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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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, 1998.
[ ] 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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 [ ].
As of February 28, 1999, there were 26,891,782 shares of the Registrant's
Common Stock outstanding and the aggregate market value of such stock held by
non-affiliates of the Registrant was $187,896,720.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting
of stockholders to be held on May 5, 1999 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
<TABLE>
<S> <C>
PART I
ITEM 1. BUSINESS 4
EXECUTIVE OFFICERS OF THE REGISTRANT 28
ITEM 2. PROPERTIES 29
ITEM 3. LEGAL PROCEEDINGS 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 29
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 30
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 32
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 49
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES 71
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 72
ITEM 11. EXECUTIVE COMPENSATION 72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 72
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 72
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 73
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Advanced Energy is a leading supplier of power conversion and control
systems incorporated in plasma-based thin film production equipment. The
Company's systems are key elements of semiconductor, data storage, flat panel
display, and a range of other industrial manufacturing equipment that utilize
gaseous plasmas to deposit or etch thin film layers on materials or
substrates such as silicon, glass and metals. The effectiveness of
plasma-based production processes depends largely on the quality of the
electrical power used to ignite and manipulate the plasma. The Company's
power conversion and control systems refine, modify and control the raw power
from a utility and produce power which is uniform, predictable and precisely
repeatable to permit the production of identical films of unvarying thickness
on a mass scale. Customer applications of the Company's systems include 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 non thin film applications such as modems and
non-impact printers. The technology of these processes is used in a broad
range of applications such as the production of semiconductors, magnetic
hard disks, CD-ROMs, audio and video discs, thin film heads, liquid crystal
displays and optical, glass and automobile coatings. The Company's customers
include Applied Materials, Lam Research, Balzers, Eaton, Intevac, Multi-Arc,
Novellus, Singulus Technologies and Ulvac Technologies.
The Company seeks to expand its product offerings and customer base. In
August 1997, the Company acquired Tower Electronics, Inc. ("Tower"). This
acquisition expanded the Company's technology and customer base, and provided
the Company with the capability to design and manufacture power conversion
systems for use in modems, non-impact printers, night vision goggles and
laser devices. Representative customers of these systems include U.S.
Robotics, Videojet Systems International and ITT.
Another step in achieving further market penetration was taken in
September 1998 when the Company acquired the assets of Fourth State
Technology, Inc. ("FST"). This acquisition provided the Company with the
capability to design and manufacture power-related process control systems
used to monitor and analyze data in thin film processes.
In October 1998, the Company acquired RF Power Products, Inc. ("RFPP"),
which designs, manufactures and markets radio frequency (RF) power conversion
and control systems consisting of generators and matching networks. This
acquisition expanded the Company's existing product line of RF generators and
matching networks. Generators provide radio frequency power and matching
networks provide the power flow control to the customers' equipment. The
Company sells these products principally to semiconductor capital equipment
manufacturers. The Company also sells similar systems
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to capital equipment manufacturers in the flat panel display and thin film
disk media industries. The Company is exploring applications for these
products in other industries, including medical and surgical instrumentation,
food processing and preparation and materials processing.
Since inception, the Company has sold over 100,000 power conversion and
control systems. Sales to customers in the semiconductor capital equipment
industry constituted 59% of the Company's sales in 1997 and 49% in 1998. The
Company sells its systems primarily through direct sales personnel to
customers in the United States, Europe and Asia, and through distributors in
China, France, Israel, Italy, Japan, Singapore, Sweden and Taiwan.
International sales represented 23% of the Company's sales in 1997 and 28% in
1998.
DEVELOPMENT OF COMPANY BUSINESS
Advanced Energy was incorporated in Colorado in 1981 and reincorporated
in Delaware in September 1995. In November 1995, Advanced Energy effected the
initial public offering of its Common Stock. 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; 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 introduced its first direct current (DC)
system designed for use in physical vapor deposition (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. This theme was carried further with the introduction of the Pinnacle
series of DC-based systems in 1995. In the early 1990's the Company
introduced the first fully switchmode RF power conversion and control systems
for use in semiconductor etch applications. This product achieved significant
design wins because of its smaller size and the ability to provide more
precise control. During 1998 the Company developed the APEX series of RF
systems which use new technology to further reduce size and extend the
frequency and power range of the Company's RF product line. 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 products in these
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product families range in price from $1,500 to $80,000, with an average price
of approximately $9,200.
As a result of the Tower acquisition in August 1997, the Company expanded
its product line to include low-power DC power conversion systems for use in
telecommunications and other industrial applications. These power conversion
systems range in power from 50 watts to 600 watts and have an average selling
price of approximately $500.
As a result of the RF Power Products acquisition in October 1998, the
Company expanded its product line of RF generators and matching networks.
Solid-state generators are presently available for power requirements of up
to 5,000 watts and are sold primarily to capital equipment manufacturers in
the semiconductor equipment, flat panel, thin film, and analytical equipment
markets. Tube-type generators are available at power levels from 10,000 to
30,000 watts and are primarily sold to capital equipment manufacturers in the
film disc media market. RF matching networks are systems composed primarily
of variable inductors and capacitors with application-specific circuits that
can be designed to a customer's specific power requirements. The Company's RF
generators and matching networks have average selling prices similar to the
Company's switchmode and DC products.
Also in 1998 the Company acquired substantially all of the assets of FST,
a developer and producer of advanced RF measurement products and process
control systems.
The following chart sets forth the Company's principal product lines and
related basic information:
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<TABLE>
<CAPTION>
- --------------------- ---------------- ---------------------- --------------------- ------------------------
Product Power/Current Major Process
Platform Description Level Applications
- --------------------- ---------------- ---------------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
MDX Power control and 500W-80kW PVD
conversion system - Metal sputtering
- Reactive sputtering
---------------- ---------------------- --------------------- ------------------------
DIRECT MDX II Power control and 15kW-120kW PVD
conversion system - Metal sputtering
CURRENT - Reactive sputtering
---------------- ---------------------- --------------------- ------------------------
Pinnacle-TM- Power control and 6kW-120kW PVD
PRODUCTS conversion system - Metal sputtering
- Reactive sputtering
---------------- ---------------------- --------------------- ------------------------
Sparc-le Arc management 1kW-60kW For use with MDX
-Registered accessory systems -- permits
Trademark- precise control of
reactive sputtering of
insulating films
---------------- ---------------------- --------------------- ------------------------
E-Chuck Electrostatic chuck Less than 100W General wafer handling
power system in semiconductor PVD,
CVD, and etch
applications
- --------------------- ---------------- ---------------------- --------------------- ------------------------
HIGH-POWER Astral-TM- - 20 Pulsed DC power 20kW PVD
system - Metal sputtering
- Reactive sputtering
---------------- ---------------------- --------------------- ------------------------
PRODUCTS Astral-TM- - 120 Pulsed DC power 120kW PVD
system - Reactive sputtering
---------------- ---------------------- --------------------- ------------------------
Crystal-TM- Multizone induction 120kW Semiconductor epitaxy
heating power system
- --------------------- ---------------- ---------------------- --------------------- ------------------------
PE and PE-II Low-frequency 1.25kW-30kW CVD
LOW- AND MID- power control and PVD
conversion system - Reactive sputtering
FREQUENCY Surface modification
---------------- ---------------------- --------------------- ------------------------
PD Mid-frequency 1.25kW-8kW CVD
PRODUCTS power control and PVD
conversion system - Reactive sputtering
Surface modification
---------------- ---------------------- --------------------- ------------------------
LF Low-frequency 500W-1kW Etch
power control and PVD
conversion system
- --------------------- ---------------- ---------------------- --------------------- ------------------------
HFV Power control and 3kW-8kW PVD
conversion system Etch
---------------- ---------------------- --------------------- ------------------------
RADIO RFX Power control and 600W General R&D
conversion system
---------------- ---------------------- --------------------- ------------------------
FREQUENCY RFG Power control and 600W-5.5kW Etch
conversion system CVD
---------------- ---------------------- --------------------- ------------------------
PRODUCTS RFXII Power control and 600W-5.5kW Etch
conversion system CVD
---------------- ---------------------- --------------------- ------------------------
APEX-TM- Power control and 1000W-10kW Etch
conversion system CVD
---------------- ---------------------- --------------------- ------------------------
AZX, VZX, Tuner 100W-5kW Impedance matching
SwitchMatch-TM- network
---------------- ---------------------- --------------------- ------------------------
RF Power control and 500W-3kW Etch
conversion system CVD
---------------- ---------------------- --------------------- ------------------------
Hercules-TM- Power control and 10kW-30kW PVD
conversion system
---------------- ---------------------- --------------------- ------------------------
Atlas-TM- Power control and 1.5kW-5kW Etch
conversion system
---------------- ---------------------- --------------------- ------------------------
Mercury-TM- Tuner 500W-10kW Impedance matching
network
---------------- ---------------------- --------------------- ------------------------
FTMS Tuner 2kW-5kW Impedance matching
network
- --------------------- ---------------- ---------------------- --------------------- ------------------------
OTHER Gen-Cal-TM- RF power measurement 50W-3kW Generator diagnostic
tool
---------------- ---------------------- --------------------- ------------------------
RF-EP RF probe 50W-5kW End-point detection
system
---------------- ---------------------- --------------------- ------------------------
PRODUCTS Z-Scan-TM- RP probe 50W-5kW Impedance measurement
tool
---------------- ---------------------- --------------------- ------------------------
RF-MS RF metrology system 5W-5kW Plasma diagnostic tool
---------------- ---------------------- --------------------- ------------------------
ID Ion-beam conversion 500W-5kW Ion-beam deposition
and control system Ion implantation
Ion-beam etching/milling
---------------- ---------------------- --------------------- ------------------------
E'Wave-TM- Bi-polar 400W-8kW Electroplating copper
electroplating onto a wafer
- --------------------- ---------------- ---------------------- --------------------- ------------------------
</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
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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, 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-TM- PLATFORM. The Pinnacle platform, 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 the Company's DC 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.
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.
ASTRAL-TM- PRODUCTS. The Astral products, made in both 20kW and 120kW
versions, offer a new technology, called "current pulsed dual magnetron
sputtering." The first of these units is in experimental use in development
of coatings for CRT displays, automotive applications, and new types of glass
coatings.
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CRYSTAL-TM-. The Crystal 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 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 result in an undesirable 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 as many as 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 PE-II systems
are water cooled and produce 10kW at 40kHz. 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 cost-effective
single-stage power generation, and include systems with pulsed power
technology.
LF GENERATORS. The LF low-frequency generators were introduced to the
Company as a result of the acquisition of RF Power Products. The LF-5 is a
500W unit and the LF-10 is a 1kW unit. Both of these units are
variable-frequency, microprocessor-controlled systems. With a frequency range
extending from 50kHz to 460kHz, these generators are a good complement to the
PD and PE series.
RADIO FREQUENCY PRODUCTS
HFV POWER GENERATOR. The HFV power generator produces 3, 5, or 8kW of
power at a variable frequency of about 2MHz for powering 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 at these frequencies.
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
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development applications. The RFG and RFXII, introduced in the early 1990s,
are water-cooled power conversion and control systems utilizing a hybrid
switchmode technology. The RFG and RFXII systems operate at frequencies
ranging from 4MHz to 13.56MHz. These systems were the first fully switchmode
RF designs. These RF systems are most commonly used in semiconductor
processes, including RF sputtering, plasma etching/deposition, and reactive
ion etching applications.
During 1998 the Company developed the APEX series of power control and
conversion systems, which have the highest power density ever produced at RF
frequencies. One APEX unit produces 10kW at 13.56MHz in a 5-1/4 inch rack
mount enclosure. Another APEX unit produces 5.5 kW in a 5x7.5x15 inch
enclosure, and still another produces 3kW in the same enclosure but includes
a switchable matching network and a voltage-current (V-I) probe measurement
system in the package. The APEX line includes power conversion systems which
produce 1,2,4 and 8kW at 27.12MHz.
The RF-5, RF-10, RF-20, and RF-30 units generate power between 500W and
3kW. These units are available at 13.56 and 27.12MHz. These units are being
replaced in new applications with either the Atlas or APEX power systems.
THE ATLAS-TM- SERIES. The Atlas power systems were introduced in 1998.
These systems currently range in power from 1.5kW to 5kW at nominal
frequencies of 13.56 and 27.12MHz. These units complement the Company's new
APEX series. For a number of applications, the ability to sweep the frequency
about the nominal center frequency provides significant advantages to the
customer. Now, the customer can choose to have either the compact package of
the fixed-frequency APEX, or, where required, the frequency agility of the
Atlas systems.
THE HERCULES-TM- SERIES. The new Hercules series was introduced in 1998.
These power generation systems range in power from 10kW to 30kW at 13.56 and
27.12MHz. These units employ a solid state front end with tube technology for
the high-power output stage.
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 VZX series
tuners, introduced in 1998, are digital automatic impedance matching networks
which utilize a predictive algorithm to provide tuning speeds up to three
times faster than the older AZX series. SwitchMatch-TM- networks, also
introduced by the Company in 1998, are selectable fixed matching units, which
the Company offers both as part of APEX systems and as standalone products.
THE MATCHING NETWORK SERIES. The mechanical matching networks are
available in power handling capabilities up to 30kW. These matching networks
are extremely compact, utilizing two ceramic envelope vacuum variable
capacitors. The modular
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construction of the matching networks allows rapid customization without the
delays usually encountered in custom design. Since most applications require
custom refinements for optimum performance, this feature has benefited the
Company greatly in achieving numerous design wins. In 1998, the Company
introduced the FTMS (Frequency Transformation Matching System), which is a
solid state matching network with no moving parts. This system is used in
conjunction with the Company's Atlas generators. The FTMS is available in
power levels up to 5kW.
OTHER PRODUCTS
THE RF-EP END-POINT DETECTION SYSTEM. The RF-EP reduces length of time
to end-point on CVD and etch chambers in comparison to optical detection.
This system uses one of three signals (voltage, current or phase) to
precisely and accurately detect end-point. The RF-EP also greatly reduces the
level of greenhouse emissions by consuming less process gas.
THE Z- Scan-TM- VOLTAGE-CURRENT (V-I) PROBE. This unit, first delivered
in 1998, replaces the RFZ impedance probe introduced in 1993. Z-Scan measures
the RF properties of a plasma process and provides condensed information
through its Z-Ware software. The sensing technology incorporated in Z-Scan
probe allows accurate, real-time measurement of power, voltage, current and
impedance levels at both fundamental and harmonic frequencies, under actual
powered process conditions. Such measurements can not only help the Company's
customers design their process systems, but can be used as sensitive
detectors of process conditions, including etch endpoint.
THE RF-MS DIAGNOSTIC SYSTEM. The RF-MS simultaneously performs
end-point and excursion detection for multiple CVD chambers. Additionally,
the system's software monitors the long-term transients in the process tool
performance such as wet clean and transition in the film stress. The RF-MS
has demonstrated significant cost savings through improved wafer yields,
reduced particle contamination and higher throughput.
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.
THE E'WAVE-TM-. The E'Wave is designed for the semiconductor industry
for electroplating copper onto a wafer. The power supply can produce up to
four channels of multi-step, bi-polar, square waveforms. Each channel can
produce 400W continuous and up to 2kW peak, for a total supply output of
1.6kW continuous and 8kW peak.
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MARKETS AND CUSTOMERS
MARKETS
Sales to customers in the semiconductor capital equipment industry
represented 59% of the Company's sales 1997 and 49% in 1998. Increasingly,
the Company's power conversion and control systems are being used in markets
other than the semiconductor capital equipment industry, 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 sells its
products primarily to semiconductor equipment manufacturers for incorporation
into equipment used to make integrated circuits. The Company's products are
currently used in a variety of applications including deposition, etch, ion
implantation and megasonic cleaning. The precise 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 capital equipment industry will continue to be a substantial
part of its business for the foreseeable future.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT MARKET. The Company also
sells its systems to manufacturers of flat panel displays (FPDs) and flat
panel projection devices (FPPs) 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 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
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diamond coatings and other materials are currently applied to products in
plasma-based processes to strengthen and harden surfaces on such diverse
products as tools, automotive parts and hip joint replacements. Other thin
film processes that use the Company's products also enable a variety of
industrial packaging applications, such as decorative wrapping and food
packaging. 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 make 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 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. Tower also provides products to the largest manufacturer of
non-impact printers used for printing date codes and lot information on
beverage cans.
APPLICATIONS
The Company's products have been sold for use in connection with the
following processes and applications:
<TABLE>
<CAPTION>
Semiconductor Data Storage Flat Panel Display Industrial/Research
------------- ------------ ------------------ --------------------
<S> <C> <C> <C>
Physical vapor deposition Thin film heads Liquid crystal displays Optical coatings
Etching CD-ROMs Active matrix LCDs Automobile coatings
Ion implantation Audio discs Digital micro-mirror Food package coatings
Chemical vapor deposition Recordable CDs Plasma displays Glass coatings
(metal and dielectric) Hard disk magnetic media Large flat panel displays Consumer products coatings
Plasma-enhanced CVD Hard disk carbon wear coatings Field emission displays Circuit board etch-back and de-smear
Magnet field controls Magneto-optic CDs LCD projection Photovoltaics
Photo-resist stripping Digital video discs (DVD) Medical applications
Megasonic cleaning Superconductors
Etch (post-treatment) Diamond-like coatings
HDP-CVD 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, measurement, and control
systems. The Company's largest customers are involved principally in the
semiconductor capital equipment market. The Company also has significant
customers in the data storage equipment, flat panel display equipment and
industrial markets. Sales to Applied Materials, Lam Research, and Balzers
accounted in the aggregate for 47% of the Company's total sales in each of
1996 and 1997 and 40% in 1998. The Company expects that sales of its products
to these three customers will continue to account for a high percentage of
its sales in the foreseeable future. Representative customers of the Company
include:
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<TABLE>
<S> <C>
Alcatel Comptech Mattson Technologies
Applied Materials Motorola
Balzers Novellus
CVC Products Optical Coating Laboratory
First Light Technology PlasmaTherm
Fujitsu Sony
Hewlett-Packard Sputtered Films
IBM Texas Instruments
Intevac Ulvac Technologies
Komag U.S. Robotics
Lam Research Verteq
Materials Research Division of Tokyo Electron, Ltd. Videojet International
</TABLE>
MARKETING, SALES AND SERVICE
The Company sells its systems primarily through direct sales personnel to
customers in the United States, Japan and Europe. The Company's sales
personnel are located at the Company's headquarters in Fort Collins,
Colorado, and in regional sales offices in Voorhees, New Jersey; 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; Dorking, United Kingdom; and Seoul, South
Korea; which have primary responsibility for sales in their respective
markets. The Company also has distributors and sales representatives in
China, France, Israel, Italy, Japan, Singapore, Sweden and Taiwan. Tower,
which is located in Fridley, Minnesota, sells through manufacturers'
representatives.
Sales outside the United States represented approximately 22% of the
Company's total sales during 1996 and 23% in 1997. Such sales represented 28%
of the Company's total sales in 1998. 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
involving 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; Voorhees, New Jersey;
Milpitas, California; Tokyo, Japan; Filderstadt,
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Germany; Dorking, United Kingdom; and Seoul, South Korea. Tower maintains a
customer service office 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; Austin, Texas; Voorhees, New Jersey; 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 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 sixteen United States
patents and four foreign patents covering various aspects of its products,
and has other patent 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.
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Although the Company has not been notified of any infringement by its
products of any patents or proprietary rights of others, there can be no
assurance that such infringements do not exist or will not occur in the
future. Litigation may be necessary in the future to enforce patents issued
to the Company, to protect trade secrets or know-how owned by the Company, to
defend the Company against claimed infringement of the rights of others or to
determine the scope and validity of the proprietary rights of others. Any
such litigation could result in substantial cost and diversion of effort by
the Company, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, adverse
determinations in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent
the Company from manufacturing or selling its products, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION
The markets the Company serves are highly competitive and characterized
by rapidly evolving technology. Significant competitive factors in the
Company's markets include product performance, price, quality and reliability
and level of customer service and 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 depends 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, Huettinger, Shindingen,
Kyosan, 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.
OPERATING SEGMENT
The Company operates and manages its business of supplying power
conversion and control systems as one segment.
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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 $17.3 million in 1996, $19.3
million in 1997 and $23.8 million in 1998. Such expenses represented 13.3% of
the Company's total sales in 1996, 11.0% in 1997 and 19.1% in 1998. The
Company believes that continued research and development investment and
ongoing development of new products are essential to the expansion of its
markets and does not expect any significant decline in spending in dollar
terms.
NUMBER OF EMPLOYEES
At December 31, 1998, the Company had a total of 876 employees, of whom
858 are full-time continuous employees. There is no union representation of
the Company's employees, 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
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. The Company
believes such fluctuations are affected by a variety of factors, including
the following:
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- The Company's sales often are subject to its customers' production
schedules because the Company is a supplier of subsystems;
- The Company operates with a low level of backlog, which at any point
is not sufficient to meet its revenue expectations for a particular
quarter, because it makes a substantial and increasing proportion of
its shipments on a "just-in-time" basis (meaning that it ships systems
within a few days or hours after receiving the order); and
- it is difficult for the Company to predict accurately the timing and
level of revenues for a particular quarter because orders generally
are subject to cancellation or delay at the customer's option without
penalty.
Fluctuations in the Company's quarterly revenues can result from factors such
as:
- specific economic conditions in the semiconductor and semiconductor
capital equipment industries and other industries in which the
Company's customers operate;
- the timing of orders from major customers;
- customer cancellations and 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, experience pressure to reduce costs. This causes
the Company's customers to exert pressure on the Company to reduce prices,
shorten delivery times, and extend payment terms, all of which could lead to
significant changes in revenue and operating margins from quarter to quarter.
Fluctuations in the Company's gross profit and operating income in a
particular quarter can result from factors such as:
- product mix
- price changes
- outsourcing costs
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- manufacturing efficiencies
- costs incurred by responding to specific feature requests by customers
Generally, these factors have caused the Company's quarterly operating results
to fluctuate significantly. In the past eight quarters:
- Revenue has fluctuated between $22.6 million (fourth quarter of 1998)
and $56.1 million (fourth quarter of 1997);
- Gross profit has fluctuated between $6.6 million (fourth quarter of
1998) and $21.2 million (fourth quarter of 1997);
- Gross margin has fluctuated between 26.6% (second quarter of 1998) and
39.9% (third quarter of 1997);
- Operating income (loss) has fluctuated between a loss of $5.6 million
(fourth quarter of 1998) to an income of $8.8 million (fourth quarter
of 1997); and
- Operating income (loss) as a percentage of revenues has fluctuated
between a 24.9% loss (fourth quarter of 1998) to a 15.6% income
(fourth quarter of 1997).
The Company expects its quarterly operating results to continue to
fluctuate. In particular, as the Company expands its manufacturing capacity,
it may incur manufacturing overhead and other costs before it can fully
utilize the additional capacity. Further, the Company often requires long
lead times for production of its systems, during which it must expend
substantial funds and management effort. As a result, the Company may incur
significant development and other expenses without realizing corresponding
revenue in the same quarter. In addition, many of the Company's expenses,
which are based in part on expectations of future revenue, are fixed.
Accordingly, if revenue levels in a particular quarter do not meet
expectations, operating results could be disproportionately adversely
affected. When the semiconductor capital equipment market went through a
significant downturn in 1996, the Company's operating results were severely
impacted, which in turn caused the market price of the Company's common stock
to fall. When the Asian financial crisis began to affect the semiconductor
capital equipment market during the fourth quarter of 1997, and when that
market entered another severe downturn that continued throughout 1998, the
Company's operating results and market price of common stock were severely
impacted again. Further fluctuations in operating results on a quarterly
basis could have a material adverse effect on the market price of the
Company's common stock.
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THE SEMICONDUCTOR AND SEMICONDUCTOR EQUIPMENT INDUSTRIES ARE HIGHLY VOLATILE
Sales to customers in the semiconductor capital equipment industry
accounted for 62% of the Company's total sales in 1996, 59% in 1997, and 49%
in 1998. The Company expects that it will continue to depend significantly on
the semiconductor and semiconductor capital equipment industries for the
foreseeable future. The Company's business largely depends 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. During
downturns, a number of the Company's customers, including Applied Materials
and Lam Research, have drastically reduced their orders from the Company and
have implemented substantial cost reduction programs, including reductions in
workforce. Because the Company supplies subsystems to equipment manufacturers
and makes a substantial and increasing proportion of its shipments on a
just-in-time basis, events that may occur with limited advance notice, such
as a rapid drop in demand for the Company's products from a particular
customer, can adversely impact the Company. Failure to respond promptly to
these events can reduce the Company's operating results. In addition, the
Company has observed that downturns in the semiconductor industry can more
negatively affect semiconductor capital equipment manufacturers and their
suppliers than device manufacturers. In August 1998, in response to a
slowdown in the semiconductor and semiconductor capital equipment industries,
the Company commenced a broad restructuring program to reduce fixed operating
costs. The program included the layoff of approximately 14% of its Advanced
Energy workforce and the closure of one of its six facilities in Fort
Collins, Colorado. Further downturns or slowdowns in any of the markets that
the Company serves could have a material adverse effect on the Company's
business, financial condition and results of operations.
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 67% of
the Company's total sales in 1997 and 62% in 1998. The loss of any of these
customers, particularly Applied Materials, Lam Research or Balzers, or a
reduction in their orders, could have a material adverse effect on the
Company's business, financial condition and results of operations. In the
second quarter of 1998, each of Applied Materials and Lam Research announced
substantial cost reduction programs, including significant reductions in
their workforces, on account of the continued slowdown in demand for
semiconductor capital equipment. This slowdown has had a material adverse
effect on the Company's revenues.
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<PAGE>
RISKS ASSOCIATED WITH MANUFACTURING FACILITIES
The Company conducts the majority of its manufacturing at its facilities
in Fort Collins, Colorado and in Voorhees, New Jersey. The Company also
conducts manufacturing for one customer in Austin, Texas. Tower conducts
manufacturing at its facility in Fridley, Minnesota. In July 1997, a severe
rainstorm in Fort Collins caused substantial damage to the Company's
facilities and certain equipment and inventory. The damage caused the Company
to cease manufacturing at that facility temporarily and prevented the Company
from resuming full production there until mid-September 1997. The Company's
insurance policies did not cover all of the costs that the Company incurred
in connection with the rainstorm. As a result, the Company recorded a
one-time charge of $3.0 million in the third quarter of 1997 for such losses.
Future natural or other uncontrollable occurrences at any of the Company's
primary manufacturing facilities could have a material adverse effect on the
Company's operations. Any cessation of manufacturing or reduction in
manufacturing capacity for an extended period of time could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, the Company is inexperienced with maintaining multiple
manufacturing locations. The failure of the Company to manage and integrate
these geographically separated facilities efficiently could result in
substantial costs and delays, which in turn 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. In 1997, Advanced Energy acquired Tower
and, in a separate transaction, acquired all of the assets of MIK Physics. In
1998, Advanced Energy acquired RF Power Products in a pooling of interests,
and acquired substantially all the assets of Fourth State Technology. The
assets acquired from MIK Physics consisted predominantly of inventory. Tower
designs and manufactures custom, high performance switchmode power supplies
for use principally in the telecommunications, medical and non-impact
printing industries, while MIK Physics had developed technology to design
high power systems for certain industrial uses. Fourth State Technology
designed and manufactured process controls to monitor and analyze data in the
radio frequency process. The Company has limited experience in the markets
served by Tower, MIK and Fourth State. The Company might not be able to
compete in these markets successfully, or it might not be able to operate the
acquired businesses profitably. In addition, although the Company has
experience in the markets served by RF Power Products, the size of its
operations provides the Company with a number of integration challenges.
Failure to integrate 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. Future
acquisitions by the Company also may result in dilutive issuances of equity
securities, the incurrence of debt, large one-time expenses
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and the creation of goodwill or other intangible assets that could result in
significant amortization expense. In addition, the Company might not 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.
This growth and expansion is placing significant demands on the Company's
resources. The management of such growth requires the Company to continue to
improve and expand its management, operational and financial systems,
procedures and controls, including accounting and other internal management
systems, quality control, delivery and service capabilities. In 1997, to
accommodate its growth, the Company started implementation of a
comprehensive, integrated information management system that will incorporate
substantially all of the Company's internal financial and business systems,
procedures and controls. The implementation is progressing well, but any
problems encountered during the implementation process at the new locations
could severely disrupt the Company's daily operations. The Company has not
yet fully implemented the new system at all of its domestic and international
locations, due primarily to a shortage of trained personnel and other
resources.
SUPPLY CONSTRAINTS AND DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS
The Company requires numerous electronic components to manufacture its
power conversion and control systems. Dramatic growth in the electronics
industry has significantly increased demand for these 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, possibly causing 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 the
following:
- 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 it could obtain and qualify alternative sources, if
necessary, for most sole and limited source parts. However, seeking alternative
sources or
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commencing internal manufacture of such parts could require the Company to
redesign its systems, causing delays in shipments. This could damage the
Company's relationships with current and potential customers, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company considers the inability to obtain electronic components from
its suppliers to be one of its greatest Year 2000 risks. See "--The Year 2000
Problem Could Have an Adverse Impact" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Program."
DEPENDENCE ON DESIGN WINS; BARRIERS TO OBTAINING NEW CUSTOMERS; HIGH LEVEL OF
CUSTOMIZED SYSTEMS
The constantly changing nature of semiconductor fabrication technology
causes equipment manufacturers to begin new system design projects
periodically. The Company often must work with these manufacturers early in
their design cycles to modify the Company's equipment to meet the
requirements of the new systems. As the manufacturers near completion in
their design cycles, they typically choose one or two vendors to provide the
power conversion equipment for use with the early system shipments. Selection
as one of these vendors is called a "design win." The Company believes that
it is critical to achieve these "design wins" in order to retain existing
customers and to obtain new customers. Power conversion and control systems
vary in characteristics such as power levels and modes of interfacing with
the customer's equipment. As a result, once a manufacturer chooses a power
conversion and control system for use in a particular product, it is likely
to retain that system for the life of that product. As a result, failure to
achieve design wins for semiconductor fabrication and other equipment could
have a material and prolonged adverse effect on the Company's sales and
growth. The Company also believes that equipment manufacturers often select
their suppliers based on factors such as long-term relationships.
Accordingly, the Company may have difficulty achieving design wins from
equipment manufacturers who are not currently customers, and existing or
potential customers may not select the Company's systems for new products.
In order to achieve design wins, the Company typically must customize its
systems for particular customers to use in their equipment. 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 its inventory. As the
Company develops new systems and as its customers develop new products,
systems in inventory may become obsolete. Such inventory obsolescence might
have a material adverse effect on the Company's business, financial condition
and results of operations.
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RAPID TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW SYSTEM INTRODUCTIONS
The market for the Company's products and the markets in which the
Company's customers compete are characterized by ongoing technological
developments and changing customer requirements. In order to succeed, the
Company must continue to improve existing systems and to develop new systems
that keep pace with technological advances and meet the needs of its
customers; however, the Company might not be able to continue to improve its
systems or develop new systems. Even if the Company is able to improve or
develop new systems, such systems might not be cost-effective or introduced
in a timely manner. Development and introduction of new systems may involve
significant and uncertain costs. 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.
THE YEAR 2000 PROBLEM COULD HAVE AN ADVERSE IMPACT
The Year 2000 problem is the result of computer programs that rely on
two-digit date codes, instead of four-digit date codes, to indicate the year.
Such computer programs, which are unable to interpret the date code "00" as
the year 2000, may not be able to perform computations and decision-making
functions and could cause computer systems to malfunction. The Company has
developed a multi-phase program for Year 2000 information systems compliance.
In what the Company believes to be the most reasonably likely worst case Year
2000 scenario, the Company would be unable to obtain electronic components
from its suppliers because of such third parties' failure to become Year 2000
compliant, and the Company would be unable to manufacture such components
internally or to redesign its systems to accommodate different components
because of the failure of the Company's engineering and manufacturing systems
to be Year 2000 compliant. Although the Company has begun to develop
contingency plans to address potential Year 2000 problems, the Company may
not be able to respond fully and efficiently to such problems. In addition,
although the Company does not expect the costs associated with its Year 2000
program to have a material effect on the Company's financial results, the
Company's cost estimates 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Year 2000 Program."
COMPETITION
The Company faces substantial competition, primarily from established
companies, some of which have greater financial, marketing and technical
resources than the Company. Because of the trend toward consolidation in the
semiconductor capital equipment industry, the Company must be able to compete
effectively across a broad range of product offerings, to fund worldwide
customer service and support and to invest in research and development. The
Company expects its competitors to continue to
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develop new products in direct competition with those of 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 must maintain a high level of investment
in research and development and sales and marketing. In the future, the
Company might not have sufficient resources to make such investments, or the
Company might not be able to make the technological advances necessary to
remain competitive. In addition, new products developed by competitors could
make pricing more competitive. This may necessitate significant price
reductions by the Company or result in lost orders, either of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, electronics companies, including
companies in the semiconductor capital equipment industry, have been facing
pressure to reduce costs. This is causing the Company's current and
prospective customers to exert pricing pressure and make other demands on the
Company, which could lead to significant changes in revenue and operating
margins from quarter to quarter. Failure to respond adequately to such
pressure and demands could result in a loss of customers, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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; Dorking, United Kingdom; and Seoul, South
Korea. The Company might not be able to compete successfully in the
international market or to meet the service and support needs of such
customers. Sales to customers outside the United States accounted for 22% of
the Company's total sales in 1996, 23% in 1997 and 28% in 1998. The Company
expects this trend to continue. Such sales are subject to various risks,
including the following:
- exposure to currency fluctuations
- governmental controls
- political and economic instability
- trade restrictions
- changes in tariffs and taxes
- longer payment cycles typically associated with international sales
The Company has entered into various forward foreign exchange contracts
to mitigate the effect of devaluation of the Japanese yen; however, this or
other hedging techniques
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might not protect the Company successfully against substantial currency
fluctuations. The Company has not employed hedging techniques with respect to
any other currencies, but would consider entering into forward foreign
exchange contracts or obtaining lines of credit in foreign currencies if
economic conditions created such a need. The Company's international
activities are also subject to the difficulties of managing overseas
distributors and representatives and managing foreign subsidiary operations.
THE ASIAN FINANCIAL CRISIS
The economic conditions in certain Asian countries began to deteriorate
in the third quarter of 1997 and, in certain countries, including Japan,
where conditions remain uncertain. The Company derived 10% of its total sales
in 1997 and 8% of its total sales in 1998 from sales to customers in Asia,
including Japan. Many of the Company's key customers have had and continue to
have an even greater concentration of their sales in Asia. In early 1999, the
Company and its customers have seen increased revenue and an improved outlook
for the economic conditions in Asia.
INTELLECTUAL PROPERTY RIGHTS
The Company's success largely depends 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. The
Company might not be able to protect its technology, and competitors might be
able to develop similar technology independently. In addition, the laws of
certain foreign countries might not afford the Company's intellectual
property the same protection as the laws of the United States do. For
example, the Company's intellectual property is not protected by patents in
several countries in which it does business, including China, Taiwan, South
Korea, Malaysia and Singapore. Further, the Company has limited patent
protection in Japan and certain European countries. The costs of applying for
patents in foreign countries and translating the applications into foreign
languages require the Company to select carefully the inventions for which it
applies for patent protection and the countries in which it seeks such
protection. Generally, the Company concentrates its efforts in the United
Kingdom, Germany, France, Italy and Japan, because there are other
manufacturers and developers of power systems in such countries, as well as
customers for such systems. The inability or failure to obtain adequate
patent protection in other countries could have a material adverse effect on
the Company's ability to compete effectively in such countries, which in turn
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risks Associated with
International Sales."
Further, the Company's patents might not be sufficiently broad to protect
the Company's technology, and any existing or future patents might be
challenged, invalidated or circumvented. Additionally, the Company's rights
under its patents might not provide meaningful competitive advantages. Any of
such events could have a
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material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company believes that its products are not infringing any
patents or proprietary rights of others, such infringements might exist or
might occur in the future. Litigation might 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 Company's business, financial condition and results of
operations. Moreover, adverse determinations in such litigation could cause
the Company to lose 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.
GOVERNMENTAL REGULATIONS
The Company is subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to the design
and operation of its power conversion and control systems. The Company must
ensure that its systems meet certain safety and emissions standards, many of
which vary across the countries in which the Company's systems are used. The
Company believes that it is in compliance with current regulations and that
is has obtained all necessary permits, approvals and authorizations to
conduct its business; however, compliance with future regulations could
require the Company to redesign certain systems, make capital expenditures or
incur substantial costs. Failure to comply with current or future regulations
could subject the Company to fines, suspension of production or an inability
to offer certain systems in specified markets, any of which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
VOLATILITY OF MARKET PRICE OF THE COMMON STOCK; STOCK PRICE FLUCTUATIONS
The stock market generally and the market for technology stocks in
particular have experienced significant price and volume fluctuations, which
often have been unrelated or disproportionate to the operating performance of
such companies. From the initial public offering of the Company's common
stock in November 1995 through March 1, 1999, the closing prices of the
Company's common stock on the Nasdaq National Market have ranged from $3.50
to $36.8125, and the intra-day trading prices have ranged from $2.875 to
$38.125. The market for the Company's common stock likely will continue to be
subject to similar fluctuations. Many factors could cause the trading price
of the common stock to fluctuate substantially, including the following:
- future announcements concerning the Company or its competitors
27
<PAGE>
- 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
- financial conditions in the industries in which the Company's
customers operate
- general stock market trends
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of February 28,
1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Douglas S. Schatz 53 President, Chief Executive Officer and Chairman
of the Board
Richard P. Beck 65 Senior Vice President, Chief Financial Officer
and Director
Hollis L. Caswell, Ph.D. 67 Chief Operating Officer and Director
Richard A. Scholl 60 Senior Vice President and Chief Technology Officer
Joseph Stach, Ph.D. 60 Senior Vice President
</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.
RICHARD P. BECK joined the Company in March 1992 as Vice President and
Chief Financial Officer and became Senior Vice President in February 1998. He
became a director of Advanced Energy in September 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 a director of
Applied Films Corporation, a publicly held manufacturer of flat panel display
equipment.
HOLLIS L. CASWELL, PH.D. joined the Board of Directors of Advanced Energy
in February 1997 and joined the Company as Chief Operating Officer in June
1997. From 1990 to 1994, Dr. Caswell was Chairman of the Board and Chief
Executive officer of HYPRES, Inc., a manufacturer of superconducting
electronics. Prior to that time, Dr. Caswell served as senior vice president
of Unisys Corporation, an information technology company, and president of
such company's Computer Systems Group.
28
<PAGE>
RICHARD A. SCHOLL joined the Company in 1988 as Vice President,
Engineering. Mr. Scholl became Chief Technology Officer of the Company in
September 1995. Prior to joining the Company, Mr. Scholl was General Manager,
Vacuum Products Division at Varian Associates, Inc.
JOSEPH STACH, PH.D. joined the Company in October 1998 as Senior Vice
President. He was previously Chairman, President and Chief Executive Officer
of RF Power Products from 1992 to 1998.
ITEM 2. PROPERTIES
The Company's headquarters and main manufacturing facility are located in
Fort Collins, Colorado, in approximately 190,000 square feet of leased space.
Additional manufacturing facilities are located in Voorhees, New Jersey;
Austin, Texas; and Fridley, Minnesota. To serve the needs of its customers,
Company also maintains regional offices in Milpitas, California; Concord,
Massachusetts; Tokyo, Japan; Filderstadt, Germany; Bicester, United Kingdom;
Dorking, United Kingdom; and Seoul, South Korea.
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings that are
expected to have a material effect on its business, assets or property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
<PAGE>
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Advanced Energy's common stock was approved for quotation on the Nasdaq
National Market under the symbol AEIS, beginning November 17, 1995. At March 8,
1999, the number of common stockholders of record was 970.
Below is a table showing the range of high and low bid quotations for the
common stock as quoted (without retail markup or markdown and without
commissions) on the Nasdaq National Market. They do not necessarily represent
actual transactions:
<TABLE>
<CAPTION>
High Bid Low Bid
<S> <C> <C>
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
1998 FISCAL YEAR
----------------
First Quarter 18 13/16 10
Second Quarter 16 7/16 11
Third Quarter 13 6
Fourth Quarter 25 3/4 5 5/8
</TABLE>
Advanced Energy 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. Advanced Energy
currently intends to retain all future earnings to finance its business.
Accordingly, Advanced Energy 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.
30
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read with, the Company's 1998 Consolidated
Financial Statements, related notes and management's discussion included in
this Form 10-K. The selected consolidated statement of operations data for
the year ended December 31, 1998 and the related consolidated balance sheet
data as of and for the year ended December 31, 1998 were derived from
consolidated financial statements audited by Arthur Andersen LLP, independent
accountants, whose related audit report is included in this Form 10-K. The
selected consolidated statement of operations data for the years ended
December 31, 1996 and 1997 and the related consolidated balance sheet data as
of and for the year ended December 31, 1997 were derived from consolidated
financial statements audited in part by Arthur Andersen LLP and in part by
KPMG LLP, whose audit reports are included in this Form 10-K, and pertain to
RF Power Products' fiscal years ended November 30. As such, the balance sheet
data and the statement of operations data of the Company for fiscal 1997 and
1996 includes the balance sheet of RF Power Products as of November 30, 1997
and 1996, and the statement of operations for each of the two years in the
period ended November 30, 1997, respectively. The selected consolidated
statements of operations data for the years ended December 31, 1994 and 1995,
and the related consolidated balance sheet data as of December 31, 1994, 1995
and 1996 were derived from audited consolidated financial statements of the
Company not included in this Form 10-K.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................... $124,698 $175,758 $129,931 $121,075 $ 68,159
Gross profit.............................. 36,713 66,956 47,246 56,072 31,976
Total operating expenses.................. 49,488 47,242 36,876 31,733 20,161
(Loss) income from operations............. (12,775) 19,714 10,370 24,339 11,815
Net (loss) income......................... $ (9,517) $ 12,056 $ 6,371 $ 14,798 $ 7,333
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted (loss) earnings per share......... $ (0.36) $ 0.46 $ 0.25 $ 0.63 $ 0.32
Diluted weighted-average common shares
outstanding (anti-dilutive in 1998)..... 26,572 26,302 25,738 23,310 22,605
<CAPTION>
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and marketable securities............ $ 28,134 $ 32,215 $11,778 $14,022 $ 536
Working capital........................... 62,059 74,342 41,638 38,861 10,847
Total assets.............................. 101,035 130,064 68,078 68,234 29,832
Total debt................................ 537 6,518 3,741 3,458 10,797
Stockholders' equity...................... 89,133 97,527 54,927 48,057 10,710
</TABLE>
31
<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. For example, statements relating to the
Company's beliefs, expectations and plans are forward-looking statements, as
are statements that certain actions, conditions or circumstances will
continue. 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 or prove any forward-looking statements, by
hindsight, to be overly optimistic or unachievable, include, but are not
limited to the following: the significant fluctuations in the Company's
quarterly operating results, the volatility of the semiconductor and
semiconductor capital equipment industries, timing and success of integration
of recent and potential future acquisitions, supply constraints and
technological changes. For a discussion of these and other factors that may
impact the Company's realization of its forward-looking statements, see Part
I "Cautionary Statements - Risk Factors."
OVERVIEW
The Company designs, manufactures, markets and supports power conversion
and control systems used in industrial processes. The Company's systems are
key elements in products that utilize gaseous plasmas to deposit or etch thin
film layers on materials or substrates such as silicon, glass and metals. The
Company commenced operations in 1981. 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 capital equipment industry accounted for approximately
59% of the Company's sales in 1997 and 49% in 1998. The Company benefited
from strong growth in the semiconductor capital equipment industry until the
industry growth stopped in mid-1996. A brief recovery in the second half of
1997 was followed by a severe downturn near the end of that year that
continued through 1998. The largest customer of the Company is also the
largest semiconductor capital equipment manufacturer. Sales to the data
storage and flat panel display markets increased significantly in 1997 when
compared to 1996, but declined significantly in 1998. Industrial and other
markets grew significantly in 1997 when compared to 1996 and grew moderately
in 1998 when compared to 1997. In connection with the acquisition of Tower,
the Company now has products manufactured for use in the telecommunications,
laser and non-impact printing
32
<PAGE>
industries. The future success of the Company depends primarily on continued
growth of the semiconductor capital 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. Margins improved in 1997 when the semiconductor capital equipment
industry rebounded. In anticipation of a continued rebound, the Company
relocated and expanded an existing manufacturing and office facility and
invested in and opened a new manufacturing facility in 1997, and relocated
portions of a manufacturing operation dedicated to its largest customer to
another new, expanded facility in 1998. As these new facilities opened, the
semiconductor capital equipment industry experienced another significant
downturn, which was more severe and prolonged than the previous downturn. The
1997-1998 downturn was aggravated by the Asian financial crisis. Asian
semiconductor companies, primarily in Japan, South Korea and Taiwan,
represent an increasingly larger percentage of the worldwide semiconductor
capital equipment market. The expansion of capacity combined with significant
reductions in customer demand resulted in a significant decline in operating
margins for the Company in 1998.
Several events occurred during 1997 and 1998 that affected the Company's
operations. The Company sustained damage to its manufacturing facilities and
certain equipment during a severe rainstorm in July 1997, which reduced
production capacity during the following several months. In August 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. In August 1998, the Company implemented a
restructuring plan to respond to the downturn in the semiconductor capital
equipment industry, including a reduction in workforce and the closure of a
warehouse facility. In September 1998, the Company acquired substantially all
of the assets of Fourth State Technology, Inc. ("FST"), a privately held,
Texas-based designer and manufacturer of process controls used to monitor and
analyze data in the RF process. In October 1998, the Company acquired RF
Power Products, Inc. ("RFPP"), a publicly held, New Jersey-based designer and
manufacturer of RF power systems, including generators and matching networks.
The Company issued common stock in this business combination accounted for as
a pooling of interests, and all financial statements included in this Form
10-K reflect the pooled operations, except where otherwise stated. In
December 1998, the
33
<PAGE>
South Korean subsidiary relocated its operation to a larger facility in
Seoul, South Korea, where it began direct service to its customers.
In conjunction with the acquisition of RF Power Products, the operating
results of RF Power Products for the month of December 1998 are not reflected
in the income statement. This is due to the change of RF Power Products'
fiscal year-end from November 30 to December 31 to correlate with Advanced
Energy's year-end. Because of the one month difference in the two companies'
financial reporting periods, RF Power Products' financial results for the
month of December are treated as an adjustment to equity.
RESULTS OF OPERATIONS
The following table summarizes certain data as a percentage of sales
extracted from statements of operations of the Company:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Sales............................................. 100.0% 100.0% 100.0%
Cost of sales..................................... 70.6 61.9 63.6
------ ------ ------
Gross margin...................................... 29.4 38.1 36.4
------ ------ ------
Operating expenses:
Research and development........................ 19.1 11.0 13.3
Sales and marketing............................. 10.9 6.6 8.3
General and administrative...................... 7.5 6.0 6.8
Restructuring charge............................ 0.8 -- --
Merger costs.................................... 2.2 -- --
Storm (recoveries) damages...................... (0.9) 1.5 --
Purchased in-process research and development... -- 1.8 --
------ ------ ------
Total operating expenses.......................... 39.6 26.9 28.4
------ ------ ------
(Loss) income from operations..................... (10.2) 11.2 8.0
Other income (expense)............................ 0.2 (0.1) 0.0
------ ------ ------
Net (loss) income before income taxes............. (10.0) 11.1 8.0
(Benefit) provision for income taxes.............. (2.4) 4.2 3.1
------ ------ ------
Net (loss) income................................. (7.6)% 6.9% 4.9%
------ ------ ------
------ ------ ------
</TABLE>
SALES
Sales were $129.9 million, $175.8 million and $124.7 million in 1996,
1997 and 1998, respectively, representing an increase of 35% from 1996 to
1997 and a decrease of 29% from 1997 to 1998. The Company's sales growth from
1996 to 1997 resulted from increased unit sales of the Company's systems,
while the decrease from 1997 to 1998 was due to decreased unit sales.
A substantial portion of the Company's sales growth from 1996 to 1997 is
due to higher system sales to three of the Company's largest customers, two
of whom are primarily semiconductor capital equipment OEMs, and one of whom
is a data storage OEM. Sales to the semiconductor capital equipment industry
increased 27% from 1996 to 1997, while sales to the data storage equipment
industry increased 53% during the same
34
<PAGE>
period. During the second half of 1996, the semiconductor capital equipment
industry experienced a downturn, followed by a brief recovery in 1997, which
resulted in strong sales growth by the Company between the periods,
particularly to the Company's largest customer, a semiconductor capital
equipment manufacturer. The Company's sales to this industry were
predominately in the United States, which caused sales in this region to
increase from 1996 to 1997. The Company's sales to the data storage industry
during this period were predominately in Europe. Sales by the Company to the
flat panel display industry almost doubled during this period, favorably
impacting sales to the Asia Pacific region, while sales by the Company to
industrial markets also increased significantly, partially due to the
inclusion of Tower during the second half of 1997.
Toward the end of 1997, after a relatively strong recovery which
favorably impacted sales during 1997, the semiconductor capital equipment
industry, affected primarily by the Asian financial crisis, began a severe
downturn, which continued through 1998. This caused a 41% decrease in the
Company's sales to this industry in 1998 when compared to 1997, which
resulted in lower sales to the United States and the Asia Pacific region.
Sales to the data storage industry decreased 27%, though sales to the
Company's largest customer in that industry grew significantly from 1997 to
1998, resulting in higher sales to Europe. Sales to industrial markets were
slightly higher, but would have been lower if not for the full-year effect of
sales by Tower in 1998.
The following tables summarize annual net sales and percentages of net
sales by customer type for the Company for each of the three years in the
period ended December 31, 1998:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Semiconductor capital equipment................... $ 60,573 $102,723 $ 81,100
Data storage...................................... 17,300 23,583 15,385
Flat panel display................................ 5,832 11,438 5,848
Industrial........................................ 33,593 30,748 23,353
Customer service technical support................ 7,400 7,266 4,245
-------- -------- --------
$124,698 $175,758 $129,931
-------- -------- --------
-------- -------- --------
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Semiconductor capital equipment................... 48.6% 58.5% 62.4%
Data storage...................................... 13.9 13.4 11.8
Flat panel display................................ 4.7 6.5 4.5
Industrial........................................ 26.9 17.5 18.0
Customer service technical support................ 5.9 4.1 3.3
----- ----- ------
100.0% 100.0% 100.0%
----- ----- ------
----- ----- ------
</TABLE>
The following tables summarize annual net sales and percentages of net
sales by geographic region for the Company for each of the three years in the
period ended December 31, 1998:
35
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
United States and Canada.......................... $ 89,452 $134,955 $101,486
Europe............................................ 25,357 23,092 18,591
Asia Pacific...................................... 9,478 17,110 9,370
Rest of world..................................... 411 601 484
-------- -------- --------
$124,698 $175,758 $129,931
-------- -------- --------
-------- -------- --------
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
United States and Canada.......................... 71.7% 76.9% 78.1%
Europe............................................ 20.3 13.1 14.3
Asia Pacific...................................... 7.7 9.7 7.2
Rest of world..................................... 0.3 0.3 0.4
------ ------ ------
100.0% 100.0% 100.0%
------ ------ ------
------ ------ ------
</TABLE>
GROSS MARGIN
The Company's gross margins were 36.4%, 38.1% and 29.4% for 1996, 1997
and 1998, respectively. The increase in gross margin from 1996 to 1997 was
primarily due to favorable absorption of manufacturing overhead as a result
of the significantly higher sales in 1997. The decrease in gross margin from
1997 to 1998 was primarily due to unfavorable absorption of manufacturing
overhead as a result of significant capacity expansion in 1997 and the
reduced level of sales in 1998.
During the first quarter of 1997, the Company relocated and expanded its
Voorhees, New Jersey facility. In the fourth quarter of 1997, the Company
expanded into a new manufacturing facility in Fort Collins, Colorado. In the
second quarter of 1998, the Company relocated part of its previously existing
Fort Collins manufacturing operations to a new facility in Austin, Texas. The
three new facilities were intended to serve existing and anticipated growth
in the semiconductor capital equipment industry. The expansion to the new
location in Austin was to provide service specifically to the Company's
largest customer, a semiconductor capital equipment manufacturer, whose
primary manufacturing facilities are in Austin.
In the fourth quarter of 1997, the semiconductor capital equipment
industry entered a severe downturn, which continued through the end of 1998.
The downturn in this industry, with the resulting underutilization of
capacity, has significantly impacted the Company's financial results. The
combination of the expansion and lower sales has resulted in an over-capacity
situation for the Company, leading to unfavorable absorption of manufacturing
overhead and a substantially reduced margin. The Company expects that
underutilization of manufacturing capacity will continue to negatively impact
gross margins until sales to the semiconductor capital equipment market
recover or until other markets the Company serves experience significant
growth.
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 decline in average selling prices not offset
by reduced costs could result in a decline in the Company's gross margins.
36
<PAGE>
The Company provides warranty coverage for its systems ranging from 12 to
24 months. The Company estimates the anticipated costs of repairing its
systems under such warranties based on the historical average costs of the
repairs. To date, the Company has not experienced significant warranty costs
in excess of its recorded reserves.
RESEARCH AND DEVELOPMENT
The Company's research and development costs are incurred researching new
technologies, developing new products and improving existing product designs.
Research and development expenses were $17.3 million, $19.3 million and $23.8
million for 1996, 1997 and 1998, respectively, representing an increase of
12% from 1996 to 1997 and 23% from 1997 to 1998. As a percentage of sales,
research and development expenses decreased from 13.3% in 1996 to 11.0% in
1997 as a result of the higher sales base, but increased to 19.1% in 1998 as
a result of the lower sales base. The increase in expenses from 1996 to 1998
is primarily due to increases in payroll, materials and supplies, purchased
services, and higher infrastructure costs for new product development.
In connection with the acquisition of Tower in August 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. This
one-time charge is not included in the $19.3 million reported for research
and development expense in 1997.
The Company believes continued research and development investment for
development of new products is critical to the Company's ability to serve new
and existing markets. Since inception, most research and development costs
have been internally funded and all have been expensed as incurred.
SALES AND MARKETING EXPENSES
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 $10.7 million,
$11.6 million and $13.5 million for 1996, 1997 and 1998, respectively. This
represented a 9% increase from 1996 to 1997 and a 16% increase from 1997 to
1998. The increases are attributable to higher payroll costs incurred as the
Company continues to increase its sales management and product management
capabilities. Additionally, the Company increased spending in 1998 to develop
worldwide applications engineering capabilities. As a percentage of sales,
these expenses decreased from 8.3% in 1996 to 6.6% in 1997 as a result of the
higher sales base, but increased to 10.9% in 1998 as a result of the lower
sales base.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses support the worldwide financial,
administrative, information systems and human resources functions of the
Company. General and
37
<PAGE>
administrative expenses were $8.9 million, $10.5 million and $9.5 million for
1996, 1997 and 1998, respectively. This represented an 18% increase from 1996
to 1997, an increase of $1.6 million, of which $0.7 million was due to the
inclusion of Tower, including $0.4 million for amortization of goodwill.
Other increases from 1996 to 1997 are attributed to higher lease costs and
depreciation expense associated with the new facility and the expanded and
relocated facility. General and administrative expenses were down 10% from
1997 to 1998. As a percentage of sales, general and administrative expenses
were 6.8%, 6.0% and 7.5% for 1996, 1997 and 1998, respectively. The increase
from 1997 to 1998 was due to the lower sales base.
The Company continues to implement its management system software,
including the replacement of existing systems in its domestic and foreign
locations. The Company expects that charges related to training and
implementation of the new software will continue through 2000.
ONE-TIME CHARGES AND CREDITS
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 in July 1997. The Company settled with its insurance
carrier in 1998, which resulted in a $1.1 million recovery recorded by the
Company in the fourth quarter of 1998.
As discussed above in "Research and Development," the acquisition of
Tower resulted in a charge of $3.1 million in 1997 for purchased in-process
research and development, which is nondeductible for income tax purposes.
In addition to the settlement for storm damage, the Company took one-time
charges totaling $3.7 million in 1998. In August 1998, the Company announced
a restructuring plan to respond to the downturn in the semiconductor capital
equipment market. The plan included a reduction of workforce of 128 people,
the closure of one facility in the Company's Fort Collins, Colorado campus,
and the abandonment of plans to construct a new manufacturing facility in
Fort Collins. Other reductions in workforce at the Voorhees facility were
achieved throughout 1998. The Company took a one-time charge of $1.0 million
for the restructuring in the third quarter of 1998.
On October 8, 1998, Advanced Energy acquired RF Power Products, in a
pooling of interests that involved the exchange of four million shares of
Advanced Energy common stock for the publicly held common stock of RF Power
Products. As part of the business combination, the Company incurred $2.7
million of expense recorded in the fourth quarter of 1998, which is
non-capitalizable and generally nondeductible for income tax purposes. The
Company expects to incur additional operating expenses during 1999 relating
to consolidating and integrating operations of this business combination.
38
<PAGE>
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 $0.5 million, $0.6 million and $1.1 million
for the years 1996, 1997 and 1998, respectively, and was 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 a state government loan and was
approximately $0.3 million, $0.5 million and $0.2 million for the years 1996,
1997 and 1998, respectively. The increase of interest expense 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.
The Company's foreign subsidiaries' sales are primarily denominated in
currencies other than the U.S. dollar. During 1996 the Company recorded a net
foreign exchange loss of $0.4 million primarily as a result of a 12% decrease
of 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 devaluation in the yen. The Company recorded net foreign currency gains of
$0.1 million and $0.4 million for the years 1997 and 1998, respectively. The
Company continues to evaluate various policies to minimize the effect of
foreign currency fluctuations.
Several European countries have adopted, and others are expected to
adopt, a Single European Currency (the "euro") as of January 1, 1999 with a
transition period continuing through January 1, 2002. As of January 1, 1999,
eleven of the fifteen member countries of the European Union (the
"participating countries") established fixed conversion rates between their
existing sovereign currencies and the euro. For three years after the
introduction of the euro, the participating countries can perform financial
transactions in either the euro or their original local currencies. This will
result in a fixed exchange rate among the participating countries, whereas
the euro (and the participating countries' currencies in tandem) will
continue to float freely against the U.S. dollar and other currencies of
non-participating countries. While the Company does not expect the
introduction of the euro currency to have a significant impact on the
Company's revenues or results of operations, the Company is unable to
determine what effects, if any, the currency change in Europe will have on
competition and competitive pricing in the affected regions.
(BENEFIT) PROVISION FOR INCOME TAXES
The income tax provisions of $4.0 million in 1996 and $7.5 million in
1997 represented effective tax rates of 38.3% and 38.2%, respectively. The
income tax benefit of $2.9 million for 1998 represented an effective rate of
23.4%. Though the Company's
39
<PAGE>
tax rate remained almost unchanged from 1996 to 1997, the $3.1 million
one-time charge for purchased in-process research and development associated
with the acquisition of Tower in 1997 was not deductible and therefore
increased the effective tax rate. The lower rate of the tax benefit in 1998
was due to nondeductible costs associated with the acquisition of RF Power
Products by Advanced Energy, and foreign operating losses with no benefit
recorded. 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 has experienced. 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 each of the eight quarters in the period ended
December 31, 1998. The Company believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly such quarterly information. The
operating results for any quarter are not necessarily indicative of results
for any subsequent period.
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales..................................... $26,102 $40,909 $52,688 $56,059 $43,869 $31,981 $26,292 $22,556
Cost of sales............................. 16,963 25,303 31,658 34,878 30,263 23,466 18,317 15,939
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 9,139 15,606 21,030 21,181 13,606 8,515 7,975 6,617
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development................ 3,576 4,620 5,484 5,656 5,835 6,394 5,722 5,898
Sales and marketing..................... 2,258 2,875 2,829 3,684 3,564 3,512 3,255 3,200
General and administrative.............. 1,896 2,433 2,780 3,371 2,859 2,768 2,353 1,503
Restructuring charge.................... -- -- -- -- -- -- 1,000 --
Merger costs............................ -- -- -- -- -- -- -- 2,742
Storm damages (recoveries).............. -- -- 3,000 (300) -- -- -- (1,117)
Purchased in-process research and
development........................... -- -- 3,080 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.................. 7,730 9,928 17,173 12,411 12,258 12,674 12,330 12,226
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 1,409 5,678 3,857 8,770 1,348 (4,159) (4,355) (5,609)
Other (expense) income.................... (434) 228 (22) 37 98 129 (214) 345
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) before income taxes..... 975 5,906 3,835 8,807 1,446 (4,030) (4,569) (5,264)
Provision (benefit) for income taxes...... 383 2,235 2,544 2,305 552 (885) (1,089) (1,478)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 592 $ 3,671 $ 1,291 $ 6,502 $ 894 $(3,145) $(3,480) $(3,786)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Diluted earnings (loss) per share......... $ 0.02 $ 0.14 $ 0.05 $ 0.24 $ 0.03 $ (0.12) $ (0.13) $ (0.14)
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Diluted weighted-average number of
shares and share equivalents (basic
weighted-average in loss quarters)...... 25,760 25,904 26,401 27,143 27,170 26,531 26,585 26,681
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- -------- -------- -------- -------- -------- --------
<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............................. 65.0 61.9 60.1 62.2 69.0 73.4 69.7 70.7
----- ----- ----- ----- ----- ----- ----- -----
Gross margin.............................. 35.0 38.1 39.9 37.8 31.0 26.6 30.3 29.3
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development................ 13.6 11.3 10.4 10.1 13.3 19.9 21.8 26.1
Sales and marketing..................... 8.7 7.0 5.4 6.6 8.1 11.0 12.4 14.2
General and administrative.............. 7.3 5.9 5.3 6.0 6.5 8.7 8.9 6.7
Restructuring charge.................... -- -- -- -- -- -- 3.8 --
Merger costs............................ -- -- -- -- -- -- -- 12.2
Storm damages (recoveries).............. -- -- 5.7 (0.5) -- -- -- (5.0)
Purchased in-process research and
development........................... -- -- 5.8 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.................. 29.6 24.2 32.6 22.2 27.9 39.6 46.9 54.2
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations............. 5.4 13.9 7.3 15.6 3.1 (13.0) (16.6) (24.9)
Other (expense) income.................... (1.7) 0.5 0.0 0.1 0.2 0.4 (0.8) 1.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before income taxes..... 3.7 14.4 7.3 15.7 3.3 (12.6) (17.4) (23.3)
Provision (benefit) for income taxes...... 1.4 5.4 4.8 4.1 1.3 (2.8) (4.2) (6.5)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)......................... 2.3% 9.0% 2.5% 11.6% 2.0% (9.8)% (13.2)% (16.8)%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>
The Company has experienced and expects to continue to experience
significant fluctuations in its quarterly operating results. The Company's
expense levels are based, in part, on expectations of future revenues. If
revenue levels in a particular quarter do not meet expectations, operating
results may be adversely affected. A variety of factors have an influence on
the level of the Company's revenues in a particular quarter. These factors
include general economic conditions, specific economic conditions in the
industries the Company serves, the timing of the receipt of orders from major
customers, customer cancellations or delay of shipments, specific feature
requests by customers, production delays or manufacturing inefficiencies,
exchange rate fluctuations, management decisions to commence or discontinue
product lines, the Company's ability to design, introduce and manufacture new
products on a cost effective and timely basis, the introduction of new
products by the Company or its competitors, the timing of research and
development expenditures, and expenses related to acquisitions, strategic
alliances, and the further development of marketing and service capabilities.
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 to continue to occur.
The Company's quarterly operating results in 1997 and 1998 reflect the
changing demand for the Company's products during this period, principally
from manufacturers of semiconductor capital equipment and data storage
equipment, other industrial markets, and the Company's ability to adjust its
manufacturing capacity to meet this demand.
41
<PAGE>
Demand from the semiconductor capital equipment companies increased in each
quarter of 1997 subsequent to the first quarter of that year, then decreased
in each of the four quarters of 1998. In the second quarter of 1997, the
semiconductor capital equipment market began a major, but short-lived,
recovery that continued throughout 1997, but which was followed by a severe
downturn that began at the end of 1997 and continued throughout 1998. Sales
to the data storage industry increased in both the second and third quarters
of 1997, but declined during the fourth quarter of 1997 and in both the first
and second quarters of 1998. Data storage sales then increased in the third
quarter of 1998 but dropped significantly in the fourth quarter of 1998.
Sales to industrial markets increased throughout each of the three quarters
following the first quarter of 1997, with the increases during the third and
fourth quarters partially due to the inclusion of industrial sales by Tower.
Then sales to industrial markets were lower in the first half of 1998 and
lower again in the second half of that year.
The Company's gross margin fluctuated significantly on a quarterly basis
in 1997 and 1998, primarily reflecting utilization of manufacturing capacity.
The improvement in gross margin to 38.1% in the second quarter of 1997 was
primarily the result of a more favorable absorption of manufacturing overhead
resulting from a 57% increase in sales from the first quarter of 1997 to the
second quarter of 1997. The improvement in gross margin to 39.9% in the third
quarter of 1997 was primarily due to improved material costs. Beginning
August 15, 1997, the Company's operating results included Tower. Gross margin
declined to 37.8% in the fourth quarter of 1997, and was primarily attributed
to higher customer service costs and higher cost of goods sold as a
percentage of sales for Tower. The two successive decreases in gross margin
to 31.0% and 26.6% in the first and second quarters of 1998, respectively,
were attributed to decreased utilization of capacity resulting from two
successive quarterly decreases in sales to the semiconductor capital
equipment industry. Gross margin improved to 30.3% in the third quarter of
1998 even though there was a decrease in sales to the semiconductor capital
equipment industry and decreased utilization of capacity. The improvement was
due to the Company's efforts to lower material costs through supplier
contract negotiations while improving material quality and material handling
efficiency, as well as from cost improvements realized from the
restructuring. Gross margin declined to 29.3% in the fourth quarter of 1998,
due primarily to another decrease in sales to the semiconductor capital
equipment industry that resulted in decreased utilization of capacity, though
material costs improved due to the improvement efforts continued from the
previous quarter.
The Company's operating expenses, excluding one-time charges and credits,
increased on a quarterly basis throughout 1997. The increases in operating
expenses during 1997 reflected costs in support of higher sales resulting
from the recovery in the semiconductor capital equipment industry and
increases in sales to the data storage industry in the second and third
quarters of 1997. Operating expenses of $17.2 million in the third quarter of
1997 would have been $11.1 million if not for the one-time charges of $6.1
million. Due to the downturn in the semiconductor capital equipment industry
in 1998, operating expenses of the Company, excluding one-time charges and
credits, were held
42
<PAGE>
relatively flat during the first half of 1998 in anticipation of an early
recovery. Operating expenses were $12.3 million and $12.7 million,
respectively, in the first and second quarters of 1998. With the extent and
duration of the downturn still uncertain, in the second half of 1998 the
Company reduced operating expenses, excluding one-time charges and credits,
while maintaining a minimum level of resources necessary to address an upturn
in the semiconductor capital equipment industry that is now anticipated to
occur during 1999. Operating expenses in the third and fourth quarters of
1998 were $12.3 million and $12.2 million, respectively, and would have been
$11.3 million and $10.6 million, respectively, if not for one-time charges
and credits. 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.
Other income (expense) consists primarily of interest income and expense
and foreign currency gain and loss. Interest income increased substantially
in the fourth quarter of 1997, attributed to the receipt of funds from the
public offering that quarter. In 1997, the Company recorded a foreign
currency gain of $0.1 million, despite a foreign currency loss in the first
quarter of that year. During 1998, the Company recorded a net foreign
exchange gain of $0.4 million, earned primarily in the fourth quarter of that
year. The Company continues to utilize forward foreign exchange contracts in
Japan to mitigate the effects of foreign currency fluctuations. In each of
the third and fourth quarters of 1998, the Company recorded $0.3 million
losses from its investment in LITMAS.
The Company's provision (benefit) for income taxes fluctuated
significantly throughout 1997 and 1998. An effective income tax rate of 66.3%
in the third quarter of 1997 was due primarily to the one-time nondeductible
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
26.2% 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. An effective income tax benefit rate of 28.1% for the fourth quarter
of 1998 was due primarily to nondeductible merger costs offset by tax
benefits recorded for operating losses incurred during the quarter. Most
other quarters during these two years had effective income tax rates 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 operations, and, from November 1995, proceeds
from underwritten public offerings.
Cash provided by operations totaled $8.9 million in 1997, of which major
factors were net income, depreciation, amortization, purchased in-process
research and development,
43
<PAGE>
and increases in accounts payable and accrued payroll, offset by increases in
accounts receivable and inventories. Cash provided by operations totaled $8.7
million in 1998, of which major factors were depreciation, amortization and
decreases in accounts receivable and inventories, offset by net loss,
decreases in income taxes payable, accounts payable and payroll. 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 1997 used cash of $40.5 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
$7.5 million. Investing activities in 1998 used cash of $3.7 million and
consisted of the purchase of property and equipment of $5.3 million, the
acquisition of the assets of FST for $2.5 million and the purchase of
preferred stock of LITMAS for $1.0 million, offset by a net decrease in
marketable securities of $5.1 million.
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 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 $32.0 million and
consisted primarily of the net proceeds of $28.7 million from the
underwritten public offering, $0.4 million of other sales of common stock,
and $1.6 million from stockholders' notes receivable. In 1998, financing
activities used cash of $5.1 million and consisted primarily of changes in
notes payable and capital lease obligations.
The Company plans to spend approximately $4.9 million through 1999 for
the acquisition of equipment, leasehold improvements and furnishings, with
depreciation expense projected to be $5.0 million.
As of December 31, 1998, the Company had working capital of $62.1
million. The Company's principal sources of liquidity consisted of $12.3
million of cash and cash equivalents, $15.8 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 revolving line
of credit bear interest at either the prime rate (7.75% at February 28, 1999)
minus 1.25% or the LIBOR 360-day rate (5.39375% at February 28, 1999) plus
150 basis points, at the Company's option. All advances under this revolving
line of credit will be due and payable in December 2000; however, there were
no advances outstanding as of December 31, 1998.
44
<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 1999. 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.
YEAR 2000 PROGRAM
The Year 2000 problem is the result of computer programs that rely on
two-digit date codes, instead of four-digit date codes, to indicate the year.
Such computer programs, which are unable to interpret the date code "00" as
the year 2000, may not be able to perform computations and decision-making
functions and could cause computer systems to malfunction.
The Company has developed a multi-phase program for Year 2000 information
systems compliance that consists of the following:
- ASSESSMENT of the corporate systems and operations of the Company that
could be affected by the Year 2000 problem;
- REMEDIATION of non-compliant systems and components; and
- TESTING of systems and components following remediation.
The Company has focused its Year 2000 review on three areas:
- information technology (IT) system applications;
- non-IT systems, including engineering and manufacturing applications;
and
- relationships with third parties.
The Company has completed assessment of its IT and non-IT systems at all
of its facilities, except for Tower's manufacturing facility in Fridley,
Minnesota. Assessment of the IT and non-IT systems at Tower's facility is
underway and is expected to be complete during the second quarter of 1999.
The Company believes that its enterprise-wide software system, which is
installed at the Fort Collins facility and certain other facilities, is Year
2000 compliant. Such belief is based significantly on discussions with and
representations by the vendor of such software. The Company has been, and
will continue to be, in contact with such vendor in order to obtain any
additional revisions or upgrades issued by the vendor to ensure that such
enterprise-wide software remains Year 2000 compliant. The Company also has
conducted its own tests on the enterprise-wide
45
<PAGE>
software to verify the vendor's representations. The Company has not
determined whether to install its enterprise-wide software system at the
Fridley facility prior to the year 2000.
Following completion of the assessment phase, the Year 2000 team
identified those non-compliant systems that it considers to be "mission
critical." Remediation and testing of the mission critical IT systems, except
at the Fridley facility, have been completed. Remediation and testing of
mission critical non-IT systems are underway and are expected to be completed
during the second quarter of 1999, except at the Fridley facility.
Remediation and testing of non-compliant systems that are not mission
critical are expected to be completed during the third quarter of 1999. Once
the Year 2000 team has completed assessment of the IT and non-IT systems at
the Fridley facility, it will identify the non-compliant systems that are
mission critical. Until such time, the Company cannot determine the date by
when remediation and testing will be completed at the Fridley facility. Based
on the assessment results to date, the Company expects to complete
remediation and testing of mission critical IT systems at the Fridley
facility during the third quarter of 1999.
The Company is examining its relationship with third parties whose Year
2000 compliance could have a material effect on the Company. The Company
considers third party suppliers and customers to pose the greatest Year 2000
risk to the Company, because the failure of such persons to become Year 2000
compliant in a timely manner, if at all, could result in the Company's
inability to obtain components in a timely manner, reductions in the quality
of components obtained, reductions, delays or cancellations of customer
orders or delay in payments by customers for products shipped. In addition,
conversions by third parties to become Year 2000 compliant might not be
compatible with the Company's systems. Any or all of these events could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company has circulated questionnaires to and has actively solicited
feedback from its significant vendors and customers with respect to such
persons' Year 2000 compliance programs and status, except that the Company
has not yet contacted all of RF Power Products' significant vendors. Based on
the results of such efforts, the Company believes that its principal
customers and all of its sole source suppliers are either Year 2000 compliant
or are implementing plans to become Year 2000 compliant in a timely manner.
Certain suppliers have advised the Company that they are implementing Year
2000 programs, but have not indicated by when they expect to be Year 2000
compliant or have indicated that they don't expect to be Year 2000 compliant
until the fourth quarter of 1999. The Company continues to pursue additional
information about such suppliers' Year 2000 readiness in order to assess the
risks involved in relying on such suppliers.
In what the Company believes to be the most reasonably likely worst case
Year 2000 scenario, the Company would be unable to obtain electronic
components from its suppliers because of such third parties' failure to
become Year 2000 compliant, and the Company would be unable to manufacture
such components internally or to redesign its
46
<PAGE>
systems to accommodate different components because of the failure of the
Company's engineering and manufacturing systems to be Year 2000 compliant.
The Company is in the process of reviewing the capabilities of its current
and other component suppliers to ensure that the components most critical to
production of the Company's systems are not sole-sourced. See "Cautionary
Statements - Risk Factors--Supply Constraints and Dependence on Sole and
Limited Source Suppliers."
Although the Company is continuing to assess Year 2000 costs, it does not
expect the costs associated with such projects to have a material effect on
the Company's financial results. The Company expects to spend less than five
percent of its total IT budget on Year 2000 costs. The Company has not
identified any IT projects that have been deferred due to its Year 2000
efforts. The Company's current estimates of the impact of the Year 2000
problem on its operations 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 believes that its systems are Year 2000 ready, except that
certain products acquired from Fourth State Technology have not been fully
assessed. The Company intends to complete assessment of the Fourth State
Technology products during the second quarter of 1999.
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.
47
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and long-term debt
obligations. The Company does not use derivative financial instruments in its
investment portfolio. The Company places its investments with high credit
quality issuers and by policy is averse to principal loss and ensures the
safety and preservation of its invested funds by limiting default risk,
market risk and reinvestment risk. As of December 31, 1998, the Company's
investments consisted of equities, municipal bonds and notes and mutual funds.
The Company's interest expense is sensitive to changes in the general
level of U.S. interest rates. The Company's debt is fixed rate in nature and
mitigates the impact of fluctuations in interest rates. The fair value of the
Company's debt approximates the carrying amount at December 31, 1998.
Management believes the potential effects of near-term changes in interest
rates on the Company's fixed rate debt is not material.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company's subsidiary in 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 other currencies will be adversely affected by changes in
exchange rates. 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, 1998, maturing through June 1999. At December 31,
1998, the Company held foreign forward exchange contracts with nominal
amounts of $3,000,000 and market settlement amounts of $3,513,000 for an
unrealized loss position of $513,000.
48
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Arthur Andersen LLP, Independent Public Accountants.......................................... 50
Report of KPMG LLP, Independent Public Accountants..................................................... 51
Consolidated Balance Sheets as of December 31, 1998 and 1997........................................... 52
Consolidated Statement of Operations for the Years Ended December 31, 1998, 1997 and 1996.............. 54
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1998, 1997 and 1996.... 55
Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996.............. 56
Notes to Consolidated Financial Statements............................................................. 57
Schedule II - Valuation and Qualifying Accounts........................................................ 71
</TABLE>
49
<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, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years
in the period ended December 31, 1998. 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. The
consolidated financial statements give retroactive effect to the merger of
the Company and RF Power Products, Inc., which has been accounted for as a
pooling of interests as described in Note 3 to the consolidated financial
statements. We did not audit the consolidated balance sheet of RF Power
Products, Inc. as of November 30, 1997 (the previous year-end of RF Power
Products, Inc. - see Note 3), or the related statements of operations and
cash flows for the years ended November 30, 1997 and 1996, which statements
reflect total assets of 14% as of December 31, 1997, and total revenues of
19% and 24% for the years ended December 31, 1997 and 1996, of the related
consolidated totals, respectively. These statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to amounts included for RF Power Products, Inc., is based solely
upon the report of the other auditors.
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 and the report
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998 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 5, 1999.
50
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RF Power Products, Inc.:
We have audited the consolidated balance sheets of RF Power Products,
Inc. and subsidiary as of November 30, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for
the years then ended (not separately presented herein). In connection with
our audit of these consolidated financial statements, we also have audited
the related consolidated financial statement schedule (not separately
presented herein). These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement 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 our audits provide a reasonable
basis for our opinion.
In our opinion, the 1997 and 1996 consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of RF Power Products, Inc. and subsidiary as of November 30, 1997
and 1996, and the results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
KPMG LLP
Philadelphia, Pennsylvania
January 16, 1998
51
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 12,295 $ 12,041
Marketable securities - trading............................................ 15,839 20,174
Accounts receivable --
Trade (less allowances for doubtful accounts of approximately
$582 and $587 at December 31, 1998 and 1997, respectively)............ 14,841 33,819
Related parties......................................................... 221 893
Other................................................................... 542 1,343
Income tax receivable...................................................... 3,576 --
Inventories................................................................ 21,412 31,207
Other current assets....................................................... 797 2,561
Deferred income tax assets, net............................................ 4,112 3,320
--------- --------
Total current assets............................................... 73,635 105,358
--------- --------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $14,316 and $9,667 at December 31,
1998 and 1997, respectively................................................ 15,320 14,852
--------- --------
OTHER ASSETS:
Deposits and other......................................................... 1,007 570
Goodwill and intangibles, net of accumulated amortization of $1,505 and
$378 at December 31, 1998 and 1997, respectively........................ 8,586 7,112
Demonstration and customer service equipment, net of
accumulated depreciation of $1,743 and $1,936 at December 31,
1998 and 1997, respectively............................................. 2,487 2,172
--------- --------
12,080 9,854
--------- --------
Total assets....................................................... $101,035 $130,064
--------- --------
--------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
52
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade..................................................... $ 5,675 $ 15,111
Accrued payroll and employee benefits...................................... 2,983 5,538
Other accrued expenses..................................................... 2,074 2,410
Customer deposits.......................................................... 66 226
Accrued income taxes payable............................................... 567 2,734
Capital lease obligations, current portion................................. 111 147
Notes payable, current portion............................................. 100 4,850
--------- --------
Total current liabilities.......................................... 11,576 31,016
--------- --------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion.......................... 110 22
Notes payable, net of current portion...................................... 216 1,499
--------- --------
326 1,521
--------- --------
Total liabilities.................................................. 11,902 32,537
--------- --------
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;
26,725 and 26,486 shares issued and outstanding, respectively........... 27 26
Additional paid-in capital................................................. 60,381 59,156
Retained earnings.......................................................... 29,139 39,138
Stockholders' notes receivable............................................. -- (67)
Deferred compensation...................................................... -- (34)
Accumulated other comprehensive loss....................................... (414) (692)
--------- --------
Total stockholders' equity......................................... 89,133 97,527
--------- --------
Total liabilities and stockholders' equity......................... $101,035 $130,064
--------- --------
--------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
53
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
SALES........................................................... $124,698 $175,758 $129,931
COST OF SALES................................................... 87,985 108,802 82,685
-------- -------- --------
Gross profit.................................................. 36,713 66,956 47,246
-------- -------- --------
OPERATING EXPENSES:
Research and development...................................... 23,849 19,336 17,288
Sales and marketing........................................... 13,531 11,646 10,723
General and administrative.................................... 9,483 10,480 8,865
Restructuring charge.......................................... 1,000 -- --
Merger costs.................................................. 2,742 -- --
Storm (recoveries) damages.................................... (1,117) 2,700 --
Purchased in-process research and development................. -- 3,080 --
-------- -------- --------
Total operating expenses.................................... 49,488 47,242 36,876
-------- -------- --------
(LOSS) INCOME FROM OPERATIONS................................... (12,775) 19,714 10,370
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income............................................... 1,111 573 481
Interest expense.............................................. (191) (481) (284)
Foreign currency gain (loss).................................. 369 97 (351)
Other, net.................................................... (931) (380) 115
-------- -------- --------
358 (191) (39)
-------- -------- --------
Net (loss) income before income taxes....................... (12,417) 19,523 10,331
(BENEFIT) PROVISION FOR INCOME TAXES............................ (2,900) 7,467 3,960
-------- -------- --------
NET (LOSS) INCOME............................................... $ (9,517) $12,056 $ 6,371
-------- -------- --------
-------- -------- --------
BASIC (LOSS) EARNINGS PER SHARE................................. $(0.36) $0.47 $0.25
-------- -------- --------
-------- -------- --------
DILUTED (LOSS) EARNINGS PER SHARE............................... $(0.36) $0.46 $0.25
-------- -------- --------
-------- -------- --------
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING................................................... 26,572 25,523 25,203
-------- -------- --------
-------- -------- --------
DILUTED WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING............................................ 26,572 26,302 25,738
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
54
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL STOCKHOLDERS' OTHER TOTAL
------------- PAID-IN RETAINED NOTES DEFERRED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION INCOME (LOSS) EQUITY
------ ------ ---------- -------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1995,
as previously reported........... 21,069 $ 21 $ 22,925 $ 19,921 $ (1,083) $ (130) $ (567) $ 41,087
Adjustment for pooling of
interests...................... 3,961 4 6,331 790 (155) -- -- 6,970
------ ---- -------- ------- -------- ------ ------ --------
BALANCES, December 31, 1995,
as restated...................... 25,030 25 29,256 20,711 (1,238) (130) (567) 48,057
Exercise of stock options and
warrants for cash.............. 223 -- 160 -- -- -- -- 160
Proceeds from stockholders'
notes receivable............... -- -- -- -- 77 -- -- 77
Amortization of deferred
compensation................... -- -- -- -- -- 48 -- 48
Tax benefit related to shares
acquired by employees under
stock compensation plans....... -- -- 148 -- -- -- -- 148
Comprehensive income:
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- 67 --
Net income....................... -- -- -- 6,371 -- -- -- --
Total comprehensive income..... -- -- -- -- -- -- -- 6,438
------ ---- -------- ------- -------- ------ ------ --------
BALANCES, December 31, 1996........ 25,253 25 29,564 27,082 (1,161) (82) (500) 54,928
Exercise of stock options
for cash....................... 135 -- 268 -- -- -- -- 268
Exercise of stock options in
exchange for stockholders'
notes receivable............... 90 -- 470 -- (470) -- -- --
Proceeds from stockholders'
notes receivable............... -- -- -- -- 1,564 -- -- 1,564
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
Tax benefit related to shares
acquired by employees under
stock compensation plans........ -- -- 29 -- -- -- -- 29
Comprehensive income:
Equity adjustment from foreign
currency translation............ -- -- -- -- -- -- (192) --
Net income........................ -- -- -- 12,056 -- -- -- --
Total comprehensive income...... -- -- -- -- -- -- -- 11,864
------ ---- -------- ------- -------- ------ ------ --------
BALANCES, December 31, 1997......... 26,486 26 59,156 39,138 (67) (34) (692) 97,527
Exercise of stock options
for cash........................ 219 1 727 -- -- -- -- 728
Proceeds from stockholders'
notes receivable................ -- -- -- -- 67 -- -- 67
Sale of common stock through
employee stock purchase plan.... 20 -- 133 -- -- -- -- 133
Amortization of deferred
compensation................... -- -- -- -- -- 34 -- 34
Tax benefit related to shares
acquired by employees under
stock compensation plans....... -- -- 365 -- -- -- -- 365
Adjustment to conform year-end
of merged entity............... -- -- -- (482) -- -- -- (482)
Comprehensive loss:
Equity adjustment from foreign
currency translation........... -- -- -- -- -- -- 278 --
Net loss......................... -- -- -- (9,517) -- -- -- --
Total comprehensive loss....... -- -- -- -- -- -- -- (9,239)
------ ---- -------- ------- -------- ------ ------ --------
BALANCES, December 31, 1998........ 26,725 $ 27 $ 60,381 $ 29,139 $ -- $ -- $ (414) $ 89,133
------ ---- -------- ------- -------- ------ ------ --------
------ ---- -------- ------- -------- ------ ------ --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
55
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................................. $ (9,517) $ 12,056 $ 6,371
Adjustment for conforming year-end of merged entity................................ (482) -- --
Adjustments to reconcile net (loss) income to net cash provided
by operating activities -
Depreciation and amortization................................................... 6,544 4,838 3,305
Provision for deferred income taxes............................................. (792) (1,657) (124)
Amortization of deferred compensation........................................... 34 48 48
Purchased in-process research and development................................... -- 3,080 --
Loss on disposal of property and equipment...................................... 102 1,046 41
Earnings from marketable securities, net........................................ (765) (174) --
Writedown of stock investment................................................... 600 -- --
Changes in operating assets and liabilities -
Accounts receivable-trade, net............................................... 19,343 (12,067) (1,430)
Related parties and other receivables........................................ 1,473 (502) 803
Inventories.................................................................. 9,795 (11,513) 3,193
Other current assets......................................................... 1,764 (1,138) (597)
Deposits and other........................................................... (37) 777 (186)
Demonstration and customer service equipment................................. (1,016) (641) (743)
Accounts payable trade....................................................... (9,436) 10,402 (5,823)
Accrued payroll and employee benefits........................................ (2,555) 2,613 (553)
Customer deposits and other accrued expenses................................. (591) 699 (835)
Income taxes payable/receivable.............................................. (5,743) 1,040 299
-------- -------- --------
Net cash provided by operating activities.................................. 8,721 8,907 3,769
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities.................................................. (1,000) (20,000) --
Sale of marketable securities...................................................... 6,100 -- --
Purchase of stock investment....................................................... (1,000) -- --
Purchase of property and equipment, net............................................ (5,292) (7,494) (6,521)
Acquisition of assets of Fourth State Technology, Inc.............................. (2,500) -- --
Acquisition of Tower Electronics, Inc., net of cash acquired....................... -- (12,995) --
-------- -------- --------
Net cash used in investing activities...................................... (3,692) (40,489) (6,521)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable........................................................ 2,201 15,828 3,992
Repayment of notes payable and capital lease obligations........................... (8,182) (14,449) (3,788)
Sale of common stock, net of expenses.............................................. -- 28,724 --
Sale of common stock through employee stock purchase plan.......................... 133 102 --
Proceeds from exercise of stock options and warrants............................... 728 268 160
Proceeds from stockholders' notes receivable....................................... 67 1,564 77
-------- -------- --------
Net cash (used in) provided by financing activities............................. (5,053) 32,037 441
-------- -------- --------
EFFECT OF CURRENCY TRANSLATION ON CASH............................................... 278 (192) 67
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 254 263 (2,244)
CASH AND CASH EQUIVALENTS, beginning of period....................................... 12,041 11,778 14,022
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period............................................. $ 12,295 $ 12,041 $ 11,778
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Note payable assumed in Tower acquisition........................................ $ -- $ 1,389 $ --
-------- -------- --------
-------- -------- --------
Exercise of stock options in exchange for stockholders' notes receivable......... $ -- $ 470 $ --
-------- -------- --------
-------- -------- --------
Tax benefit related to shares acquired by employees under stock option plans..... $ 365 $ 29 $ 148
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................................. $ 283 $ 456 $ 273
-------- -------- --------
-------- -------- --------
Cash paid for income taxes......................................................... $ 2,327 $ 7,918 $ 4,463
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
56
<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 Industries GmbH ("AE-Germany"), Advanced Energy Industries
U.K. Limited ("AE-UK") and Advanced Energy Industries Korea, Inc.
("AE-Korea"). The Company also owns 100% of RF Power Products, Inc. ("RFPP")
and Tower Electronics, Inc. ("Tower"). RFPP is a New Jersey-based designer
and manufacturer of radio frequency power systems, matching networks and
peripheral products primarily for original equipment providers in the
semiconductor capital equipment, commercial coating, flat panel display and
analytical instrumentation markets. Tower is 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 Company continues to be subject to certain risks similar to other
companies in its industry. These risks include significant fluctuations of
quarterly operating results, the volatility of the semiconductor and
semiconductor capital equipment industries, customer concentration within the
markets the Company serves, manufacturing facilities risks, recent and
potential future acquisitions, management of growth, supply constraints and
dependencies, dependence on design wins, barriers to obtaining new customers,
the high level of customized designs, rapid technological changes, potential
impacts of the year 2000 problem, competition, international sales risks, the
Asian financial crisis, intellectual property rights, governmental
regulations, and the volatility of the market price of the Company's common
stock. 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 -- The Company has investments in
marketable equity securities and municipal bonds, which have original
maturities of 90 days or more. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," 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
57
<PAGE>
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.
The Company depreciates the equipment based on its estimated useful life
in the sales and customer service functions. The depreciation is computed
based upon a 3-year life.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost.
Additions, improvements, and major renewals are capitalized. Maintenance,
repairs, and minor renewals are expensed as incurred.
Depreciation is provided using straight-line and accelerated methods over
three to ten years for machinery and equipment. Amortization of leasehold
improvements and leased equipment is provided using the straight-line method
over the life of the lease term or the life of the assets, whichever is
shorter.
GOODWILL AND INTANGIBLES - Goodwill and intangibles are recorded at the
date of acquisition at their allocated cost. Amortization is provided over
the estimated useful lives of approximately 7 years for both the goodwill and
the intangible assets.
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 capital 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, AE-Korea and AE-UK. This
equity account includes the results of translating all balance sheet assets
and liabilities at current exchange rates as of the balance sheet date, and
the statements of operations and cash flows 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 $369,000,
$97,000 and $(351,000) for the years ended December 31, 1998, 1997 and 1996,
respectively.
REVENUE RECOGNITION -- The Company recognizes revenue when products are
shipped.
INCOME TAXES -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109,
deferred tax assets and liabilities are recognized for temporary differences
between the tax basis and financial reporting basis of assets and
liabilities, computed at current tax rates. Also, the Company's deferred
income tax assets include certain future tax benefits. The Company records a
valuation allowance against any portion of those deferred income tax assets
which it believes it will more likely than not fail to realize.
EARNINGS PER SHARE -- In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share," which
requires companies to present basic earnings (loss) per share ("EPS") and
diluted EPS, instead of primary and fully-diluted EPS that was previously
required. This standard was effective for the Company in fiscal 1997 and
prior periods have been retroactively adjusted. Basic EPS is computed by
dividing income available to common stockholders by the weighted-average
58
<PAGE>
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. Basic and diluted EPS were the same for fiscal 1998 as the Company
has incurred losses from operations, therefore, making the effect of all
potential common shares anti-dilutive.
COMPREHENSIVE INCOME (LOSS) -- In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income," which establishes rules for the
reporting of comprehensive income (loss) and its components. Comprehensive
income (loss) for the Company consists of net income (loss) and foreign
currency translation adjustments and is presented in the Consolidated
Statement of Stockholders' Equity. The adoption of SFAS No. 130 in fiscal
1998 had no impact on total stockholders' equity. Prior year financial
statements have been reclassified to conform to the SFAS No. 130 requirements.
SEGMENT REPORTING -- In June 1997, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
requires a public business enterprise to report financial and descriptive
information about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision-maker
in deciding how to allocate resources and in assessing performance. SFAS No.
131 is effective for the Company in fiscal 1998. Management operates and
manages its business of supplying power conversion and control systems as one
operating segment, as their products have similar economic characteristics
and production processes.
NEW ACCOUNTING STANDARD -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activity. SFAS No. 133 is effective for all periods in fiscal
years beginning after June 15, 1999. SFAS No. 133 requires all derivatives to
be recorded on the balance sheet as either an asset or liability and measured
at their fair value. Changes in the derivative's fair value will be
recognized currently in earnings unless specific hedging accounting criteria
are met. SFAS No. 133 also establishes uniform hedge accounting criteria for
all derivatives. The Company has not yet evaluated the impact that the
adoption of SFAS No. 133 will have on the financial statements.
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.
ASSET IMPAIRMENTS -- The Company reviews its long-lived assets and
certain identifiable intangibles to be 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.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year financial statement presentation.
(3) ACQUISITIONS
RF POWER PRODUCTS-- On October 8, 1998, RF Power Products, Inc., a New
Jersey-based designer and manufacturer of radio frequency power systems,
matching networks and peripheral products primarily for original equipment
providers in the semiconductor capital equipment, commercial coating, flat
panel
59
<PAGE>
display and analytical instrumentation markets, was merged with a wholly
owned subsidiary of the Company. The Company issued approximately 4 million
shares of its common stock to the former shareholders of RFPP. Each share of
RFPP common stock was exchanged for 0.3286 of one share of the Company's
common stock. In addition, outstanding RFPP stock options were converted at
the same exchange factor into options to purchase approximately 148,000
shares of the Company's common stock.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests under Accounting Principles Board Opinion No.
16. Accordingly, all prior period consolidated financial statements presented
have been restated to include the combined balance sheet, statements of
operations and cash flows of RFPP as though it had always been part of the
Company. RFPP's year-end was November 30, and therefore, the combined balance
sheet of the Company for fiscal 1997 includes the balance sheet of RFPP as of
November 30, 1997, and the combined statements of operations and cash flows
for both fiscal 1997 and 1996 include RFPP's results for the years ended
November 30, 1997 and 1996, respectively.
RFPP's operating results for the month of December 1998 are not reflected
in the accompanying statement of operations. This is due to changing RFPP's
year-end from November 30 to December 31 to conform to the Company's
year-end. RFPP's month of December 1998 operating results were revenues of
approximately $723,000 and a net loss of $482,000, which has been charged
directly to retained earnings in order to report only twelve months'
operating results. In connection with the merger, the Company recorded in the
fourth quarter a charge to operating expenses of $2,742,000 for direct
merger-related costs.
There were no transactions between the Company and RFPP prior to the
combination, and immaterial adjustments were recorded to conform RFPP's
accounting policies. Certain reclassifications were made to conform the RFPP
financial statements to the Company's presentations. The results of
operations for the separate companies and combined amounts presented in the
consolidated financial statements follow:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Pre-merger
Advanced Energy.................... $ 86,289 $ 141,923 $ 98,852
RFPP............................... 18,436 33,835 31,079
Post-merger.......................... 19,973 -- --
--------- --------- ---------
Consolidated $ 124,698 $ 175,758 $ 129,931
--------- --------- ---------
--------- --------- ---------
Net (loss) income:
Pre-merger
Advanced Energy.................... $ (2,748) $ 10,362 $ 5,144
RFPP............................... (3,859) 1,694 1,227
Post-merger.......................... (168) -- --
Merger cost.......................... (2,742) -- --
--------- --------- ---------
Consolidated $ (9,517) $ 12,056 $ 6,371
--------- --------- ---------
--------- --------- ---------
</TABLE>
FST-- Effective September 3, 1998, the Company acquired substantially all
of the assets of Fourth State Technology, Inc. ("FST"), a privately held,
Texas-based designer and manufacturer of process controls used to monitor and
analyze data in the RF process. The purchase price consisted of $2.5 million
in cash, assumption of a $113,000 liability, and an earn-out provision which
is based on profits over the next three-year period. Approximately $2.6
million of the purchase price was allocated to intangible assets. The results
of operations of FST are included within the accompanying consolidated
financial statements from the date of acquisition.
TOWER-- 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
60
<PAGE>
"Note"), which was paid in full during 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 costs 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>
<CAPTION>
(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 purchase agreement included a contingent purchase price based on
Tower exceeding a certain sales level in 1998. No additional purchase price
has been recorded during 1998 as the sales level was not achieved.
The results of operations of Tower are included within the accompanying
consolidated financial statements from the date of acquisition.
(4) PUBLIC OFFERING OF COMMON STOCK
In October 1997, the Company closed on an offering of its common stock.
In connection with the 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 are reported at their fair value and
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Equities............................... $ 12,290 $ 18,345
Municipal bonds and notes.............. 2,815 1,700
Mutual funds........................... 734 129
-------- --------
$ 15,839 $ 20,174
-------- --------
-------- --------
</TABLE>
These marketable securities have original costs of $14,900,000 and
$20,000,000 as of December 31, 1998 and 1997, respectively.
61
<PAGE>
(6) ACCOUNTS RECEIVABLE - TRADE
ACCOUNTS RECEIVABLE - TRADE consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Domestic............................... $ 8,295 $ 23,341
Foreign................................ 7,128 11,065
Allowance for doubtful accounts........ (582) (587)
-------- ---------
$ 14,841 $ 33,819
-------- ---------
-------- ---------
</TABLE>
(7) INVENTORIES
INVENTORIES consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Parts and raw materials................ $ 13,212 $ 20,622
Work in process........................ 1,934 3,592
Finished goods......................... 6,266 6,993
-------- ---------
$ 21,412 $ 31,207
-------- ---------
-------- ---------
</TABLE>
(8) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................... $ 14,680 $ 11,368
Computers and communication equipment..... 7,306 6,584
Furniture and fixtures.................... 3,591 2,846
Vehicles.................................. 155 155
Leasehold improvements.................... 3,904 3,566
-------- ---------
29,636 24,519
Less -- accumulated depreciation.......... (14,316) (9,667)
-------- ---------
$ 15,320 $ 14,852
-------- ---------
-------- ---------
</TABLE>
Included in the cost of property and equipment above is equipment
obtained through capital leases. The original cost of capital lease equipment
included in property and equipment above was as follows at December 31, 1998
and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................... $ 90 $ 573
Computers and communication equipment..... 286 63
Furniture and fixtures.................... 2 2
Less - accumulated depreciation........... (177) (558)
------ -----
$ 201 $ 80
------ -----
------ -----
</TABLE>
Depreciation of assets acquired under capitalized leases is included in
depreciation expense.
62
<PAGE>
(9) NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
(IN THOUSANDS)
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. This line includes $20,000,000 available for general use, with an
option to convert up to $10,000,000 to a three-year term loan; additional
advances up to $5,000,000 each for Optional Currency Rate Advances and
Foreign Exchange Contracts. Borrowing base consists of the sum of 80
percent of eligible accounts receivable plus the lesser of 20 percent of
eligible inventory or $5,000,000. Loan covenants provide certain financial
restrictions related to working capital, leverage, net worth, payment and
declaration of dividends and profitability........................................... $ -- $ --
Bank overdraft loan, at interest rates ranging from 1.05% to 1.65% annually............ -- 1,762
Promissory note related to indemnification clause of Tower acquisition,
with an imputed interest rate of 8%.................................................. -- 1,389
Note payable to financial institution with interest at the LIBOR rate, plus 1.5%....... -- 904
Note payable to financial institution with interest at the LIBOR rate, plus 1.5%....... -- 875
Note payable to the New Jersey Economic Development Authority, with interest at
5%, principal and interest due monthly, matures January 2002 and secured by
machinery and equipment.............................................................. 316 419
Revolving line of credit at 8.5%....................................................... -- 1,000
------ -------
316 6,349
Less -- current portion................................................................ (100) (4,850)
------ -------
$ 216 $ 1,499
------ -------
------ -------
</TABLE>
(10) INCOME TAXES
For the years ended December 31, 1998, 1997 and 1996, 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%.
The (benefit) provision for income taxes for the years ended December 31,
1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal....................... $ (3,307) $ 5,964 $ 3,351
State and local............... (475) 1,432 761
Foreign taxes................. 882 71 (152)
-------- ------- -------
$ (2,900) $ 7,467 $ 3,960
-------- ------- -------
-------- ------- -------
Current....................... $ (2,108) $ 9,124 $ 4,084
Deferred...................... (792) (1,657) (124)
-------- ------- -------
$ (2,900) $ 7,467 $ 3,960
-------- ------- -------
-------- ------- -------
</TABLE>
63
<PAGE>
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) expense per federal statutory rate....................... $ (4,346) $ 6,808 $ 3,512
State income taxes, net of federal deduction.................................. (309) 830 462
Foreign sales corporation..................................................... -- (209) (108)
Nondeductible merger costs.................................................... 960 -- --
Nondeductible goodwill amortization........................................... 353 132 --
Nondeductible purchased in-process research and development................... -- 1,078 --
Other permanent items, net.................................................... (109) (22) 77
Effect of foreign taxes....................................................... 80 275 (68)
Foreign operating loss with no benefit provided............................... 610 -- --
Change in valuation allowance................................................. 107 (530) --
Tax credits................................................................... (164) (511) (184)
Other......................................................................... (82) (384) 269
-------- ------- -------
$ (2,900) $ 7,467 $ 3,960
-------- ------- -------
-------- ------- -------
</TABLE>
The Company's deferred income taxes assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 CHANGE DECEMBER 31, 1997
----------------- ------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Employee bonuses.................................................... $ 67 $ (136) $ 203
Warranty reserve.................................................... 409 61 348
Bad debt reserve.................................................... 205 6 199
Vacation accrual.................................................... 277 (103) 380
Obsolete and excess inventory....................................... 1,255 87 1,168
Foreign operating loss carryforwards................................ 1,253 610 643
Research and development credit carryforwards....................... 324 324 --
Alternative minimum tax credit carryforwards........................ 276 276 --
Depreciation and amortization....................................... 172 75 97
Other............................................................... 591 309 282
Less: Valuation allowance on foreign operating loss carryforwards... (717) (717) --
------- ------ -------
$ 4,112 $ 792 $ 3,320
------- ------ -------
------- ------ -------
</TABLE>
The domestic versus foreign component of the Company's net (loss) income
before income taxes at December 31, 1998, 1997 and 1996, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic............. $ (12,891) $ 18,594 $ 10,282
Foreign.............. 474 929 49
--------- -------- --------
$ (12,417) $ 19,523 $ 10,331
--------- -------- --------
--------- -------- --------
</TABLE>
(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 ($10,000 during 1998).
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 $746,000, $620,000 and $97,000 for the years ended December 31,
1998, 1997 and 1996, respectively. Vesting in the profit sharing
64
<PAGE>
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
8.96%. The future minimum lease payments under capitalized lease obligations
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999....................................................... $ 112
2000....................................................... 89
2001....................................................... 45
-----
Total minimum lease payments....................... 246
Less -- amount representing interest............... (25)
Less -- current portion............................ (111)
-----
$ 110
-----
-----
</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 $4,556,000 and $2,976,000 and $2,147,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The future minimum rental payments required under noncancelable operating
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999...................................................... $ 4,350
2000...................................................... 3,968
2001...................................................... 2,926
2002...................................................... 2,365
2003...................................................... 1,899
Thereafter................................................ 9,935
-------
$25,443
-------
-------
</TABLE>
GUARANTEE
In December 1998, 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. No value has currently been assigned
to these warrants.
65
<PAGE>
(13) FOREIGN OPERATIONS
The Company operates in a single operating segment with operations in the
U.S., Asia and Europe. The following is a summary of the Company's foreign
operations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Originating in Japan to unaffiliated customers............. $ 6,300 $ 11,431 $ 6,467
Originating in Europe to unaffiliated customers............ 8,489 7,487 8,023
Originating in U.S. and sold to foreign customers.......... 20,457 21,885 14,202
Originating in U.S. and sold to domestic customers......... 89,452 134,955 101,239
Transfers between geographic areas......................... 10,304 14,523 10,496
Intercompany eliminations.................................. (10,304) (14,523) (10,496)
---------- ----------- ----------
$124,698 $175,758 $129,931
---------- ----------- ----------
---------- ----------- ----------
(Loss) income from operations:
Japan...................................................... $ (1,505) $ (73) $ (920)
Europe..................................................... 1,722 1,488 1,056
U.S........................................................ (12,971) 18,602 10,542
South Korea................................................ (186) -- --
Intercompany eliminations.................................. 165 (303) (308)
---------- ----------- ----------
$(12,775) $19,714 $10,370
---------- ----------- ----------
---------- ----------- ----------
Identifiable assets:
Japan...................................................... $ 6,039 $ 10,709 $ 6,445
Europe..................................................... 5,073 4,676 3,788
U.S........................................................ 120,675 143,932 66,783
South Korea................................................ 610 250 --
Intercompany eliminations.................................. (31,362) (29,503) (8,938)
---------- ----------- ----------
$101,035 $130,064 $68,078
---------- ----------- ----------
---------- ----------- ----------
</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 $1,359,000, $1,320,000 and $1,364,000 was charged to rent
expense attributable to these leases for the years ended December 31, 1998,
1997 and 1996, respectively.
The Company leases, for business purposes, a condominium owned by a
partnership of certain stockholders. The Company paid the partnership
approximately $36,000 for each of the years ended December 31, 1998, 1997 and
1996, relating to this lease.
Included in AE-Japan's accounts receivable at December 31, 1997 and 1996 is
approximately $835,000 and $394,000, respectively, due from an entity that
was controlled by the former president of AE-Japan. This entity also
accounted for approximately 2% and 3% of consolidated sales during 1997 and
1996, respectively.
In prior years, certain stockholders of the Company exercised options to
purchase shares of the Company's common stock in exchange for notes
receivable in the amount of the exercise price. These
66
<PAGE>
notes receivable and accrued interest have been paid in full.
In August 1993, RFPP entered into a five-year exclusive distributorship
agreement with Astech Corporation ("Astech") to distribute RFPP's products in
Japan. The President and Chief Operating Officer of Astech was a member of
RFPP's Board of Directors prior to his resignation in December 1996. Sales to
Astech were $1.6 million in both 1997 and 1996, and purchases from Astech
were $1.0 million and $1.3 million in 1997 and 1996, respectively.
(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
capital equipment and disk storage equipment and, for the years ended
December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Customer A............................ 23% 31% 25%
Customer B............................ 7% 11% 19%
Customer C............................ 10% 5% 3%
---- ---- ----
40% 47% 47%
---- ---- ----
---- ---- ----
</TABLE>
(16) FORWARD CONTRACTS
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 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. Foreign currency gains and losses under the
above arrangements are not deferred. The Company generally enters into
foreign currency forward contracts with maturities ranging from 7 to 10
months, with contracts outstanding at December 31, 1998, maturing through
June 1999. At December 31, 1998, the Company held foreign forward exchange
contracts with nominal amounts of $3,000,000 and market settlement amounts of
$3,513,000 for an unrealized loss position of $513,000.
(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 September 1995. In February 1998, the Employee Option Plan was further
amended to increase the number of shares of common stock issuable under such
plan. 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 1998, 1997 and 1996 were issued at 100% of
fair market value, as determined by the Company, with typical vesting over
three to five 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 4,625,000 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
67
<PAGE>
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
has been 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 in 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 1998 and 1997,
employees purchased an aggregate of 20,264 and 8,186 shares under the Stock
Purchase Plan, respectively.
NON-EMPLOYEE DIRECTORS 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 for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- --------------------------- -----------------------
(IN THOUSANDS, EXCEPT SHARE PRICES)
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.................................... 1,475 $ 7.02 1,017 $ 3.57 847 $ 2.84
Granted..................................... 937 10.23 731 11.60 837 5.49
Exercised................................... (219) 3.35 (225) 3.25 (223) 0.71
Terminated.................................. (206) 6.35 (48) 4.96 (444) 6.88
----- ----- -----
Options outstanding at end of period........ 1,987 9.01 1,475 7.02 1,017 3.57
----- ----- -----
----- ----- -----
Options exercisable at end of period........ 651 6.89 489 4.35 422 2.40
Weighted-average fair value of
options granted during the period......... $ 6.71 $ 7.41 $ 3.05
----- ----- -----
----- ----- -----
Price range of outstanding options.......... $0.67 - $31.63 $0.67 - $31.63 $0.67 - $17.68
-------------- -------------- --------------
-------------- -------------- --------------
Price range of options terminated........... $0.83 - $12.75 $ 3.40 - $9.00 $0.83 - $11.05
-------------- -------------- --------------
-------------- -------------- --------------
Non-employee directors stock options--
Options outstanding at beginning of period... 25 $ 14.67 20 $ 9.82 15 $ 11.05
Granted...................................... 20 7.55 17 16.64 5 6.13
Exercised.................................... -- -- (2) 7.13 -- --
Terminated................................... -- -- (10) 9.82 -- --
----- ----- -----
Options outstanding at end of period......... 45 11.61 25 14.67 20 9.82
----- ----- -----
----- ----- -----
Options exercisable at end of period......... 15 11.40 8 14.62 5 11.05
----- ----- -----
----- ----- -----
Weighted-average fair value of options
granted during the period.................. $ 4.93 $ 11.43 $ 4.68
----- ----- -----
----- ----- -----
Price range of outstanding options.......... $8.63 - $29.88 $8.63 - $31.63 $6.13 - $11.05
-------------- -------------- --------------
-------------- -------------- --------------
Price range of options terminated........... $ -- $6.13 - $11.05 $ --
----- ----- -----
----- ----- -----
</TABLE>
68
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), defines a fair value based method
of accounting for employee stock options or similar equity instruments.
However, SFAS No. 123 allows the continued measurement of compensation cost
for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"),
provided that pro forma disclosures are made of net income or loss and net
income or loss per share, assuming the fair value based method of SFAS No.
123 had been applied. The Company has elected to account for stock-based
compensation plans under APB No. 25, under which no compensation expense is
recognized.
For SFAS No. 123 purposes, the fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rates 5.06% 6.17% 6.57%
Expected dividend yield rates 0.0% 0.0% 0.0%
Expected lives 4 years 4 years 4 years
Expected volatility 87.48% 101.16% 22.57%
</TABLE>
The total fair value of options granted was computed to be approximately
$6,056,000, $4,912,000 and $1,694,000 for the years ended December 31, 1998,
1997 and 1996, 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 $2,033,000, $906,000 and $87,000
for 1998, 1997 and 1996, respectively.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income would have been reduced to the following
pro forma amounts:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net (Loss) Income:
As reported $ (9,517) $12,056 $ 6,371
Pro forma (11,550) 11,150 6,284
Diluted Earnings Per Share:
As reported $ (0.36) $ 0.46 $ 0.25
Pro forma (0.43) 0.42 0.24
</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.
69
<PAGE>
The following table summarizes information about the stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Year Range of Number Contractual Exercise Number Exercise
Granted Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ---------------- ------------ ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
1993 - 1994 $0.67 to $8.76 107,000 4.4 years $ 1.64 107,000 $ 1.64
1995 $2.57 to $11.05 74,000 6.2 years $ 5.93 71,000 $ 5.80
1996 $3.88 to $11.05 300,000 7.6 years $ 4.88 186,000 $ 5.05
1997 $7.13 to $31.63 631,000 7.9 years $ 11.92 227,000 $ 11.81
1998 $6.75 to $17.32 920,000 9.5 years $ 10.07 75,000 $ 9.09
--------- --------- ------- ------- -------
2,032,000 8.4 years $ 9.29 666,000 $ 7.34
--------- --------- ------- ------- -------
--------- --------- ------- ------- -------
</TABLE>
70
<PAGE>
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
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, 1996:
Inventory obsolescence reserve..... $ 890 $ 3,308 $ 2,121 $ 2,077
Allowance for doubtful accounts.... 316 77 11 382
------- ------- ------- -------
$ 1,206 $ 3,385 $ 2,132 $ 2,459
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31, 1997:
Inventory obsolescence reserve..... $ 2,077 $ 4,526 $ 3,322 $ 3,281
Allowance for doubtful accounts.... 382 263 58 587
------- ------- ------- -------
$ 2,459 $ 4,789 $ 3,380 $ 3,868
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31, 1998:
Inventory obsolescence reserve..... $ 3,281 $ 6,712 $ 7,367 $ 2,626
Allowance for doubtful accounts.... 587 77 82 582
------- ------- ------- -------
$ 3,868 $ 6,789 $ 7,449 $ 3,208
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
71
<PAGE>
PART III
In accordance with General Instruction G(3) of Form 10-K, the information
required by this Part III is incorporated by reference to the Advanced
Energy's definitive proxy statement relating to its 1999 Annual Meeting of
Stockholders (the "Proxy Statement"), as set forth below. The Proxy Statement
will be filed with the Securities and Exchange Commission within 120 days
after the end of 1998.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement under the captions
"Proposal I/Election of Directors--Nominees" and "Section 16(a) Beneficial
Ownership Reporting Compliance" and in Part I of this Form 10-K under the
caption "Executive Officers of the Company" is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the Proxy Statement under the caption "Common
Stock Ownership by Management and Other Stockholders" is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement under the caption "Certain
Transactions with Management" is incorporated herein by reference.
72
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (i) Financial Statements:
Reports of Independent Public Accountants 50
Consolidated Financial Statements:
Balance Sheets at December 31, 1998 and 1997 52
Statement of Operations for each of the three years
in the period ended December 31, 1998 54
Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 1998 55
Statement of Cash Flows for each of the three years
in the period ended December 31, 1998 56
Notes to Consolidated Financial Statements 57
(ii) Financial Statement Schedules for each of the three years
in the period ended December 31, 1998
Schedule II--Valuation and Qualifying Accounts 71
(iii) Exhibits:
2.1 Agreement and Plan of Reorganization, dated as of June 1, 1998,
by and among the Company, Warpspeed, Inc., a wholly owned
subsidiary of the Company, and RF Power Products, Inc.(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 Comprehensive Supplier Agreement, dated May 18, 1998, between
Applied Materials Inc. and the Company(1)+
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 Loan and Security Agreement, dated August 15, 1997, among Silicon
Valley Bank, Bank of Hawaii and the Company(4)
10.5 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(5)
10.6 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property in
Fort Collins, Colorado(2)
10.7 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort Collins,
Colorado(2)
10.8 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C.
and the Company for a building in Fort Collins, Colorado(2)
73
<PAGE>
10.9 Lease, dated April 15, 1998, between Cross Park Investors, Ltd.,
and the Company for property in Austin, Texas(1)
10.10 Lease, dated April 15, 1998, between Cameron Technology
Investors, Ltd., and the Company for property in Austin, Texas(1)
10.11 Sublease Agreement, dated November 1, 1992, between RF Power
Products, Inc., and Test Technology, Inc. for property in
Voorhees, New Jersey(6)
10.12 Lease Agreement, dated March 18, 1996, and amendments dated June
21, 1996 and August 30, 1996, between RF Power Products, Inc.,
and Laurel Oak Road, L.L.C. for property in Voorhees, New
Jersey(7)
10.13 Form of Indemnification Agreement(2)
10.14 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach
10.15 1995 Stock Option Plan, as amended and restated*
10.16 1995 Non-Employee Directors' Stock Option Plan*
10.17 License Agreement, dated May 13, 1992 between RF Power Products
and Plasma-Therm, Inc.(8)
10.18 Distribution Agreement dated August 10, 1993 between RF Power
Products, Inc. and Astech Corporation(9)
10.19 Master Purchase Order and Sales Agreement dated May 1994 between
RF Power Products, Inc. and Applied Materials, Inc. and Master
Purchase Order and Sales Agreement Revision I dated November 9,
1994 between RF Power Products, Inc. and Applied Materials,
Inc.(10)
10.20 Purchase Agreement dated October 14, 1994 between RF Power
Products, Inc. and Plasma Therm Incorporated(10)
10.21 Purchase Agreement dated October 28, 1994 between RF Power
Products, Inc. and Plasma Etch, Inc.(10)
10.22 Purchase Agreement dated November 9, 1995 between RF Power
Products, Inc. and Plasma and Material Technology, Inc.(11)
10.23 Purchase Agreement dated October 16, 1995 between RF Power
Products, Inc. and Plasma Therm, Incorporated(11)
10.24 Purchase Agreement dated June 5, 1995 between RF Power Products,
Inc. and Mattson Technology(11)
10.25 Lease Agreement dated March 18, 1996 and amendments dated June
21, 1996 and August 30, 1996 between RF Power Products, Inc. and
Laurel Oak Road, L.L.C. for office, manufacturing and warehouse
space at 1007 Laurel Oak Road, Voorhees, New Jersey(7)
10.26 Direct Loan Agreement dated December 20, 1996 between RF Power
Products, Inc. and the New Jersey Economic Development
Authority(7)
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP, Independent Accountants
23.2 Consent of KPMG 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 for the year ended December 31, 1998
27.2 Financial Data Schedule as restated for the years ended
December 31, 1997 and 1996
74
<PAGE>
(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, 1998.
_______________
(1) Incorporated by reference to the Company's quarterly Report on Form
10-Q for the quarter ended June 30, 1998 (File No. 0-26966), filed
August 7, 1998.
(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, 1995 (File No. 0-26966), filed March
28, 1996, 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.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-26966), filed March
24, 1998.
(6) Incorporated by reference to RF Power Products' Annual Report on Form
10-K for the fiscal year ended November 30, 1992 (File No. 0-20229),
filed February 26, 1993.
(7) Incorporated by reference to RF Power Products' Annual Report on Form
10-K for the fiscal year ended November 30, 1996 (File No. 0-20229),
filed February 25, 1997.
(8) Incorporated by reference to RF Power Products' Registration Statement
on Form 10 (File No. 0-020229), filed May 19, 1992 as amended.
(9) Incorporated by reference to RF Power Products' Annual Report on Form
10-K for the fiscal year ended November 30, 1993 (File No. 0-20229),
filed February 28, 1994.
(10) Incorporated by reference to RF Power Products' Annual Report on Form
10-K for the fiscal year ended November 30, 1994 (File No. 0-20229),
filed February 24, 1995.
(11) Incorporated by reference to RF Power Products' Annual Report on Form
10-K for the fiscal year ended November 30, 1995 (File No. 0-20229),
filed February 28, 1996.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
75
<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.
<TABLE>
<CAPTION>
Signatures Title Date
---------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ Douglas S. Schatz Chairman of the Board, March 18, 1999
---------------------- President and Chief Executive Officer
Douglas S. Schatz (Principal Executive Officer)
/s/ Richard P. Beck Vice President, Chief Financial March 11, 1999
---------------------- Officer, Assistant Secretary and
Richard P. Beck Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ Hollis L. Caswell Chief Operating Officer March 19, 1999
---------------------- and Director
Hollis L. Caswell
/s/ G. Brent Backman Director March 18, 1999
----------------------
G. Brent Backman
/s/ Elwood Spedden Director March 15, 1999
----------------------
Elwood Spedden
/s/ Arthur A. Noeth Director March 15, 1999
----------------------
Arthur A. Noeth
/s/ Gerald Starek Director March 15, 1999
----------------------
Gerald Starek
/s/ Arthur W. Zafiropoulo Director March 12, 1999
----------------------
Arthur W. Zafiropoulo
</TABLE>
76
<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization, dated as of June 1, 1998,
by and among the Company, Warpspeed, Inc., a wholly owned
subsidiary of the Company, and RF Power Products, Inc.(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 Comprehensive Supplier Agreement, dated May 18, 1998, between
Applied Materials Inc. and the Company(1)+
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 Loan and Security Agreement, dated August 15, 1997, among Silicon
Valley Bank, Bank of Hawaii and the Company(4)
10.5 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(5)
10.6 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property in
Fort Collins, Colorado(2)
10.7 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort Collins,
Colorado(2)
10.8 Lease, dated May 19, 1995, between Sharp Point Properties, L.L.C.
and the Company for a building in Fort Collins, Colorado(2)
10.9 Lease, dated April 15, 1998, between Cross Park Investors, Ltd.,
and the Company for property in Austin, Texas(1)
10.10 Lease, dated April 15, 1998, between Cameron Technology
Investors, Ltd., and the Company for property in Austin, Texas(1)
10.11 Sublease Agreement, dated November 1, 1992, between RF Power
Products, Inc., and Test Technology, Inc. for property in
Voorhees, New Jersey(6)
10.12 Lease Agreement, dated March 18, 1996, and amendments dated June
21, 1996 and August 30, 1996, between RF Power Products, Inc.,
and Laurel Oak Road, L.L.C. for property in Voorhees, New
Jersey(7)
10.13 Form of Indemnification Agreement(2)
10.14 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach
10.15 1995 Stock Option Plan, as amended and restated*
10.16 1995 Non-Employee Directors' Stock Option Plan*
77
<PAGE>
10.17 License Agreement, dated May 13, 1992 between RF Power Products
and Plasma-Therm, Inc.(8)
10.18 Distribution Agreement dated August 10, 1993 between RF Power
Products, Inc. and Astech Corporation(9)
10.19 Master Purchase Order and Sales Agreement dated May 1994 between
RF Power Products, Inc. and Applied Materials, Inc. and Master
Purchase Order and Sales Agreement Revision I dated November 9,
1994 between RF Power Products, Inc. and Applied Materials,
Inc.(10)
10.20 Purchase Agreement dated October 14, 1994 between RF Power
Products, Inc. and Plasma Therm Incorporated(10)
10.21 Purchase Agreement dated October 28, 1994 between RF Power
Products, Inc. and Plasma Etch, Inc.(10)
10.22 Purchase Agreement dated November 9, 1995 between RF Power
Products, Inc. and Plasma and Material Technology, Inc.(11)
10.23 Purchase Agreement dated October 16, 1995 between RF Power
Products, Inc. and Plasma Therm, Incorporated(11)
10.24 Purchase Agreement dated June 5, 1995 between RF Power Products,
Inc. and Mattson Technology(11)
10.25 Lease Agreement dated March 18, 1996 and amendments dated June
21, 1996 and August 30, 1996 between RF Power Products, Inc. and
Laurel Oak Road, L.L.C. for office, manufacturing and warehouse
space at 1007 Laurel Oak Road, Voorhees, New Jersey(7)
10.26 Direct Loan Agreement dated December 20, 1996 between RF Power
Products, Inc. and the New Jersey Economic Development
Authority(7)
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP, Independent Accountants
23.2 Consent of KPMG 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 for the year ended December 31, 1998
27.2 Financial Data Schedule as restated for the years ended
December 31, 1997 and 1996
_______________
(1) Incorporated by reference to the Company's quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No. 0-26966),
filed August 7, 1998.
(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, 1995 (File No. 0-26966),
filed March 28, 1996, 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.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (File No. 0-26966),
filed March 24, 1998.
(6) Incorporated by reference to RF Power Products' Annual Report on
Form 10-K for the fiscal year ended November 30, 1992 (File
No. 0-20229), filed February 26, 1993.
78
<PAGE>
(7) Incorporated by reference to RF Power Products' Annual Report on
Form 10-K for the fiscal year ended November 30, 1996
(File No.0-20229), filed February 25, 1997.
(8) Incorporated by reference to RF Power Products' Registration
Statement on Form 10 (File No. 0-020229), filed May 19, 1992 as
amended.
(9) Incorporated by reference to RF Power Products' Annual Report on
Form 10-K for the fiscal year ended November 30, 1993 (File No.
0-20229), filed February 28, 1994.
(10) Incorporated by reference to RF Power Products' Annual Report on
Form 10-K for the fiscal year ended November 30, 1994 (File No.
0-20229), filed February 24, 1995.
(11) Incorporated by reference to RF Power Products' Annual Report on
Form 10-K for the fiscal year ended November 30, 1995 (File No.
0-20229), filed February 28, 1996.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
79
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
This Employment Agreement (this "AGREEMENT") is entered into as of
June 1, 1998, but shall be effective only at the Effective Date as set forth
below, by and between RF Power Products, Inc., a New Jersey corporation (the
"COMPANY"), having its principal place of business at Voorhees, New Jersey,
and Joseph Stach ("EXECUTIVE"), an individual resident of the State of New
Jersey.
R E C I T A L S
A. Executive has heretofore been employed as an executive officer of
Company.
B. Company, Advanced Energy Industries, Inc., a Delaware corporation
("PARENT"), and Warpspeed, Inc., a New Jersey corporation and wholly owned
subsidiary of Parent ("MERGER SUB"), are parties to that certain Agreement
and Plan of Reorganization, dated as of June 1, 1998 (the "REORGANIZATION
AGREEMENT"), pursuant to which Merger Sub shall be merged with and into
Company (the "MERGER"), and pursuant to which Company shall be a wholly owned
subsidiary of Parent.
C. Company desires to retain the services of Executive and Executive
desires to be employed by Company subsequent to the effective time of the
Merger (the "EFFECTIVE DATE") as such date is defined in Section 1.3 of the
Reorganization Agreement.
In consideration of the promises, the respective undertakings of
Company and Executive set forth below, and as an inducement to Parent and
Merger Sub to effect the Merger described above, Company and Executive agree
as follows:
1. POSITION. During the term of this Agreement, Company will employ
Executive, and Executive will serve as President and Chief Executive Officer
of Company, and as a Senior Vice President of Parent. Executive's
responsibilities and authority in such capacity, subject to Section 2 hereof,
may be different than those pertaining to Executive's position on the date of
this Agreement. Executive will report to the CEO of Parent ("PARENT CEO").
2. DUTIES. Executive will serve Company and its affiliated business
entities in such capacities and with such duties and responsibilities
consistent with Executive's position as the Board of Directors of Company
(the "COMPANY BOARD") and Parent CEO may from time to time determine. Such
duties and responsibilities shall include, without limitation, researching,
design engineering, and exploring the application of radio frequency ("RF")
products, and evaluating potential business acquisitions of Parent and its
affiliated business entities. Executive shall devote his best efforts and
the equivalent of full time employment to the performance of services
customarily incident to Executive's office and to such other services as may
be reasonably requested by Company Board and Parent CEO, PROVIDED HOWEVER,
that nothing in this Agreement shall preclude Executive from devoting
reasonable periods of his own time required for (i) participating in
professional, educational, philanthropic, public interest, charitable, social
or community activities, (ii) serving as a director or advisor of any
corporation, trade association or
<PAGE>
other entity that Executive is serving as of the Effective Date or that is
not in direct competition with Company or (iii) managing his personal
investments, provided that in any such case that such activities do not
materially interfere with Executive's regular performance of his duties and
responsibilities hereunder. Executive will perform his principal duties
under this Agreement at the offices of Company in Voorhees, New Jersey, and
neither Company nor Parent shall require Executive to relocate permanently
from the State of New Jersey to perform his duties under this Agreement,
unless Executive agrees to do so. Executive may be required to do a
reasonable amount of traveling in connection with the performance of his
duties hereunder. Executive hereby represents and warrants that he is free
to enter into and fully perform this Agreement and the agreements referred to
herein without breach of any agreement or contract to which he is a party or
by which he is bound.
3. OBLIGATION NOT TO COMPETE. Executive hereby agrees that (a)
while he is employed by Company and (b) for a period of one (1) year
following the earlier of (i) the fifth (5th) anniversary of the Effective
Date or (ii) the date Executive's employment is terminated as set forth in
Section 7 hereunder (the "RESTRICTED PERIOD"), Executive shall not engage in
or provide services to any business that is competitive with any present
business of Company or Parent known to Executive in any geographic area where
Company or Parent engages in such business or maintains sales or service
representatives or employees at the time Executive separates from Company.
Each of the following activities shall, without limitation, be deemed to
constitute engaging in business within the meaning of this Section 3: to
engage in, work with, have an interest or concern in, advise, lend money to,
guarantee the debts or obligations of, or permit one's name or any party
thereof to be used in connection with, an enterprise or endeavor, either
individually, in partnership, or in conjunction with any person or persons,
firms, associations, companies, or corporations, whether as a principal,
agent, shareholder, employee, officer, director, partner, consultant or in
any other manner whatsoever; PROVIDED HOWEVER, that Executive shall retain
the right to invest in or have an interest in securities traded on any
national stock exchange or recognized over-the-counter market, if such
interest does not exceed two percent (2%) of the voting control of such
entity if an equity interest and in any case any traded debt. In addition,
Executive may make passive investments in privately held entities that are
determined by Company Board or Parent CEO not to be competitors of Company or
Parent. Executive also agrees that he shall not in any manner attempt to
induce or assist others to attempt to induce any customer or client of
Company or Parent to terminate association with Company or Parent, nor do
anything directly or indirectly to interfere with the relationship between
Company or Parent and any such persons or concerns through the Restricted
Period. Executive is privy to trade secrets and confidential proprietary
information of Company, and hereby agrees that this clause is necessary to
protect that information from willful or inevitable disclosure, among other
reasons.
4. TERM OF AGREEMENT. This Agreement will commence on the Effective
Date, and will terminate as of the fifth (5th) anniversary date of the
Effective Date as set forth in Section 7 of this Agreement.
-2-
<PAGE>
5. COMPENSATION AND BENEFITS.
5.1 BASE SALARY. Company agrees to pay Executive a base salary
("BASE SALARY") of $250,000 per year during the term of this Agreement.
Executive's salary will be payable as earned, in accordance with Company's
customary payroll practice. Executive's Base Salary shall be reviewed
annually by the Parent Board of Directors (the "PARENT BOARD") for
consideration of appropriate merit increases.
5.2 ADDITIONAL BENEFITS. Executive will be eligible to
participate in Company's and Parent's employee benefit plans of general
application, including without limitation Parent's 401(k) pension plan that
shall match fifty percent (50%) of Executive's contributions to such plan up
to six percent (6%) of Executive's Base Salary (subject to IRS limitations),
and any plans covering pension and profit sharing, stock purchases, stock
options, and those plans covering life, health, and dental insurance in
accordance with the general rules established for individual participation in
any such plan and applicable law. Executive will receive such other
benefits, including fringes, perquisites and holidays and leave policies , as
Company and Parent generally provide to its employees holding similar
positions as that of Executive. Company shall provide Executive four (4)
weeks paid vacation per year and an annual physical at company expense.
Company will continue to reimburse Executive for New Jersey living expenses
until he disposes of his former Florida home, in accordance with prior
Company Practice.
5.3 STOCK OPTIONS. On the Effective Date, Executive shall be
granted an option to purchase Two Hundred Twenty-Five Thousand (225,000)
shares of Common Stock of Parent at the fair market value as determined by
Compensation Committee of Parent on the date of grant. To the extent
permitted by IRS regulations, such options shall be Incentive Stock Options.
Twenty percent (20%) of such options shall become exercisable ("vest") on the
Effective Date and the balance shall vest pro rata on a monthly basis at the
end of each of the first forty-eight months following the Effective Date.
5.4 OFFICERS' COMPENSATION PLAN. Executive will also be
eligible to participate in the executive officers' incentive compensation
plan of Parent under guidelines determined by the Compensation Committee of
Parent, with a target bonus of $200,000 if applicable bonus targets are
achieved. Such annual bonuses shall be consistent with the Company's
variable compensation plans for its executives. Executive shall also
participate in any long-term incentive compensation plan of Parent on terms
equivalent to similarly situated executives.
5.5 AUTOMOBILE. Company shall provide Executive with a Company
owned or leased automobile (which shall be a Mercedes SL 600 or an equivalent
model).
5.6 PROMISSORY NOTE. As of the Effective Date, Executive shall
deliver to Parent a promissory note (the "NOTE"), substantially in the form
of EXHIBIT A hereto, which will state an original principal amount of
approximately One Hundred Seventy-Five Thousand Dollars ($175,000), and which
shall be payable to Parent in accordance with the terms set forth in the
Note. Upon delivery of such Note, Parent shall pay the proceeds to Executive
by wire transfer to any bank account designated by Executive at a bank
located in the United States. The Note shall
-3-
<PAGE>
bear interest at the rate of six percent (6%) per annum. The repayment terms
set forth in the Note notwithstanding, Executive shall pay the following
amounts toward repayment of the Note until such time that the Note is paid in
full: (a) fifteen percent (15%) of Executive's Base Salary, payable at such
times such Base Salary is paid, in accordance with Company's customary
payroll practice, (b) sixty percent (60%) of annual bonuses paid to Executive
by Company or Parent pursuant to Section 5.4, and (c) sixty percent (60%) of
all proceeds from the sale of Common Stock of Company received in connection
with the Merger and beneficially held by Executive. The Note shall be due
immediately in full upon termination of Executive pursuant to Sections 7.1(a)
or 7.1(c) hereunder.
5.7 LIFE INSURANCE. Company shall maintain a term life
insurance policy with a life insurance company rated "A" by A.M. Best Company
covering Executive, with a death benefit payable to such beneficiary as
Executive properly may designate, in the minimum amount of $1,000,000. Such
amount shall include any amount of term life insurance provided to Executive
or his beneficiary under employee benefit plans of general application of
Company and Parent.
5.8 EXPENSES. Company will reimburse Executive for all
reasonable and necessary expenses incurred by Executive in connection with
Company's business including, without limitation, professional society dues
of Executive and reasonable relocation expenses incurred by Executive in
connection with his relocation from Florida to New Jersey.
6. PROPRIETARY RIGHTS. Executive hereby agrees to execute an
Executive Invention, Assignment and Confidentiality Agreement with Parent and
Company in substantially the form attached hereto as EXHIBIT B.
7. TERMINATION.
7.1 EVENTS OF TERMINATION. Executive's employment with
Company shall terminate upon any one of the following:
(a) Company's determination made in good faith that it is
terminating Executive for "cause" as defined under Section 7.2 below
("TERMINATION FOR CAUSE");
(b) the effective date of a written notice sent to
Executive stating that Company is terminating his employment, without cause,
which notice can be given by Company at any time after the Effective Date at
Company's sole discretion, for any reason or for no reason ("TERMINATION
WITHOUT CAUSE");
(c) the effective date of a written notice sent to Company
from Executive stating that Executive is electing to terminate his employment
with Company ("VOLUNTARY TERMINATION"); or
-4-
<PAGE>
(d) termination of employment by reasons of Executive's
disability (determined in accordance with the requirements for eligibility of
benefits under Company's long-term disability insurance plan).
7.2 "CAUSE" DEFINED. For purposes of this Agreement, "cause"
for Executive's termination will exist at any time after the happening of one
or more of the following events: (i) the conviction of Executive of a felony
under the laws of the United States or any state thereof; (ii) the willful
misconduct of Executive, or the willful or continued failure by Executive to
substantially perform his duties hereunder, in either case which has a
material adverse effect on Company; or (iii) the fraud or material dishonesty
of Executive in connection with his performance of duties to Company.
However, in no event shall Executive's employment be considered to have been
terminated for "Cause" unless and until Executive receives a copy of a
resolution adopted by the Parent Board finding that, in the good faith
opinion of the Parent Board, Executive is guilty of acts or omissions
constituting Cause, which resolution has been duly adopted by an affirmative
vote of a majority of the Parent Board. Any such vote shall be taken at a
meeting of the Parent Board called and held for such purpose, after
reasonable written notice is provided to Executive setting forth in
reasonable detail the facts and circumstances claimed to provide a basis of
termination for Cause and Executive is given an opportunity, together with
counsel, to be heard before the Parent Board. Executive shall have the
opportunity to cure any such acts or omissions within 30 days of Executive's
receipt of such resolution. The foregoing shall not limit the right of
Company to suspend Executive from his day-to-day responsibilities with
Company pending the completion of such notice and cure procedures.
8. EFFECT OF TERMINATION.
8.1 TERMINATION FOR CAUSE OR VOLUNTARY TERMINATION. In the event
of any termination of this Agreement pursuant to Sections 7.1(a) or 7.1(c),
Company's obligations under this Agreement, including without limitation
payment of Base Salary, shall cease and none of Executive, his
representatives, administrators or conservators nor his estate shall be
entitled thereafter to (i) any further payments of Base Salary, except for
unpaid Base Salary attributable to days worked prior to the effective date of
the termination, (ii) any benefits or reimbursements provided by Company to
Executive during the term of this Agreement, or (iii) any severance
compensation, except in any such case as required by applicable law or an
employee benefit plan or stock option or incentive compensation plan in which
Executive participates prior to termination.
8.2 TERMINATION WITHOUT CAUSE. In the event of any termination
of this Agreement pursuant to Section 7.1(b),
(a) through the fifth (5th) anniversary of the Effective
Date, Company shall continue to pay Executive his Base Salary under Section
5.1 above, less applicable withholding taxes, payable on Company's normal
payroll dates.
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<PAGE>
(b) Executive's rights under Company's benefit plans of
general application shall be determined under the provisions of each such
plan and any applicable provisions of law.
(c) Company shall provide to Executive all payments accrued
but unpaid under any incentive compensation plan in which Executive
participates for any completed year or performance period (as applicable), as
well as a pro rata payment for any partial period through the date of
termination, based on the target bonus amount measured at the end of the year
(not including personal subjective bonus criteria).
8.3 TERMINATION FOR DISABILITY. In the event of any termination
of this Agreement pursuant to Section 7.1(d),
(a) through the fifth (5th) anniversary of the Effective
Date, Company shall continue to pay or cause to be paid to Executive sixty
percent (60%) of his Base Salary under Section 5.1 above, less applicable
withholding taxes, payable on Company's normal payroll dates.
(b) Executive's rights under Company's benefit plans of
general application shall be determined under the provisions of each such
plan and any applicable provisions of law.
(c) Company shall provide to Executive all payments accrued
but unpaid under any incentive compensation plan in which Executive
participates for any completed year or performance period (as applicable), as
well as a pro rata payment for any partial period through the date of
termination, based on the target bonus amount measured at the end of the year
(not including personal subjective bonus criteria).
8.4 RESIGNATIONS. Upon termination of his employment, Executive
shall be deemed to have resigned from all offices and directorships then held
with Company and Parent and its affiliated business entities, and will
execute a letter of resignation if requested.
9. NON-SOLICITATION. So long as Executive is an employee of Company
or Parent and for the Restricted Period, Executive shall not, directly or
indirectly, either for himself or for any other person or entity, directly or
indirectly, solicit, induce or attempt to induce any employee of Company to
terminate his or her employment with Company or Parent.
10. MISCELLANEOUS.
10.1 ARBITRATION. Executive and Company shall submit to
mandatory binding arbitration in any controversy or claim arising out of, or
relating to, Executive's employment, this Agreement or any breach hereof;
PROVIDED HOWEVER, that Company retains its right to, and shall not be
prohibited, limited or in any other way restricted from, seeking or obtaining
equitable relief with respect to Sections 3 or 9 hereof from a court having
jurisdiction over the parties. This provision includes, but is not limited
to, statutory claims of employment discrimination. Such
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<PAGE>
arbitration shall be conducted in the State of New Jersey in accordance with
the commercial arbitration rules of the American Arbitration Association in
effect at that time, and judgment upon the determination or award rendered by
the arbitrator may be entered in any court having jurisdiction thereof.
Executive's obligations under this Section 10.1 shall survive termination of
his employment and the expiration of this Agreement.
10.2 SEVERABILITY. If any provision of this Agreement shall be
found by any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent
that it is found to be invalid or unenforceable and to the extent that to do
so would not deprive one of the parties of the substantial benefit of its
bargain. Such provision shall, to the extent allowable by law and the
preceding sentence, be modified by such arbitrator or court so that it
becomes enforceable and, as modified, shall be enforced as any other
provision hereof, all the other provisions continuing in full force and
effect.
10.3 REMEDIES. Company and Executive acknowledge that the
service to be provided by Executive is of a special, unique, unusual,
extraordinary and intellectual character, which gives it peculiar value the
loss of which cannot be reasonably or adequately compensated in damages in an
action at law. Accordingly, Executive hereby consents and agrees that for
any breach or violation by Executive of Sections 3 and 9 of this Agreement, a
restraining order and/or injunction may be issued against Executive, in
addition to any other rights and remedies Company may have, at law or equity,
including without limitation the recovery of money damages.
10.4 NO WAIVER. The failure by either party at any time to
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of
any provision hereof shall not be taken or held to be a waiver of any
preceding or succeeding breach of such provision or as a waiver of the
provision itself. No waiver of any kind shall be effective or binding, unless
it is in writing and is signed by the party against whom such waiver is
sought to be enforced.
10.5 ASSIGNMENT. This Agreement and all rights hereunder are
personal to Executive and may not be transferred or assigned by Executive at
any time. Company may assign its rights, together with its obligations
hereunder, to any successor, in connection with any sale, transfer or other
disposition of all or substantially all of its business and assets; PROVIDED
HOWEVER, that any such assignee assumes Company's obligations hereunder.
10.6 WITHHOLDING. All sums payable to Executive hereunder shall
be reduced by all federal, state, local and other withholding and similar
taxes and payments required by applicable law.
10.7 INDEMNIFICATION. Company agrees to provide to Executive
all rights of indemnification and all director's and officer's insurance
coverage required under Section 5.16 of the Reorganization Agreement.
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<PAGE>
10.8 GUARANTEE. By execution of this Agreement, Parent hereby
agrees to guarantee the performance by Company of all of its obligations
under this Agreement and to be jointly and severally liable to Executive for
all financial liabilities of Company hereunder.
10.9 NO MITIGATION OR OFFSET. Executive shall not be required
to seek other employment or to reduce any severance benefit payable to him
under Section 8.2 hereof, and no such severance benefit shall be reduced on
account of any compensation received by Executive from other employment.
Company's obligations to Executive under this Agreement, including, without
limitation, any obligation to provide severance benefits, shall not be
subject to set-off or counterclaim in respect of any debts or liabilities of
Executive to Company except for payments on the Note as set forth in
Section 5.6.
10.10 ENTIRE AGREEMENT. This Agreement constitutes the entire
and only agreement between the parties relating to employment of Executive
with Company, and this Agreement supersedes and cancels any and all previous
contracts, arrangements or understandings with respect thereto, including,
without limitation, that certain employment agreement between Executive and
Company, dated as of December 1, 1993.
10.11 AMENDMENT. This Agreement may be amended, modified,
superseded, canceled, renewed or extended only by an agreement in writing
executed by the parties hereto.
10.12 NOTICES. All notices and other communications required or
permitted under this Agreement shall be in writing and hand delivered, sent
by Telecopier, sent by certified first class mail, postage pre-paid, or sent
by nationally recognized express courier service. Such notices and other
communications shall be effective upon receipt if hand delivered or sent by
telecopier, five (5) days after mailing if sent by mail, and one (1) day
after dispatch if sent by express courier, to the following addresses, or
such other addresses as any party shall notify the other parties:
If to Company:
Facsimile: (970) 407-5315
Attention: Douglas S. Schatz
With copies to:
Jay L. Margulies, Esq.
Thelen, Reid & Priest LLP
333 West San Carlos
San Jose, California 95113
If to Executive:
Facsimile: (609) 627-1103
Attention: Joseph Stach
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<PAGE>
With copies to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, NY 10019-6092
Attention: Paul J. Wessel, Esq.
10.13 BINDING NATURE. This Agreement shall be binding upon, and
inure to the benefit of, the successors and personal representatives of the
respective parties hereto.
10.14 HEADINGS. The headings contained in this Agreement are
for reference purposes only and shall in no way affect the meaning or
interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, the masculine gender includes
both male and female referents, and the word "or" is used in the inclusive
sense.
10.15 COUNTERPARTS. This Agreement may be executed in two or
more counterparts, each of which shall be deemed to be an original but all of
which, taken together, constitute one and the same agreement.
10.16 GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereto shall be construed in accordance with the
laws of the State of New Jersey, without giving effect to the principles of
conflict of laws (except as otherwise specified herein).
IN WITNESS WHEREOF, Company and Executive have executed this
Employment Agreement as of the date first above written.
EXECUTIVE: Joseph Stach
/S/ JOSEPH STACH
-------------------------------
COMPANY: RF Power Products, Inc.
By: /S/ PAUL S. ZAUN
----------------------------
Name: PAUL S. ZAUN
--------------------------
Title: TREASURER AND CONTROLLER
-------------------------
PARENT (as Guarantor): Advanced Energy Industries, Inc.
By: /S/ DOUGLAS S. SCHATZ
----------------------------
Name: DOUGLAS S. SCHATZ
--------------------------
Title: PRESIDENT, CEO & CHAIRMAN
OF THE BOARD
-------------------------
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EXHIBIT A
<PAGE>
UNSECURED PROMISSORY NOTE
$175,000.00 Voorhees, New Jersey
October 8, 1998
For value received, the undersigned, Joseph Stach, ("OBLIGOR"),
promises to pay to the order of Advanced Energy Industries, Inc., a Delaware
corporation (collectively with its successors and assigns, "HOLDER"), in
lawful money of the United States and in immediately available funds, the
principal sum of ONE HUNDRED SEVENTY-FIVE THOUSAND DOLLARS ($175,000.00) and
interest on the outstanding principal amount in accordance with the terms of
this Note, until paid in full.
1. ISSUANCE. This Note is issued pursuant to the terms of that
certain Employment Agreement (the "EMPLOYMENT AGREEMENT") by and among
Obligor and RF Power Products, Inc., a New Jersey corporation (the
"COMPANY"), dated as of the date hereof, pursuant to which Obligor has agreed
to issue this Note as consideration for the delivery by Holder of One Hundred
Seventy-Five Thousand Dollars ($175,000.00). Capitalized terms used but not
otherwise defined in this Note have the meanings given them in the Employment
Agreement.
2. PAYMENT. Payment shall be made in the following manner:
(a) PRINCIPAL PAYMENT AMOUNTS. Obligor shall pay to Holder the
following amounts until such time that the unpaid outstanding principal
amount under this Note is paid in full:
(i) Fifteen percent (15%) of Obligor's Base Salary at
such times Base Salary is paid (each such date, a "SALARY DEDUCTION DATE"),
in accordance with Company's customary payroll practice;
(ii) Sixty percent (60%) of annual bonuses paid to Obligor
by Company or Holder pursuant to Section 5.4 of the Employment Agreement;
(iii) Sixty percent (60%) of all proceeds from the sale of
Common Stock of Holder received in connection with the Merger and
beneficially held by Obligor, within three (3) business days after such
proceeds are payable to Obligor or his designated representative.
(b) INTEREST. Obligor shall pay to Holder interest on the
outstanding principal amount under this Note at a fixed interest rate equal
to six percent (6%) (computed on the basis of a 360-day year). Obligor shall
pay interest to Holder on each Salary Deduction Date.
3. ACCELERATION OF PAYMENT. The entire sum of unpaid principal
amount under this Note and all interest accrued thereon shall become due and
payable upon termination of Obligor's employment with the Company pursuant to
Sections 7.1(a) or 7.1(c) of the Employment Agreement.
<PAGE>
4. METHOD OF PAYMENT. The payment hereunder shall be made by
payment in immediately available funds to Holder at 1625 Sharp Point Drive,
Fort Collins, CO 80525, or by wire transfer to any bank account designated
by Holder at a bank located in the United States, or at such other place as
Holder may specify to Obligor in writing.
5. PREPAYMENT. Notwithstanding the foregoing, any amounts due
hereunder may be prepaid in whole or in part at any time by Obligor without
penalty or premium.
6. WAIVER. Obligor, to the extent allowed by law, waives any
applicable statute of limitations, presentment, demand for payment, protest
and notice of dishonor in connection with the delivery, acceptance,
performance, default or enforcement of this Note.
7. GOVERNING LAW. This Note shall be governed by, and construed,
interpreted and enforced in accordance with, the laws of the State of New
Jersey, excluding the body of law relating to conflicts of law.
8. EXPENSES; ATTORNEYS' FEES. In the event action is instituted to
enforce any of the provisions contained in this Note, the party prevailing in
such action shall be entitled to recover from the other party thereto
reasonable attorneys' fees and costs of such suit as part of the judgment.
IN WITNESS WHEREOF, Obligor has executed this Unsecured Promissory
Note as of the day and year first above written.
OBLIGOR: Joseph Stach
/S/ JOSEPH STACH
--------------------------
2
<PAGE>
EXHIBIT B
<PAGE>
CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is entered into as of the 8th day of October, 1998,
between Advanced Energy Industries, Inc. and its subsidiaries, divisions, and
other related entities (the "Company") and Joseph Stach (the "Employee").
WHEREAS, the Employee is considered a valuable member of the Company and
as such has accepted either initial or continued employment with the Company
through the parent company or any of its related entities, or has accepted an
increase in compensation or other beneficial charge of position by the
Company; and
WHEREAS, out of respect for the Employee's integrity and abilities the
Company is placing trust in the Employee by placing him/her in a position
where the Employee may have access to or may be exposed to Confidential
Information; and
WHEREAS, the Company's present and future competitive position in the
international marketplace is largely dependent upon the confidentiality of
such information;
NOW, THEREFORE, the parties agree as follows:
1. CONFIDENTIAL INFORMATION: As used in this Agreement, Confidential
Information shall include all information considered by the Company to
provide it a competitive advantage to the extent it cannot be clearly
established that such information either was known by the Employee prior to
the Employee's employment by the Company or is publicly available as
assembled information from one library source. As an example, but without
limitations, Confidential Information shall include the information set forth
in Exhibit A.
2. NONDISCLOSURE OF CONFIDENTIAL INFORMATION: The Employee agrees that
he/she shall take all reasonable steps to maintain and hold confidential all
Confidential Information only for the benefit of the Company. The Employee
understands that all documents and materials which contain Confidential
Information are the property of the Company; the Employee agrees to return
all such items and any copies thereof upon any termination of employment with
the Company or upon the request of the Company.
3. ENFORCEABILITY: The Employee understands that the Company's
competitive position is highly dependent on its Confidential Information.
Accordingly, the Employee recognizes that any disclosure of Confidential
Information will cause immediate, irreparable harm to the Company. Any
breach or threatened breach of this Agreement, therefore, may be presented
without notice to either a court or arbitration panel for enforcement by both
injunction and damages. All obligations of this Agreement shall survive any
termination of employment for the Company whether by the Employee or the
Company and shall remain in effect for the longer of a four year period
following any termination of employment with the Company and so long
thereafter as each particular item of Confidential Information remains not
rightfully and publicly available as assembled information from one library
source. In the event litigation or arbitration is instituted seeking the
enforcement of this Agreement, the prevailing party shall be entitled to
recover reasonable attorney fees and costs incurred in such litigation or
arbitration; however, such attorney fees and costs shall not be assessed
against the Employee in the event that the Employee consents, prior to a
preliminary hearing, to a permanent injunction as requested by the Company.
<PAGE>
4. GENERAL PROVISIONS. This Agreement shall be construed and enforced
in accordance with the laws and jurisdiction of the State of Colorado in the
United States of America and all parties submit to jurisdiction and venue in
Larimer County, Colorado except to the extent such enforcement must be and is
required to be enforced by the law of another state, country, or other such
forum, in which case, and only to the extent required, such law and/or
jurisdiction shall control. Recognizing that the Employee is submitting to
resolution of any dispute in the parent Company's jurisdiction, venue, and
law, the Company agrees that should it lose any such dispute, the court or
arbitrator shall have discretion to award the reasonable out of pocket travel
costs of the Employee. In the event any provision of this Agreement is found
to be unenforceable, void, or invalid or to be unreasonable in scope, such
provision shall be modified to the extent necessary to make it enforceable,
and as so modified, this Agreement shall remain in full force and effect.
Failure to exercise any rights contained in this Agreement shall not be
construed as a waiver of such rights. All terms of this Agreement shall be
independent and unconditional so that the performance of any one term shall
not be subject to any setoff or counterclaim. This Agreement shall be freely
assignable by the Company only. In the event of any conflict between the
terms of this Agreement and any statement of employees policies or other
document of the Company, the terms of this Agreement shall be deemed superior
and shall supersede such conflicting terms. Other than that injunctive
relief by the Company which must be pursued in a court, the parties agree to
submit any dispute arising hereunder or in any way arising from the
employment relationship to binding arbitration pursuant to the rules of the
American Arbitration Association or such other rules as may be decided by a
majority of the arbitrators, and each party hereby submits to such
arbitration in Fort Collins, Colorado, unless oterwise agreed in writing.
Entered into as of the day referenced above.
Advanced Energy Industries, Inc.
/S/ JOSEPH STACH By: /S/ RICHARD P. BECK
- -------------------------- ---------------------------
Employee Signature
<PAGE>
EXHIBIT A
As used in the associated document, "Confidential Information" shall
include by example, but not as a limitation, the following information:
1. All development or design information relating to existing products of
the Company or relating to products under development or planned by the
Company or on its behalf, such as the information contained in:
a. schematics
b. circuitry descriptions and drawings
c. parts designed by the Plaintiff or on its behalf
d. descriptions of product problems or limitations
e. technical and scientific information
f information relating to key research and development areas
g. consulting source's documents, notes and correspondence
h. descriptions of development efforts, whether successful or not
i. flow charts
j. source code listings
2. All manufacturing information of existing products of and products under
development or planned by the Company or on its behalf such as:
a. materials sources
b. vendors
c. costs
d. manufacturing methods
e. purchasing sources
3. All business, marketing and financial information of the Company
including but not limited to:
a. research and development strategies
b. employee responsibilities other than generic titles
c. development schedules
d. business forecasts
e. client and customer lists
f past, present and future financial information about the Company
g. consultant identities and capabilities
h. materials and component supplies
i. Company opportunity lists or items
4. All other information which is or may be subject to trade secret,
copyright, mask, or other proprietary protection whether or not registration
has been sought for such.
5. All information relative to patents either issued, pending, or
contemplated by the Company.
<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 AND FEBRUARY 9, 1999
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.
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<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.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
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<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.
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<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
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<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 five million six hundred twenty-five thousand
(5,625,000) 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.
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(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.
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(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
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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
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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,
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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
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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.
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8. USE OF PROCEEDS FROM STOCK.
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
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consent of the affected holders of Options, the cancellation of any
outstanding Options and the 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
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but the shares of the Company's common stock outstanding immediately
preceding the merger are 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.
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(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.
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ADVANCED ENERGY INDUSTRIES, INC.
1995 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
ADOPTED ON SEPTEMBER 20, 1995,
AS AMENDED ON FEBRUARY 9, 1999
1. PURPOSE.
(a) The purpose of the 1995 Non-Employee Directors' Stock Option Plan,
as amended (the "Plan") is to provide a means by which each director of Advanced
Energy Industries, Inc. (the "Company") who is not otherwise an employee of or
consultant to the Company or of any Affiliate of the Company (a "Non-Employee
Director") will be given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). 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, subject, however, to such resolutions, not
<PAGE>
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.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate One Hundred Thousand (100,000)
shares of the Company's common stock. If any option granted under the Plan
shall for any reason expire or otherwise terminate without having been exercised
in full, the stock not purchased under such option shall again become available
for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
5. NON-DISCRETIONARY GRANTS.
(a) Each person who, on September 20, 1995, is a Non-Employee Director
automatically shall be granted on that date an option to purchase Seven Thousand
Five Hundred (7,500) shares of common stock of the Company (an "Initial Grant")
on the terms and conditions set forth herein.
(b) Each person who, after September 20, 1995, is elected for the first
time to be a Non-Employee Director automatically shall, upon the date of his or
her initial election to be a Non-Employee Director by the Board or stockholders
of the Company, receive an Initial Grant on the terms and conditions set forth
herein.
(c) Each Non-Employee Director automatically shall be granted, on the
first and each subsequent anniversary of his or her Initial Grant, an option to
purchase Two Thousand Five Hundred (2,500) shares of common stock of the Company
(an "Annual Grant") on the terms and conditions set forth herein.
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6. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionee's service as
director or employee of or consultant to the Company or any Affiliate of the
Company terminates for any reason or for no reason, the option shall terminate
on the earlier of the Expiration Date or the date six (6) months following the
date of termination of service. In any and all circumstances, an option may be
exercised following termination of the optionee's service as a director or
employee of or consultant to the Company or any Affiliate of the Company only as
to that number of shares as to which it was exercisable on the date of
termination of such service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent
(100%) of the fair market value of the stock subject to such option on the date
such option is granted.
(c) Payment of the exercise price of each option is due in full in cash
upon any exercise when the number of shares being purchased upon such exercise
is less than 1,000 shares; but when the number of shares being purchased upon an
exercise is 1,000 or more shares, the optionee may elect to make payment of the
exercise price under one of the following alternatives:
(i) Payment of the exercise price per share in cash at the time
of exercise; or
(ii) Provided that at the time of the exercise the Company's
common stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of shares of common stock of the Company already owned by
the optionee, held for the period required to avoid a charge to the Company's
reported earnings, and owned free and clear of any liens, claims, encumbrances
or security interest, which common stock shall be valued at its fair market
value on the date preceding the date of exercise; or
(iii) Payment by a combination of the methods of payment specified
in subparagraph 6(c)(i) and 6(c)(ii) above.
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Notwithstanding the foregoing, this option may be exercised pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve Board
which results in the receipt of cash (or check) by the Company prior to the
issuance of shares of the Company's common stock.
(d) An option shall not be transferable except by will or by the laws
of descent and distribution, or pursuant to a domestic relations order
satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "DRO"), and shall be exercisable during the lifetime of
the person to whom the option is granted only by such person or by his or her
guardian or legal representative or transferee pursuant to a DRO. The person to
whom the Option is granted may, by delivering written notice to the Company, in
a form satisfactory to 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) Upon an Initial Grant, one-third of the Option (2,500 shares) shall
be fully vested and exercisable. On each of the second and third anniversaries
of an Initial Grant, an additional one-third of the Option (2,500 shares) shall
become fully vested and exercisable, provided that the optionee has, during the
entire period prior to such vesting date, continuously served as a director or
employee of or consultant to the Company or any Affiliate of the Company. The
Option representing an Annual Grant shall become fully vested and exercisable on
the third anniversary of the Annual Grant, provided that the optionee has,
during the entire period prior to such vesting date, continuously served as a
director or employee of or consultant to the Company or any Affiliate of the
Company.
(f) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionee's knowledge and experience in financial and business matters; and
(ii) 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. These
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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 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.
(g) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.
7. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, 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 granted under the
Plan; PROVIDED, HOWEVER, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, 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.
8. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the Plan
shall constitute general funds of the Company.
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9. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 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 granted pursuant to the Plan, the
Company shall make available 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, upon request, such financial and other information
regarding the Company as comprises the annual report to the stockholders of the
Company provided for in the Bylaws of the Company and such other information
regarding the Company as the holder of such option may reasonably request.
(c) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate or shall affect any right of the Company, its
Board or stockholders or any Affiliate to terminate the service of any
Non-Employee Director with or without cause.
(d) No Non-Employee Director, individually or as a member of a group,
and no beneficiary or other person claiming under or through him or her, shall
have any right, title or interest in or to any option reserved for the purposes
of the Plan except as to such shares of common stock, if any, as shall have been
reserved for him or her pursuant to an option granted to him or her.
(e) In connection with each option made pursuant to the Plan, it shall
be a condition precedent to the Company's obligation to issue or transfer shares
to a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of any federal or other withholding tax
required to be withheld with respect to such sale or transfer, or such removal
or lapse, is made available to the Company for timely payment of such tax.
-6-
<PAGE>
(f) As used in this Plan, fair market value means, as of any date, the
value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market, the Fair Market Value of a share of common stock shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported) as quoted on such system or exchange (or the exchange with the
greatest volume of trading in common stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable;
(ii) If the common stock is quoted on The Nasdaq SmallCap Market
or is regularly quoted by a recognized securities dealer but selling prices are
not reported, the Fair Market Value of a share of common stock shall be the mean
between the bid and asked prices for the common stock on the last market trading
day prior to the day of determination, as reported in the Wall Street Journal or
such other source as the Board deems reliable;
(iii) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.
10. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any option granted under the Plan (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 and outstanding
options will be appropriately adjusted in the class(es) and maximum number of
shares subject to the Plan and the class(es) and number of shares and price per
share of stock subject to outstanding options.
(b) In the event of: (1) a merger or consolidation in which the
Company is not the surviving corporation; (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
-7-
<PAGE>
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise; or (3) any other capital reorganization in
which more than fifty percent (50%) of the shares of the Company entitled to
vote are exchanged, the time during which options outstanding under the Plan
may be exercised shall be accelerated and the options terminated 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,
PROVIDED, HOWEVER, that the Board shall not amend the plan more than once every
six (6) months, with respect to the provisions of the Plan which relate to the
amount, price and timing of grants, other than to comport with changes in the
Code, the Employee Retirement Income Security Act, or the rules thereunder.
Except as provided in paragraph 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:
(i) Increase the number of shares which may be issued under the
Plan;
(ii) 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 comply with the requirements of Rule 16b-3); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to comply with the
requirements of Rule 16b-3.
(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be altered or impaired by such amendment 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 September 20, 2005. No options
may be granted under the Plan while the Plan is suspended or after it is
terminated.
-8-
<PAGE>
(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.
(c) The Plan shall terminate upon the occurrence of any of the events
described in Section 10(b) above.
13. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved by the
stockholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
-9-
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Name or Organization
- ---- -------------------------------
<S> <C>
Advanced Energy Japan K.K. Japan
Advanced Energy Industries GmbH Germany
Advanced Energy Industries U.K. Limited United Kingdom
Advanced Energy Industries, FSC Inc. Virgin Islands
Tower Electronics, Inc. Minnesota
Advanced Energy Industries Korea, Inc. South Korea
RF Power Products, Inc. New Jersey
</TABLE>
<PAGE>
ARTHUR ANDERSEN LLP
EXHIBIT 23.1
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 Statements on Form S-8 (File Nos. 333-01616, 333-04073,
333-46705, 333-57233 and 333-65413).
/s/ Arthur Andersen LLP
Denver, Colorado,
March 23, 1999.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Advanced Energy Industries, Inc.:
We consent to the use of our report dated January 16, 1998 with respect to
the consolidated balance sheets of RF Power Products, Inc. as of
November 30, 1997 and 1996 and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the years in the
two-year period ended November 30, 1997 and related schedule (not separately
presented herein), which report appears in the annual report on Form 10-K of
Advanced Energy Industries, Inc. for the year ended December 31, 1998. We
also consent to incorporation by reference of such report in the registration
statements (Nos. 333-01616, 333-04073, 333-46705, 333-57233 and 333-65413) on
Form S-8 of Advanced Energy Industries, Inc.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,295
<SECURITIES> 15,839
<RECEIVABLES> 16,186
<ALLOWANCES> (582)
<INVENTORY> 21,412
<CURRENT-ASSETS> 73,635
<PP&E> 29,636
<DEPRECIATION> (14,316)
<TOTAL-ASSETS> 101,035
<CURRENT-LIABILITIES> 11,576
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 89,106
<TOTAL-LIABILITY-AND-EQUITY> 101,035
<SALES> 124,698
<TOTAL-REVENUES> 124,698
<CGS> 87,985
<TOTAL-COSTS> 87,985
<OTHER-EXPENSES> 49,488
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191
<INCOME-PRETAX> (12,417)
<INCOME-TAX> (2,900)
<INCOME-CONTINUING> (9,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,517)
<EPS-PRIMARY> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1> DEC-31-1996<F1>
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 12,041 11,778
<SECURITIES> 20,174 0
<RECEIVABLES> 36,642 21,313
<ALLOWANCES> (587) (382)
<INVENTORY> 31,207 17,003
<CURRENT-ASSETS> 105,358 52,729
<PP&E> 24,519 19,295
<DEPRECIATION> (9,667) (7,574)
<TOTAL-ASSETS> 130,064 68,078
<CURRENT-LIABILITIES> 31,016 11,091
<BONDS> 0 0
0 0
0 0
<COMMON> 26 25
<OTHER-SE> 97,501 54,903
<TOTAL-LIABILITY-AND-EQUITY> 130,064 68,078
<SALES> 175,758 129,931
<TOTAL-REVENUES> 175,758 129,931
<CGS> 108,802 82,685
<TOTAL-COSTS> 108,802 82,685
<OTHER-EXPENSES> 47,242 36,876
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 481 284
<INCOME-PRETAX> 19,523 10,331
<INCOME-TAX> 7,467 3,960
<INCOME-CONTINUING> 12,056 6,371
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,056 6,371
<EPS-PRIMARY> 0.47 0.25
<EPS-DILUTED> 0.46 0.25
<FN>
<F1> 1997 & 1996 RESTATED PER POOLING MERGER OF ADVANCED ENERGY & RF POWER
PRODUCTS
</FN>
</TABLE>
