to One Quarter of One Percent (0.25%) of
the amount of the prepayment.
(e) CASH FLOW RECAPTURE. Beginning December 31, 1997, and
continuing on the last day of each of Borrower's fiscal years, Borrower shall
make a mandatory prepayment on account of the Term Advance equal to the lesser
of (i) the amount by which EBITDA for such fiscal year exceeded Twenty Million
Dollars ($20,000,000) or (ii) Three Million Dollars ($3,000,000) per year.
Payments made under this section shall be applied to principal installments in
the reverse order of maturity. Each such payment shall be made by not later
than April 30 for the prior fiscal year.
(f) FEE. Borrower shall pay Servicing Agent a fee equal to Sixty
Thousand Dollars ($60,000) on the Closing Date on account of the Acquisition
Term Facility.
2.4 EQUIPMENT ADVANCES.
(a) Subject to and upon the terms and conditions of this
Agreement, at any time from the date hereof through August 14, 1998, Banks will
make advances (each an "Equipment Advance" and, collectively, the "Equipment
Advances") to Borrower in an aggregate outstanding amount not to exceed Four
Million Dollars ($4,000,000). To evidence the Equipment Advance or Equipment
Advances, Borrower shall deliver to Servicing Agent, at the time of each
Equipment Advance request, an invoice for the equipment to be purchased. The
Equipment Advances shall be used only to purchase or refinance Equipment
approved from time to time by
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Banks that was purchased in any case on or after ninety (90) days prior to the
Closing Date and shall not exceed one hundred percent (100%) of the invoice
amount of such Equipment, excluding taxes, shipping, warranty charges, freight
discounts and installation expense. Each Equipment Advance must be in a minimum
amount of One Hundred Thousand Dollars ($100,000).
(b) Interest shall accrue from the date of each Equipment
Advance through August 14, 1998, at a floating rate equal to the Prime Rate
minus One Half of One Percent (0.5%), and shall be payable monthly for each
month through August 14, 1998. Any Equipment Advances that are outstanding on
such date will be payable in sixteen (16) equal quarterly installments of
principal, beginning on September 15, 1998, and continuing on the fifteenth
calendar day preceding the last day of each fiscal quarter thereafter through
August 14, 2002. Interest thereon shall be payable monthly, beginning
September 15, 1998, and continuing on the fifteenth calendar day of each month
until the Equipment Advances have been paid in full. The Equipment Advances
that are outstanding on August 14, 1998 shall bear interest at a floating rate
equal to the Prime Rate minus One Half of One Percent (0.5%); provided Borrower
shall have a one-time option, on August 14, 1998 to select a fixed rate of
interest equal to Two and One Half (2.50) percentage points above the yield of
48 month Treasury Notes as reported in the Western Edition of THE WALL STREET
JOURNAL on August 13, 1998. If SVB does not timely receive written notice of
Borrower's election of the fixed rate, the Equipment Advances shall bear
interest at the floating rate specified in the first sentence of this section.
Equipment Advances, once repaid, may not be reborrowed.
(c) When Borrower desires to obtain an Equipment Advance,
Borrower shall notify Bank (which notice shall be irrevocable) by facsimile
transmission to be received no later than 3:00 p.m. Pacific time three (3)
Business Days before the day on which the Equipment Advance is to be made. Such
notice shall be substantially in the form of EXHIBIT B. The notice shall be
signed by a Responsible Officer or its designee and include a copy of the
invoice and proof of payment for the Equipment to be financed.
(d) Borrower may prepay all or any portion of any Equipment
Advance without penalty or premium, provided that any prepayment of an Equipment
Advance bearing a fixed rate of interest shall be accompanied by a prepayment
fee equal to the breakage costs advised by Banks at the time of such prepayment.
(e) Borrower shall pay Servicing Agent a fee equal to Ten
Thousand Dollars ($10,000) on account of the Equipment Facility.
2.5 EXISTING TERM LOAN.
Borrowers acknowledge that Borrowers owe a principal amount of
One Million, One Hundred Twenty-Four Thousand Nine Hundred Ninety-Nine Dollars
and 97/100 ($1,124,999.97) to Banks on account of a term loan previously made to
Borrower. Such term loan shall bear interest at a rate equal to the Prime Rate
minus One Quarter of One Percent (0.25%). Borrower shall repay such term loan
in Twenty Seven (27) equal monthly installments of principal, plus accrued
interest, on the fifteenth day of each month, beginning August 15, 1997 and
continuing through November 15, 1999, on which date the entire principal balance
and all accrued but unpaid interest thereon shall be due and payable.
2.6 OVERADVANCES. If, at any time or for any reason, the sum of
(i) Advances owed by Borrowers to Banks pursuant to Section 2.1 of this
Agreement plus (ii) the Foreign Exchange Reserve plus (iii) the face amount of
any outstanding Letters of Credit is greater than the Committed Line, Borrowers
shall immediately pay to SVB, in cash, the amount of such excess, for payment to
the Banks according to their respective Percentage Shares. If, at any time or
for any reason, the Equivalent Amount of Outstanding Optional Currency Advances
exceeds Five Million Dollars ($5,000,000), Borrowers shall immediately pay to
BofH the amount of such excess.
2.7 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.7(b), any
Obligations shall bear interest, on the average Daily Balance, at the rates
specified in the provisions relating to each facility under this Agreement.
(b) DEFAULT RATE. All Obligations shall bear interest, from and
after the occurrence of an Event of Default, at a rate equal to the lesser of
(i) three (3) percentage points above the interest rate applicable immediately
prior to the occurrence of the Event of Default or (ii) the maximum rate
permitted by law including, to the extent applicable to Optional Currency
Advances, the law of the country of such Optional
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Currency.
(c) PAYMENTS. Accrued interest shall be due and payable in
arrears upon the earlier of (i) the end of the Interest Period or (ii) any
payment of principal or (iii) on the fourteenth day of each calendar month.
With respect to repayments of Prime Rate Advances and LIBOR Rate Advances,
Servicing Agent shall, at the option of each Bank, charge such interest, all
Bank Expenses, and all Periodic Payments against a Borrower's deposit account
held at SVB or against the Committed Line, in which case those amounts shall
thereafter accrue interest at the rate then applicable hereunder. With respect
to repayments of Optional Currency Advances, the branch of BofH in the country
of the Optional Currency shall, at the option of each Bank, charge such interest
and all periodic payments against a Borrower's deposit account in such country
or against the Committed Line, in which case those amounts shall thereafter
accrue interest at the rate then applicable hereunder. Any interest not paid
when due shall be compounded by becoming a part of the Obligations, and such
interest shall thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed, except that
interest chargeable on account of Optional Rate Currency Advances shall be
computed on the basis of a three hundred sixty five (365) day year where such
computation is required by any law or is customary in the country of the
Optional Currency.
2.8 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, each Bank shall credit a wire transfer of funds, check, or other item
of payment to such deposit account held at such Bank or Obligation as a Borrower
specifies; provided that payments in an Optional Currency shall be made only at
the branch of BofH in the country of such Optional Currency. After the
occurrence and during the continuation of an Event of Default, the receipt by a
Bank of any wire transfer of funds, check, or other item of payment shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such payment is of immediately available
federal funds or unless and until such check or other item of payment is honored
when presented for payment. Notwithstanding anything to the contrary contained
herein, any wire transfer or payment received by a Bank after noon California
time (or, as to a payment in an Optional Currency, noon at the BofH branch
office in the country of the Optional Currency) shall be deemed to have been
received by such Bank as of the opening of business on the immediately following
Business Day. Whenever any payment to a Bank under the Loan Documents would
otherwise be due (except by reason of acceleration) on a date that is not a
Business Day, such payment shall instead be due on the next Business Day, and
additional fees or interest, as the case may be, shall accrue and be payable for
the period of such extension.
2.9 BANK EXPENSES. Borrowers shall pay to Banks upon the date
hereof, all Bank Expenses incurred through the date hereof, including reasonable
attorneys' fees and expenses, and, within thirty (30) days of demand, other Bank
Expenses as they become due from time to time hereunder.
2.10 ADDITIONAL COSTS. In case any law, regulation, treaty or
official directive or the written interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law):
(a) subjects any Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of such Bank imposed by the United States of America
or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit insurance,
reserve, special deposit or similar requirement against assets held by, or
deposits in or for the account of, or loans by, any Bank; or
(c) imposes upon any Bank any other material condition with
respect to its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to such Bank,
reduce the income receivable by such Bank or impose any expense upon such Bank
with respect to any loans, such Bank shall notify Borrowers thereof in writing.
Borrowers shall pay to such Bank the amount of such increase in cost, reduction
in income or additional
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expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by such Bank of a statement of the amount and setting forth
such Bank's calculation thereof, all in reasonable detail, which statement shall
be deemed true and correct absent manifest error; PROVIDED, HOWEVER, that
Borrowers shall not be liable for any such amount attributable to any period
prior to 180 days prior to the date of such certificate.
2.11 CONVERSION/CONTINUATION OF ADVANCES.
(a) Borrowers may from time to time submit in writing a request
that Prime Rate Advances be converted to LIBOR Rate Advances or that any
existing LIBOR Rate Advances continue for an additional Interest Period. Such
request shall specify the amount of the Prime Rate Advances which will
constitute LIBOR Rate Advances (subject to the limits set forth below) and the
Interest Period to be applicable to such LIBOR Rate Advances. Each written
request for a conversion to a LIBOR Rate Advance or a continuation of a LIBOR
Rate Advance shall be substantially in the form of an Optional Currency Rate or
LIBOR Rate Conversion/Continuation Certificate as set forth on Exhibit B, which
shall be duly executed by a Responsible Officer. Subject to the terms and
conditions contained herein, three (3) Business Days after Servicing Agent's
receipt of such a request from Borrowers, such Prime Rate Advances shall be
converted to LIBOR Rate Advances or such LIBOR Rate Advances or an Optional
Currency Rate Advance shall continue, as the case may be provided that:
(i) no Event of Default or event which with
notice or passage of time or both would constitute an Event of Default exists;
(ii) no party hereto shall have sent any notice of
termination of the Agreement;
(iii) Borrowers shall have complied with such
customary procedures as Banks have established from time to time for Borrowers'
requests for Optional Currency Rate Advances or LIBOR Rate Advances;
(iv) the amount of a Prime Rate Advance shall be
$25,000 or more, the amount of an Optional Currency Rate Advance shall be
$50,000 or more, and the amount of a LIBOR Rate Advance shall be $500,000 or
such greater amount which is an integral multiple of $50,000; and
(v) Servicing Agent shall have determined that
the Interest Period or LIBOR Rate or Optional Currency Rate is available to
Banks as of the date of the request for such LIBOR Rate Advance or Optional
Currency Rate Advance.
Any request by Borrowers to convert Prime Rate Advances to LIBOR Rate
Advances or continue any existing LIBOR Rate Advances shall be irrevocable.
Notwithstanding anything to the contrary contained herein, Banks shall not be
required to purchase United States Dollar deposits in the London interbank
market or other applicable LIBOR Rate market to fund any LIBOR Rate Advances,
but the provisions hereof shall be deemed to apply as if Banks had purchased
such deposits to fund the LIBOR Rate Advances.
(b) Any LIBOR Rate Advances shall automatically convert to Prime
Rate Advances upon the last day of the applicable Interest Period, unless Banks
have received and approved a complete and proper request to continue such LIBOR
Rate Advance at least three (3) Business Days prior to such last day in
accordance with the terms hereof. Any LIBOR Rate Advances or Optional Currency
Rate Advances shall, at Banks' option, convert to Prime Rate Advances in the
event that an Event of Default shall exist. Borrowers shall pay to Banks, upon
demand by Banks (or Servicing Agent may, at its option, charge a Borrower's
deposit account) any amounts required to compensate Banks for any loss
(including loss of anticipated profits), cost or expense incurred by such
person, as a result of the conversion of LIBOR Rate Advances or Optional
Currency Rate Advances to Prime Rate Advances pursuant to any of the foregoing.
2.12 ADDITIONAL REQUIREMENTS/PROVISIONS REGARDING LIBOR RATE ADVANCES
OR OPTIONAL CURRENCY RATE ADVANCES.
(a) If for any reason (including voluntary or mandatory
prepayment or acceleration), Banks receive all or part of the principal amount
of a LIBOR Rate Advance prior to the last day of the Interest Period for such
LIBOR Rate Advance or the proposed term of any Optional Currency Rate Advance
for which the term and the interest rate have been fixed, Borrowers shall on
demand by Servicing Agent, pay Servicing
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Agent the amount (if any) by which (i) the additional interest which would have
been payable on the amount so received had it not been received until the last
day of such Interest Period or term exceeds (ii) the interest which would have
been recoverable by Banks by placing the amount so received on deposit in the
certificate of deposit markets or the offshore currency interbank markets or
United States Treasury investment products, as the case may be, for a period
starting on the date on which it was so received and ending on the last day of
such Interest Period or term at the interest rate determined by Servicing Agent
in its reasonable discretion. Servicing Agent's determination as to such amount
shall be conclusive absent manifest error.
(b) Borrowers shall pay to a Bank, upon demand by a Bank, from
time to time such amounts as such Bank may reasonably determine to be necessary
to compensate it for any costs incurred by such Bank that such Bank determines
are attributable to its making or maintaining of any amount receivable by such
Bank hereunder in respect of any Advances relating thereto (such increases in
costs and reductions in amounts receivable being herein called "Additional
Costs"), in each case resulting from any Regulatory Change which:
(i) changes the basis of taxation of any amounts payable
to such Bank under this Agreement in respect of any Advances (other than changes
which affect taxes measured by or imposed on the overall net income of such Bank
by the jurisdiction in which such Bank has its principal office); or
(ii) imposes or modifies any reserve, special deposit or
similar requirements relating to any extensions of credit or other assets of, or
any deposits with or other liabilities of such Bank (including any Advances or
any deposits referred to in the definition of "LIBOR Base Rate"); or
(iii) imposes any other material condition affecting this
Agreement (or any of such extensions of credit or liabilities).
Such Bank will notify Borrowers of any event occurring after the date of the
Agreement which will entitle such Bank to compensation pursuant to this section
as promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Such Bank will furnish Borrower with a statement
setting forth the basis and amount of each request by such Bank for compensation
under this Section 2.12. Determinations and allocations by a Bank for purposes
of this Section 2.12 of the effect of any Regulatory Change on its costs of
maintaining its obligations to make Advances or of making or maintaining
Advances or on amounts receivable by it in respect of Advances, and of the
additional amounts required to compensate such Bank in respect of any Additional
Costs, shall be conclusive absent manifest error.
(c) Borrowers shall pay to a Bank, upon the request of such
Bank, such amount or amounts as shall be sufficient (in the sole good faith
opinion of such Bank) to compensate it for any reasonable loss, costs or expense
incurred by it as a result of any failure by Borrower to borrow a LIBOR Rate
Advance on the date for such borrowing specified in the relevant notice of
borrowing hereunder.
(d) If a Bank shall determine that the adoption or
implementation of any applicable law, rule, regulation or treaty regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank or comparable
agency charged with the interpretation or administration thereof, or compliance
by Bank (or its applicable lending office) with any respect or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, has or would have the effect of
reducing the rate of return on capital of such Bank or any person or entity
controlling Bank (a "Parent") as a consequence of its obligations hereunder to a
level below that which Bank (or its Parent) could have achieved but for such
adoption, change or compliance (taking into consideration its policies with
respect to capital adequacy) by an amount deemed by Bank to be material, then
from time to time, within 15 days after demand by such Bank, Borrowers shall pay
to Bank such additional amount or amounts as will compensate such Bank for such
reduction. A statement of such Bank claiming compensation under this Section
and setting forth the additional amount or amounts to be paid to it hereunder
shall be conclusive absent manifest error.
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(e) If at any time a Bank, in its sole and absolute discretion,
determines that: (i) the amount of the LIBOR Rate Advances or Optional Currency
Rate Advances for periods equal to the corresponding Interest Periods or any
other period are not available to such Bank in the offshore currency interbank
markets, or (ii) the LIBOR Rate or Optional Currency Rate does not accurately
reflect the cost to Bank of lending the LIBOR Rate Advance or Optional Currency
Rate Advance, then such Bank shall promptly give notice thereof to Borrowers,
and upon the giving of such notice such Bank's obligation to make the LIBOR Rate
Advances or Optional Currency Rate Advances shall terminate, unless Banks and
Borrowers agree in writing to a different interest rate applicable to LIBOR Rate
Advances or Optional Currency Rate Advances. If it shall become unlawful for a
Bank to continue to fund or maintain any Advances, or to perform its obligations
hereunder, upon demand by such Bank, Borrower shall prepay the Advances in full
with accrued interest thereon and all other amounts payable by Borrower
hereunder (including, without limitation, any amount payable in connection with
such prepayment pursuant to Section 2.12(a)).
2.13 TERM. This Agreement shall become effective upon the date hereof
and shall continue in full force and effect for a term ending on the Maturity
Date. Notwithstanding the foregoing, Banks shall have the right to terminate
any obligation to make Advances under this Agreement immediately and without
notice upon the earlier of (i) the occurrence and during the continuance of an
Event of Default or (ii) the Revolving Maturity Date. On the date of
termination, all Obligations shall become immediately due and payable in cash or
by wire transfer.
Upon satisfaction of all Obligations hereunder (including prepayment
fees, if applicable) this Agreement shall, at Borrowers' request, terminate, and
Banks shall execute such terminations of financing statements as Borrowers may
reasonably request.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of
either Bank to make the initial Advance is subject to the condition precedent
that such Bank shall have received, in form and substance satisfactory to such
Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of each Borrower with respect
to incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) the Optional Currency Rate Instruments (with respect to
Optional Currency Rate Advances only);
(d) a financing statement (Form UCC-1) for each Borrower;
(e) evidence of the consummation of the Acquisition;
(f) solvency certificates;
(g) an opinion of Borrower's counsel;
(h) payment of the fees and Bank Expenses then due specified in
Section 2.5 hereof, provided reasonably detailed invoices are received; and
(i) such other documents, and completion of such other matters,
as Banks may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of any Bank
to make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Servicing Agent of the Loan
Payment/Advance Form as provided in Section 2.1;
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
such Loan Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date (except to the extent they relate
specifically to an
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earlier date, in which case such representations and warranties shall
continue to have been true and accurate as of such date), and no Event of
Default shall have occurred and be continuing, or would result from such
Advance; and
(c) as to each Optional Currency Rate Advance, all of the terms
and conditions contained in the applicable Optional Currency Rate Instruments
have been satisfied.
The making of each Advance shall be deemed to be a representation and
warranty by each Borrower on the date of such Advance as to the accuracy of the
facts referred to in this Section 3.2(b).
4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Banks
a continuing security interest in all presently existing and hereafter acquired
or arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Servicing Agent, at the request of
Servicing Agent, all Negotiable Collateral, all financing statements and other
documents that Servicing Agent may reasonably request, in form satisfactory to
Servicing Agent, to perfect and continue perfected Banks' security interests in
the Collateral and in order to fully consummate all of the transactions
contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Any Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
4.4 STOCK PLEDGE.
(a) AEI hereby pledges, assigns and delivers to Banks and grants
to Banks a security interest in the Shares, together with all proceeds and
substitutions thereof, all cash, stock and other moneys and property paid
thereon, all rights to subscribe for securities declared or granted in
connection therewith, and all other cash and noncash proceeds of the foregoing
(all hereinafter called the "Pledged Collateral"), as security for the prompt
performance of all of the Obligations.
(b) The term "Pledged Collateral" shall also include any
securities, instruments or distributions of any kind issuable, issued or
received by AEI upon conversion of, in respect of, or in exchange for any other
Pledged Collateral, including, but not limited to, those arising from a stock
dividend, stock split, reclassification, reorganization, merger, consolidation,
sale of assets or other exchange of securities or any dividends or other
distributions of any kind upon or with respect to the Pledged Collateral.
(c) The certificate or certificates for the securities included
in the Pledged Collateral, accompanied by an instrument of assignment duly
executed in blank by AEI, have been delivered by AEI to Bank. Tower shall cause
its books to reflect the pledge of the Shares. Upon the occurrence of an Event
of Default hereunder, Banks may effect the transfer of any securities included
in the Pledged Collateral into the name of Banks and cause new certificates
representing such securities to be issued in the name of Banks. AEI will
execute and deliver such documents, and take or cause to be taken such actions,
as Banks may reasonably request to perfect or continue the perfection of Banks'
security interest in the Pledged Collateral.
(d) Unless an Event of Default (as defined below) shall have
occurred and be continuing, AEI shall be entitled to exercise any voting rights
with respect to the Pledged Collateral and to give consents, waivers and
ratifications in respect thereof, PROVIDED that no vote shall be cast or
consent, waiver or ratification given or action taken which would be
inconsistent with any of the terms of this Agreement or which would constitute
or create any violation of any of such terms. All such rights of AEI to vote
and give consents, waiver and ratifications shall cease in case such an Event of
Default hereunder shall occur and be continuing.
(e) AEI recognizes that Banks may be unable to effect a public
sale of all or a part of the Pledged Collateral by reason of certain
prohibitions contained in the Securities Act of 1933, as amended
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("Act"), so that Banks may be compelled to resort to one or more private sales
to a restricted group of purchasers who will be obliged to agree, among other
things, to acquire the Pledged Collateral for their own account, for investment
and without a view to the distribution or resale thereof. AEI understands that
private sales so made may be at prices and on other terms less favorable to the
seller than if the Pledged Collateral were sold at public sales, and agrees that
Banks have no obligation to delay the sale of any of the Pledged Collateral for
the period of time necessary (even if Banks would agree), to register such
securities for sale under the Act. AEI agrees that private sales made under the
foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
5. REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Each Borrower is a
corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified except for states as to which any
failure so to qualify would not have a Material Adverse Effect.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within each Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in such Borrower's Articles or Certificate of Incorporation
or Bylaws, nor will they constitute an event of default under any material
agreement to which such Borrower is a party or by which such Borrower is bound.
No Borrower is in default under any agreement to which it is a party or by which
it is bound, which default is reasonably likely to have a Material Adverse
Effect.
5.3 NO PRIOR ENCUMBRANCES. Each Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
5.5 LITIGATION. There are no actions or proceedings pending by or
against any Borrower before any court or administrative agency in which an
adverse decision is reasonably likely to have a Material Adverse Effect. No
Borrower has knowledge of any such pending or threatened actions or proceedings.
5.6 SHARES. There are no subscriptions, warrants or other options
exercisable with respect to the Shares. The Shares represent one hundred
percent (100%) of the issued and outstanding stock of Tower, there are no
agreements that require Tower to issue any additional shares, and there are no
outstanding options to purchase such additional shares. The Shares have been
duly authorized and validly issued, and are fully paid and non-assessable.
5.7 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrowers that have been delivered
to Banks fairly present in all material respects the consolidated financial
condition as of the date thereof of each such entity and consolidated results of
operations for the period then ended of each such entity. There has not been a
material adverse change in the consolidated financial condition of a Borrower
since the date of the most recent of such financial statements submitted to
Banks.
5.8 SOLVENCY. Each Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.9 REGULATORY COMPLIANCE. Each Borrower has met the minimum funding
requirements of ERISA with respect to any employee benefit plans subject to
ERISA. No Borrower has withdrawn from, and no termination or partial
termination has occurred with respect to, any deferred compensation plan, and no
Borrower has withdrawn from any multi-employer plan under ERISA. No event has
occurred resulting from a Borrower's failure to comply with ERISA that is
reasonably likely to result in such Borrower's incurring any liability that is
reasonably likely to have a Material Adverse Effect. No Borrower is an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. No Borrower is engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations G, T and U of the Board of
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Governors of the Federal Reserve System), and no part of the proceeds of the
Advances will be used to purchase or carry any margin stock or for any purpose
that would violate any of Regulations G, T and U. Each Borrower has complied
with all the provisions of the Federal Fair Labor Standards Act. Each Borrower
has complied with all laws and regulations to which it is subject, noncompliance
with which is reasonably likely to have a Material Adverse Effect.
5.10 ENVIRONMENTAL CONDITION. None of any Borrower's properties or
assets has ever been used by Borrower or any Subsidiary or, to each Borrower's
knowledge, without any independent investigation, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by a Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal or state governmental
agency concerning any action or omission by a Borrower or any Subsidiary
resulting in the releasing, or otherwise disposing of hazardous waste or
hazardous substances into the environment.
5.11 TAXES. Each Borrower and each Subsidiary have filed or caused to
be filed all material tax returns required to be filed, and has paid, or have
made adequate provision for the payment of, all taxes reflected therein.
5.12 SUBSIDIARIES. No Borrower owns any stock, partnership interest
or other equity securities of any Person, except for Permitted Investments.
5.13 GOVERNMENT CONSENTS. Each Borrower has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all governmental authorities that are necessary for the
continued operation of their respective businesses as currently conducted.
5.14 FULL DISCLOSURE. The representations, warranties and other
statements included in the documents, certificates and written statements
furnished by each Borrower to either Bank prior to or as of the date of this
Agreement for use in connection with the transactions contemplated by this
Agreement, taken as a whole, do not contain any untrue statement of a material
fact or omit to state a material fact (known to a Borrower, in the case of any
document not furnished by it) necessary in order to make the statements
contained herein or therein not misleading (it being recognized by Banks that
the projections and forecasts provided by Borrowers are not to be viewed as
facts and that actual results during the period or periods covered by any such
projections and forecasts may differ from the projected or forecasted results).
6. AFFIRMATIVE COVENANTS
Each Borrower covenants and agrees that, from and after the Closing
Date until payment in full of all outstanding Obligations, and for so long as
any Bank may have any commitment to make an Advance hereunder, such Borrower
shall do all of the following:
6.1 GOOD STANDING. Maintain its and cause to be maintained each of
its Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify is reasonably likely to have a Material Adverse Effect.
Borrower shall maintain, and shall cause each of its Subsidiaries to maintain in
force all licenses, approvals and agreements, the loss of which would have a
Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Meet, and shall cause each Subsidiary to
meet, the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. Borrower shall comply, and shall cause each
Subsidiary to comply, with all statutes, laws, ordinances and government rules
and regulations to which it is subject, noncompliance with which could have a
Material Adverse Effect or a material adverse effect on the Collateral or the
priority of Banks' Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. AEI shall deliver
to Banks: (a) upon the sooner of 45 days after the last day of each fiscal
quarter as to Form 10-Q, and the sooner of 90 days after the last
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day of each fiscal year as to Form 10-K, or within five (5) days upon becoming
available, copies of all statements, reports and notices sent or made available
generally by Borrower to its security holders or to any holders of Subordinated
Debt and all reports on Form 10-K and 10-Q filed with the Securities and
Exchange Commission; (b) promptly upon receipt of notice thereof, a report of
any legal actions pending or threatened against Borrower or any Subsidiary that
is reasonably likely to result in damages or costs to Borrower or any Subsidiary
of Five Hundred Thousand Dollars ($500,000) or which could have a Material
Adverse Effect; and (c) such budgets, sales projections, operating plans or
other financial information as Bank may reasonably request from time to time.
AEI shall deliver to Banks with the quarterly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT C hereto.
Any Bank shall have a right from time to time hereafter to audit Borrower's
Accounts, provided that such audits will be conducted at Borrower's expense no
more often than annually, unless an Event of Default has occurred and is
continuing, with the auditing Bank to conduct all other audits at its own
expense.
6.4 INVENTORY; RETURNS. Keep all Inventory in good and marketable
condition, free from all material defects. Returns and allowances, if any, as
between a Borrower and its account debtors shall be on the same basis and in
accordance with the usual customary practices of Borrower, as they exist at the
time of the execution and delivery of this Agreement. Borrower shall promptly
notify Bank when any particular return, recovery, dispute or claim causes the
aggregate returns for any fiscal month to exceed Ten Percent (10%) of the gross
sales for such month.
6.5 TAXES. Make, and shall cause each Subsidiary to make, due and
timely payment or deposit of all material federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Banks, on demand, appropriate certificates attesting to the payment
or deposit thereof; and Borrower will make, and will cause each Subsidiary to
make, timely payment or deposit of all material tax payments and withholding
taxes required of it by applicable laws, including, but not limited to, those
laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and
federal income taxes, and will, upon request, furnish each Bank with proof
satisfactory to such Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 INSURANCE.
(a) Borrowers, at their expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where their
respective businesses are conducted on the date hereof. Each Borrower shall
also maintain insurance relating to Borrower's ownership and use of the
Collateral in amounts and of a type that are customary to businesses similar to
Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as are reasonably satisfactory to Banks.
All such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Banks, showing Banks as additional loss
payees thereof and all liability insurance policies shall show Banks as
additional insureds, and shall specify that the insurer must give at least
twenty (20) days notice to Bank before canceling its policy for any reason. At
a Bank's request, Borrowers shall deliver to Banks certified copies of such
policies of insurance and evidence of the payments of all premiums therefor.
All proceeds payable under any such policy shall, at the option of Banks, be
payable to Banks to be applied on account of the Obligations.
6.7 QUICK RATIO. Maintain, on a consolidated basis, as of the last
day of each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at
least 1.25 to 1.00, increasing to not less than 1.50 to 1.00 as of December 31,
1997.
6.8 DEBT-TANGIBLE NET WORTH RATIO. Maintain, on a consolidated
basis, as of the last day of each fiscal quarter, a ratio of Total Liabilities
to Tangible Net Worth of not more than 1.00 to 1.00.
6.9 TANGIBLE NET WORTH. Maintain, on a consolidated basis, as of the
last day of each fiscal quarter, a Tangible Net Worth of not less than Forty
Million Dollars ($40,000,000) plus Seventy Five Percent (75%)
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of Borrowers' quarterly profits beginning December 31, 1997.
6.10 PROFITABILITY. On a consolidated basis, have a minimum net
profit of One Dollar ($1.00) for each fiscal quarter, provided Borrowers may
suffer a loss in any one fiscal quarter per fiscal year of not more than Five
Hundred Thousand Dollars ($500,000). Non-cash charges incurred in the
Acquisition shall not be included in the calculation of profitability for the
fiscal quarter ending September 30, 1997.
6.11 DEBT SERVICE COVERAGE. Borrower shall maintain, as of the last
day of each fiscal quarter, a Debt Service Coverage of at least 2.0 to 1.0 on a
rolling two quarter basis, excluding capital expenditures. "Debt Service
Coverage" means (a) the sum of (i) earnings after tax plus (ii) depreciation and
amortization expense less (iii) capital expenditures, divided by
(b) the current portion of total long term debt, excluding Advances under the
Committed Line.
6.12 FURTHER ASSURANCES. At any time and from time to time Borrowers
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by any Bank to effect the purposes of this
Agreement.
7. NEGATIVE COVENANTS
Each Borrower covenants and agrees that, from and after the Closing
Date, so long as any credit hereunder shall be available and until payment in
full of the outstanding Obligations or for so long as any Bank may have any
commitment to make any Advances, such Borrower will not do any of the following:
7.1 DISPOSITIONS. Without the Banks' consent, which shall not be
unreasonably withheld, convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers in the
ordinary course of business; (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment; or
(iv) Transfers which constitute liquidation of Investments permitted under
Section 7.7.
7.2 CHANGE IN BUSINESS OR CONTROL. Engage in any business, or permit
any of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto).
7.3 MERGERS OR ACQUISITIONS. Except in the ordinary course of
Borrower's business, merge or consolidate, or permit any of its Subsidiaries to
merge or consolidate, with or into any other business organization, or acquire,
or permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person; provided that this Section 7.3
shall not apply to Permitted Investments or to transactions among a Borrower and
its Subsidiaries in which such Borrower is the surviving entity or among its
Subsidiaries.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock, except for so long as an Event of Default has not occurred and is not
continuing (and would not exist immediately after such payment), a Borrower may
repurchase its stock from former employees of such Borrower in accordance with
the terms of repurchase or similar agreements between such Borrower and such
employees.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments and except as made in the ordinary course of
Borrower's business.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into
or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of
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Borrower's business, upon fair and reasonable terms that are no less favorable
to Borrower than would be obtained in an arm's length transaction with a
nonaffiliated Person, and except for transactions with a Subsidiary that are
upon fair and reasonable terms and transactions constituting Permitted
Investments.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Banks' prior written consent.
7.10 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose.
Fail to meet the minimum funding requirements of ERISA, permit a Reportable
Event or Prohibited Transaction, as defined in ERISA, to occur, permit any
condition to exist that would entitle any Person to obtain a decree adjudicating
that any Plan under ERISA must be terminated, fail to comply with the Federal
Fair Labor Standards Act or violate any law or regulation, which violation could
have a Material Adverse Effect or a material adverse effect on the Collateral or
the priority of Banks' Lien on the Collateral, or permit any of its Subsidiaries
to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrowers under this Agreement:
8.1 PAYMENT DEFAULT. If a Borrower fails to pay the principal of, or
any interest on, any Credit Extensions when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of receipt
by such Borrower of a reasonably detailed invoice on account of such other
Obligations;
8.2 COVENANT DEFAULT. If a Borrower fails to perform any obligation
under Article 5 or violates any of the covenants contained in Article 6 of this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Loan Documents, or in any other present or future agreement
between a Borrower and any Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within twenty (20) days after a Borrower receives notice
thereof or any Responsible Officer becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the twenty (20) day
period or cannot after diligent attempts by such Borrower be cured within such
twenty (20) day period, and such default is likely to be cured within a
reasonable time, then Borrowers shall have an additional reasonable period
(which shall not in any case exceed thirty (30) days) to attempt to cure such
default, and within such reasonable time period the failure to have cured such
default shall not be deemed an Event of Default (provided that no Advances will
be required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in the business or financial condition of Borrowers, taken as a whole, or
if there is a material impairment of the prospect of repayment of any portion of
the Obligations;
8.4 ATTACHMENT. If any material portion of a Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within thirty (30) days, or if a Borrower
is enjoined, restrained, or in any way prevented by court order from continuing
to conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of a
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of a Borrower's assets by the United States
Government, or any department, agency, or instrumentality thereof, or by any
state, county, municipal, or governmental agency, and the same is not paid
within thirty (30) days after a Borrower receives notice thereof, provided that
none of the foregoing shall constitute an Event of Default where such action or
event is stayed or an adequate bond has been posted pending a good faith contest
by such Borrower (provided that no Advances will be required to be made during
such cure period);
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8.5 INSOLVENCY. If a Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by a Borrower, or if an Insolvency Proceeding is
commenced against a Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which a Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of Five Hundred Thousand
Dollars ($500,000) or which would have a Material Adverse Effect;
8.7 JUDGMENTS. If a judgment or judgments for the payment of money
in an amount, individually or in the aggregate, of at least Five Hundred
Thousand Dollars ($500,000) shall be rendered against a Borrower and shall
remain unsatisfied and unstayed for a period of thirty (30) days (provided that
no Advances will be made prior to the satisfaction or stay of such judgment); or
8.8 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to any Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANKS' RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, any Bank may, at its election, do any one or
more of the following, all of which are authorized by Borrowers:
(a) Declare all Obligations owing to such Bank, whether
evidenced by this Agreement, by any of the other Loan Documents, or otherwise,
immediately due and payable (provided that upon the occurrence of an Event of
Default described in Section 8.5 all Obligations shall become immediately due
and payable without any action by any Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrowers under this Agreement or under any other agreement between a
Borrower and any Bank; and
(c) Set off and apply to the Obligations any and all (i)
balances, deposits and investments of any Borrower held by such Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of a Borrower
held by such Bank;
(d) Liquidate any Exchange Contracts not yet settled and demand
that Borrower immediately deposit cash with Banks in an amount sufficient to
cover any losses incurred by Bank due to liquidation of the Exchange Contracts
at the then prevailing market price;
(e) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(f) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's premises, Borrower hereby grants Bank a
license to enter such premises and to occupy the same, without charge, in order
to exercise any of Bank's rights or remedies provided herein, at law, in equity,
or otherwise;
(g) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(h) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise
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for sale, and sell (in the manner provided for herein) the Collateral. Bank is
hereby granted a non-exclusive, royalty-free license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, mask works, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising matter,
or any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral and,
in connection with Bank's exercise of its rights under this Section 9.1,
Borrower's rights under all licenses and all franchise agreements shall inure to
Bank's benefit;
(i) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply the proceeds thereof to the
Obligations in whatever manner or order Bank deems appropriate;
(j) Bank may credit bid and purchase at any public sale, or at
any private sale as permitted by law; and
(k) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or
notify account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; (e) settle and adjust disputes and
claims respecting the Accounts directly with account debtors, for amounts and
upon terms which Bank determines to be reasonable; and (f) dispose of the
Collateral in accordance with applicable law. The appointment of Bank as
Borrower's attorney in fact, and each and every one of Bank's rights and powers,
being coupled with an interest, is irrevocable until all of the Obligations have
been fully repaid and Bank's obligation to provide Advances hereunder is
terminated.
9.3 BANK EXPENSES. After the occurrence of an Event of Default, if a
Borrower fails to pay any amounts or furnish any required proof of payment due
to third persons or entities, as required under the terms of this Agreement,
then Banks may do any or all of the following: (a) make payment of the same or
any part thereof; (b) set up such reserves under the Committed Line as Banks
deem necessary to protect Banks from the exposure created by such failure; or
(c) obtain and maintain insurance policies of the type discussed in Section 6.6
of this Agreement, and take any action with respect to such policies as Banks
reasonably deem prudent. Any amounts so paid or deposited by Banks shall
constitute Bank Expenses, shall be immediately due and payable, and shall bear
interest at the then applicable rate hereinabove provided. Any payments made by
any Bank shall not constitute an agreement by such Bank to make similar payments
in the future or a waiver by Bank of any Event of Default under this Agreement.
9.4 REMEDIES CUMULATIVE. Banks' rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Banks shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by any Bank of one
right or remedy shall be deemed an election. No waiver by any Bank of any Event
of Default on a Borrower's part shall be effective unless also waived in writing
by any other Bank. No waiver shall be deemed a continuing waiver. No delay by
any Bank shall constitute a waiver, election, or acquiescence by it.
9.5 DEMAND; PROTEST. Each Borrower waives protest, notice of
protest, notice of dishonor, notice of payment and nonpayment, notice of any
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by any Bank on which Borrower may in any way be liable.
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10. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by certified mail, postage
prepaid, return receipt requested, or by prepaid telefacsimile to Borrowers or
to each Bank, as the case may be, at its addresses set forth below:
If to AEI: Advanced Energy Industries, Inc.
1625 Sharp Point Drive
Ft. Collins, CO 80525
Attn: Dick Beck
FAX: (970) 221-5583
If to Tower: Tower Electronics, Inc.
281 Commerce Circle South
Fridley, MN 55432
Attn: Duane Ness
FAX: (612) 571-5605
If to Banks: Silicon Valley Bank
4430 Arapahoe Avenue, Suite 225
Boulder, CO 80303
Attn: Greg Becker
FAX: (303) 938-0483
Bank of Hawaii
1850 N. Central Avenue, Suite 400
Phoenix, AZ 85004
Attn: Ken Loveless
FAX: (602) 257-2235
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other. NOTICES TO ONE BANK SHALL NOT BE DEEMED NOTICE TO THE OTHER BANK.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Borrowers and Banks hereby submit to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWERS AND BANKS HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. INTERCREDITOR PROVISIONS
12.1 PROPORTIONATE INTERESTS. Except for Optional Currency Advances,
which shall be the sole responsibility of BofH, and except as otherwise provided
in this Agreement, the rights, interests, and obligations of each Bank under
this Agreement and the Loan Documents at any time shall be shared in the ratio
of (a) the maximum amount the Bank has committed to advance as set forth on the
signature page signed by the Bank to (b) the Committed Line. Any reference in
this Agreement or the Loan Documents to an allocation between or sharing by the
Banks of any right, interest, or duty "ratably," "proportionally," "pro rata,"
or in similar terms shall refer to
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this ratio. No Bank is obligated to advance any funds in lieu of or for the
account of the other Bank if the latter Bank fails to make such Advance.
12.2 DESIGNATION OF SERVICE AGENT. To facilitate the administration
of this Agreement, SVB shall act as "Servicing Agent" for itself and BofH.
Servicing Agent shall have only such duties as are expressly set forth in this
Agreement, or as otherwise agreed in writing by the Banks. Servicing Agent
shall be deemed to act on behalf of both Banks whenever Servicing Agent acts
under this Agreement.
12.3 RESIGNATION. Servicing Agent may resign as Servicing Agent, upon
thirty (30) day's written notice to the other Banks and to Borrower and
appointment of a successor Servicing Agent approved by Banks. Upon receipt of
notice of resignation, the Banks shall appoint a successor Servicing Agent. The
resigning Servicing Agent shall cooperate fully in delivering to the successor
Servicing Agent the Loan Documents and copies of all records relating to the
Advances and payments made hereunder that the successor Servicing Agent
reasonably requests.
12.4 SERVICING AGENT AS BANK. Servicing Agent shall have the same
rights and powers under this Agreement as any other Bank and may exercise the
same as though it were not Servicing Agent. The term "Banks" includes Servicing
Agent in Servicing Agent's individual capacity. Servicing Agent and its
Subsidiaries and Affiliates may accept deposits from, lend money to, act as
agent or trustee for other lenders to, and generally engage in any kind of
banking, trust, or other business with, any Borrower or any Subsidiary or
Affiliates as if Servicing Agent were not Servicing Agent.
12.5 NO AGENCY. EXCEPT AS SPECIFIED HEREIN, NEITHER BANK IS AN AGENT
OF THE OTHER. NEITHER BANK HAS ANY AUTHORITY TO ACT OR FAIL TO ACT FOR THE
OTHER. THE OBLIGATIONS OF EACH BANK HEREUNDER ARE SEVERAL. NO BANK SHALL BE
LIABLE FOR THE FAILURE OF ANY OTHER BANK TO PERFORM ITS OBLIGATIONS HEREUNDER.
12.6 NO RELIANCE. The provisions of this Article 12 are solely for
the benefit of Banks in specifying their rights and obligations with respect to
each other, and not for the benefit of any Borrower or its assigns or
successors.
13. GENERAL PROVISIONS
13.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to
the benefit of the respective successors and permitted assigns of each of the
parties; PROVIDED, HOWEVER, that neither this Agreement nor any rights hereunder
may be assigned by any Borrower without each Bank's prior written consent, which
consent may be granted or withheld in each Bank's sole discretion. Subject to
the terms of any agreement between Banks, each Bank shall have the right with
the consent (which shall not be unreasonably withheld) of Borrower to sell,
transfer, negotiate, or grant participations in all or any part of, or any
interest in, Bank's obligations, rights and benefits hereunder; provided no Bank
will sell, transfer, negotiate or grant participations in any part of, or any
interest in, such obligations, rights and benefits in a principal amount of less
than Five Million Dollars ($5,000,000).
13.2 INDEMNIFICATION. Borrowers shall defend, indemnify and hold
harmless each Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement (except
with regard to a dispute between the Banks); and (b) all losses or Bank Expenses
in any way suffered, incurred, or paid by such Bank as a result of or in any way
arising out of, following, or consequential to transactions between such Bank
and Borrowers whether under this Agreement, or otherwise (including without
limitation reasonable attorneys fees and expenses), except for losses caused by
such Bank's gross negligence or willful misconduct and except with regard to a
dispute between the Banks.
13.3 SUBROGATION AND SIMILAR RIGHTS. Notwithstanding any other
provision of this Agreement or any other Loan Document, until all amounts that
Borrowers owe to Banks have been paid in full, each Borrower irrevocably waives
all rights that it may have at law or in equity (including, without limitation,
any law subrogating such Borrower to the rights of Bank under the Loan
Documents) to seek contribution, indemnification, or any other form of
reimbursement from any other Borrower, or any other Person now or hereafter
primarily or secondarily liable for any of the Obligations, for any payment made
by such Borrower with respect to the Obligations in connection with the Loan
Documents or otherwise and all rights that it might have to benefit from, or to
participate in, any security for the Obligations as a result of any payment made
by such Borrower with respect to the
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Obligations in connection with the Loan Documents or otherwise. Until all
amounts that Borrowers owe to Banks have been paid in full, any agreement
providing for indemnification, reimbursement or any other arrangement prohibited
under this Section 13.3 shall be null and void. If any payment is made to a
Borrower in contravention of this Section 13.3, such Borrower shall hold such
payment in trust for Bank and such payment shall be promptly delivered to Bank
for application to the Obligations, whether matured or unmatured.
13.4 WAIVERS OF NOTICE. Each Borrower waives notice of acceptance
hereof; notice of the existence, creation or acquisition of any of the
Obligations; notice of an Event of Default; notice of the amount of the
Obligations outstanding at any time; notice of intent to accelerate; notice of
acceleration; notice of any adverse change in the financial condition of any
other Borrower or of any other fact that might increase the Borrower's risk;
presentment for payment; demand; protest and notice thereof as to any
instrument; default; and all other notices and demands to which the Borrower
would otherwise be entitled. Each Borrower waives any defense arising from any
defense of any other Borrower, or by reason of the cessation from any cause
whatsoever of the liability of any other Borrower. Bank's failure at any time
to require strict performance by any Borrower of any provision of the Loan
Documents shall not waive, alter or diminish any right of Bank thereafter to
demand strict compliance and performance therewith. Nothing contained herein
shall prevent Bank from foreclosing on the Lien of any deed of trust, mortgage
or other security instrument, or exercising any rights available thereunder, and
the exercise of any such rights shall not constitute a legal or equitable
discharge of any Borrower. Each Borrower also waives any defense arising from
any act or omission of Bank that changes the scope of the Borrower's risks
hereunder. Each Borrower hereby waives any right to assert against Bank any
defense (legal or equitable), setoff, counterclaim, or claims that such Borrower
individually may now or hereafter have against another Borrower or any other
Person liable to Bank with respect to the Obligations in any manner or
whatsoever.
13.5 SUBROGATION DEFENSES. Until all amounts that Borrowers owe to
Banks have been paid in full, each Borrower hereby waives any defense based on
impairment or destruction of its subrogation or other rights against any other
Borrower and waives all benefits which might otherwise be available to it under
California Civil Code Sections 2809, 2810, 2819, 2839, 2845, 2848, 2849, 2850,
2899, and 3433 and California Code of Civil Procedure Sections 580a, 580b, 580d
and 726, as those statutory provisions are now in effect and hereafter amended,
and under any other similar statutes now and hereafter in effect.
13.6 RIGHT TO SETTLE, RELEASE.
(a) The liability of Borrowers hereunder shall not be diminished
by (i) any agreement, understanding or representation that any of the
Obligations is or was to be guaranteed by another Person or secured by other
property, or (ii) any release or unenforceability, whether partial or total, of
rights, if any, that Bank may now or hereafter have against any other Person,
including another Borrower, or property with respect to any of the Obligations.
(i) Without notice to any Borrower and without affecting
the liability of any Borrower hereunder, Banks may (i) compromise, settle,
renew, extend the time for payment, change the manner or terms of payment,
discharge the performance of, decline to enforce, or release all or any of the
Obligations with respect to a Borrower, (ii) grant other indulgences to a
Borrower in respect of the Obligations, (iii) modify in any manner any documents
relating to the Obligations with respect to a Borrower, (iv) release, surrender
or exchange any deposits or other property securing the Obligations, whether
pledged by a Borrower or any other Person, or (v) compromise, settle, renew, or
extend the time for payment, discharge the performance of, decline to enforce,
or release all or any obligations of any guarantor, endorser or other Person who
is now or may hereafter be liable with respect to any of the Obligations.
13.7 PRIMARY OBLIGATION. This Agreement is a primary and original
obligation of each Borrower and shall remain in effect notwithstanding future
changes in conditions, including any change of law or any invalidity or
irregularity in the creation or acquisition of any Obligations or in the
execution or delivery of any agreement between Bank and any Borrower. Each
Borrower shall be liable for existing and future Obligations as fully as if all
of the Loan were advanced to the Borrower. Bank may rely on any certificate or
representation made by any Borrower as made on behalf of, and binding on, all
Borrowers, including without limitation Borrowing Certificates, Borrowing Base
Certificates and Compliance Certificates.
13.8 SUBORDINATION. All indebtedness of a Borrower now or hereafter
arising held by another Borrower is subordinated to the Obligations and the
Borrower holding the indebtedness shall take all actions reasonably requested by
Bank to effect, to enforce and to give notice of such subordination.
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13.9 ENFORCEMENT OF RIGHTS. Borrowers are jointly and severally
liable for the Obligations and Bank may proceed against one or more of the
Borrowers to enforce the Obligations without waiving its right to proceed
against any of the other Borrowers.
13.10 AEI AS AGENT. Each of the Borrowers irrevocably appoints
AEI as its agent to accept and deliver all notices, certificates and other
documents under this Agreement on behalf of all of the Borrowers, and to
request, accept and disburse all Advances, and to make payments hereunder.
13.11 TIME OF ESSENCE. Time is of the essence for the performance
of all obligations set forth in this Agreement.
13.12 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
13.13 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot
be changed or terminated orally. No amendment shall be effective without the
consent of all the parties hereto, except the provisions of Article 12 may be
amended by Banks without Borrower's approval. All prior agreements,
understandings, representations, warranties, and negotiations between the
parties hereto with respect to the subject matter of this Agreement, if any, are
merged into this Agreement and the Loan Documents.
13.14 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
13.15 SURVIVAL. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 13.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
13.16 CONFIDENTIALITY. In handling any confidential information
each Bank shall exercise the same degree of care that it exercises with respect
to its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of such Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank, and (v)
as may be appropriate in the exercise of any remedies hereunder. Confidential
information hereunder shall not include information that either: (a) is in the
public domain or in the knowledge or possession of Bank when disclosed to Bank,
or becomes part of the public domain after disclosure to Bank through no fault
of Bank; or (b) is disclosed to the Bank by a third party, provided the Bank
does not have actual knowledge that such third party is prohibited from
disclosing such information.
13.17 OPTIONAL CURRENCY RATE INSTRUMENTS. To the extent the terms
of any Optional Currency Rate Instrument differ from the terms of this Agreement
then the terms of such Optional Currency Rate Instrument shall govern the rights
and obligations of the parties thereto.
26
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ADVANCED ENERGY INDUSTRIES, INC.
By:
---------------------------------------------
Title:
------------------------------------------
TOWER ELECTRONICS, INC.
By:
---------------------------------------------
Title:
------------------------------------------
SILICON VALLEY BANK
By:
---------------------------------------------
Title:
------------------------------------------
Maximum Commitment Amount: $13,562,499.99 (50%)
BANK OF HAWAII
By:
---------------------------------------------
Title:
------------------------------------------
Maximum Commitment Amount: $13,562,499.98 (50%)
27
<PAGE>
EXHIBIT 21.1
Jurisdiction of Incorporation
Subsidiaries of the Registrant or Organization
- ------------------------------ ----------------------------
Advanced Energy Industries, Japan KK Japan
Advanced Energy Industries, GmbH Germany
Advanced Energy Industries, U.K. Limited United Kingdom
Advanced Energy Industries, FSC Virgin Islands
Tower Electronics, Inc. Minnesota
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 31, 1997
included in Advanced Energy Industries, Inc.'s Form 10-K for the year ended
December 31, 1996 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado,
August 20, 1997
