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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED).
For the fiscal year ended December 31, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________.
Commission file number: 0-26966
ADVANCED ENERGY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-0846841
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1625 SHARP POINT DRIVE, FORT COLLINS, CO 80525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (970) 221-4670
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's
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knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [X].
As of January 31, 1998, there were 22,500,007 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such stock held by
non-affiliates of the Registrant was $101,827,588 (based on the closing price
on the Nasdaq Stock Market).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the year ended December 31,
1997, are incorporated by reference into Parts I and II of this Form 10-K.
Portions of the Company's definitive proxy statement for the annual
shareholders meeting to be held May 6, 1998, are incorporated by reference
into Part III of this Form 10-K.
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ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 4
EXECUTIVE OFFICERS OF THE REGISTRANT 23
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 25
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES 59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 59
ITEM 11. EXECUTIVE COMPENSATION 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 60
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PART I
ITEM 1. BUSINESS
GENERAL
Advanced Energy is a leading supplier of power conversion and control
systems most of which are incorporated in plasma-based thin film production
equipment. The Company's systems are key elements of semiconductor, data
storage, flat panel display, and a range of other industrial manufacturing
equipment that utilizes gaseous plasmas to deposit or etch thin film layers
on materials or substrates such as silicon, glass and metals. As a result of
a recent acquisition, the Company now provides power supplies for
non-plasma-based processes. The effectiveness of plasma-based production
processes depends in large part on the characteristics of the electrical
power used to ignite and maintain the plasma. The Company's power conversion
and control systems refine, modify and control the raw power from a utility
and produce the power required to obtain predictable and repeatable film
characteristics. 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 for thin film applications include Applied
Materials, Lam Research, Balzers/Leybold, Materials Research, Multi-Arc, and
Ulvac.
In recent years, significant technological advances in thin film processes
have enabled the manipulation of materials on the atomic and molecular level.
Manufacturers can now both deposit and etch layers of materials that are less
than one-hundredth of a micron in thickness. By using modern thin film
production processes, manufacturers are better able to control and alter the
electrical, magnetic, optical and mechanical characteristics of materials.
Thin film processes have been employed most extensively in the semiconductor
industry, where multiple thin film layers of insulating or conductive
material are deposited on a wafer or substrate. These processes are now used
in a growing range of diverse industries. Thin film production was initially
accomplished using either liquid chemical or thermal processes. Plasma-based
process technology was developed to address the limitations of wet chemistry
and thermal technologies in certain applications requiring thinner, more
precise film, and to enable new applications.
The Company is seeking, as part of its long-term strategy, opportunities
that will allow it to diversify and generate business in growth sectors that
are not related to the thin film applications that the Company has
historically served. The first step in achieving that objective was the
acquisition of Tower Electronics in August 1997. Tower designs and
manufactures products for non-thin film applications including power supplies
for use in modems, non-impact printers, night vision goggles and laser
devices. The acquisition of Tower expands the Company's technology and
customer base. Representative customers
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of Tower include U.S. Robotics, Videojet International and ITT.
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, and 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. Most of the Company's products employ sophisticated switchmode
technology that affords plasma-based systems the ability to minimize arc
energy, 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, excluding Tower, has sold over 100,000 power
conversion and control systems. Approximately 64% of the Company's sales in
1996 and 58% in 1997 were to the semiconductor equipment industry. Advanced
Energy sells its systems primarily through direct sales personnel to
customers in the United States, Japan and Europe. The Company also sells
through distributors in Singapore, China, Japan, France, Italy, Israel, South
Korea and Taiwan. International sales represented 24% and 25% of the
Company's sales in 1996 and 1997, respectively.
DEVELOPMENT OF COMPANY BUSINESS
Advanced Energy was incorporated in Colorado in 1981 and reincorporated in
Delaware in September 1995. In November 1995, the company effected the
initial public offering of its common stock, $0.001 par value ("Common
Stock"), pursuant to a registration statement on Form S-1 under the
Securities Act of 1933, as amended (the "Securities Act"). In October 1997,
the Company effected a second public offering of its Common Stock pursuant to
a registration statement on Form S-3 under the Securities Act. As used in
this Form 10-K, references to "Advanced Energy" refer to Advanced Energy
Industries, Inc. and references to the "Company" refer to Advanced Energy and
its consolidated subsidiaries. The Company's principal executive offices are
located at 1625 Sharp Point Drive, Fort Collins, Colorado 80525, and its
telephone number is (970) 221-4670.
PRODUCTS
The Company's switchmode power conversion and control technology products
have enabled its customers to develop 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
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introduced its first direct current (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
PVD systems. In the early 1990's the Company introduced the first fully
switchmode radio frequency (RF) power conversion and control systems for use
in semiconductor etch applications. This product achieved significant design
wins because of its smaller size and precise control. The Company introduced
a family of accessories for the DC product line in 1993; these pulsed DC
products 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 currently range in price from $2,880 to
$80,000, with an average price of approximately $10,000. As a result of an
acquisition in August 1997, the Company expanded its product line to include
low-power DC power supplies for use in telecommunications and other
industrial applications. These power supplies range in power from 50 watts to
600 watts and have an average selling price of about $500.
The following chart sets forth the Company's principal product lines and
related basic information:
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<TABLE>
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PRODUCT POWER/CURRENT MAJOR PROCESS
PLATFORM DESCRIPTION LEVEL APPLICATIONS
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<S> <C> <C> <C> <C>
MDX Power control 500W-80kW PVD
and - Metal
conversion sputtering
system - Reactive
sputtering
-----------------------------------------------------------------
DIRECT MDX-II Power control 15kW-120kW PVD
and - Metal
conversion sputtering
system - Reactive
CURRENT sputtering
-----------------------------------------------------------------
Pinnacle Power control 6kW-120kW PVD
-TM- and - Metal
PRODUCTS conversion sputtering
system - Reactive
sputtering
-----------------------------------------------------------------
Sparc-le Arc management 1kW-60kW For use with MDX
-Registered accessory systems --
Trademark- permits precise
control of
reactive
sputtering of
insulating films
-----------------------------------------------------------------
E-Chuck Electrostatic < 100W General wafer
chuck power handling in
system semiconductor
PVD, CVD, and
etch applications
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HIGH-POWER Astral-TM- Pulsed DC power 20kW PVD
- 20 system - Metal
sputtering
- Reactive
sputtering
-----------------------------------------------------------------
PRODUCTS Astral-TM- Pulsed DC power 120kW PVD
- 120 system - Metal
sputtering
- Reactive
sputtering
-----------------------------------------------------------------
Crystal-TM- Multizone 120kW Semiconductor
induction epitaxy
heating power
system
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PE Low-frequency 1.25kW-30kW CVD
LOW- AND MID- power control PVD
and - Reactive
conversion sputtering
system Surface
FREQUENCY modification
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PD Mid-frequency 1.25kW-8kW CVD
PRODUCTS power control PVD
and - Reactive
conversion sputtering
system Surface
modification
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HFV/HFG Power control 3kW-8kW PVD
and
conversion Etch
system
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RADIO RFX Power control 600W General R&D
and
conversion
system
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FREQUENCY RFG Power control 600W-5.5kW Etch
and
conversion CVD
system
-----------------------------------------------------------------
PRODUCTS RFXII Power control 600W-5.5kW Etch
and
conversion CVD
system
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AZX Tuner 100W-5kW Impedance
matching
network
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OTHER RFZ Probe 50W-5kW Impedance
measurement
tool
-----------------------------------------------------------------
PRODUCTS ID Ion-beam 500W-5kW Ion-beam
conversion and deposition
control system Ion implantation
Ion-beam etching/
milling
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</TABLE>
DIRECT CURRENT PRODUCTS
THE MDX SERIES. The Company's MDX series of products was introduced in
1983. These products are most commonly used as DC power supplies for PVD
sputtering where precise control, superior arc prevention and suppression and
low stored energy characteristics are required. They are also used as bias
supplies for RF sputtering, tool coating and some etching systems. The MDX
series consists of six different product lines that provide a range of power
levels from 500W to 120kW. The Company's second generation product, the MDX
II, was introduced in 1991 to support higher power levels,
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to provide wider output range, and to meet strict European regulatory
requirements. A model in the MDX series, the MDX-L, was designed for
especially high reliability and was introduced in 1992.
THE PINNACLE SERIES-TM-. The Pinnacle series, introduced in 1995, is the
most recent platform in the DC product line. 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. The low stored energy of Pinnacle, a basic
feature of AE power conversion equipment, is the lowest ever achieved in a
switchmode power supply, and is due to the patented basic circuit topology.
SPARC-LE-Registered Trademark- 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 energy delivered
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.
ELECTROSTATIC CHUCK POWER SYSTEMS. This system of power conversion units
was designed for a specific customer to be used in wafer handling systems for
the semiconductor fabrication market. The electrostatic chuck is a device
which uses electric fields to hold (or "chuck") a wafer in a vacuum
environment without mechanical holding force. This permits more gentle
handling of the wafer and its simultaneous heating or cooling during
processing. The electric fields used to hold the wafer are created by
applying to the wafer a voltage produced by the Advanced Energy power system.
Exact control and careful ramping of the voltage permits the wafer to be
picked and placed with precision. The system permits multiple power units to
be held in a single chassis for ease of integration into the customer's
system.
HIGH-POWER PRODUCTS
These products are designed for use in heavy industrial processes such as
architectural glass and other large area coating applications. The
Astral-TM-products, made in both 20kW and 120kW versions, offer a new
technology, called "current pulsed dual magnetron sputtering," heretofore
unavailable. The first of these units are in experimental use in development
of coatings for CRT displays, automotive applications, and new types of glass
coatings.
The Crystal-TM- 120kW power conversion unit was developed for multizone
induction heating in heating systems for semiconductor processing equipment
in which layers are formed on heated semiconductor wafers by chemical vapor
deposition, producing
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epitaxial growth (the growth of a single crystal film as determined by the
underlying wafer). One of the problems in forming such layers on a
semiconductor wafer is ensuring that the temperature of the semiconductor
wafer is kept uniform across the wafer during the deposition process, i.e.,
during heat-up, processing and cool-down. Since the deposition rate of a
layer of material upon the wafer is dependent on the temperature of the
wafer, any temperature variations between the center and edge of a wafer will
undesirably result in the deposition of a layer of non-uniform thickness on
the wafer. The multizone capability of the Crystal 120kW power conversion
unit permits the furnace system to divide the wafer heater into up to six
zones, and control power to each zone independently.
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 HFV AND HFG POWER GENERATORS. The HFV unit produces 3, 5, or 8kW of
power at a variable frequency of about 2MHz for powering of inductively
coupled plasma (ICP) systems. It is water cooled and ultra compact, providing
up to 8kW of power in a 5-1/4 inch rack mount enclosure 20-1/4 inches deep,
thereby representing the highest power density in the industry. The HFG unit
is similar but produces 8kW at a fixed frequency of 4MHz.
THE RF SERIES. The RFX system is a 13.56MHz, 600W, air-cooled platform
introduced in 1985. This low-power 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 switchmode technology. The RFG and RFXII systems operate at
frequencies ranging from 4MHz to 13.56MHz. These systems were the first
entirely switchmode RF designs. These RF systems are most commonly used in
semiconductor processes, including RF sputtering, plasma etching/deposition,
and reactive ion etching applications. The Company also produces the RFXII in
a compact version which incorporates new Fixed Match-TM- impedance matching
technology. This technology eliminates certain previously required motors,
gear trains, variable capacitors and inductors and
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servomechanism circuitry, which results in cost savings and improvements in
reliability.
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 Fixed Match technology
designed as part of the RFXII product line.
OTHER PRODUCTS
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.
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, implantation and etching and
milling.
MARKETS AND CUSTOMERS
MARKETS
Approximately 64% of the Company's sales in 1996 and 58% in 1997 were to
the semiconductor equipment industry. Increasingly, the Company's power
conversion and control systems are also being used in other markets,
including flat panel display, data storage and various industrial
applications. The following is a discussion of the major markets for the
Company's systems:
SEMICONDUCTOR MANUFACTURING EQUIPMENT MARKET. The Company's products are
sold primarily to semiconductor equipment manufacturers for incorporation
into equipment used to make integrated circuits. The Company's products are
currently employed in a variety of applications including deposition, etch,
ion implantation and megasonic cleaning. The precision control over plasma
processes that use the Company's power conversion and control systems enables
the production of integrated circuits with reduced feature sizes and
increased speed and performance. The Company anticipates that the
semiconductor equipment industry will continue to be a substantial part of
its business for the foreseeable future.
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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) which have fabrication processes similar to those
employed in manufacturing integrated circuits. FPDs produce bright, sharp,
large, color-rich images on flat, lightweight screens such as portable
computer monitors. Currently there are three major types of FPDs: liquid
crystal displays, field emitter displays and gas plasma displays. Two types
of FPP, another emerging display technology, are currently in production:
liquid crystal projection and digital micro-mirror displays. The Company
sells its products to all three of the active FPD markets, as well as to each
of the FPP markets.
DATA STORAGE MANUFACTURING EQUIPMENT MARKETS. The Company's products are
sold 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 (DVD). 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.
THIN FILM INDUSTRIAL MARKETS. The Company sells its products to both OEMs
and producers of end products in a variety of industrial markets. Thin film
optical coatings 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 thin film industrial applications require power
levels substantially greater than those used in the Company's other markets.
OTHER INDUSTRIAL MARKETS. Tower Electronics sells low-wattage power
supplies to OEMs in the telecommunications, non-impact printing and laser
markets. As an example, Tower provides U.S. Robotics, a subsidiary of 3Com,
with three models of power supplies that are used in modems for Internet
service providers. They also provide products to the largest manufacturer of
non-impact printers used for printing date codes and lot information on
beverage cans.
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APPLICATIONS
The Company's products have been sold for use in connection with the
following processes and applications:
<TABLE>
SEMICONDUCTOR DATA STORAGE FLAT PANEL DISPLAY INDUSTRIAL/RESEARCH
------------- ------------ ------------------ -------------------
<S> <C> <C> <C>
Physical vapor Thin film heads Liquid crystal Optical coatings
deposition displays
Etching CD-ROMs Active matrix LCDs Automobile coatings
Ion implantation Audio discs Digital micro- Food package
mirror coatings
Chemical vapor Recordable CDs Plasma displays Glass coatings
deposition (metal
and dielectric)
Plasma-enhanced Hard disk Large flat panel Consumer products
CVD magnetic media displays coatings
Magnet field Hard disk carbon Field emission Circuit board etch-
controls wear coatings displays back and de-smear
Photo-resist Magneto-optic CDs LCD projection Photovoltaics
stripping
Megasonic cleaning Digital video Medical applications
discs (DVD)
Etch (post- Superconductors
treatment) Diamond coatings
Chemical, physical
and materials research
Telecommunications
Non-impact printing
</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 sold more than 100,000 power conversion and control systems. The
Company's largest customers are involved principally in the semiconductor
equipment market. The Company also has significant customers in the data
storage equipment, flat panel display equipment and industrial markets. Sales
to Applied Materials and Lam Research in 1995, 1996 and 1997 accounted in the
aggregate for approximately 41%, 47% and 44% of total sales, respectively.
The Company expects that sales of its products to Applied Materials and Lam
Research will continue to account for a high percentage of its sales in the
foreseeable future. Representative customers of the Company include:
Applied Materials Lam Research
Balzers/Leybold Materials Research division of
Tokyo Electron
CVC Products Motorola
First Light Technology Novellus
Fujitsu Optical Coating Laboratory
Hewlett-Packard Sony
IBM Sputtered Films
Intevac Texas Instruments
Komag Ulvac
U.S. Robotics
Verteq
Videojet International
MARKETING, SALES AND SERVICE
The Company sells its systems primarily through direct sales personnel to
customers
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in the United States, Japan and Europe. The Company's sales personnel are
located at the Company's headquarters in Fort Collins, Colorado, and in
regional sales offices in Milpitas, California; Concord, Massachusetts; and
Austin, Texas. To serve customers in Asia and Europe, the Company has offices
in Tokyo, Japan; Filderstadt, Germany; Bicester, United Kingdom; and Seoul,
South Korea; 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
Singapore, China, France, Italy, Israel, South Korea and Taiwan. The
Company's Tower Electronics subsidiary, located in Fridley, Minnesota, sells
through manufacturer's representatives.
Sales outside the United States represented approximately 29%, 24% and 25%
of the Company's total sales during 1995, 1996 and 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
customer service offices in Fort Collins, Colorado; Milpitas, California;
Tokyo, Japan; Filderstadt, Germany; Seoul, South Korea; and Tower Electronics
in Fridley, Minnesota.
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.
MANUFACTURING
The Company's manufacturing facilities are located in Fort Collins,
Colorado and Fridley, Minnesota. 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 subjected
to a series of reliability enhancing operations prior to shipment
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to customers. The Company purchases a wide range of electronic, mechanical
and electrical components, some of which are designed to the Company's
specifications. The Company does outsource some of its subassembly work.
The Company relies on sole and limited source suppliers for certain parts
and subassemblies. This reliance creates a potential inability to obtain an
adequate supply of required components, and reduced control over pricing and
time of delivery of components. An inability to obtain adequate supplies
would require the Company to seek alternative sources of supply or might
require the Company to redesign its systems to accommodate different
components or subassemblies. This could prevent the Company from shipping its
systems to its customers on a timely basis. However, if the Company were
forced to seek alternative sources of supply, manufacture such components or
subassemblies internally, or redesign its systems, this could prevent the
Company from shipping its systems to its customers on a timely basis.
INTELLECTUAL PROPERTY
The Company has a policy of seeking patents on inventions governing new
products or technologies as part of its ongoing research, development, and
manufacturing activities. The Company currently holds twelve United States
patents and two foreign patents covering various aspects of its products, and
has other applications pending in the U.S., Europe and Japan. The Company
believes the duration of its patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. No assurance can be given that
the Company's patents will be sufficiently broad to protect the Company's
technology, nor that any existing or future patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will
provide meaningful competitive advantages to the Company. Any of such events
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Although the Company is not aware of any infringement by its products of
any patents or proprietary rights of others, there can be no assurance that
such infringements do not exist or will not occur in the future. Litigation
may be necessary in the future to enforce patents issued to the Company, to
protect trade secrets or know-how owned by the Company, to defend the Company
against claimed infringement of the rights of others or to determine the
scope and validity of the proprietary rights of others. Any such litigation
could result in substantial cost and diversion of effort by the Company,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent
the Company from manufacturing or selling its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
14
<PAGE>
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 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- and European-based equipment vendors.
The Company has several foreign and domestic competitors for each of the DC,
low-frequency and mid-frequency alternating current (AC), and radio frequency
AC lines of products. Some of these competitors are larger and have greater
resources than the Company. The Company's ability to continue to compete
successfully in these markets will depend upon its ability to introduce
product enhancements and new products on a timely basis. The Company's
primary competitors are ENI, a subsidiary of Astec (BSR) PLC, Huttinger,
Shindingen, Kyosan, RF Power Products, Comdel and Daihen. The Company's
competitors in each product area are expected to continue to improve the
design and performance of their systems and to introduce new systems with
competitive performance characteristics. To remain competitive, the Company
believes it will be required to maintain a high level of investment in
research and development and sales and marketing. No assurance can be given
that the Company will continue to be competitive in the future.
INDUSTRY SEGMENTS
The Company operates entirely within one industry sector.
RESEARCH AND DEVELOPMENT
The market for power conversion and control systems and related
accessories is characterized by rapid technological changes. The Company
believes that continued and timely development of new products and
enhancements to existing products to support OEM requirements is necessary
for the Company to maintain a competitive position in the markets the Company
serves. Accordingly, the Company devotes a significant portion of its
personnel and financial resources to research and development projects and
seeks to maintain close relationships with its customers and other industry
leaders to remain responsive to their product requirements.
Research and development expenses were approximately $10.5 million, $13.8
million and $14.8 million in fiscal 1995, 1996 and 1997, respectively. These
amounts represented
15
<PAGE>
11.1%, 13.9% and 10.4% of total sales for those periods. From 1995 to 1997,
the Company introduced more than forty-five new products. The Company
believes that continued research and development investment and ongoing
development of new products is essential to the expansion of its markets and
does not expect any significant decline in spending as a percentage of sales.
NUMBER OF EMPLOYEES
At December 31, 1997, the Company had a total of 1,059 employees, of whom 853
are full-time continuous employees. None of the Company's employees is
represented by a union, and the Company has never experienced a work stoppage.
The Company utilizes temporary employees as a means to provide additional staff
while reviewing the performance of the temporary employee. The Company considers
its employee relations to be good.
EFFECTS OF ENVIRONMENTAL LAWS
The Company is subject to federal, state and local environmental laws and
regulations. The Company is in compliance with all such laws and regulations.
CAUTIONARY STATEMENTS - RISK FACTORS
In the interest of providing the Company's shareholders and potential
investors with certain Company information, including management's assessment of
the Company's future potential, certain statements set forth herein contain or
are based on projections of revenue, income, earnings per share and other
financial items or relate to management's future plans and objectives or to the
Company's future economic performance. Such statements are "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934, as amended.
Although any forward-looking statements contained herein or otherwise
expressed by or on behalf of the Company are to the knowledge and in the
judgment of the officers and directors of the Company, expected to prove true
and to come to pass, management is not able to predict the future with absolute
certainty. Accordingly, shareholders and potential investors are hereby
cautioned that certain events or circumstances could cause actual results to
differ materially from those projected or predicted herein. In addition, the
forward-looking statements herein are based on management's knowledge and
judgment as of the date hereof, and the Company does not intend to update any
forward-looking statements to reflect events occurring or circumstances existing
hereafter.
In particular, the Company believes that the following factors could impact
forward-
16
<PAGE>
looking statements made herein or in future written or oral releases and by
hindsight, prove such statements to be overly optimistic and unachievable.
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. As a supplier of
subsystems to equipment manufacturers, the Company's sales often are subject
to its customers' production schedules. A substantial and increasing
proportion of the Company's shipments are made on a just-in-time basis in
which the shipment of systems occurs within a few days or hours after an
order is received. Due to the short time between receipt of orders and
shipments, the Company operates with a low level of backlog. Moreover, this
backlog at any point in time is not sufficient to meet the Company's revenue
expectations for a particular quarter and orders generally are subject to
cancellation or delay at the customer's option without penalty. As a result
of these factors, it is difficult for the Company to predict accurately the
timing and level of revenues for a particular quarter. The Company's
quarterly revenues are also affected by a variety of other factors, including
specific economic conditions in the industries in which the Company's
customers operate, particularly the semiconductor industry; the timing of the
receipt of orders from major customers; customer cancellations or shipment
delays; pricing competition; component shortages resulting in manufacturing
delays; changes in customers' inventory management practices; exchange rate
fluctuations and the introduction of new products by the Company or its
competitors. In addition, electronics companies, including companies in the
semiconductor capital equipment industry, are subject to ongoing pressure to
reduce costs. This has in the past caused and is continuing to cause the
Company's current and prospective customers to exert pricing pressure and
make other demands on the Company, which may include faster delivery times
and longer payment terms, 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 may 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. 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. The Company has recently gone through
a period of increasing production and capacity to meet 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
17
<PAGE>
throughout 1996 and the first half of 1997. In late 1995, the Company was in
a growth mode 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.
THE SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES ARE HIGHLY VOLATILE
Approximately 61%, 64% and 58% of the Company's sales in 1995, 1996, and
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 44% of the Company's
revenues during 1996 and 1997, respectively.
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 75% of the Company's sales in 1996 and 1997,
respectively. The loss of any of its major customers, particularly Applied
Materials or Lam Research, or a reduction in orders from any of such
customers, including reductions caused by changes in a customer's competitive
position or economic conditions in the industries in which the Company's
customers compete, could have a material adverse effect on the Company's
business, financial condition and results of operations. None of the
Company's customers has entered into a long-term agreement requiring it to
purchase the Company's systems. Similarly, Tower's sales historically have
been concentrated among a small number of customers. Tower's sales to U.S.
Robotics (recently acquired by 3Com Corporation) and its contract
manufacturer accounted for approximately 73% of Tower's total sales in 1997.
The success of the Company's acquisition of Tower will depend in large part
on retention of Tower's major customers, including U.S. Robotics and its
contract manufacturer, and the level of orders received from such customers.
RISKS ASSOCIATED WITH MANUFACTURING FACILITY
All of the Company's manufacturing is conducted at its facility in Fort
Collins, Colorado
18
<PAGE>
except for the manufacturing conducted by its subsidiary Tower Electronics in
Fridley, Minnesota. 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 did not resume full production until
mid-September 1997. The Company's insurance policies will not cover all of
the costs incurred by the Company in connection with the rainstorm. Because
substantially 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.
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
continues to operate Tower's business out of Tower's existing facilities in
Fridley, Minnesota, and, accordingly, is required to manage two
geographically separated manufacturing locations. Failure to integrate Tower,
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.
MANAGEMENT OF GROWTH
The Company has been experiencing a period of rapid growth and expansion.
Such growth and expansion has placed, and is expected to continue to place,
significant demands on the Company's resources. The management of such growth
will require the Company to continue to improve and expand its management,
operational and financial systems, procedures and controls, including
accounting and other internal management systems, quality control, delivery
and service capabilities. To accommodate its recent growth, the Company
started to implement in 1997 a new comprehensive, integrated information
management system that will incorporate substantially all of the Company's
internal
19
<PAGE>
financial and business systems, procedures and controls. The implementation
is progressing well but the system is still prone to problems which can
introduce severe disruptions in the Company's daily operations.
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.
SUPPLY CONSTRAINTS AND DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS
Manufacture of the Company's power conversion and control systems requires
numerous electronic components. 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 experienced
a temporary delay in replacing certain key components that had been lost or
damaged in the July 1997 rainstorm in Fort Collins.
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.
DEPENDENCE ON DESIGN WINS; BARRIERS TO OBTAINING NEW CUSTOMERS; HIGH LEVEL OF
CUSTOMIZED SYSTEMS
Equipment manufacturers begin new system design projects periodically due
to the constantly changing nature of semiconductor fabrication technology. It
is important for the Company to work with these manufacturers early in their
design cycle because it is common for modifications to the Company's
equipment to be required to meet the requirements of the new system. As the
design cycle nears completion, one or two vendors are chosen by the equipment
manufacturer to provide the power conversion equipment to be used with the
early system shipments. Being selected as one of these vendors is called a
"design win." The Company believes that achieving these "design wins" is
critical to
20
<PAGE>
retaining existing customers and to obtaining new customers. 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.
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. Development and introduction of new systems may involve
significant costs that are difficult to forecast. Failure of the Company to
develop or introduce improved systems and new systems in a timely manner
could have a material adverse effect on the Company's business, financial
condition and results of operations, as well as on its customer
relationships.
COMPETITION
The Company faces substantial competition, primarily from established
companies, some of which have greater financial, marketing and technical
resources than the Company. The trend toward consolidation in the
semiconductor equipment industry has made it increasingly important to have
the resources necessary to compete effectively across a broad range of
product offerings, to fund customer service and support on a worldwide basis
and to invest in research and development. The Company expects its
competitors to continue to develop new products aimed at applications
currently served by the Company, to continue to improve the design and
performance of their systems, and to introduce new systems with competitive
performance characteristics. To remain competitive, the Company believes it
will be required to maintain a high level of investment in research and
development and sales and marketing. 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. In
addition, electronics companies, including companies in the semiconductor
capital equipment industry, have been characterized by ongoing pressure to
reduce costs.
21
<PAGE>
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; Bicester, United Kingdom; and Seoul, South Korea. 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 25% of the Company's
sales in 1995, 1996 and 1997, respectively, were attributable to customers
outside the United States. The Company expects sales outside the United
States to continue to represent a significant portion of future sales. Sales
to customers outside the United States are subject to various risks,
including exposure to currency fluctuations, the imposition of governmental
controls, political and economic instability, trade restrictions, changes in
tariffs and taxes, and longer payment cycles typically associated with
international sales. The Company has entered into various forward foreign
exchange contracts to mitigate the effect of depreciation of the Japanese
yen; however, there can be no assurance that this or other hedging techniques
can successfully protect the Company against substantial currency
fluctuations. The Company has not employed hedging techniques with respect to
any other currencies.
THE ASIAN FINANCIAL CRISIS
In the third quarter of 1997 the economic conditions in several Asian
countries began to deteriorate and those conditions were exacerbated in the
fourth quarter. The Company realized approximately 10% of its 1997 revenue
from sales to customers in Asia, including Japan. Many of the Company's key
customers had a much greater concentration of their revenue in Asia. Until
such time as the uncertainty is resolved the Company, directly and through
its customers, could suffer material reductions in revenue.
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.
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
22
<PAGE>
defend the Company against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. 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.
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 December 31, 1997, the closing price of the Common
Stock on the Nasdaq National Market has ranged from $3.50 to $38.125. 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company and their ages as of February 28,
1998 are as follows:
<TABLE>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Douglas S. Schatz 52 President, Chief Executive Officer and
Chairman of the Board
G. Brent Backman 57 Vice President, Special Projects,
Assistant Secretary and Director
Eric A. Balzer 49 Vice President, Operations
Richard P. Beck 64 Vice President, Chief Financial Officer
and Director
Hollis L. Caswell, Ph.D. 66 Chief Operating Officer and Director
James F. Gentilcore 45 Vice President, Sales and Marketing
Timothy A. Kerr 37 Vice President, Engineering
Susan C. Schell 48 Vice President, Quality and Human Resources
Richard A. Scholl 58 Vice President and Chief Technology Officer
</TABLE>
- -----------
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.
23
<PAGE>
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
the Company, Mr. Backman was a Business Manager at Ion Tech, Inc. and a
Laboratory Administrator at Hughes Aircraft Company.
ERIC A. BALZER joined the Company 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 the Company in 1992 as Vice President and Chief
Financial Officer. He became a director of the Company in 1995. From 1987 to
1992, Mr. Beck served as Executive Vice President and Chief Financial Officer
of Cimage Corporation, a computer software company. Mr. Beck is also a
director of Target Financial, Inc., a privately-held computer rental company.
HOLLIS L. CASWELL, PH.D. joined the Board of Directors of the Company in
February 1997 and joined the Company as Chief Operating Officer in May 1997.
Dr. Caswell was Chairman of the Board and Chief Executive Officer of HYPRES,
Inc., a manufacturer of superconducting electronics, from 1990 to 1994. From
1984 to 1990, Dr. Caswell served as Senior Vice President of Unisys
Corporation and President of such company's Computer Systems Group. He is a
director of Thomas Group, Inc., a publicly traded consulting 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, Inc.
TIMOTHY A. KERR joined the Company in 1987 as an engineer. In 1995, he
became Director of Engineering and in August 1996, Vice President,
Engineering. Prior to joining the Company, Mr. Kerr was a member of the
technical staff at Hughes Aircraft Company.
SUSAN C. SCHELL joined the Company in 1984 as Human Resources Manager and
became Vice President, Quality and Human Resources in 1991. Prior to joining
the Company, Ms. Schell was a Management Advisory Services Consultant with
Cady and Company, P.C.
RICHARD A. SCHOLL joined the Company 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.
24
<PAGE>
ITEM 2. PROPERTIES
The Company's headquarters and manufacturing facility are located in Fort
Collins, Colorado, in approximately 190,000 square feet of leased space. The
Company also maintains sales and service offices in Milpitas, California;
Tokyo, Japan; Filderstadt, Germany; and Seoul, South Korea; and sales offices
in Concord, Massachusetts; Austin, Texas; and Bicester, United Kingdom.
In August 1997, the Company acquired 100% of the common stock of Tower
Electronics, Inc. The headquarters, sales and service offices and
manufacturing facilities of Tower are in Fridley, Minnesota.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings in the ordinary course
of its business to the best of its knowledge.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
25
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Prior to November 17, 1995, there had been no public market for the
Company's Common Stock. The Common Stock was approved for quotation on the
Nasdaq Stock Market under the symbol AEIS, beginning November 17, 1995. At
January 31, 1998, the number of common stockholders of record was 421.
The range of high and low bid quotations for the Company's Common Stock as
quoted (without retail markup or markdown and without commissions) on the
Nasdaq Stock Market since its initial public offering is provided below. They
do not necessarily represent actual transactions:
<TABLE>
High Bid Low Bid
-------- -------
<S> <C> <C>
1995 Fiscal Year
----------------
Fourth Quarter
(from November 17) 11 8-1/4
1996 Fiscal Year
----------------
First Quarter 10 6-1/2
Second Quarter 9-1/8 5-3/4
Third Quarter 7-3/4 4-1/2
Fourth Quarter 7-1/4 2-7/8
1997 Fiscal Year
----------------
First Quarter 8-3/8 5-1/4
Second Quarter 15-3/8 7-1/8
Third Quarter 33-3/8 14-1/2
Fourth Quarter 38-1/8 12-1/4
</TABLE>
The Company has not declared or paid any cash dividends on its capital
stock since it terminated its election to be treated as an S corporation for
tax purposes, effective January 1, 1994. The Company currently intends to
retain all future earnings to finance its business. Accordingly, the Company
does not anticipate paying cash or other dividends on its Common Stock in the
foreseeable future. Furthermore, the Company's revolving credit facility
prohibits the declaration or payment of any cash dividends on the Common
Stock.
26
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, the Company's 1997
Consolidated Financial Statements and notes thereto and the discussion
thereof included elsewhere in this Form 10-K. The selected consolidated
statements of operations for the years ended December 31, 1995, 1996 and 1997
and the related consolidated balance sheet data as of and for the years ended
December 31, 1996 and 1997 derived from consolidated financial statements
have been audited by Arthur Andersen LLP, independent accountants, whose
report with respect thereto is included elsewhere in this Form 10-K. The
selected consolidated statements of operations data for the years ended
December 31, 1993 and 1994, and the related consolidated balance sheet data
as of December 31, 1993, 1994 and 1995 have been derived from audited
consolidated financial statements of the Company not included in this Form
10-K.
<TABLE>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales $141,923 $98,852 $94,708 $51,857 $31,577
Gross profit 54,385 36,814 45,394 25,814 15,248
Total operating expenses 37,380 28,603 23,916 15,811 11,547
Income from operations 17,005 8,211 21,478 10,003 3,701
Net income $ 10,362 $ 5,144 $13,281 $ 5,963 $ 3,417
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
Diluted earnings per share $ 0.47 $ 0.24 $ 0.69 $ 0.32
Pro forma net income(1) $ 2,054
-------
-------
</TABLE>
<TABLE>
DECEMBER 31,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 66,708 $35,179 $33,749 $ 7,773 $ 3,587
Total assets 112,243 56,031 55,319 23,149 13,389
Total debt 3,320 2,051 2,484 9,946 8,459
Stockholders' equity 87,348 46,496 41,087 7,218 1,011
</TABLE>
- ------------
(1) In 1993, the Company was treated as an S corporation for tax purposes. The
Company terminated its election to be treated as an S corporation effective
as of January 1, 1994. Pro forma information assumes federal, state and
foreign income tax rates aggregating 40.0%. See Note 10 of Notes to
Consolidated Financial Statements.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements, within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve
risks and uncertainties. As a result, the Company's actual results may differ
materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below.
In particular, the Company believes that the following factors could impact
forward-looking statements made herein or in future written or oral releases
and by hindsight, prove such statements to be overly optimistic and
unachievable: volatility of the semiconductor and semiconductor equipment
industries, customer concentration, dependence on design wins, rapid
technological change and dependence on new system introduction, competition,
and management of growth.
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, and OEMs
of the telecommunications, medical and non-impact printing industries. 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 64% of
the Company's sales in 1996 and 58% in 1997. The Company has benefited from
strong growth in the semiconductor equipment industry in recent years until
the industry growth stopped in mid-1996, but recovered in the second half of
1997. The largest customer of the Company is also the largest semiconductor
equipment manufacturer. Sales to the data storage market increased
significantly in 1997 when compared to 1996, but sales to industrial markets
were flat during this same period. The Company experienced a decline in sales
to the flat panel display market in 1996, primarily in Japan, but recovered
in 1997 to a level higher than 1995. In connection with the acquisition of
Tower Electronics, Inc. ("Tower") the Company now has products manufactured
for use in the
28
<PAGE>
telecommunications, laser and non-impact printing industries. The future
success of the Company depends primarily on continued growth of the
semiconductor equipment industry, data storage industry, and flat panel
display industry. To date, the Company has been successful in achieving a
number of "design wins" which have resulted in the Company obtaining new
customers and solidifying relationships with its existing customers. The
Company believes that its ability to continue to achieve design wins with
existing and new customers will be critical to its future success.
In response to the high rate of growth in 1995 and anticipated growth
during 1996, the Company made substantial investments in infrastructure such
as information technology, facilities, and in worldwide sales and support in
1996, which caused operating expenses to increase. This, combined with the
slower growth in the semiconductor equipment industry, resulted in reduced
operating margins in 1996. Margins improved in 1997 when the semiconductor
equipment industry rebounded and returned to growth more in line with
historical experience.
Several events occurred during 1997 that affected and may continue to
influence the Company's operations into 1998. The Company sustained damage to
its manufacturing facilities and certain equipment during a severe rainstorm
on July 29, 1997, which reduced production capacity during the following
several months. On August 15, 1997, the Company purchased all of the
outstanding stock of Tower Electronics, Inc. ("Tower"), a privately-held
Minnesota-based manufacturer of custom, low-power power supplies used
principally in the telecommunications, medical and non-impact printing
markets. In October 1997, the Company completed an underwritten public
offering of 1,000,000 shares of common stock at a price of $31 per share, for
aggregate net proceeds of approximately $28.7 million. In October 1997, the
Company completed formation of its 100%-owned sales and service subsidiary in
South Korea.
YEAR 2000
Computer programs that rely on two-digit date codes to perform
computations and decision-making functions may cause computer systems to
malfunction due to an inability of such programs to interpret the date code
"00" as the year 2000. Advanced Energy has conducted an initial assessment of
its internal exposure to the Year 2000 problem and believes that its recently
installed enterprise-wide software system is Year 2000 compliant. Such belief
is based significantly on discussions with and representations by the vendor
of such software. The Company intends to conduct its own evaluations and
testing of such software system and is currently involved in a project to
ensure that its ancillary software and hardware are Year 2000 compliant. The
Company expects to complete these projects during the second and third
quarters of 1998. The Company does not expect the costs associated with such
projects to have a material effect on the Company's financial results.
Advanced Energy also may be vulnerable to other companies' Year 2000
issues. The Company's current estimates of the impact of the Year 2000
problem on its operations
29
<PAGE>
and financial results do not include costs and time that may be incurred as a
result of any vendors' or customers' failures to become Year 2000 compliant
on a timely basis. The Company has initiated formal communications with all
of its significant vendors and customers with respect to such persons' Year
2000 compliance programs and status. However, there can be no assurance that
such other companies will achieve Year 2000 compliance or that any
conversions by such companies to become Year 2000 compliant will be
compatible with the Company's computer systems.
The inability of the Company or any of its principal vendors or customers
to become Year 2000 compliant in a timely manner could have a material
adverse effect on the Company's financial condition or results of operations.
The foregoing beliefs and expectations are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of
the Exchange Act, and are based in large part on certain statements and
representations made by persons outside the Company, any of which statements
or representations ultimately could prove to be inaccurate.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of sales:
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 61.7 62.8 52.1
------ ------ ------
Gross margin 38.3 37.2 47.9
------ ------ ------
Operating expenses:
Research and development 10.4 13.9 11.1
Sales and marketing 6.7 8.7 6.5
General and administrative 5.1 6.3 7.6
Storm damage, net of insurance reimbursement 1.9 0.0 0.0
Purchased in-process research and development 2.2 0.0 0.0
------ ------ ------
Total operating expenses 26.3 28.9 25.2
------ ------ ------
Income from operations 12.0 8.3 22.7
Other income (expense) 0.0 0.1 (0.4)
------ ------ ------
Net income before income taxes 12.0 8.4 22.3
Provision for income taxes 4.7 3.2 8.3
------ ------ ------
Net income 7.3% 5.2% 14.0%
------ ------ ------
------ ------ ------
</TABLE>
SALES
Sales were $94.7 million, $98.9 million and $141.9 million in 1995, 1996
and 1997, respectively, representing an increase of 4% from 1995 to 1996 and
44% from 1996 to 1997. The Company's sales growth during all periods
presented has resulted from the increased unit sales of the Company's
systems. A significant part of this growth during 1996 is attributable to
increased sales to domestic customers and to customers in Europe,
30
<PAGE>
offset by a 46% decrease in Japan sales when compared to 1995, which were
primarily to the flat panel display market. In 1995 the Company sold
subsystems in Japan to replace subsystems originally provided by competitors.
That retrofit program was completed in 1995. A substantial portion of the
Company's sales growth since 1995 is attributable to higher system sales to
the Company's two largest customers, both of whom are primarily semiconductor
equipment OEMs. Sales to this industry increased 35% from 1996 to 1997, while
sales to data storage equipment OEMs increased 53% during the same period.
Sales to international customers, primarily in Japan, Asia and Europe,
were approximately $27.3 million, $24.0 million, and $36.0 million in 1995,
1996 and 1997, respectively. These amounts represented 29%, 24% and 25% 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 margins were 47.9%, 37.2% and 38.3% for 1995, 1996 and
1997, respectively. Major factors causing the decrease in gross margin from 1995
to 1996 were generally higher material costs and other costs associated with
continued outsourcing efforts in the first half of 1996, and underabsorption of
manufacturing overhead due to lower sales in the second half of 1996. Sales for
the first six months of 1996 were $57.0 million versus sales of $43.0 million in
the comparable period in 1995, an increase of 33%, while sales in the last six
months of 1996 were $41.9 million versus sales of $51.7 million for the
comparable period in 1995, a decrease of 19%. Additionally, gross margin was
negatively impacted throughout 1996 by a shift in product mix toward products on
which material costs increased as a percentage of sales and by increased
customer service costs. The increase in gross margin from 1996 to 1997 was
primarily due to lower infrastructure costs associated with cost of goods sold
and decreased material costs as a percentage of sales. Other cost improvements,
as a percentage of sales, were achieved to a lesser extent in labor and customer
support costs largely because of the higher 1997 base resulting from the
recovery in the semiconductor equipment industry in the second quarter of 1997.
These improvements were partially offset by a less favorable absorption of
manufacturing overhead costs. The underabsorption of manufacturing overhead may
continue to negatively impact gross margin should future sales levels decline.
During the periods presented, the average selling price per unit has
remained relatively constant. Historically, price competition has not had a
material effect on margins. However, competitive pressures may produce a
decline in average selling prices for certain products. Any material decline
in average selling prices not offset by reduced costs could result in a
material decline in the Company's gross margins.
The Company provides warranty coverage for its systems ranging from 12 to
24
31
<PAGE>
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 $10.5 million, $13.8
million and $14.8 million for 1995, 1996 and 1997, respectively, representing
an increase of 31% from 1995 to 1996 and 7% from 1996 to 1997. As a
percentage of sales, research and development expenses increased from 11.1%
in 1995 to 13.9% in 1996, but decreased to 10.4% in 1997 as a result of the
higher sales base. The increase in expenses from 1995 to 1997 is primarily
associated with increases in payroll and outside service costs incurred for
new product development.
In connection with the acquisition of Tower on August 15, 1997, the
Company recorded a one-time charge of $3.1 million in 1997 for the portion of
the purchase price attributable to in-process research and development, not
included in the $14.8 million reported for research and development expense.
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 when
incurred.
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 $6.2 million,
$8.6 million and $9.6 million for 1995, 1996 and 1997, respectively. This
represented a 39% increase from 1995 to 1996 and an 11% increase from 1996 to
1997. The increases are attributable to higher payroll, promotional
materials, depreciation and travel costs associated with expansion to support
the increase in sales volume. As a percentage of sales, these expenses
increased from 6.5% in 1995 to 8.7% in 1996, but decreased to 6.7% in 1997 as
a result of the higher sales base.
The Company continues to reorganize its sales and marketing team to better
address the specific needs of its customers. Sales and marketing expenses are
expected to continue to increase in future periods.
GENERAL AND ADMINISTRATIVE
General and administrative expenses support the worldwide financial,
administrative, information systems and human resources functions of the
Company. General and
32
<PAGE>
administrative expenses were $7.2 million, $6.3 million and $7.3 million for
1995, 1996 and 1997, respectively. The decrease in general and administrative
expenses from 1995 to 1996 was due primarily to a reduction in accrued
bonuses and other employee benefits made in 1996 as part of the Company's
cost reduction efforts, which were one-time reductions. Of the increase from
1996 to 1997 of $1.0 million, $0.7 million was due to the inclusion of Tower,
of which $0.4 million was for amortization of goodwill resulting from the
purchase. As a percentage of sales, general and administrative expenses were
7.6%, 6.3% and 5.1% for 1995, 1996 and 1997, respectively. The overall
decrease as a percentage of sales from 1995 to 1997 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.
The Company continues to implement its new information management system
software throughout the Company, including the replacement of existing
systems in its foreign locations. The Company expects that charges related to
training and implementation of the new software will continue through 1998,
particularly for the foreign locations.
ONE-TIME CHARGES
The Company took one-time net charges totaling $5.8 million in 1997. A net
charge of $2.7 million was taken for storm damage to the Company's
headquarters and main manufacturing facilities that resulted from heavy rains
in the Fort Collins area on July 29, 1997. The final extent of insurance
coverage, if any, is unresolved, although the Company has received and
recorded $0.3 million of proceeds to date. Any additional recoveries from the
Company's insurance will likewise be recorded when received.
As discussed above in "Research and Development," the acquisition of Tower
resulted in a charge of $3.1 million for purchased in-process research and
development, which is non-deductible for income tax purposes.
OTHER INCOME (EXPENSE)
Other income consists primarily of interest income and expense, foreign
exchange gains and losses and other miscellaneous income and expense items.
Interest income was approximately $0.1 million, $0.5 million and $0.5 million
for the years 1995, 1996 and 1997, respectively. The higher amounts in 1996
and 1997 were due primarily to earnings on investments made from the proceeds
of the initial public offering in November 1995 and the underwritten public
offering in October 1997.
Interest expense consists principally of borrowings under the Company's
bank credit and capital lease facilities and was approximately $0.6 million,
$0.2 million and $0.3 million for the years 1995, 1996 and 1997,
respectively. The decrease of interest expense from 1995 to 1996 was
primarily 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. The increase of interest
expense
33
<PAGE>
from 1996 to 1997 was primarily due to a short-term loan used to finance the
acquisition of Tower, which was repaid with the proceeds from the
underwritten public offering in October 1997.
Approximately 91% of the Company's foreign subsidiaries' sales are
denominated in currencies other than the U.S. dollar. An increase in the
value of the German deutsche mark of 7% and a decrease in the value of the
Japanese 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 began to enter into various
forward foreign exchange contracts to mitigate the effect in depreciation in
the yen. During 1997, the Company recorded a net foreign currency gain of
$0.1 million. The Company continues to evaluate various policies to minimize
the effect of foreign currency fluctuations.
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. The income
tax provision of $6.7 million for 1997 represented an effective rate of
39.2%. The increase in the Company's tax rate from 1996 to 1997 is primarily
attributed to certain one-time charges in 1997 which were not deductible,
including the $3.1 million one-time charge for purchased in-process research
and development associated with the acquisition of Tower. 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 than the historical
rates the Company experienced before 1997. The Company adjusts its income
taxes periodically based upon the anticipated tax status of all foreign and
domestic entities.
QUARTERLY RESULTS OF OPERATIONS
The following table presents unaudited quarterly results in dollars and as
a percentage of sales for the eight quarters ended December 31, 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.
34
<PAGE>
<TABLE>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $27,166 $29,831 $21,639 $20,216 $20,667 $32,690 $42,571 $45,995
Cost of sales 17,035 17,204 15,047 12,752 13,158 20,139 25,538 28,703
------- ------- ------- ------- ------- ------- ------- -------
Gross profit 10,131 12,627 6,592 7,464 7,509 12,551 17,033 17,292
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development 3,498 3,645 3,349 3,268 2,821 3,513 4,072 4,345
Sales and marketing 2,083 2,248 2,201 2,058 1,799 2,336 2,329 3,101
General and administrative 1,725 2,330 933 1,265 1,248 1,702 1,943 2,391
Storm damage -- -- -- -- -- -- 3,000 (300)
Purchased in-process research and
development -- -- -- -- -- -- 3,080 --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 7,306 8,223 6,483 6,591 5,868 7,551 14,424 9,537
------- ------- ------- ------- ------- ------- ------- -------
Income from operations 2,825 4,404 109 873 1,641 5,000 2,609 7,755
Other (expense) income (170) (66) 97 232 (387) 286 54 73
------- ------- ------- ------- ------- ------- ------- -------
Net income before income taxes 2,655 4,338 206 1,105 1,254 5,286 2,663 7,828
Provision for income taxes 982 1,676 83 419 489 1,996 2,146 2,038
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,673 $ 2,662 $ 123 $ 686 $ 765 $ 3,290 $ 517 $ 5,790
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Diluted earnings per share $ 0.08 $ 0.12 $ 0.01 $ 0.03 $ 0.04 $ 0.15 $ 0.02 $ 0.25
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Weighted-average number of
shares and share equivalents 21,794 21,653 21,622 21,728 21,735 21,877 22,372 23,112
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 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 62.7 57.7 69.5 63.1 63.7 61.6 60.0 62.4
----- ----- ----- ----- ----- ----- ----- -----
Gross margin 37.3 42.3 30.5 36.9 36.3 38.4 40.0 37.6
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development 12.9 12.2 15.5 16.2 13.7 10.8 9.6 9.4
Sales and marketing 7.7 7.5 10.2 10.2 8.7 7.1 5.5 6.7
General and administrative 6.3 7.8 4.3 6.2 6.0 5.2 4.6 5.2
Storm damage -- -- -- -- -- -- 7.0 (0.6)
Purchased in-process research and
development -- -- -- -- -- -- 7.2 --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses 26.9 27.5 30.0 32.6 28.4 23.1 33.9 20.7
----- ----- ----- ----- ----- ----- ----- -----
Income from operations 10.4 14.8 0.5 4.3 7.9 15.3 6.1 16.9
Other (expense) income (0.6) (0.3) 0.5 1.2 (1.8) 0.9 0.2 0.1
----- ----- ----- ----- ----- ----- ----- -----
Net income before income taxes 9.8 14.5 1.0 5.5 6.1 16.2 6.3 17.0
Provision for income taxes 3.6 5.6 0.4 2.1 2.4 6.1 5.1 4.4
----- ----- ----- ----- ----- ----- ----- -----
Net income 6.2% 8.9% 0.6% 3.4% 3.7% 10.1% 1.2% 12.6%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
The Company has experienced and expects to continue to experience significant
fluctuations in its quarterly operating results. The Company's expense levels
are based, in part, on expectations of future revenues. If revenue levels in a
particular quarter do not meet expectations, operating results may be adversely
affected. A variety of factors have an influence on the level of the Company's
revenues in a particular quarter. These factors include general economic
conditions, specific economic conditions in the industries the Company serves,
the timing of the receipt of orders from major customers, customer cancellations
or delay of shipments, specific feature requests by customers, production delays
or manufacturing inefficiencies, exchange rate fluctuations, management
decisions to commence or discontinue product lines, the Company's ability to
design, introduce and manufacture new products on a cost effective and timely
basis, the introduction of new products by the Company or its competitors, the
timing of research and development expenditures, and expenses related to
acquisitions, strategic alliances, and the further
35
<PAGE>
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
importance of "just-in-time" shipments. The Company is dependent on obtaining
orders for shipment in a particular quarter to achieve its revenue objectives
for that quarter. Accordingly, it is difficult for the Company to predict
accurately the timing and level of sales in a particular quarter. Due to its
"just-in-time" program, the Company anticipates quarterly fluctuations in sales
will continue to occur.
The Company's quarterly operating results in 1996 and 1997 reflect the
changing demand for the Company's products during this period, principally from
manufacturers of semiconductor equipment and data storage equipment, and the
Company's ability to quickly adjust its manufacturing capacity to meet this
demand. Demand from the semiconductor equipment companies was significantly
lower from the third quarter of 1996 until the second quarter of 1997. In the
second quarter of 1997, the semiconductor equipment market began a major
recovery which continued throughout 1997, and sales to the data storage
equipment market also experienced significant growth. Sales during the fourth
quarter of 1997 increased 8% from the third quarter of 1997 primarily as a
result of the inclusion of revenues from Tower. This increase was offset by a
significant drop in sales in Japan from the third quarter of 1997 to the fourth
quarter of 1997.
The Company's gross margin fluctuated significantly on a quarterly basis in
1996 and 1997, primarily reflecting utilization of manufacturing capacity.
Average selling prices remained relatively constant throughout the periods
presented. The increase in gross margin from 37.3% in the first quarter of 1996
to 42.3% in the second quarter of 1996 resulted from a number of factors which
resulted in decreased component costs. 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. 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 in gross margin to 36.9%
in the fourth quarter of 1996 was attributable primarily to a favorable product
mix, decreased direct material costs and decreased customer service costs. The
improvement in gross margin to 38.4% in the second quarter of 1997 and 40.0% in
the third quarter of 1997 was primarily the result of a more favorable
absorption of manufacturing overhead resulting from a 58% increase in sales from
the first quarter of 1997 to the second quarter of 1997. Beginning August 15,
1997, the Company's operating results included Tower. The Company returned to
full production in the fourth quarter of 1997, during which time gross margin
declined to 37.6%. This decrease was primarily attributed to higher customer
service costs and higher cost of goods sold as a percentage of sales for Tower.
36
<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. Quarterly decreases of operating expenses in the second half of
1996 and the first quarter of 1997 reflected a companywide restructuring and the
implementation of cost containment measures started in the third quarter of 1996
to react to the significant decrease in demand, primarily from semiconductor
equipment companies. The increases in operating expenses during the remaining
quarters of 1997 reflected costs in support of higher sales resulting from the
recovery in the semiconductor equipment industry and increases in sales to the
data storage industry in the second and third quarters of 1997. Operating
expenses of $14.4 million in the third quarter of 1997 would have been $8.3
million if not for the one-time charges of $6.1 million. As a percentage of
sales, operating expenses have declined during periods of rapid sales growth,
when sales increased at a rate faster than the Company's ability to add
personnel and facilities to support the growth, and increased during periods of
flat or decreased sales, when the Company's infrastructure is retained to
support anticipated future growth or from non-recurring charges associated with
downsizing.
Other income (expense) consists primarily of interest income and expense and
foreign currency gain and loss. The net foreign exchange loss of $0.4 million in
1996 was recognized during the first and fourth quarters of 1996, with
essentially no gain or loss in the second and third quarter. During 1997, the
Company recorded a net foreign exchange gain of $0.1 million. The Company
continues to utilize forward foreign exchange contracts in Japan to mitigate the
effects of foreign currency fluctuations.
The Company's provision for income taxes remained relatively stable in 1996,
ranging from 37.0% to 40.3%, but fluctuated significantly in 1997. An effective
income tax rate of 80.6% in the third quarter of 1997 was due primarily to the
one-time non-deductible charge of $3.1 million for the purchased in-process
research and development associated with the acquisition of Tower. An effective
income tax rate of 26.0% in the fourth quarter of 1997 was due primarily to a
revised estimate resulting in a favorable adjustment to previously-accrued
income taxes in Japan. The first and second quarters of 1997 had effective
income tax rates of 39.0% and 37.8%, respectively, closer to historical rates.
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
37
<PAGE>
operations, and, from November 1995, proceeds from underwritten public
offerings.
Cash provided by operations totaled $3.3 million in 1996. In 1996, net income,
depreciation, amortization and decreases in inventory were partially offset by
increases in accounts receivable and decreases in accounts payable. Cash
provided by operations totaled $8.1 million in 1997, of which major factors were
net income, depreciation, amortization, purchased in-process research and
development, and increases in accounts payable, offset by increases in accounts
receivable and inventories. The Company expects future receivable and inventory
balances to fluctuate with net sales. The Company provides "just-in-time"
deliveries to certain of its customers and may be required to maintain higher
levels of inventory to satisfy its customers' delivery requirements.
Investing activities in 1996 used cash of $5.1 million and consisted of
equipment acquisitions. Investing activities in 1997 used cash of $38.2 million
and consisted of the acquisition of Tower for $13.0 million, the purchase of
marketable securities of $20.0 million and the purchase of property and
equipment of $5.2 million.
Financing activities used cash of $0.3 million in 1996, and consisted
primarily of net proceeds of notes payable to finance equipment of $1.6 million,
offset by repayments of notes payable and capital lease obligations.
In October 1997, the Company completed an underwritten public offering of
1,000,000 shares of common stock at a price of $31 per share, for aggregate net
proceeds of approximately $28.7 million. The Company used $12.0 million of the
net proceeds to repay a $12.0 million term loan used to finance the acquisition
of Tower, and incurred a prepayment penalty of approximately $90,000. The
remaining proceeds were added to the Company's working capital to finance future
business needs.
In 1997, financing activities provided cash of $30.5 million and consisted
primarily of the net proceeds of $28.7 million from the underwritten public
offering. Long-term loans secured by property and equipment were $1.5 million in
1996 and were paid off in 1997.
The Company plans to spend approximately $6.0 million through 1998 for the
acquisition of equipment, leasehold improvements and furnishings.
As of December 31, 1997, the Company had working capital of $66.7 million. The
Company's principal sources of liquidity consisted of $11.5 million of cash and
cash equivalents, $20.2 million of marketable securities, and a credit facility
consisting of a $30.0 million revolving line of credit which replaced the
Company's prior line of credit, with options to convert up to $10.0 million to a
three-year term loan. Advances under the new revolving line of credit bear
interest at either the prime rate (8.5% at January 31, 1998) minus 1.25% or the
LIBOR 360-day rate (5.65625% at January 31, 1998) plus 150 basis points, at the
Company's option. All advances under the revolving line of credit will be due
and payable in December 2000; however, there were no advances outstanding as of
December 31, 1997.
38
<PAGE>
The Company believes that its cash and cash equivalents, cash flow from
operations and available borrowings, will be sufficient to meet the Company's
working capital needs through at least the end of 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.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants 41
Consolidated Balance Sheets as of December 31, 1997 and 1996 42
Consolidated Statements of Income for the Years Ended December 31,
1997, 1996 and 1995 44
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995 45
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995 46
Notes to Consolidated Financial Statements 47
Schedule II -- Valuation and Qualifying Accounts 58
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To 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, 1997 and 1996, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1997 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index of the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
Denver, Colorado ARTHUR ANDERSEN LLP
February 6, 1998.
41
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
DECEMBER 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,470 $11,231
Marketable securities - trading 20,174 --
Accounts receivable --
Trade (less allowances for doubtful accounts
of approximately $428 and $242 at
December 31, 1997 and 1996, respectively) 26,150 15,287
Related parties 893 541
Other 1,343 288
Inventories 26,243 13,976
Other current assets 2,472 1,013
Deferred income tax assets, net 2,836 1,223
-------- -------
Total current assets 91,581 43,559
-------- -------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $7,017 and $5,779 at December 31,
1997 and 1996, respectively 11,331 9,500
-------- -------
OTHER ASSETS:
Deposits and other 500 1,139
Goodwill, net of accumulated amortization of
$378 at December 31, 1997 7,112 --
Demonstration and customer service equipment,
net of accumulated depreciation of $1,673 and
$1,276 at December 31, 1997 and 1996,
respectively 1,719 1,833
-------- -------
9,331 2,972
-------- -------
Total assets $112,243 $56,031
-------- -------
-------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
42
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
DECEMBER 31,
-----------------------
1997 1996
-------- -------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade $ 12,045 $ 2,253
Accrued payroll and employee benefits 5,243 2,396
Other accrued expenses 1,327 1,156
Customer deposits 226 166
Accrued income taxes payable 2,734 1,485
Capital lease obligations, current portion 147 315
Notes payable, current portion 3,151 609
-------- -------
Total current liabilities 24,873 8,380
-------- -------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion 22 169
Notes payable, net of current portion -- 958
Deferred income taxes -- 28
-------- -------
22 1,155
-------- -------
Total liabilities 24,895 9,535
-------- -------
COMMITMENTS AND CONTINGENCIES (Note 12)
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; 22,493 and 21,268 shares issued
and outstanding, respectively 22 21
Additional paid-in capital 52,625 23,075
Retained earnings 35,427 25,065
Stockholders' notes receivable -- (1,083)
Deferred compensation (34) (82)
Cumulative translation adjustment (692) (500)
-------- -------
Total stockholders' equity 87,348 46,496
-------- -------
Total liabilities and stockholders' equity $112,243 $56,031
-------- -------
-------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
43
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SALES $141,923 $98,852 $94,708
COST OF SALES 87,538 62,038 49,314
-------- ------- -------
Gross profit 54,385 36,814 45,394
-------- ------- -------
OPERATING EXPENSES:
Research and development 14,751 13,760 10,522
Sales and marketing 9,565 8,590 6,201
General and administrative 7,284 6,253 7,193
Storm damage, net of $300 insurance reimbursement 2,700 -- --
Purchased in-process research and development 3,080 -- --
-------- ------- -------
Total operating expenses 37,380 28,603 23,916
-------- ------- -------
INCOME FROM OPERATIONS 17,005 8,211 21,478
-------- ------- -------
OTHER INCOME (EXPENSE):
Interest income 543 455 71
Interest expense (329) (168) (612)
Foreign currency gain (loss) 97 (351) (7)
Other (expense) income, net (285) 157 155
-------- ------- -------
Total other income (expense) 26 93 (393)
-------- ------- -------
Net income before income taxes 17,031 8,304 21,085
PROVISION FOR INCOME TAXES 6,669 3,160 7,804
-------- ------- -------
NET INCOME $ 10,362 $ 5,144 $13,281
-------- ------- -------
-------- ------- -------
BASIC EARNINGS PER SHARE $ 0.48 $ 0.24 $ 0.73
-------- ------- -------
-------- ------- -------
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.24 $ 0.69
-------- ------- -------
-------- ------- -------
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 21,544 21,242 18,216
-------- ------- -------
-------- ------- -------
DILUTED WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING 22,274 21,666 19,310
-------- ------- -------
-------- ------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
44
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
COMMON STOCK ADDITIONAL STOCKHOLDERS' CUMULATIVE TOTAL
-------------- PAID-IN RETAINED NOTES DEFERRED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION ADJUSTMENT EQUITY
------ ------ ------- -------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994 17,293 $17 $ 367 $ 6,640 $ -- $ -- $ 194 $ 7,218
Equity adjustment from foreign
currency translation -- -- -- -- -- -- (761) (761)
Exercise of stock options for cash 140 1 124 -- -- -- -- 125
Exercise of stock options in exchange
for stockholders' notes receivable 1,236 1 1,082 -- (1,083) -- -- --
Deferred compensation on stock
options issued -- -- 142 -- -- (142) -- --
Amortization of deferred compensation -- -- -- -- -- 12 -- 12
Sale of common stock through public
offering, net of approximately $2,790
of expenses 2,400 2 21,210 -- -- -- -- 21,212
Net income -- -- -- 13,281 -- -- -- 13,281
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1995 21,069 21 22,925 19,921 (1,083) (130) (567) 41,087
Equity adjustment from foreign
currency translation -- -- -- -- -- -- 67 67
Exercise of stock options for cash 199 -- 150 -- -- -- -- 150
Amortization of deferred compensation -- -- -- -- -- 48 -- 48
Net income -- -- -- 5,144 -- -- -- 5,144
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1996 21,268 21 23,075 25,065 (1,083) (82) (500) 46,496
Equity adjustment from foreign
currency translation -- -- -- -- -- -- (192) (192)
Exercise of stock options for cash 127 -- 255 -- -- -- -- 255
Exercise of stock options in exchange
for stockholders' notes receivable 90 -- 470 -- (470) -- -- --
Proceeds from stockholders' notes
receivable -- -- -- -- 1,553 -- -- 1,553
Sale of common stock through employee
stock purchase plan 8 -- 102 -- -- -- -- 102
Amortization of deferred compensation -- -- -- -- -- 48 -- 48
Sale of common stock through public
offering, net of approximately $2,276
of expenses 1,000 1 28,723 -- -- -- -- 28,724
Net income -- -- -- 10,362 -- -- -- 10,362
------ --- ------- ------- ------- ----- ----- -------
BALANCES, December 31, 1997 22,493 $22 $52,625 $35,427 $ -- $ (34) $(692) $87,348
------ --- ------- ------- ------- ----- ----- -------
------ --- ------- ------- ------- ----- ----- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
45
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $10,362 $ 5,144 $13,281
Adjustments to reconcile net income to net cash
provided by operating activities -
Depreciation and amortization 3,710 2,609 1,543
Provision for deferred income taxes (1,584) (286) (252)
Amortization of deferred compensation 48 48 12
Purchased in-process research and development 3,080 -- --
Loss on disposal of property and equipment 1,046 41 66
Earnings from marketable securities, net (174) -- --
Changes in operating assets and liabilities -
Accounts receivable-trade, net (9,213) (1,747) (5,477)
Related parties and other receivables (502) 803 (889)
Inventories (9,576) 2,128 (8,907)
Other current assets (1,420) (350) (371)
Deposits and other 639 (324) (225)
Demonstration and customer service equipment (636) (644) (937)
Accounts payable, trade 8,500 (4,412) 3,568
Accrued payroll and employee benefits 2,569 (367) 725
Customer deposits and other accrued expenses 231 460 149
Income taxes payable 1,011 149 1,388
------- ------- -------
Net cash provided by operating activities 8,091 3,252 3,674
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (20,000) -- --
Acquisition of Tower Electronics, Inc., net of
cash acquired (12,995) -- --
Purchase of property and equipment, net (5,179) (5,137) (3,824)
------- ------- -------
Net cash used in investing activities (38,174) (5,137) (3,824)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 13,763 1,606 31,179
Repayment of notes payable and capital
lease obligations (13,883) (2,039) (34,103)
Repayment of subordinated notes to stockholders -- -- (4,538)
Sale of common stock, net of expenses 28,724 -- 21,212
Sale of common stock through employee stock
purchase plan 102 -- --
Proceeds from exercise of stock options and
warrants 255 150 125
Proceeds from stockholders' notes receivable 1,553 -- --
------- ------- -------
Net cash provided by (used in) financing
activities 30,514 (283) 13,875
------- ------- -------
EFFECT OF CURRENCY TRANSLATION ON CASH FLOW (192) 67 (761)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 239 (2,101) 12,964
CASH AND CASH EQUIVALENTS, beginning of period 11,231 13,332 368
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $11,470 $11,231 $13,332
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Note payable assumed in Tower acquisition $ 1,389 $ -- $ --
------- ------- -------
------- ------- -------
Deferred compensation on stock options
issued $ -- $ -- $ 142
------- ------- -------
------- ------- -------
Exercise of stock options in exchange for
stockholders' notes receivable $ 470 $ -- $ 1,083
------- ------- -------
------- ------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 329 $ 168 $ 604
------- ------- -------
------- ------- -------
Cash paid for income taxes $ 7,242 $ 3,940 $ 6,668
------- ------- -------
------- ------- -------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
46
<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"), Advanced Energy U.K. Limited ("AE-UK")
and Advanced Energy Korea, Limited ("AE-Korea"). The Company also owns 100%
of Tower Electronics, Inc. ("Tower"), a Minnesota-based designer and
manufacturer of custom, high performance switchmode power supplies used
principally in the telecommunications, medical and non-impact printing
industries.
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 highly liquid 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 market or
cost, computed on a first-in, first-out basis.
MARKETABLE SECURITIES - TRADING -- Effective July 1, 1994, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No.
115 addresses the accounting and reporting for investments in equity and debt
securities. The Company has investments in marketable equity securities and
municipal bonds which have original maturities of 90 days or more. The
investments are classified as trading securities and reported at fair value
with unrealized gains and losses included in earnings.
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.
47
<PAGE>
The Company depreciates the equipment based on an estimated 3-year useful
life in the sales and customer service functions.
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 equipment industry. The Company establishes an allowance
for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information.
WARRANTY POLICY -- The Company estimates the anticipated costs of
repairing products under warranty based on the historical average cost of the
repairs. The Company offers warranty coverage for its systems for periods
ranging from 12 to 24 months after shipment.
CUMULATIVE TRANSLATION ADJUSTMENT -- The functional currency for the
Company's foreign operations is the applicable local currency.
The Company records a cumulative translation adjustment from translation
of the financial statements of AE-Japan, AE-Germany and AE-UK. This equity
account includes the results of translating all balance sheet assets and
liabilities at current exchange rates as of the balance sheet date, and the
statements of income 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 gain (loss) on foreign currency transactions of $97,000,
$(351,000) and $(7,000) for the years ended December 31, 1997, 1996 and 1995,
respectively.
REVENUE RECOGNITION -- The Company recognizes revenue when products are
shipped.
INCOME TAXES -- The Company accounts for income taxes by recognizing
deferred tax assets and liabilities for temporary differences between the tax
basis and financial reporting basis of assets and liabilities, computed at
current tax rates.
EARNINGS PER SHARE -- In February 1997, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings Per Share," which requires companies to
present basic earnings per share ("EPS") and diluted EPS, instead of the
primary and fully-diluted EPS that were previously required. The new standard
is effective for the Company in fiscal 1997 and all prior periods have been
retroactively adjusted. Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding during the period. The computation of diluted EPS is similar to
the computation of basic EPS except that the denominator is increased to
include the number of additional common shares that would have been
outstanding if dilutive potential common shares had been issued.
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.
48
<PAGE>
ASSET IMPAIRMENTS -- The Company reviews its long-lived assets and certain
identifiable intangibles held and used by the Company for impairment whenever
events or changes in circumstances indicate their carrying amount may not be
recoverable. In so doing, the Company estimates the future net cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future net cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized to reduce the asset to its estimated fair value. Otherwise, an
impairment loss is not recognized. Long-lived assets and certain identifiable
intangibles to be disposed of, if any, are reported at the lower of carrying
amount or fair value less cost to sell.
(3) ACQUISITION
Effective August 15, 1997, the Company acquired all of the outstanding
stock of Tower, a Minnesota-based designer and manufacturer of custom,
high-performance switchmode power supplies used principally in the
telecommunications, medical and non-impact printing industries. The purchase
price consisted of $14.5 million in cash and a $1.5 million non-interest
bearing promissory note to the seller (the "Note"), payable in August 1998.
Total consideration, including the effect of imputing interest on the Note,
equaled $15,889,000. The acquisition was accounted for using the purchase
method of accounting and resulted in a one-time charge of $3,080,000 for
in-process research and development acquired as a result of the transaction.
Acquisition costs totaled approximately $209,000.
The purchase price was allocated to the net assets of Tower as summarized
below:
<TABLE>
(In thousands)
<S> <C>
Cash and cash equivalents $ 1,714
Accounts receivable 2,555
Inventories 2,691
Deferred tax asset 57
Fixed assets 280
Goodwill 7,490
Purchased in-process research and development 3,080
Other assets 39
Accounts payable (1,292)
Accrued liabilities (516)
--------
$16,098
--------
--------
</TABLE>
The results of operations of Tower are included within the accompanying
consolidated financial statements from the date of acquisition.
The following table sets forth the condensed unaudited pro forma operating
results of the Company for the twelve months ended December 31, 1997 and
1996. The condensed pro forma operating results assume that the Tower
acquisition had occurred on January 1, 1996 and was funded with debt
outstanding until the secondary offering occurred in October 1997.
Additionally, the pro forma operating results do not include charges for the
$3,080,000 purchased in-process research and development as it is
non-recurring. The condensed pro forma results are not necessarily indicative
of the results of operations had the acquisition consummated on January 1,
1996, and may not necessarily be indicative of future performance.
<TABLE>
TWELVE MONTHS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED) 1997 1996
-------------------------------- ----------- -----------
<S> <C> <C>
Sales $154,568 $112,253
Net income $ 14,476 $ 4,842
Basic earnings per share $ 0.67 $ 0.23
Diluted earnings per share $ 0.65 $ 0.22
Basic weighted-average common shares
outstanding 21,544 21,242
Diluted weighted-average common shares
outstanding 22,274 21,666
</TABLE>
49
<PAGE>
(4) PUBLIC OFFERINGS
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 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.
In October 1997, the Company closed on a secondary offering of its common
stock. In connection with this offering, 1,000,000 shares of common shares
were sold at a price of $31 per share, providing gross proceeds of
$31,000,000, less $2,276,000 in offering costs.
(5) MARKETABLE SECURITIES - TRADING
Marketable securities - trading consisted of the following:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Equities $18,345 $ --
Municipal bonds and notes 1,700 --
Mutual funds 129 --
------- -----
$20,174 $ --
------- -----
------- -----
</TABLE>
These marketable securities are reported at fair value and have original
costs of $20,000,000.
(6) ACCOUNTS RECEIVABLE - TRADE
Accounts receivable - trade consisted of the following:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Domestic $16,724 $ 9,944
Foreign 9,854 5,585
Allowance for doubtful accounts (428) (242)
------- -------
$26,150 $15,287
------- -------
------- -------
</TABLE>
(7) INVENTORIES
Inventories consisted of the following:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Parts and raw materials $18,549 $11,149
Work in process 2,542 1,122
Finished goods 5,152 1,705
------- -------
$26,243 $13,976
------- -------
------- -------
</TABLE>
50
<PAGE>
(8) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 8,912 $ 5,708
Computers and communication equipment 4,638 4,793
Furniture and fixtures 1,996 1,996
Vehicles 100 140
Leasehold improvements 2,702 2,642
------- -------
18,348 15,279
Less -- accumulated depreciation (7,017) (5,779)
------- -------
$11,331 $ 9,500
------- -------
------- -------
</TABLE>
Included in the cost of property and equipment above is equipment obtained
through capital leases. The net book value of capital lease equipment
included in property and equipment above was as follows at December 31, 1997
and 1996:
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment $ 79 $243
Computers and communication equipment -- 62
Furniture and fixtures 1 14
---- ----
$ 80 $319
---- ----
---- ----
</TABLE>
Depreciation of assets acquired under capitalized leases is included in
depreciation expense.
(9) NOTES PAYABLE
<TABLE>
DECEMBER 31,
----------------------
1997 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit of $30,000,000, expiring December 7, 2000,
interest at bank's prime rate minus 1.25% or the LIBOR 360-day rate
plus 150 basis points. Option to convert up to $10,000,000 to a
three-year term loan; advances up to $5,000,000 each for Optional
Currency Rate Advances and Foreign Exchange Contracts. Loan
covenants provide certain financial restrictions related to working
capital, leverage, net worth and profitability $ -- $ --
Bank overdraft loan, maturing February and March 1998 at interest
rates ranging from 1.05% to 1.65% annually 1,762 --
Promissory note related to indemnification clause of Tower acquisition,
maturing August 1998 with an imputed interest rate of 8% 1,389 --
Term loan of $1,500,000 with a bank at prime plus 0.25% -- 1,458
Other -- 109
-------- --------
3,151 1,567
Less -- current portion (3,151) (609)
-------- --------
$ -- $ 958
-------- --------
-------- --------
</TABLE>
(10) INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995, the provision for
income taxes consists of an amount for taxes currently payable and a
provision for tax effects deferred to future periods. In 1997, the Company
increased its statutory U.S. tax rate from 34% to 35%.
51
<PAGE>
The provision (benefit) for income taxes for the years ended December 31,
1997, 1996 and 1995, is as follows:
<TABLE>
DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal $ 5,470 $2,744 $5,827
State and local 1,128 568 918
Foreign taxes 71 (152) 1,059
------- ------ ------
$ 6,669 $3,160 $7,804
------- ------ ------
------- ------ ------
Current 8,253 $3,446 $8,056
Deferred (1,584) (286) (252)
------- ------ ------
$ 6,669 $3,160 $7,804
------- ------ ------
------- ------ ------
</TABLE>
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
DECEMBER 31,
---------------------------------
1997 1996 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense per federal statutory rate $5,961 $2,823 $7,397
State income taxes, net of federal deduction 733 375 596
Foreign sales corporation (209) (108) (208)
Nondeductible goodwill amortization 132 -- --
Nondeductible purchased in-process research
and development 1,078 -- --
Other permanent items, net (22) 77 49
Effect of foreign taxes (255) (168) 316
Tax credits (272) (182) (260)
Other (477) 343 (86)
------ ------ ------
$6,669 $3,160 $7,804
------ ------ ------
------ ------ ------
</TABLE>
The Company's deferred income taxes are summarized as follows:
<TABLE>
DECEMBER 31, 1997 CHANGE DECEMBER 31, 1996
----------------- ------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Employee bonuses $ 203 $ 203 $ --
Warranty reserve 312 137 175
Bad debt reserve 135 60 75
Vacation accrual 295 (31) 326
Obsolete and excess inventory 1,049 475 574
Foreign operating loss carryforward 643 643 --
Other 199 69 73
------ ------ ------
2,836 1,556 1,223
------ ------ ------
Deferred tax liabilities:
Accumulated depreciation -- 28 (28)
------ ------ ------
Net deferred income tax assets $2,836 $1,584 $1,195
------ ------ ------
------ ------ ------
</TABLE>
The domestic versus foreign component of the Company's net income before
income taxes at December 31, 1997, 1996 and 1995, was as follows:
<TABLE>
DECEMBER 31,
-------------------------------------
1997 1996 1995
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic $16,102 $8,255 $18,969
Foreign 929 49 2,116
------- ------ -------
$17,031 $8,304 $21,085
------- ------ -------
------- ------ -------
</TABLE>
52
<PAGE>
(11) RETIREMENT PLAN
The Company has a 401(k) Profit Sharing Plan which covers all full-time
employees who have completed six months of full-time continuous service and
are age eighteen or older. Participants may defer up to 20% of their gross
pay up to a maximum limit determined by law ($9,500 during 1997).
Participants are immediately vested in their contributions.
The Company may make discretionary contributions based on corporate
financial results for the fiscal year. Effective January 1, 1998, the Company
increased its matching contribution for participants in the 401(k) Plan up to
a 50% matching on contributions by employees up to 6% of the employee's
compensation. The Company's total contributions to the plan were
approximately $580,000, $45,000 and $537,000 for the years ended December 31,
1997, 1996 and 1995, 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.
(12) COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company finances a portion of its property and equipment (Note 8) 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, 1997, are as follows:
<TABLE>
(IN THOUSANDS)
<S> <C>
1998 $ 154
1999 23
-----
Total minimum lease payments 177
Less -- amount representing interest (8)
Less -- current portion (147)
-----
$ 22
-----
-----
</TABLE>
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and
office and production space (Note 14). Lease expense under operating leases
was approximately $2,251,000, $1,788,000 and $1,184,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.
The future minimum rental payments required under noncancelable operating
leases as of December 31, 1997, are as follows:
<TABLE>
(IN THOUSANDS)
<S> <C>
1998 $ 2,597
1999 2,488
2000 2,201
2001 1,929
2002 1,553
Thereafter 9,199
-------
$19,967
-------
-------
</TABLE>
GUARANTEE
In October 1997, the Company extended a guarantee for a $2,500,000 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. The Company has received warrants to purchase shares of the
supplier for providing this guarantee.
53
<PAGE>
(13) FOREIGN OPERATIONS
The Company operates in a single industry segment with operations in the
U.S., Japan and Europe. The following is a summary of the Company's foreign
operations:
<TABLE>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Originating in Japan to unaffiliated customers $ 11,431 $ 6,467 $ 11,997
Originating in Europe to unaffiliated customers 7,487 8,023 6,237
Originating in U.S. and sold to unaffiliated foreign
customers 17,095 9,506 9,018
Originating in U.S. and sold to domestic customers 105,910 74,856 67,456
Transfers between geographic areas 14,523 10,496 11,524
Intercompany eliminations (14,523) (10,496) (11,524)
-------- -------- --------
$141,923 $ 98,852 $ 94,708
-------- -------- --------
-------- -------- --------
Income (loss) from operations:
Japan $ (73) $ (920) $ 1,094
Europe 1,488 1,056 953
U.S. 15,893 8,383 19,448
South Korea -- -- --
Intercompany eliminations (303) (308) (17)
-------- -------- --------
$ 17,005 $ 8,211 $ 21,478
-------- -------- --------
-------- -------- --------
Identifiable assets:
Japan $ 10,709 $ 6,445 $ 6,342
Europe 4,676 3,788 2,502
U.S. 126,111 54,736 54,415
South Korea 250 -- --
Intercompany eliminations (29,503) (8,938) (7,940)
-------- -------- --------
$112,243 $ 56,031 $ 55,319
-------- -------- --------
-------- -------- --------
</TABLE>
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
(14) RELATED PARTY TRANSACTIONS
The Company leases office and production spaces from a limited liability
partnership consisting of certain officers of the Company and other
individuals. The leases relating to these spaces expire in 2009 and 2011 with
monthly payments of approximately $39,000 and $46,000, respectively.
The Company also leases other office and production space from another
limited liability partnership consisting of certain officers of the Company
and other individuals. The lease relating to this space expires in 2002 with
a monthly payment of approximately $23,000.
Approximately $1,320,000, $1,364,000, and $800,000 was charged to rent
expense attributable to these leases for the years ended December 31, 1997,
1996 and 1995, 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, 1997, 1996 and 1995, relating to
this lease.
Included in AE-Japan's accounts receivable at December 31, 1997, 1996 and
1995, is approximately $835,000, $394,000 and $953,000, respectively, due
from an entity that is controlled by the president of AE-Japan. This entity
also accounted for approximately 2%, 3%, and 3% of consolidated sales during
1997, 1996 and 1995, respectively.
During 1997 and 1995, certain stockholders of the Company exercised options
to purchase shares of the Company's common stock for an aggregate exercise
price of $470,000 and $1,083,000, respectively. In exchange for the stock the
Company received notes receivable in the amount of the exercise price. These
notes receivable and accrued interest were paid in full during 1997.
54
<PAGE>
(15) 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, 1997, 1996 and 1995 are as
follows:
<TABLE>
DECEMBER 31,
-------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Customer A 34% 27% 24%
Customer B 10% 20% 17%
---- ---- ----
44% 47% 41%
---- ---- ----
---- ---- ----
</TABLE>
(16) FORWARD CONTRACT
AE-Japan enters into foreign currency forward contracts to buy U.S.
dollars to hedge its payable position arising from trade purchases and
intercompany transactions with its parent. Foreign currency forward contracts
reduce the Company's exposure to the risk that the eventual net cash outflows
resulting from the purchase of products denominated in yen will be adversely
affected by changes in exchange rates. Foreign currency gains and losses
under the above arrangements are not deferred. Foreign currency forward
contracts are entered into with a major commercial Japanese bank that has a
high credit rating and the Company does not expect the counterparty to fail
to meet its obligations under outstanding contracts. The Company generally
enters into foreign currency forward contracts with maturities ranging from 7
to 10 months, with contracts outstanding at December 31, 1997, maturing
through September 1998. At December 31, 1997, the Company held foreign
forward exchange contracts with notional amounts of $8,000,000 and fair value
amounts of $7,280,000 or an unrealized gain position of $720,000.
(17) 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, non-qualified 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
non-qualified stock options shall not be less than 50% of the stock's fair
market value on the date of grant. Options issued in 1997, 1996 and 1995 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.
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 1997 and 1996,
55
<PAGE>
employees purchased an aggregate of 19,878 and 11,572 shares under the Stock
Purchase Plan and the Company recognized approximately $27,000 and $11,000 in
compensation expense, respectively.
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 non-qualified stock options to directors of the
Company who are not employees of the Company ("Outside Directors"). Pursuant
to the Directors Plan, upon becoming a director of the Company, each Outside
Director will be granted an option to purchase 7,500 shares of common stock.
Such options will be immediately exercisable as to 2,500 shares of common
stock, and will vest as to 2,500 shares of common stock on each of the second
and third anniversaries of the grant date. On each anniversary of the date on
which a person became an Outside Director, an option for an additional 2,500
shares is granted. Such additional options vest on the third anniversary of
the date of grant. Options will expire ten years after the grant date, and
the exercise price of the options will be equal to the fair market value of
the common stock on the grant date. The Directors Plan terminates September
2005.
The following summarizes the activity relating to options and warrants for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
1997 1996 1995
---------------------- --------------------- ---------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock options:
INCENTIVE STOCK OPTIONS --
Options outstanding at beginning of
period 841 $ 3.02 729 $ 2.62 1,904 $ 0.95
Granted 686 11.42 751 5.10 212 6.40
Exercised (215) 3.32 (199) 8.51 (1,371) 3.53
Terminated (33) 4.24 (440) 6.92 (16) 1.69
------ ----- ------
Options outstanding at end of period 1,279 6.77 841 3.02 729 2.62
------ ----- ------
------ ----- ------
Options exercisable at end of period 383 3.45 326 1.51 391 0.88
------ ----- ------
------ ----- ------
Weighted-average fair value of
options granted during the period $ 7.86 $3.14 $ 1.84
------ ----- ------
------ ----- ------
Price range of outstanding options $0.83 - $31.63 $0.83 - $11.05 $0.83 - $11.05
-------------- -------------- --------------
-------------- -------------- --------------
Price range of options terminated $3.40 - $ 9.00 $0.83 - $11.05 $0.83 - $ 3.11
-------------- -------------- --------------
-------------- -------------- --------------
OUTSIDE DIRECTORS STOCK OPTIONS--
Options outstanding at beginning of
period 20 $ 9.82 15 $11.05 -- $ --
Granted 17 16.64 5 6.13 15 11.05
Exercised (2) 7.13 -- -- -- --
Terminated (10) 9.82 -- -- -- --
------ ----- ------
Options outstanding at end of period 25 14.86 20 9.82 15 11.05
------ ----- ------
------ ----- ------
Options exercisable at end of period 8 14.62 5 11.05 5 11.05
------ ----- ------
------ ----- ------
Weighted-average fair value of options
granted during the period $11.43 $4.68 $ 3.19
------ ----- ------
------ ----- ------
Price range of outstanding options $8.63 - $31.63 $6.13 - $11.05 $11.05
-------------- -------------- ------
-------------- -------------- ------
Price range of options terminated $6.13 - $11.05 $ -- $ --
-------------- -------------- ------
-------------- -------------- ------
WARRANTS--
Warrants outstanding at beginning of
period -- -- 7 $ 3.48
Granted -- -- -- --
Exercised -- -- (6) 2.27
Terminated -- -- (1) 3.99
------- ------- ------
Warrants outstanding at end of period -- -- -- --
Price range of stock issuable under
warrants $ -- $ -- $ --
------- ------- ------
------- ------- ------
Price range of warrants terminated $ -- $ -- $1.41 - $2.53
------- ------- --------------
------- ------- --------------
</TABLE>
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
56
<PAGE>
equity instruments. However, SFAS No. 123 allows the continued measurement of
compensation cost for such plans using the intrinsic value 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 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 when stock is issued at market value.
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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates 6.17% 6.57% 6.16%
Expected dividend yield rates 0.00% 0.00% 0.00%
Expected lives 4 years 4 years 4 years
Expected volatility 92.16% 110.16% 22.57%
</TABLE>
The total fair value of options granted was computed to be approximately
$5,594,000, $1,317,000 and $420,000 for the years ended December 31, 1997,
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 $415,000, $47,000 and $19,000 for
1997, 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>
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net Income:
As reported $10,362 $5,144 $13,281
Pro forma 9,947 5,097 13,262
Diluted Earnings Per Share:
As reported $ 0.47 $ 0.24 $ 0.69
Pro forma 0.45 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, 1997:
<TABLE>
Options Outstanding Options Exercisable
---------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Year Exercise Number Contractual Exercise Number Exercise
Granted Prices Outstanding Life Price Exercisable Price
- ---------- --------------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1993-1994 $0.83 to $2.53 169,000 5.9 years $ 0.92 169,000 $ 0.92
1995 $2.57 to $11.05 71,000 7.5 years $ 4.69 53,000 $ 4.48
1996 $3.88 to $8.75 389,000 8.8 years $ 4.10 136,000 $ 4.13
1997 $7.12 to $31.63 675,000 9.5 years $11.57 33,000 $12.04
--------- --------- ------ ------- ------
1,304,000 8.7 years $ 7.58 391,000 $ 3.45
--------- --------- ------ ------- ------
--------- --------- ------ ------- ------
</TABLE>
57
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
BALANCE AT
BEGINNING OF ADDITIONS CHARGED BALANCE AT
PERIOD TO EXPENSE DEDUCTIONS END OF PERIOD
------------ ----------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Inventory obsolescence reserve $ 724 $ 185 $ 120 $ 789
Allowance for doubtful accounts 134 76 -- 210
------ ------ ------ ------
$ 858 $ 261 $ 120 $ 999
------ ------ ------ ------
------ ------ ------ ------
Year ended December 31, 1996:
Inventory obsolescence reserve $ 789 $2,702 $1,966 $1,525
Allowance for doubtful accounts 210 35 3 242
------ ------ ------ ------
$ 999 $2,737 $1,969 $1,767
------ ------ ------ ------
------ ------ ------ ------
Year ended December 31, 1997:
Inventory obsolescence reserve $1,525 $4,310 $3,117 $2,718
Allowance for doubtful accounts 242 188 2 428
------ ------ ------ ------
$1,767 $4,498 $3,119 $3,146
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
58
<PAGE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In accordance with General Instruction G(3), the information required by this
item (with the exception of certain information pertaining to executive
officers, which is included in Part I hereof) has been omitted and is
incorporated by reference to the Registrant's definitive Proxy Statement (the
"Proxy Statement") relating to its 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The Proxy Statement will be filed not later than 120 days after the end of the
fiscal year with the Securities and Exchange Commission. The information set
forth therein under "Executive Compensation and Other Information" is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Certain Transactions"
in the Proxy Statement and is incorporated herein by reference.
59
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) (i) Financial Statements:
Report of Independent Public Accountants 41
Consolidated Financial Statements:
Balance Sheets at December 31, 1997 and 1996 42
Statements of Income for each of the three years
in the period ended December 31, 1997 44
Statements of Stockholders' Equity for each of the
three years in the period ended December 31, 1997 45
Statements of Cash Flows for each of the three years
in the period ended December 31, 1997 46
Notes to Consolidated Financial Statements 47
(ii) Financial Statement Schedules for each of the three years
in the period ended December 31, 1997
Schedule II--Valuation and Qualifying Accounts 58
(iii) Exhibits:
2.1 Share Purchase Agreement, dated August 11, 1997, among Roger
C. Hertel, Tower Electronics, Inc. and the Company(1)
3.1 The Company's Restated Certificate of Incorporation(2)
3.2 The Company's By-laws(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
4.2 The Company hereby agrees to furnish to the SEC, 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 Company.
10.1 Master Purchase Order and Sales Agreement, dated January 1, 1990,
between Applied Materials Inc. and the Company(2)+
10.2 Purchase Order and Sales Agreement, dated July 1, 1993, amended
September 16, 1995 between Lam Research Corporation and the
Company(2)+
10.3 Purchase Agreement, dated November 1, 1995, between Eaton
Corporation and the Company(3)+
10.4 Amended and Restated Loan and Security Agreement, dated as
of November 17, 1995, between Silicon Valley Bank and the
Company(2)
10.5 Loan and Security Agreement, dated August 15, 1997, among
Silicon Valley Bank, Bank of Hawaii and the Company(4)
10.6 Loan Agreement dated December 8, 1997, by and among Silicon
Valley Bank, as Servicing Agent and a Bank, and Bank of
Hawaii, as a Bank, and the Company, as borrower
10.7 Equipment Line of Credit, dated July 11, 1994, between Silicon
Valley Bank and the Company(2)
10.8 Master Lease Purchase Agreement, dated January 20, 1989,
as amended, between MetLife Capital Corporation and the
Company(2)
60
<PAGE>
10.9 Lease Purchase Agreement, dated June 11, 1992, between MetLife
Capital Corporation and the Company(2)
10.10 Master Equipment Lease, dated July 15, 1993, as amended,
between KeyCorp Leasing Ltd. and Company(2)
10.11 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property
in Fort Collins, Colorado(2)
10.12 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort
Collins, Colorado(2)
10.13 Lease, dated May 19, 1995, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(2)
10.14 Form of Indemnification Agreement(2)
10.15 1995 Stock Option Plan, as amended and restated*
10.16 Employee Stock Purchase Plan(2)*
10.17 1995 Non-Employee Directors' Stock Option Plan(2)*
21.1 Subsidiaries of the Company(4)
23.1 Consent of Arthur Andersen LLP, Independent Accountants
24.1 Power of Attorney (included on the signature pages to this
Annual Report on Form 10-K)
27.1 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were required to be filed by the Company during the
fourth quarter of the year ended December 31, 1997.
- ---------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 0-26966), dated August 15, 1997, filed August 19, 1997,
as amended.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97188), filed September 20, 1995, as amended.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 0-26966), filed March
21, 1997, as amended.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-34039), filed August 21, 1997, as amended.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ADVANCED ENERGY INDUSTRIES, INC.
-------------------------------------
(Registrant)
/s/ Douglas S. Schatz
----------------------
Douglas S. Schatz
President
Each person whose signature appears below hereby appoints Douglas S. Schatz
and Richard P. Beck, and each of them severally, acting alone and without the
other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K necessary or
advisable to enable the registrant to comply with the Securities Exchange Act
of 1934, as amended, and any rules, regulations and requirements of the
Securities and Exchange Commission in respect thereof, which amendments may
make such other changes in the Annual Report on Form 10-K as the aforesaid
attorney-in-fact deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Douglas S. Schatz Chairman of the Board, March 11, 1998
- ----------------------- President and Chief Executive Officer
Douglas S. Schatz (Principal Executive Officer)
/s/ Richard P. Beck Vice President, Chief Financial March 11, 1998
- ----------------------- Officer, Assistant Secretary and
Richard P. Beck Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ G. Brent Backman Vice President, Special Projects March 11, 1998
- ----------------------- Assistant Secretary and Director
G. Brent Backman
/s/ Hollis L. Caswell Chief Operating Officer March 11, 1998
- ----------------------- and Director
Hollis L. Caswell
/s/ Elwood Spedden Director March 11, 1998
- -----------------------
Elwood Spedden
/s/ Arthur A. Noeth Director March 11, 1998
- -----------------------
Arthur A. Noeth
62
<PAGE>
EXHIBIT INDEX
2.1 Share Purchase Agreement, dated August 11, 1997, among Roger C. Hertel,
Tower Electronics, Inc. and the Company(1)
3.1 The Company's Restated Certificate of Incorporation(2)
3.2 The Company's By-laws(2)
4.1 Form of Specimen Certificate for the Company's Common Stock(2)
4.2 The Company hereby agrees to furnish to the SEC, 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 Company.
10.1 Master Purchase Order and Sales Agreement, dated January 1, 1990,
between Applied Materials Inc. and the Company(2)+
10.2 Purchase Order and Sales Agreement, dated July 1, 1993, amended
September 16, 1995 between Lam Research Corporation and the Company(2)+
10.3 Purchase Agreement, dated November 1, 1995, between Eaton Corporation
and the Company(3)+
10.4 Amended and Restated Loan and Security Agreement, dated as of November
17, 1995, between Silicon Valley Bank and the Company(2)
10.5 Loan and Security Agreement, dated August 15, 1997, among Silicon Valley
Bank, Bank of Hawaii and the Company(4)
10.6 Loan Agreement dated December 8, 1997, by and among Silicon Valley Bank,
as Servicing Agent and a Bank, and Bank of Hawaii, as a Bank, and the
Company, as borrower
10.7 Equipment Line of Credit, dated July 11, 1994, between Silicon Valley
Bank and the Company(2)
10.8 Master Lease Purchase Agreement, dated January 20, 1989, as amended,
between MetLife Capital Corporation and the Company(2)
10.9 Lease Purchase Agreement, dated June 11, 1992, between MetLife Capital
Corporation and the Company(2)
10.10 Master Equipment Lease, dated July 15, 1993, as amended, between KeyCorp
Leasing Ltd. and Company(2)
10.11 Lease, dated June 12, 1984, amended June 11, 1992, between Prospect Park
East Partnership and the Company for property in Fort Collins,
Colorado(2)
10.12 Lease, dated March 14, 1994, as amended, between Sharp Point Properties,
L.L.C., and the Company for property in Fort Collins, Colorado(2)
10.13 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C. and
the Company for a building in Fort Collins, Colorado(2)
10.14 Form of Indemnification Agreement(2)
10.15 1995 Stock Option Plan, as amended and restated*
10.16 Employee Stock Purchase Plan(2)*
63
<PAGE>
10.17 1995 Non-Employee Directors' Stock Option Plan(2)*
21.1 Subsidiaries of the Company(4)
23.1 Consent of Arthur Andersen LLP, Independent Accountants
24.1 Power of Attorney (included on the signature pages to this Annual Report
on Form 10-K)
27.1 Financial Data Schedule
- ---------------
(1) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 0-26966), dated August 15, 1997, filed August 19, 1997, as
amended.
(2) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-97188), filed September 20, 1995, as amended.
(3) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 (File No. 0-26966), filed March
21, 1997, as amended.
(4) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-34039), filed August 21, 1997, as amended.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
64
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC.
LOAN 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 Term Conversion Option 10
2.4 Overadvances 11
2.5 Interest Rates, Payments, and Calculations 11
2.6 Crediting Payments 12
2.7 Bank Expenses 12
2.8 Additional Costs 12
2.9 Conversion/Continuation of Advances 12
2.10 Additional Requirements/Provisions Regarding LIBOR Rate
Advances or Optional Currency Rate Advances 13
2.11 Term 15
3. CONDITIONS OF LOANS 15
3.1 Conditions Precedent to Initial Advance 15
3.2 Conditions Precedent to all Advances 15
4. REPRESENTATIONS AND WARRANTIES 16
4.1 Due Organization and Qualification 16
4.2 Due Authorization; No Conflict 16
4.3 No Prior Encumbrances 16
4.4 Merchantable Inventory 16
4.5 Litigation 16
4.6 No Material Adverse Change in Financial Statements 16
4.7 Solvency 16
4.8 Regulatory Compliance 16
4.9 Environmental Condition 17
4.10 Taxes 17
4.11 Subsidiaries 17
4.12 Government Consents 17
4.13 Full Disclosure 17
5. AFFIRMATIVE COVENANTS 17
5.1 Good Standing 17
5.2 Government Compliance 18
5.3 Financial Statements, Reports, Certificates 18
5.4 Inventory; Returns 18
5.5 Taxes 18
5.6 Insurance 18
5.7 Quick Ratio 19
5.8 Debt-Tangible Net Worth Ratio 19
5.9 Tangible Net Worth 19
5.10 Profitability 19
5.11 Debt Service Coverage 19
5.12 Further Assurances 19
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6. NEGATIVE COVENANTS 19
6.1 Dispositions 19
6.2 Change in Business or Control 19
6.3 Mergers or Acquisitions 19
6.4 Indebtedness 20
6.5 Encumbrances 20
6.6 Distributions 20
6.7 Investments 20
6.8 Transactions with Affiliates 20
6.9 Subordinated Debt 20
6.10 Compliance 20
7. EVENTS OF DEFAULT 20
7.1 Payment Default 20
7.2 Covenant Default 20
7.3 Material Adverse Change 21
7.4 Attachment 21
7.5 Insolvency 21
7.6 Other Agreements 21
7.7 Judgments 21
7.8 Misrepresentations 21
8. BANKS' RIGHTS AND REMEDIES 21
8.1 Rights and Remedies 21
8.2 Bank Expenses 22
8.3 Remedies Cumulative 22
8.4 Demand; Protest 22
9. NOTICES 22
10. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER 23
11. INTERCREDITOR PROVISIONS 23
11.1 Proportionate Interests 23
11.2 Designation of Service Agent 23
11.3 Resignation 24
11.4 Servicing Agent as Bank 24
11.5 No Agency 24
11.6 No Reliance 24
12. GENERAL PROVISIONS 24
12.1 Successors and Assigns 24
12.2 Indemnification 24
12.3 Time of Essence 24
12.4 Severability of Provisions 24
12.5 Amendments in Writing, Integration 24
12.6 Counterparts 25
12.7 Survival 25
12.8 Confidentiality 25
12.9 Optional Currency Rate Instruments 25
ii
<PAGE>
This LOAN AGREEMENT is entered into as of December 8, 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" or "Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Banks, and Banks
desire to advance credit to Borrower. This Agreement sets forth the terms on
which Banks will lend to Borrower, and Borrower 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:
"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 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.
"Committed Line" means Thirty Million Dollars ($30,000,000).
"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
1
<PAGE>
with respect to undrawn letters of credit issued for the account of that
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" means 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
2
<PAGE>
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.
"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 Borrower, taken as a
whole, to repay the Obligations.
"Maturity Date" means December 7, 2003.
3
<PAGE>
"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.
"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;
4
<PAGE>
(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:
(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.
5
<PAGE>
"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
Borrower.
"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 third
anniversary of the Closing Date.
"Schedule" means the schedule of exceptions attached hereto.
"Servicing Agent" means SVB or such entity as may succeed to
such position.
"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.
6
<PAGE>
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower 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.
"Term Advance" means an Advance converted into a term loan
pursuant to Section 2.3.
"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
Borrower, 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 Borrower 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 lesser of (i)
Twenty Million Dollars ($20,000,000) or (ii) 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). At the request
of Borrower, each of the sublimits of Five Million Dollars ($5,000,000) for
Optional Currency Rate Advances and Foreign Exchange Contracts may be reduced
from time to time, and the sublimit for Advances concurrently increased by
the amount of such reduction, provided that the sum of the sublimits for
Advances, Optional Currency Rate Advances, Letters of Credit and Foreign
Exchange Contracts shall at no time exceed Thirty Million Dollars
($30,000,000), and the sublimits for Optional Currency Rate Advances or
Foreign Exchange Contracts shall not exceed Five Million Dollars ($5,000,000)
each. Each such adjustment shall be in an amount not less than
[Five Hundred Thousand Dollars ($500,000)], and shall be effected by a
written notice delivered to each Bank not later than five (5) Business Days
before the effective date of such adjustment. As a condition to any
adjustment, the Advances, Optional Currency Rate Advances, Letters of Credit
and Foreign Exchange Contracts outstanding on such effective date shall be
within the corresponding sublimits, as adjusted. 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 Borrower desires an Advance,
Borrower 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.
7
<PAGE>
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 Borrower 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 Borrower's deposit account held
by Servicing Agent, as specified by Borrower, or, as to an Advance in an
Optional Currency, to the Borrower's deposit account of Advanced Energy
Industries, K.K., Borrower's wholly-owned Japanese subsidiary, held by the
branch office of BofH in Japan.
Each such notice shall specify:
(i) the date such Advance is to be made, which shall be a
Business Day;
(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 Borrower on behalf of Borrower.
(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 One and One
Quarter of One Percent (1.25%). 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 150 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.
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(e) Prepayment of the Advances. Borrower 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 Borrower 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. 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.
2.1.1 Letters of Credit.
(a) At Borrower's written request, Issuing Bank shall issue
Letters of Credit for Borrower's 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 Borrower's written request and Issuing Bank's standard form of
application, stating (a) the date 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 Five Million
Dollars ($5,000,000). 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, Borrower shall pay to Issuing Bank the
full amount of the drawing so honored, or at Borrower's 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.
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(d) Borrower 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 Borrower 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, Borrower may utilize up
to Five Million Dollars ($5,000,000) for Exchange Contracts, pursuant to
which the Japanese branch office of BofH 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,
Borrower 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, Borrower shall reimburse Banks for any and all
fees, costs and expenses relating thereto or arising in connection therewith.
(c) Borrower 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 Borrower permit the total gross amount of all Exchange
Contracts to which Borrower is a party, outstanding at any one time, to
exceed Five Million Dollars ($5,000,000).
(d) As a condition to requesting any Exchange Contracts, Borrower
shall request each Exchange Contract by written notice to Servicing Agent,
and 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, Borrower will pay all standard fees and
charges of Banks in connection with the Exchange Contracts.
2.3 Term Conversion Option.
(a) Subject to and upon the terms and conditions of this Agreement,
at any time from the date hereof through the Revolving Maturity Date,
Borrower may elect to convert all or any portion of the outstanding Advances
in an aggregate amount not to exceed Ten Million Dollars ($10,000,000) into
Term Advances.
(b) Interest shall continue to accrue on each Term Advance at the
rate applicable prior to the effective date of conversion, and shall continue
to be payable on the seventh day of each calendar month thereafter. Each
Term Advance will be payable in twelve (12) equal
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quarterly installments of principal, beginning on the _____ day of the fiscal
quarter immediately following the date of conversion, and continuing on the
_____ day of each subsequent fiscal quarter.
(c) When Borrower desires to convert an Advance into a Term
Advance, Borrower shall notify Servicing Agent (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 conversion
is to be effected. Such notice shall be in a form reasonably acceptable to
Servicing Agent, and shall be signed by a Responsible Officer or its designee.
(d) Borrower may prepay all or any portion of any Term Advance
without penalty or premium, provided that any prepayment of a Term 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.
2.4 Overadvances. If, at any time or for any reason, the sum of
(i) Advances owed by Borrower 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,
Borrower 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),
Borrower shall immediately pay to BofH the amount of such excess.
2.5 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.5(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 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.
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2.6 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
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.
2.7 Bank Expenses. Borrower 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.
2.8 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 Borrower thereof in
writing. Borrower shall pay to such Bank the amount of such increase in
cost, reduction in income or additional 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 Borrower shall not be
liable for any such amount attributable to any period prior to 180 days prior
to the date of such certificate.
2.9 Conversion/Continuation of Advances.
(a) Borrower 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
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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 Borrower, 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) Borrower shall have complied with such customary procedures
as Banks have established from time to time for Borrower's 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 Borrower 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. Borrower shall
pay to Banks, upon demand by Banks (or Servicing Agent may, at its option,
charge 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.
2.10 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, Borrower shall on
demand by Servicing Agent, pay Servicing 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
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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) Borrower 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 Borrower 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 2.10. Determinations and
allocations by a Bank for purposes of this Section 2.10 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) Borrower 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, Borrower 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 Borrower, 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 Borrower 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 2.10(a)).
2.11 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 Borrower's request,
terminate, and Banks shall execute such terminations of financing statements
as Borrower 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 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) an opinion of Borrower's counsel;
(e) payment of the Bank Expenses then due specified in Section 2.5
hereof, provided reasonably detailed invoices are received; and
(f) 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
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they relate specifically to an 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. REPRESENTATIONS AND WARRANTIES
Each Borrower represents and warrants as follows:
4.1 Due Organization and Qualification. 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.
4.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in 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 Borrower is bound.
Borrower is not 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.
4.3 No Prior Encumbrances. Borrower has good and indefeasible
title to its assets, free and clear of Liens, except for Permitted Liens.
4.4 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
4.5 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.
Borrower has no knowledge of any such pending or threatened actions or
proceedings.
4.6 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower 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 Borrower since the date of the most recent of such
financial statements submitted to Banks.
4.7 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
4.8 Regulatory Compliance. 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 Borrower's failure to comply with ERISA that is
reasonably likely to result in 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"
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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 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. Borrower has complied with all the
provisions of the Federal Fair Labor Standards Act. 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.
4.9 Environmental Condition. None of Borrower's properties or
assets has ever been used by Borrower or any Subsidiary or, to 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 Borrower or any Subsidiary
resulting in the releasing, or otherwise disposing of hazardous waste or
hazardous substances into the environment.
4.10 Taxes. 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.
4.11 Subsidiaries. No Borrower owns any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
4.12 Government Consents. 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.
4.13 Full Disclosure. The representations, warranties and other
statements included in the documents, certificates and written statements
furnished by 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 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 Borrower 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).
5. AFFIRMATIVE COVENANTS
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, Borrower shall do
all of the following:
5.1 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
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in force all licenses, approvals and agreements, the loss of which would have
a Material Adverse Effect.
5.2 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.
5.3 Financial Statements, Reports, Certificates. Borrower 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 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.
Borrower shall deliver to Banks with the quarterly financial statements
a Compliance Certificate signed by a Responsible Officer in substantially the
form of Exhibit B 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.
5.4 Inventory; Returns. Keep all Inventory in good and marketable
condition, free from all material defects. Returns and allowances, if any,
as between 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.
5.5 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.
5.6 Insurance.
(a) Borrower, at its expense, shall keep its assets 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. Borrower shall also maintain
insurance relating to Borrower's ownership and use of its assets in amounts
and of a type that are customary to businesses similar to Borrower's.
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(b) All such policies of insurance shall be in such form, with such
companies, and in such amounts as are reasonably satisfactory to Banks. At a
Bank's request, Borrower 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.
5.7 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 1.75 to 1.00.
5.8 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 0.65 to 1.00.
5.9 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
Sixty Million Dollars ($60,000,000) plus Seventy Five Percent (75%) of
Borrower's quarterly profits beginning December 31, 1998.
5.10 Profitability. On a consolidated basis, have a minimum net
profit of One Dollar ($1.00) for each fiscal quarter, provided Borrower 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 of Tower Electronics, Inc. shall not be included in the
calculation of profitability for the fiscal quarter ending September 30, 1997.
5.11 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, annualized, 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.
5.12 Further Assurances. At any time and from time to time Borrower
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.
6. NEGATIVE COVENANTS
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, Borrower will not do any of the following:
6.1 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.
6.2 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).
6.3 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
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Permitted Investments or to transactions among a Borrower and its
Subsidiaries in which such Borrower is the surviving entity or among its
Subsidiaries.
6.4 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.
6.5 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.
6.6 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), Borrower may repurchase its stock from former employees of
Borrower in accordance with the terms of repurchase or similar agreements
between Borrower and such employees.
6.7 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.
6.8 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
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.
6.9 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.
6.10 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.
7. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event
of Default by Borrower under this Agreement:
7.1 Payment Default. If 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 Borrower of a reasonably detailed invoice on account of such
other Obligations;
7.2 Covenant Default. If 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
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contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between 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 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
Borrower be cured within such twenty (20) day period, and such default is
likely to be cured within a reasonable time, then Borrower 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);
7.3 Material Adverse Change. If there occurs a material adverse
change in the business or financial condition of Borrower, taken as a whole,
or if there is a material impairment of the prospect of repayment of any
portion of the Obligations;
7.4 Attachment. If any material portion of 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 Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of 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 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 Borrower (provided that no Advances
will be required to be made during such cure period);
7.5 Insolvency. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is
commenced against 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);
7.6 Other Agreements. If there is a default in any agreement to
which 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;
7.7 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 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
7.8 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.
8. BANKS' RIGHTS AND REMEDIES
8.1 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 Borrower:
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(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 Borrower under this Agreement or under any other agreement between
Borrower and any Bank; and
(c) Set off and apply to the Obligations any and all (i) balances,
deposits and investments of Borrower held by such Bank, or (ii) indebtedness
at any time owing to or for the credit or the account of 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; and
(e) Without notice to Borrower set off and apply to the Obligations
any and all (i) balances and deposits of Borrower held by a Bank, or (ii)
indebtedness at any time owing to or for the credit or the account of
Borrower held by a Bank.
8.2 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 5.6 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.
8.3 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.
8.4 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.
9. 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 Borrower or to each Bank, as the case may be, at its addresses set forth
below:
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If to : Advanced Energy Industries, Inc.
1625 Sharp Point Drive
Ft. Collins, CO 80525
Attn: Richard Beck
FAX: (970) 221-5583
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.
10. 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. Borrower and Banks hereby submit to the
exclusive jurisdiction of the state and Federal courts located in the County
of Santa Clara, State of California. BORROWER 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.
11. INTERCREDITOR PROVISIONS
11.1 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
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.
11.2 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.
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11.3 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.
11.4 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.
11.5 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.
11.6 No Reliance. The provisions of this Article 11 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.
12. GENERAL PROVISIONS
12.1 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).
12.2 Indemnification. Borrower 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 Borrower 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.
12.3 Time of Essence. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 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.
12.5 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,
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except the provisions of Article 11 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.
12.6 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.
12.7 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
each Bank with respect to the expenses, damages, losses, costs and
liabilities described in Section 12.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against such Bank have run.
12.8 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.
12.9 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.
25
<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:
SILICON VALLEY BANK
By:
Title:
Maximum Commitment Amount:
$15,000,000 (50%)
BANK OF HAWAII
By:
Title:
Maximum Commitment Amount:
$15,000,000 (50%)
26
<PAGE>
EXHIBIT A
LOAN PAYMENT/ADVANCE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS NOON, P.S.T.
TO: SILICON VALLEY BANK, as Servicing Agent
FAX#: (408) 432-3249 TIME: __________
FROM: __________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: __________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE: __________________________________________
PHONE NUMBER: __________________________________________________
FROM ACCOUNT # _________________ TO ACCOUNT # _________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $ ___________________________
PRINCIPAL PAYMENT (ONLY) $ ___________________________
INTEREST PAYMENT (ONLY) $ ___________________________
PRINCIPAL AND INTEREST (PAYMENT) $ ___________________________
OTHER INSTRUCTIONS: ____________________________________________
________________________________________________________________
All representations and warranties of Borrower stated in the
Loan Agreement are true, correct and complete in all material
respects as of the date of the telephone request for and Advance
confirmed by this Borrowing Certificate; provided, however, that
those representations and warranties expressly referring to
another date shall be true, correct and complete in all material
respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment
transfer/loan advance on the advance designated account and is
known to me.
______________________________ _________________
Authorized Requester Phone #
______________________________ _________________
Received By (Bank) Phone #
__________________________________________
Authorized Signature (Bank)
A-1
<PAGE>
EXHIBIT A-1
ADVANCE/CONVERSION REQUEST FORM
The undersigned hereby certifies as follows:
I, ______________ , am the duly elected and acting ______________
of Advanced Energy Industries, Inc.
This certificate is delivered on behalf of Borrower to Silicon Valley
Bank, as Servicing Agent, pursuant to Section 2 of that certain Loan by and
between Borrower and Banks (the "Agreement"). The terms used in this
Borrowing Certificate which are defined in the Agreement have the same
meaning herein as ascribed to them therein.
Borrower hereby requests on ______________, 19___ an Advance (the
"Advance") as follows:
(a) The date on which the Advance is to be made or converted into a
Term Advance is ______________, 19___.
(b) The amount of the Advance is to be ______________
($______________), in the form of a Prime Rate Advance of $______________; a
LIBOR Rate Advance for an Interest Period of ______________ months; an
Optional Currency Rate Advance of an Equivalent Amount of $ ______________ in
[currency type] for an Interest Period of ______________ months.
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of
this request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this Advance Request Form is executed by the
undersigned as of this ______________ day of ______________ , 19___.
ADVANCED ENERGY INDUSTRIES, INC.
By:
Title:
FOR INTERNAL BANK USE ONLY
LIBOR Pricing LIBOR Rate LIBOR Rate Maturity Date
Date Variance
___%
Optional Optional Optional Maturity Date
Currency Currency Rate Currency Rate
Pricing Date Variance
___%
A-2
<PAGE>
EXHIBIT A-2
Optional Currency/LIBOR RATE CONVERSION/CONTINUATION CERTIFICATE
The undersigned hereby certifies as follows:
I, ______________ , am the duly elected and acting ______________
of Advanced Energy Industries, Inc. ("Borrower").
This certificate is delivered on behalf of Borrower to Silicon Valley
Bank, as Servicing Agent, pursuant to Section 2 of that certain Loan
Agreement between Borrower and Banks (the "Agreement"). The terms used in
this Optional Currency/LIBOR Rate Conversion/Continuation Certificate which
are defined in the Agreement have the same meaning herein as ascribed to them
therein.
Borrower hereby requests on ______________ , 19___ a LIBOR Rate Advance
(the "Advance") as follows:
(a) __ (i) A rate conversion of an existing Prime Rate
Advance from a Prime Rate Advance to a LIBOR
Rate Advance; or
__ (ii) A continuation of an existing LIBOR Rate
Advance as a LIBOR Rate Advance; or
__ (iii) A continuation of an existing Optional
Currency Rate Advance as an Optional Currency
Rate Advance.
[Check (i), (ii) or (iii) above]
(b) The date on which the Advance is to be made is ______________ ,
19___.
(c) The amount or the Equivalent Amount of the Advance is to be
______________ ($__________), for an Interest Period of ______________
month(s).
All representations and warranties of Borrower stated in the Agreement
are true, correct and complete in all material respects as of the date of
this request for a loan; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
IN WITNESS WHEREOF, this Optional Currency/LIBOR Rate
Conversion/Continuation Certificate is executed by the undersigned as of this
______________ day of ______________ , 19___.
ADVANCED ENERGY INDUSTRIES, INC.
By:
Title:
FOR INTERNAL BANK USE ONLY
LIBOR Pricing LIBOR Rate LIBOR Rate Maturity Date
Date Variance
___%
Optional Optional Optional Maturity Date
Currency Currency Rate Currency Rate
Pricing Date Variance
___%
A-3
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
BANK OF HAWAII
FROM: ADVANCED ENERGY INDUSTRIES, INC.
The undersigned authorized officer of Advanced Energy Industries, Inc. hereby
certifies that, in accordance with the terms and conditions of the Loan
Agreement between Borrower and Banks (the "Agreement"), (i) Borrower is in
complete compliance for the period ending __________________ with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies
that these are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) and are consistently applied from one period to the next
except as explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
Form 10-K Annually within 5 days Yes No
Form 10-Q Quarterly within 5 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Quarterly Basis:
Minimum Quick Ratio 1.75:1.00 _____:1.0 Yes No
Minimum Tangible Net Worth $60,000,000_/1 $________ Yes No
Maximum Debt - Tangible Net
Worth 0.65:1.00 _____:1.0 Yes No
Profitability
Quarterly $1.00_/2 $________ Yes No
Debt Service Coverage 1.00:1.00 _____:1.00 Yes No
/1 Plus 75% of quarterly net income beginning 12/31/98.
/2 One loss quarter permitted per fiscal year, up to $500,000.
COMMENTS REGARDING EXCEPTIONS: BANK USE ONLY
See Attached.
Received by:
authorized signer
Sincerely,
Date:
Signature
Verified:
authorized signer
Title
Date:
Date
Compliance Status: Yes No
B-1
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Advanced Energy Industries, Inc. and Subsidiaries
LOAN TYPE. This is a Revolving Line of Credit.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital and Equipment Finance.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will
be disbursed until all of Banks' conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Revolving
Line
Amount paid to Borrower $0.0
directly:
Undisbursed Funds $
---------
Principal $30,000,000
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash:
$ Outside Counsel Fees and Expenses (Estimate)
------
Total Charges Paid in Cash $
------
AUTOMATIC PAYMENTS. Borrower hereby authorizes Banks to automatically deduct
the amount of any loan payment from AEI's account no. 351030170 at Silicon
Valley Bank. If the funds in the accounts are insufficient to cover any
payment, Banks shall not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANKS THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN SUCH BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANKS. THIS
AUTHORIZATION IS DATED AS OF ______________ , 1997.
BORROWER:
ADVANCED ENERGY INDUSTRIES, INC.
Authorized Officer
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
BORROWER: Advanced Energy Industries, Inc.
I, the undersigned Secretary or Assistant Secretary of Advanced Energy
Industries, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
Delaware.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation
(or by other duly authorized corporate action in lieu of a meeting), duly
called and held, at which a quorum was present and voting, the following
resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
- ------------------ ------------------ ------------------
- ------------------ ------------------ ------------------
- ------------------ ------------------ ------------------
- ------------------ ------------------ ------------------
- ------------------ ------------------ ------------------
acting for an on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Bank of Hawaii and
Silicon Valley Bank ("Banks"), on such terms as may be agreed upon between
the officers, employees, or agents and Bank, such sum or sums of money as in
their judgment should be borrowed, without limitation, including such sums as
are specified in that certain Loan and Security Agreement dated as of
December 8, 1997 (the "Loan Agreement").
EXECUTE NOTES. To execute and deliver to Banks the promissory note or
notes of the Corporation, on each Bank's forms, at such rates of interest and
on such terms as may be agreed upon, evidencing the sums of money so borrowed
or any indebtedness of the Corporation to Banks, and also to execute and
deliver to Banks one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for one or more of the notes,
or any portion of the notes.
NEGOTIATE ITEMS. To draw, endorse, and discount with Banks all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation or in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Banks, or to
cause such other disposition of the proceeds derived therefrom as they may
deem advisable.
1
<PAGE>
LETTERS OF CREDIT. To execute letter of credit application and other
related documents pertaining to SVB's issuance of letters of credit.
FOREIGN EXCHANGE CONTRACTS. To request any Bank to enter into foreign
exchange contracts on its behalf.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full
force and effect and Banks may rely on these Resolutions until written notice
of their revocation shall have been delivered to and received by Bank. Any
such notice shall not affect any of the Corporation's agreements or
commitments in effect at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the
case may be, and occupy the positions set forth opposite their respective
names; that the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have
not been modified or revoked in any manner whatsoever.
I FURTHER CERTIFY that attached hereto are true and correct copies of
the Certificate of Incorporation and Bylaws of the Corporation.
IN WITNESS WHEREOF, I have hereunto set my hand on _______________ ,
19___ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X
------------------------------
2
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC.
1995 STOCK OPTION PLAN
ADOPTED JUNE 6, 1993
AS AMENDED AND RESTATED SEPTEMBER 20, 1995
AND AS FURTHER AMENDED FEBRUARY 10, 1998
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its
Affiliates, may be given an opportunity to purchase stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company
or its Affiliates, to secure and retain the services of new Employees,
Directors and Consultants, and to provide incentives for such persons to
exert maximum efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Options issued under the Plan shall,
in the discretion of the Board or any Committee to which responsibility for
administration of the Plan has been delegated pursuant to subsection 3(c), be
either Incentive Stock Options or Nonstatutory Stock Options. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section
6, and a separate certificate or certificates will be issued for shares
purchased on exercise of each type of Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections
424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
1
<PAGE>
(e) "COMPANY" means Advanced Energy Industries, Inc., a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated
for such services, provided that the term "Consultant" shall not include
Directors who are paid only a director's fee by the Company or who are not
compensated by the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted
or terminated. The Board, in its sole discretion, may determine whether
Continuous Status as an Employee, Director or Consultant shall be considered
interrupted in the case of: (i) any leave of absence approved by the Board,
including sick leave, military leave, or any other personal leave; or (ii)
transfers between locations of the Company or between the Company, Affiliates
or their successors.
(h) "COVERED EMPLOYEE" means the Chief Executive Officer and the four
(4) other highest compensated officers of the Company.
(i) "DIRECTOR" means a member of the Board.
(j) "DISINTERESTED PERSON" means a Director who either (i) was not
during the one year prior to service as an administrator of the Plan granted
or awarded equity securities pursuant to the Plan or any other plan of the
Company or any of its affiliates entitling the participants therein to
acquire equity securities of the Company or any of its affiliates except as
permitted by Rule 16b-3(c)(2)(i); or (ii) is otherwise considered to be a
"disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other
applicable rules, regulations or interpretations of the Securities and
Exchange Commission.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient
to constitute "employment" by the Company.
(1) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
(m) "FAIR MARKET VALUE" means the value of the common stock as
determined in good faith by the Board and in a manner consistent with Section
260.140.50 of Title 10 of the California Code of Regulations.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of
the Plan.
(s) "OPTIONEE" means an Employee, Director or Consultant who holds an
outstanding Option.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (as defined in
the Treasury regulations promulgated under Section 162(m) of the Code), is
not a former employee of the Company or an affiliated corporation receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an affiliated corporation
at any time, and is not currently receiving compensation for personal
services in any capacity other than as a Director, or (ii) is otherwise
considered an "outside director" for purposes of Section 162(m) of the Code.
(u) "PLAN" means this 1995 Stock Option Plan.
(v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect
to the Plan.
3
<PAGE>
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Options; when and how each Option shall be
granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option; the provisions of each Option granted (which need
not be identical), including the time or times such Option may be exercised
in whole or in part; and the number of shares for which an Option shall be
granted to each such person.
(2) To construe and interpret the Plan and Options granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in
a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan as provided in Section 11.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the
members of which Committee shall be Disinterested Persons and may also be, in
the discretion of the Board, Outside Directors. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board
(and references in this Plan to the Board shall thereafter be to the
Committee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Additionally, prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, and notwithstanding anything to the contrary contained
4
<PAGE>
herein, the Board may delegate administration of the Plan to any person or
persons and the term "Committee" shall apply to any person or persons to whom
such authority has been delegated. Notwithstanding anything in this Section 3
to the contrary, the Board or the Committee may delegate to a committee of
one or more members of the Board the authority to grant Options to eligible
persons who (1) are not then subject to Section 16 of the Exchange Act and/or
(2) are either (i) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such
Option, or (ii) not persons with respect to whom the Company wishes to comply
with Section 162(m) of the Code.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply (i) prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, or (ii) if the Board or the Committee expressly declares that
such requirement shall not apply. Any Disinterested Person shall otherwise
comply with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to Options shall
not exceed in the aggregate four million six hundred twenty-five thousand
(4,625,000) shares of the Company's common stock. If any Option shall for any
reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not purchased under such Option shall
revert to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.
5
<PAGE>
(b) A Director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of the
Director as a person to whom Options may be granted, or in the determination
of the number of shares which may be covered by Options granted to the
Director: (i) the Board has delegated its discretionary authority over the
Plan to a Committee which consists solely of Disinterested Persons; or (ii)
the Plan otherwise complies with the requirements of Rule 16b-3. The Board
shall otherwise comply with the requirements of Rule 16b-3. This subsection
5(b) shall not apply (i) prior to the date of the first registration of an
equity security of the Company under Section 12 of the Exchange Act, or (ii)
if the Board or Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Option if, at the
time of grant, such person owns (or is deemed to own pursuant to Section
424(d) of the Code) stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any of its
Affiliates unless the exercise price of such Option is at least one hundred
ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5)
years from the date of grant.
(d) Subject to the provisions of Section 10 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options
covering more than three hundred thousand (300,000) shares of the Company's
common stock in any calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise)
the substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
6
<PAGE>
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the
stock subject to the Option on the date the Option is granted. The exercise
price of each Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of the stock subject to the Option on
the date the Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii)
at the discretion of the Board or the Committee, either at the time of the
grant or exercise of the Option, (A) by delivery to the Company of other
common stock of the Company, (B) according to a deferred payment or other
arrangement (which may include, without limiting the generality of the
foregoing, the use of other common stock of the Company) with the person to
whom the Option is granted or to whom the Option is transferred pursuant to
subsection 6(d), or (C) in any other form of legal consideration that may be
acceptable to the Board.
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be
interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option
shall not be transferable except by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order satisfying
the requirements of Rule 16b-3 and the rules thereunder (a "QDRO"), and shall
be exercisable during the lifetime of the person to whom the Option is
granted only by such person or any transferee pursuant to a QDRO. The person
to whom the Option is granted may, by delivering written notice to the
Company, in a form satisfactory to
7
<PAGE>
the Company, designate a third party who, in the event of the death of the
Optionee, shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period,
and may be exercised with respect to some or all of the shares allotted to
such period and/or any prior period as to which the Option became vested but
was not fully exercised. The Option may be subject to such other terms and
conditions on the time or times when it may be exercised (which may be based
on performance or other criteria) as the Board may deem appropriate. The
vesting provisions of individual Options may vary but in each case will
provide for vesting of at least twenty percent (20%) per year of the total
number of shares subject to the Option. The provisions of this subsection
6(e) are subject to any Option provisions governing the minimum number of
shares as to which an Option may be exercised.
(f) SECURITIES LAW COMPLIANCE. The Company may require any Optionee, or
any person to whom an Option is transferred under subsection 6(d), as a
condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced
in financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits
and risks of exercising the Option; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the stock
subject to the Option for such person's own account and not with any present
intention of selling or otherwise distributing the stock. The foregoing
requirements, and any assurances given pursuant to such requirements, shall
be inoperative if (i) the issuance of the shares upon the exercise of the
Option has been registered under a then currently effective registration
statement under the Securities Act
8
<PAGE>
of 1933, as amended (the "Securities Act"), or (ii) as to any particular
requirement, a determination is made by counsel for the Company that such
requirement need not be met in the circumstances under the then applicable
securities laws. The Company may, upon advice of counsel to the Company,
place legends on stock certificates issued under the Plan as such counsel
deems necessary or appropriate in order to comply with applicable securities
laws, including, but not limited to, legends restricting the transfer of the
stock.
(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that
the Optionee was entitled to exercise it at the date of termination) but only
within such period of time ending on the earlier of (i) the date three (3)
months after the termination of the Optionee's Continuous Status as an
Employee, Director or Consultant (or such longer or shorter period, which in
no event shall be less than thirty (30) days, specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in
the Option Agreement. If, after termination, the Optionee does not exercise
his or her Option within the time specified in the Option Agreement, the
Option shall terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.
(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination (or such longer or
shorter period, which in no event shall be less than six (6) months,
specified in the Option Agreement), or (ii) the expiration of the term of the
Option as set forth in the Option Agreement. If, at the date of termination,
the Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to and again
become available for issuance under the Plan. If, after termination,
9
<PAGE>
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option
shall revert to and again become available for issuance under the Plan.
(i) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option after the termination of,
the Optionee's Continuous Status as an Employee, Director or Consultant, the
Option may be exercised (to the extent the Optionee was entitled to exercise
the Option at the date of death) by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant
to subsection 6(d), but only within the period ending on the earlier of (i)
the date eighteen (18) months following the date of death (or such longer or
shorter period, which in no event shall be less than six (6) months,
specified in the Option Agreement), or (ii) the expiration of the term of
such Option as set forth in the Option Agreement. If, at the time of death,
the Optionee was not entitled to exercise his or her entire Option, the
shares covered by the unexercisable portion of the Option shall revert to and
again become available for issuance under the Plan. If, after death, the
Option is not exercised within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(j) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company,
with the repurchase price to be equal to the original purchase price of the
stock, or to any other restriction the Board determines to be appropriate;
provided, however, that (i) the right to repurchase at the original purchase
price shall lapse at a minimum rate of twenty percent (20%) per year over
five (5) years from the date the Option was granted, and (ii) such right
shall be exercisable only within (A) the ninety (90) day period following the
termination of employment or
10
<PAGE>
the relationship as a Director or Consultant, or (B) such longer period as
may be agreed to by the Company and the Optionee (for example, for purposes
of satisfying the requirements of Section 1202(c)(3) of the Code (regarding
"qualified small business stock")), and (iii) such right shall be exercisable
only for cash or cancellation of purchase money indebtedness for the shares.
Should the right of repurchase be assigned by the Company, the assignee shall
pay the Company cash equal to the difference between the original purchase
price and the stock's Fair Market Value if the original purchase price is
less than the stock's Fair Market Value.
(k) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax
withholding obligation relating to the exercise of such Option by any of the
following means or by a combination of such means: (1) tendering a cash
payment; (2) authorizing the Company to withhold shares from the shares of
the common stock otherwise issuable to the participant as a result of the
exercise of the Option; or (3) delivering to the Company owned and
unencumbered shares of the common stock of the Company.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the Options, the Company shall keep available
at all times the number of shares of stock required to satisfy such Options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Options; provided,
however, that this undertaking shall not require the Company to register
under the Securities Act either the Plan, any Option or any stock issued or
issuable pursuant to any such Option. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such
Options unless and until such authority is obtained.
8. USE OF PROCEEDS FROM STOCK.
11
<PAGE>
Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.
9. MISCELLANEOUS.
(a) Neither an Optionee nor any person to whom an Option is transferred
under subsection 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such Option
unless and until such person has satisfied all requirements for exercise of
the Option pursuant to its terms.
(b) Throughout the term of any Option, the Company shall deliver to the
holder of such Option, not later than one hundred twenty (120) days after the
close of each of the Company's fiscal years during the Option term, a balance
sheet and an income statement. This section shall not apply when issuance is
limited to key employees whose duties in connection with the Company assure
them access to equivalent information.
(c) Nothing in the Plan or any instrument executed or Option granted
pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate
or to continue acting as a Director or Consultant or shall affect the right
of the Company or any Affiliate to terminate the employment or relationship
as a Director or Consultant of any Employee, Director, Consultant or Optionee
with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by any Optionee during
any calendar year under all plans of the Company and its Affiliates exceeds
one hundred thousand dollars ($100,000), the Options or portions thereof
which exceed such limit (according to the order in which they were granted)
shall be treated as Nonstatutory Stock Options.
(e) (1) The Board or the Committee shall have the authority to effect,
at any time and from time to time (i) the repricing of any outstanding
Options under the Plan and/or (ii) with the consent of the affected holders
of Options, the cancellation of any outstanding Options and the
12
<PAGE>
grant in substitution therefor of new Options under the Plan covering the
same or different numbers of shares of Common Stock, but having an exercise
price per share not less than eighty-five percent (85%) of the Fair Market
Value (one hundred percent (100%) of the Fair Market Value in the case of an
Incentive Stock Option or, in the case of a ten percent (10%) stockholder (as
defined in subsection 5(c)), not less than one hundred and ten percent (110%)
of the Fair Market Value) per share of Common Stock on the new grant date.
(2) Shares subject to an Option canceled under this subsection 9(e)
shall continue to be counted against the maximum award of Options permitted
to be granted pursuant to subsection 5(d) of the Plan. The repricing of an
Option under this subsection 9(e), resulting in a reduction of the exercise
price, shall be deemed to be a cancellation of the original Option and the
grant of a substitute Option; in the event of such repricing, both the
original and the substituted Options shall be counted against the maximum
awards of Options permitted to be granted pursuant to subsection 5(d) of the
Plan. The provisions of this subsection 9(e) shall be applicable only to the
extent required by Section 162(m) of the Code.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Option (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or otherwise), the Plan will be appropriately
adjusted in the class(es) and maximum number of shares subject to the Plan
pursuant to subsection 4(a) and the maximum number of shares subject to award
to any person during any calendar year pursuant to subsection 5(d), and the
outstanding Options will be appropriately adjusted in the class(es) and
number of shares and price per share of stock subject to such outstanding
Options.
(b) In the event of: (1) a merger or consolidation in which the Company
is not the surviving corporation or (2) a reverse merger in which the Company
is the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are
13
<PAGE>
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise then to the extent permitted by applicable law:
(i) any surviving corporation shall assume any Options outstanding under the
Plan or shall substitute similar Options for those outstanding under the
Plan, or (ii) such Options shall continue in full force and effect. In the
event any surviving corporation refuses to assume or continue such Options,
or to substitute similar options for those outstanding under the Plan, then
such Options shall be terminated if not exercised prior to such event. In the
event of a dissolution or liquidation of the Company, any Options outstanding
under the Plan shall terminate if not exercised prior to such event.
11. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(1) Increase the number of shares reserved for Options under the
Plan;
(2) Modify the requirements as to eligibility for participation in
the Plan (to the extent such modification requires stockholder approval in
order for the Plan to satisfy the requirements of Section 422 of the Code); or
(3) Modify the Plan in any other way if such modification requires
stockholder approval in order for the Plan to satisfy the requirements of
Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments
to the Plan intended to satisfy the requirements of Section 162(m) of the
Code and the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
14
<PAGE>
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Optionees with
the maximum benefits provided or to be provided under the provisions of the
Code and the regulations promulgated thereunder relating to Incentive Stock
Options and/or to bring the Plan and/or Incentive Stock Options granted under
it into compliance therewith.
(d) Rights and obligations under any Option granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.
12. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on June 5, 2003 which shall be
within ten (10) years from the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) Rights and obligations under any Option granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of
the Plan, except with the consent of the person to whom the Option was
granted.
13. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan
has been approved by the stockholders of the Company, which approval shall be
within twelve (12) months before or after the date the Plan is adopted by the
Board, and, if required, an appropriate permit has been issued by the
Commissioner of Corporations of the State of California.
15
<PAGE>
Exhibit 23.1
[LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement File Nos. 333-01616, 333-04073 and 333-46705.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado,
March 24, 1998.
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