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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, 2001.
| | 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: 000-26966
ADVANCED ENERGY INDUSTRIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 84-0846841
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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
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 March 18, 2002, there were 31,892,670 shares of the Registrant's Common
Stock outstanding and the aggregate market value of such stock held by
non-affiliates of the Registrant was $644,805,530.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting of
stockholders to be held on May 8, 2002 are incorporated by reference into Part
III of this Form 10-K.
2
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 4
EXECUTIVE OFFICERS OF THE REGISTRANT 31
ITEM 2. PROPERTIES 33
ITEM 3. LEGAL PROCEEDINGS 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 34
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 35
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 37
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 54
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 56
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES 84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 85
ITEM 11. EXECUTIVE COMPENSATION 85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 85
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 86
3
PART I
ITEM 1. BUSINESS
GENERAL
We design, manufacture and support a group of key subsystems for vacuum
process systems. Our customers use our products in plasma-based thin-film
processing equipment that is essential to the manufacture of semiconductors;
compact disks, DVDs and other digital storage media; flat-panel computer and
television screens; coatings for architectural glass and optics; and a power
supply for advanced technology computer workstations.
Our direct current (DC) and radio frequency (RF) power systems refine,
modify and control the raw electrical power from a utility and convert it into
power that is uniform and predictable. This allows manufacturing equipment to
produce and deposit very thin films at an even thickness on a mass scale.
Moreover, through our acquisitions of Engineering Measurements Company in
January 2001 and Aera Japan Ltd. in January 2002, which provide gas flow
products, and Noah Holdings, Inc. in April 2000 and Sekidenko, Inc. in August
2000, which provide thermal control and measurement products, we are a company
that can provide best of breed components and systems that bring together
technologies that provide our customers increased precision and productivity.
We market and sell our systems primarily to large, original equipment
manufacturers (OEMs) of semiconductor, flat panel display, data storage and
other industrial thin film manufacturing equipment. We have sold our systems
worldwide to more than 100 OEMs and directly to more than 500 end-users. Our
principal customers include Applied Materials, Inc., Axcelis Technologies, Inc.,
Lam Research Corporation, Novellus Systems, Inc., ULVAC Technologies, Inc. and
The Unaxis Corporation. Sales to customers in the semiconductor capital
equipment industry comprised 59% of our sales in 2001, 70% in 2000 and 65% in
1999. We sell our systems primarily through direct sales personnel to customers
in the United States, Europe and Asia, and through distributors in various
regions outside the United States. International sales represented 36% of our
sales in 2001, 28% in 2000 and 27% in 1999.
DEVELOPMENT OF COMPANY BUSINESS
We incorporated in Colorado in 1981 and reincorporated in Delaware in
1995. In 1995 we effected the initial public offering of our Common Stock.
Unless the context otherwise requires, as used in this Form 10-K, references to
"Advanced Energy" refer to Advanced Energy Industries, Inc. and references to
"we", "us", or "our" refer to Advanced Energy and its consolidated subsidiaries.
Our executive offices are located at 1625 Sharp Point Drive, Fort Collins,
Colorado 80525, and our telephone number is 970-221-4670.
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PRODUCTS
Our switchmode power conversion and control systems have advanced
features, which have enabled our customers to develop new plasma-based
processing applications. In 1982 we introduced our first low-frequency
switchmode power conversion and control system specifically designed for use in
plasma processes. In 1983, we introduced our first direct current (DC) system
designed for use in physical vapor deposition (PVD) applications. This DC system
is a compact, cost-effective power solution, which greatly reduces stored
energy, a major limitation in PVD systems. We introduced a family of accessories
for the DC product line in 1993. These pulsed DC products provided major
improvements in arc prevention and suppression. We are currently extending the
power range of our systems to much higher power levels to enable them to supply
products for advanced product applications. We carried this technology further
in 1995 when we introduced the Pinnacle series of DC systems, which we updated
in 1997 with the Pinnacle-II.
In 1989, we introduced our radio frequency (RF) power delivery systems,
including power generators and automatic matching networks that are used to
match the impedance of the plasma to the RF generators. In 1991, we introduced
the first switchmode RF power conversion and control systems, the RFG / RFX II
series, for use in semiconductor etch applications. This product line achieved
significant design wins because of its smaller size and its ability to provide
more precise control. In 1998, we developed the APEX series of RF generators and
Navigator digital match networks, using new technology to further reduce size,
more precisely control power delivery and extend the power range of our RF
product line.
The acquisition of RF Power Products in 1998 expanded our product line of
RF generators and matching networks, so that we now offer solid state generators
and matching networks for power requirements up to 10kW and frequencies into the
high VHF range. We sell these primarily to capital equipment manufacturers in
the semiconductor equipment, flat panel display, thin film and analytical
equipment markets. Our RF generators and matching networks have average selling
prices similar to our DC products.
The acquisition of Noah Holdings, Inc. in 2000 expanded our product
offerings to include solid-state temperature control systems for use in
controlling temperatures during semiconductor manufacturing. The acquisition of
Sekidenko, Inc. in 2000 expanded our product offerings to include optical fiber
temperature measurement and control systems. The acquisition of EMCO in 2001
expanded our product offerings to include electronic and electromechanical
precision instruments for measuring and controlling the flow of liquids, steam
and gases. Subsequently, the acquisition of Aera in January 2002 expanded our
product offerings to include mass flow gas controllers.
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We use ion source technology for products that produce a beam of ions for
surface modification and other ion beam processes. We have developed a
sophisticated pulsing power supply specifically for electroplating processes on
semiconductor wafers.
In collaboration with a major microprocessor manufacturer we have
developed the Ikor product group of DC-DC converters specifically designed to
power the new low voltage, high current microprocessors, application-specific
integrated circuits (ASICs), logic and memory chips.
The following chart sets forth our principal products and related
information:
- -----------------------------------------------------------------------------------------------
PRODUCT POWER/CURRENT MAJOR PROCESS
DESCRIPTION LEVEL APPLICATIONS
- -----------------------------------------------------------------------------------------------
Power control and 500W - 200kW CVD
DIRECT CURRENT conversion system PVD
AND -Reactive sputtering
LOW FREQUENCY -Metal sputtering
PRODUCTS -Dual magnetron
Electroplating
Wafer handling
- -----------------------------------------------------------------------------------------------
Power control and 500W - 10kW Etch
RADIO conversion system CVD
FREQUENCY
PRODUCTS ----------------------------------------------------------------------
Metrology 50W - 10kW Diagnostic/control
- -----------------------------------------------------------------------------------------------
Hydro and ultrasonic N/A Flow measurement
FLOW flow meters Non-invasive measurement
PRODUCTS
----------------------------------------------------------------------
Mass flow controllers N/A Semiconductor processes
Fiber optics
CVD
CMP
- -----------------------------------------------------------------------------------------------
Dynamic point-of-use 1.5kW - 4.25kW Etch
TEMPERATURE and static Strip
CONTROL thermoelectric chillers Track
PRODUCTS
----------------------------------------------------------------------
Non-contact optical N/A RTP
fiber thermometry CVD
Strip
- -----------------------------------------------------------------------------------------------
Closed drift 1kW - 10kW PVD
SOURCES Cleaning
PRODUCTS Surface modification
----------------------------------------------------------------------
Inductively coupled 1kW - 10kW Chamber cleaning
plasma source Abatement
- -----------------------------------------------------------------------------------------------
Low voltage/high <1kW Powering of next generation
IKOR (NPSA) current microprocessors and ASICs
PRODUCTS power conversion
- -----------------------------------------------------------------------------------------------
DIRECT CURRENT PRODUCTS
The MDX Series. We introduced our MDX series of products in 1983. These
products are most commonly used as DC power supplies for PVD sputtering where
precise control, superior arc prevention and suppression and low stored energy
characteristics are required. They are also used as bias supplies for RF
sputtering, tool coating and some etching systems. The MDX series consists of
six different product lines that provide a range of power levels from 500W to
120kW. Our second-generation product, the MDX II, was introduced in 1991 to
support higher power levels, to provide wider output range,
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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, which we introduced in
1995, and updated with Pinnacle(TM) -II, in 1997, is the most recent
general-purpose platform in the DC product line. We developed the Pinnacle
primarily for use in DC PVD sputtering processes, and it 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 our DC power conversion equipment, is due to the patented basic
circuit topology.
The Pinnacle(TM) Plus Platform. This platform, introduced in 1999, is a
pulsed DC power system designed principally for use in reactive sputtering to
produce insulating films. It is capable of producing up to 10kW of power in
short pulses at frequencies up to 350kHz, for virtual elimination of arcing in
difficult processes.
Sparc-le(R) Accessories. Our Sparc-le line of DC accessories, first
introduced in 1993 and updated several times since, 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 insulating 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. We designed this system of power
conversion units for a specific customer for use in wafer handling systems for
the semiconductor fabrication market. The electrostatic chuck is a device that
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
simultaneous heating or cooling of the wafer during processing. When our power
system applies voltage to the wafer, electric fields are created which hold the
wafer in position. 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.
Astral(TM) Products. The Astral products, made in 20kW, 120kW and 200kW
versions, offer a new technology, called "current pulsed dual magnetron
sputtering." These units are used for development of coatings for CRT and flat
panel displays, automotive applications and new types of glass coatings.
Crystal(TM). The Crystal 180kW power conversion unit was developed for use
in industrial PVD applications such as architectural glass coating, but is also
useful in PECVD (Plasma Enhanced Chemical Vapor Deposition). The latter may be
used for deposition of oxygen- and water-vapor-barrier coatings on films used in
food packaging.
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In PVD the unit is typically used as a powering source for a pair of magnetron
sputtering sources in the "dual" configuration in a reactive sputtering system.
The PE Series. We introduced the PE low frequency power systems in 1982.
The PE series systems are air cooled and primarily intended for use in certain
PVD, chemical vapor deposition (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 ID Series. The ID power conversion and control systems, introduced in
1981, were the first products we designed. 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, 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, bipolar, square waveforms, which permit the copper to be
alternatively plated and etched in precisely controlled ways, in order to fill
very small cavities on the wafer surface. Each channel can produce 400W
continuous and up to 2kW peak, for a total supply output of 1.6kW continuous and
8kW peak.
RADIO FREQUENCY PRODUCTS
RF POWER GENERATORS
LF (low frequency) Generators. 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.
PDX Series. The PDX series of mid-frequency power conversion and control
systems, introduced in 1990, represented significant technological advancements
by applying cost effective, single conversion, switchmode techniques to higher
frequencies. Depending upon power levels and application, they are available as
air or water cooled generators and are used primarily in semiconductor etch and
CVD applications. Unlike the LF series, which is frequency agile, the PDX
platform products are supplied at discrete frequencies from 275kHz to 400kHz.
Some versions provide pulsed operation.
HFV Series. Three versions of the HFV generator produce 3, 5, or 8kW of
power at a variable frequency centered at about 2MHz for powering inductively
coupled plasma (ICP) systems through a fixed element matching network. This
platform 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.
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The RFG Series. The RFG and RFXII, introduced in the early 1990s, are
water-cooled, full switchmode RF power conversion generators making extensive
use of custom hybrid technologies. Versions of the RFG, targeted at OEM
installations, and the full-featured microprocessor controlled RFXII, are
currently available at frequencies of 4MHz and 13.56MHz, and in power levels up
to 5 kW. They are extensively used in semiconductor processes, including CVD, RF
sputtering, plasma etching/deposition and reactive ion etching.
Apex Series. During 1998, we developed the Apex series of power control
and conversion systems. Featuring extremely high power densities and
sophisticated microprocessor control, this product line addresses the latest
semiconductor industry trends, associated with 300mm wafer processing, for
higher power levels and tighter control. The Apex series is highly configurable
for OEM applications and includes models from 1.5kW to 10kW as well as many
custom versions, intended for direct tool mounting, which include selectable
fixed matches and post-match network RF instrumentation. The instrumentation can
be used for plasma, chamber and/or process diagnostics or closed-loop control in
conjunction with some of our other integrated system control products.
The RF Series. The RF series products generate power between 500W and 5kW,
and are selectively available with frequencies from 2MHz to 40MHz. They use
simple, reliable AC transformer front ends and employ linear RF sections,
permitting variable frequency and high-speed pulse operation.
The Atlas(TM) Series. The Atlas power systems, introduced in 1998, combine
the advantages of a modernized version of the linear RF sections of the RF
series with a switchmode AC front end. These systems currently range in power up
to 4kW and are targeted at applications requiring agile frequency control in the
HF range or fixed frequency VHF operation up to 200MHz. These units complement
the Apex series of fixed frequency, high efficiency HF range generators. Our
customers can choose to have either the compact package of the fixed frequency
Apex or, where required, the frequency agility or VHF capability of the Atlas
systems.
RF MATCHING NETWORKS
Analog Control Matching Networks. The AZX, AM and Mercury series,
impedance matching networks represent several generations of auto match
networks. These match networks are designed as accessories to match the complex
electrical impedance of the plasma to the 50-Ohm-output impedance of the
generators, to permit maximum power transfer. These networks, utilizing servo
motor driven, ceramic envelope, variable vacuum capacitors, are designed for
specific impedance ranges, and some models handle input powers up to 30kW.
Different mechanical packages and various servo control schemes are employed in
the different series, supporting a wide variety of applications.
9
Fixed and no-moving-part Variable Match Networks. We pioneered the use of
fixed element and/or electronically variable element matches for use in load
power regulated and frequency agile RF power delivery systems. In the early
1990s, we introduced the RFG 2K2V and Multi-function Adapter with fixed-element
matching networks for use in a chamber-mount dielectric CVD system. This system
provides significant cost savings and performance enhancements. In 1998, we
introduced FTMS (Frequency Transformation Matching System), which is a solid
state variable matching network with no moving parts. Used with the Atlas series
of generators in a frequency-agile, tuned poly-etch system, this delivery system
provides a wide impedance matching range, yet requires no servo controls or
moving parts. We use this system in conjunction with our frequency-agile Atlas
generators. The extension of this technology continues and is reflected in the
incorporation of selectable fixed matches within custom Apex generator packages.
Microprocessor Controlled Matching Networks. The most recent matching
network platform we introduced is the Navigator series. This platform is highly
modular and employs direct-coupled, microprocessor-controlled stepper motors to
drive variable vacuum capacitors. This platform makes provisions for pre- and
post-match RF parameter measurements. The microprocessor control enables
sophisticated control algorithms to handle tough plasma matching applications
that would be impossible with analog control schemes. The provision for
post-match RF instrumentation (Navigator Z variations), within the controlled
environment at the input to the chamber, has significant potential for improved
processes through closed-loop control. Navigator series matching networks are
being well received by OEMs for use in their next generation tools.
RF INSTRUMENTATION
Z-Scan(TM) Voltage-Current (V-I) Probe. This unit, first delivered in
1998, replaces the RFZ impedance probe we 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 the 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 not only help our customers design their
process systems, but are also used as sensitive detectors of process conditions,
including etch endpoint.
FLOW PRODUCTS
Our acquisition of Engineering Measurements Company in 2001 expanded our
product offerings to flow meters, providing applications to measure de-ionized
(DI), ultra-pure and waste water steams and gases, among other materials. Our
acquisition of Aera Japan Limited in January 2002 expanded our offerings to
thermal-based, pressure-based and liquid-based mass flow controllers for
applications in semiconductor processes, fiber optics, CVD and chemical
mechanical planarization (CMP).
10
TEMPERATURE CONTROL PRODUCTS
Our acquisition of Noah Holdings, Inc. in 2000 expanded our product
offerings to temperature control products, including dynamic point-of-use
thermoelectric chillers and static thermoelectric chillers with power levels
from 500W to 4.25kW for etch, strip and track applications. Our acquisition of
Sekidenko, Inc., also in 2000, expanded our offerings to non-contact optical
fiber thermometry for rapid thermal processing (RTP), CVD and strip
applications.
SOURCES PRODUCTS
Plasma Sources. We introduced our ion sources and inductively coupled
plasma (ICP) sources products in 1998. Several versions of the ion sources
product include a 12cm round source for the magnetic media and optical markets
as well as linear sources up to one meter long for applications in the flat
panel display and architectural glass markets. The ICP product, also developed
in 1998, allowed us access to reactive deposition and cleaning applications
where low energy is critical to prevent substrate damage. This was followed by
the development of a toroidal ICP for chamber cleaning with fluorine, called the
RAPID-F, and a second toroidal source of activated oxygen for reactive gas
processes. All these products feature high reliability, low maintenance designs,
and are well suited for the demanding environments in today's production
facilities.
IKOR (NEW POWER SUPPLY ARCHITECTURE) PRODUCTS
Ikor - formerly New Power Supply Architecture ("NPSA"). In 1998, we
embarked on a program to adapt our high frequency technology to the powering of
microprocessors, which now require higher currents at lower voltages, and which
require the powering source to be extremely agile (able to handle rapidly
changing power drains). Our technology permits smaller, less expensive power
regulators, which are stable under high rates of change of current draw, without
the use of expensive and unreliable electrolytic capacitors.
MARKETS AND CUSTOMERS
MARKETS
Most of our sales historically have been to customers in the semiconductor
capital equipment industry. Sales to customers in this industry represented 59%
of our sales in 2001, 70% in 2000 and 65% in 1999. Our power conversion and
control systems are also used in the flat panel display, data storage and
advanced product applications markets. Following is a discussion of the major
markets for our systems:
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SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING MARKET. We sell our products
primarily to semiconductor capital equipment manufacturers for incorporation
into equipment used to make integrated circuits. Our products are currently used
in a variety of applications including dielectric and metal film deposition,
etch, ion implantation, photo-resist strip and megasonic cleaning. The precise
control over plasma-based processes enables the production of integrated
circuits with reduced feature sizes and increased speed and performance. We
anticipate that the semiconductor capital equipment industry will continue to be
a substantial part of our business for the foreseeable future.
DATA STORAGE MANUFACTURING EQUIPMENT MARKETS. We also sell systems to data
storage equipment manufacturers and to data storage device manufacturers for use
in producing a variety of products, including CDs, CD-ROMs and DVDs and computer
hard disks, including both media and thin film heads. These products use a PVD
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 and the consumer electronics audio and video
markets.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT MARKET. We also sell our
systems to manufacturers of flat panel displays and flat panel projection
devices, which have fabrication processes similar to those employed in
manufacturing integrated circuits. Flat panel technology produces bright, sharp,
large, color-rich images on flat screens for products ranging from hand-held
computer games to laptop and desktop computer monitors to large-screen
televisions. There are three major types of flat panel displays, including
liquid crystal displays, field emitter displays and gas plasma displays. There
are two types of flat panel projection devices, including liquid crystal
projection and digital micro-mirror displays. We sell our products to all five
of these markets.
ADVANCED PRODUCT APPLICATIONS MARKETS. We also sell our 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, lenses, barcode readers
and front surface mirrors. Thin films of diamond-like coatings and other
materials are currently applied to products in plasma-based processes to
strengthen and harden surfaces on such diverse products as tools, razor blades,
automotive parts and hip joint replacements. Other thin film processes that use
our 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-based 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 our other markets.
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APPLICATIONS
We have sold our products for use in connection with the following
processes and applications:
SEMICONDUCTOR DATA STORAGE FLAT PANEL DISPLAY ADVANCED PRODUCT APPLICATIONS
Chemical vapor deposition CD-ROMs Active matrix LCDs Automobile coatings
(CVD) (metal and dielectric) CDs Digital micro-mirror Chemical, physical and materials
research
Plasma-enhanced CVD Recordable CDs Field emission displays Circuit board etch-back and de-smear
High-density plasma CVD DVDs Large flat panel displays Consumer product coatings
Etch Hard disk carbon wear coatings LCD projection Diamond-like coatings
Ion implantation Hard disk magnetic media Liquid crystal displays Food package coatings
Magnet field controls Magneto-optic CDs Medical applications Glass coatings
Megasonic cleaning Thin film heads Plasma displays Optical coatings
Photo-resist stripping Photovoltaics
Physical vapor deposition (PVD) Superconductors
Solid state temperature controls
Optical fiber thermometers
Mass flow controllers
CUSTOMERS
We have sold our systems worldwide to more than 100 OEMs and directly to
more than 500 end users. Our ten largest customers accounted for 53% of our
total sales in 2001, 72% in 2000 and 67% in 1999. We expect that sales of our
products to these customers will continue to account for a high percentage of
our sales in the foreseeable future. Representative customers include:
Advanced Micro Devices Mitsubishi
Applied Films Motorola
Applied Materials National Semiconductor
Axcelis Novellus
Guardian Glass Samsung
Hewlett-Packard Singulus
IBM Texas Instruments
Intel Tokyo Electron
Intevac Trikon
Lam Research ULVAC
LSI Logic Unaxis
Mattson Technologies Veeco
Applied Materials, our largest customer, accounted for 24% of our sales in
2001, 39% in 2000 and 34% in 1999. No other customer exceeded 10%. See Note 16
to our financial statements.
Our backlog was $16.3 million at December 31, 2001, $69.7 million at
December 31, 2000 and $34.0 million at December 31, 1999.
MARKETING, SALES AND SERVICE
We sell our systems primarily through direct sales personnel to customers
in the United States, Europe and Asia. Our sales personnel are located at our
headquarters in Fort Collins, Colorado, and in sales offices in San Jose,
California; and Concord, Massachusetts. To serve customers in Asia and Europe,
we have offices in Tokyo, Japan; Filderstadt, Germany; Bicester, England;
Bundang, South Korea; Taipei Hsien, Taiwan;
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and Shenzhen, China. In connection with the acquisition of Aera in 2002, we now
have sales offices in Hachioji, Japan; Austin, Texas; Bundang, South Korea;
Hsinchu, Taiwan; Dresden and Kirchheim, Germany; and Edinburgh, Scotland. These
offices have primary responsibility for sales in their respective markets. We
also have distributors outside the United States.
Sales outside the United States represented approximately 36% of our total
sales during in 2001, 28% in 2000 and 27% in 1999. We expect sales outside the
United States to continue to represent a significant portion of future sales.
Although we have 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. Our future
performance will depend, in part, upon our 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 our systems. The Japanese market has historically
been difficult for non-Japanese companies to penetrate. Although a number of our
significant non-Japanese customers have established operations in Japan, and we
have operations there ourselves that are recently expanded with our
acquisition of Aera, there can be no assurance that we or our customers will be
able to maintain or improve our competitive positions in Japan.
We believe that customer service and technical support are important
competitive factors and are essential to building and maintaining close,
long-term relationships with our customers. We maintain customer service offices
in Fort Collins, Colorado; Voorhees, New Jersey; Vancouver, Washington; Tokyo,
Japan; Filderstadt, Germany; Bundang, South Korea; Taipei Hsien, Taiwan; and
Shenzhen, China. Noah and Sekidenko maintain customer service offices in
Vancouver, Washington. EMCO has a repair facility in Longmont, Colorado. Aera
has customer service offices in most of its principal locations.
We offer warranty coverage for our systems after shipment against defects
in design, materials and workmanship, for periods ranging from 12 to 36 months,
with the majority of our products having terms ranging from 18 to 24 months.
MANUFACTURING
We have manufacturing locations in Fort Collins and Longmont, Colorado;
Voorhees, New Jersey; and Vancouver, Washington. In connection with the
acquisition of Aera, we now have manufacturing facilities in Hachioji, Japan;
Austin, Texas; Bundang, South Korea; Dresden, Germany; and Edinburgh, Scotland.
We generally manufacture different systems at each facility. Our manufacturing
activities consist of the assembly and testing of components and subassemblies,
which are then integrated into our final products. Once final testing of all
electrical and electro-mechanical subassemblies is completed, the
14
final product is subjected to a series of reliability enhancing operations prior
to shipment to customers. We purchase a wide range of electronic, mechanical and
electrical components, some of which are designed to our specifications. We
outsource some of our subassembly work.
We rely 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 timing of
delivery of components. An inability to obtain adequate supplies would require
us to seek alternative sources of supply or might require us to redesign our
systems to accommodate different components or subassemblies. We could be
prevented from the timely shipping of our systems to our customers if we were
forced to seek alternative sources of supply, manufacture such components or
subassemblies internally, or redesign our systems.
INTELLECTUAL PROPERTY
We have a policy of seeking patents on inventions governing new products
or technologies as part of our ongoing research, development, and manufacturing
activities. We currently hold 45 United States patents and 14 foreign patents
covering various aspects of our products, and have over 30 patent applications
pending in the United States, Europe and Japan. We do not have patent protection
for our intellectual property in several countries in which we do business, and
we have limited patent protection in certain other countries. The costs of
applying for patents in foreign countries and translating the applications into
foreign languages require us to select carefully the inventions for which we
apply for patent protection and the countries in which we seek such protection.
Generally, we have concentrated our efforts to obtain international patents in
the United Kingdom, Germany, France, Italy and Japan because there are other
manufacturers and developers of power conversion and control systems in those
countries, as well as customers for those systems.
Litigation may from time to time be necessary to enforce patents issued to
us, to protect trade secrets or know-how owned by us, to defend us against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. See "Cautionary Statements - Risk
Factors - We are highly dependent on our intellectual property but may not be
able to protect it adequately" and "--Intellectual property litigation is
costly."
COMPETITION
The markets we serve are highly competitive and characterized by ongoing
technological development and changing customer requirements. Significant
competitive factors in our markets include product performance, price, quality
and reliability and level of customer service and support. We believe that we
currently compete effectively with
15
respect to these factors, although there can be no assurance that we will be
able to compete effectively in the future.
The markets in which we compete have seen an increase in global
competition, especially from Japanese- and European-based equipment vendors. We
have several foreign and domestic competitors for each of our product lines.
Some of these competitors are larger and have greater resources than we have.
Our ability to continue to compete successfully in these markets depends on our
ability to make timely introductions of system enhancements and new products.
Our primary competitors are ENI, a subsidiary of MKS Instruments; Applied
Science and Technology (ASTeX), another subsidiary of MKS Instruments;
Huettinger Elektronik; Shindingen; Kyosan Electric; Comdel; STEC; Kinetics;
Mykrolis Corp.; and Daihen Corp. Our competitors are expected to continue to
improve the design and performance of their systems and to introduce new systems
with competitive performance characteristics. We believe we will be required to
maintain a high level of investment in research and development and sales and
marketing in order to remain competitive.
OPERATING SEGMENT
We operate and manage our business of supplying products and systems for
plasma-based manufacturing processes as one segment.
RESEARCH AND DEVELOPMENT
The market for our subsystems for vacuum process systems and related
accessories is characterized by ongoing technological changes. We believe that
continued and timely development of new products and enhancements to existing
systems to support OEM requirements is necessary for us to maintain a
competitive position in the markets we serve. Accordingly, we devote a
significant portion of our personnel and financial resources to research and
development projects and seek to maintain close relationships with our customers
and other industry leaders to remain responsive to their product requirements.
Research and development expenses were $45.2 million in 2001, $37.0 million in
2000 and $28.3 million in 1999, representing 23.3% of total sales in 2001, 10.2%
in 2000 and 14.0% in 1999. We believe that continued research and
development investment and ongoing development of new products are essential to
the expansion of our markets, and expect to continue to make significant
investments in research and development activities.
NUMBER OF EMPLOYEES
As of December 31, 2001, we had a total of 1,185 employees, of whom 1,164
are full-time continuous employees. There is no union representation of our
employees, and we
16
have never experienced a work stoppage. We utilize temporary employees as a
means to provide additional staff while reviewing the performance of the
temporary employee. We consider our employee relations to be good. The
acquisition of Aera has added approximately 220 people to our workforce.
EFFECTS OF ENVIRONMENTAL LAWS
We are subject to federal, state and local environmental laws and
regulations, as well as the environmental laws and regulations of the foreign
federal and local jurisdictions in which we have manufacturing facilities. We
believe we are in material compliance with all such laws and regulations.
CAUTIONARY STATEMENTS - RISK FACTORS
This Form 10-K includes "forward-looking statements" within the meanings
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. All statements contained or incorporated by reference in
this Form 10-K, other than statements of historical fact, are "forward-looking
statements." For example, statements relating to our beliefs, expectations,
plans and projections are forward-looking statements, as are statements that
specified actions or circumstances will continue or change. In some cases,
forward-looking statements can be identified by the inclusion of words such as
"believe," "expect," "plan," "anticipate," "estimate" and similar words.
Some of the forward-looking statements in this Form 10-K are expectations
or projections relating to:
- customer inventory levels, needs and order levels;
- our future revenues;
- our future gross profit;
- market acceptance of our products;
- research and development expenses;
- selling, marketing, general and administrative expenditures;
- capital resources sufficiency and availability;
- potential acquisitions;
- capital expenditures;
- restructuring activities and expenses; and
- general economic conditions in the U.S. and worldwide.
17
Our actual results could differ materially from those projected or assumed
in our forward-looking statements, because forward-looking statements by their
nature are subject to risks and uncertainties. Factors that could contribute to
these differences or prove our forward-looking statements, by hindsight, to be
overly optimistic or unachievable, include the factors described in this
section. Other factors, including factors which we do not now consider material,
also might contribute to the differences between our forward-looking statements
and our actual results. We assume no obligation to update any forward-looking
statement or the reasons why our actual results might differ.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WHICH
COULD NEGATIVELY IMPACT THE MARKET PRICES OF OUR SECURITIES.
Our quarterly operating results have fluctuated significantly and we
expect them to continue to experience significant fluctuations. Downward
fluctuations in our quarterly results historically have resulted in decreases in
the price of our common stock. Quarterly operating results are affected by a
variety of factors, many of which are beyond our control. These factors include:
- changes or slowdowns in economic conditions in the
semiconductor and semiconductor capital equipment industries
and other industries in which our customers operate;
- the timing and nature of orders placed by major customers;
- changes in customers' inventory management practices;
- customer cancellations of previously placed orders and
shipment delays;
- pricing competition from our competitors;
- component shortages resulting in manufacturing delays;
- the introduction of new products by us or our competitors;
- costs incurred by responding to specific feature requests by
customers; and
- declines in macroeconomic conditions.
In addition, companies in the semiconductor capital equipment industry and
other electronics companies experience pressure to reduce costs. Our customers
exert pressure on us to reduce prices, shorten delivery times and extend payment
terms. These pressures could lead to significant changes in our operating
results from quarter to quarter. These changes often occur quickly and make it
difficult for us to predict our revenues or operating results. For example, our
ability to predict future operating results is
18
quite low given the current uncertainty in virtually all forms of technology
spending.
In the past, we have incurred charges and costs related to events such as
acquisitions, restructuring and storm damages. In addition, we have from time to
time incurred charges and costs related to new technologies that are being
developed by others. The occurrence of similar events in the future could
adversely affect our operating results in the applicable quarter.
Our operating results in one or more future quarters may fall below the
expectations of analysts and investors. In those circumstances, the trading
price of our common stock would likely decrease and, as a result, any trading
price of our convertible notes may decrease.
THE SEMICONDUCTOR AND SEMICONDUCTOR CAPITAL EQUIPMENT INDUSTRIES ARE HIGHLY
VOLATILE, AND OUR OPERATING RESULTS ARE AFFECTED TO A LARGE EXTENT BY EVENTS IN
THOSE INDUSTRIES.
The semiconductor industry historically has been highly volatile and has
experienced periods of oversupply resulting in significantly reduced demand for
semiconductor capital equipment. These reductions, in turn, have significantly
reduced demand for our systems. A rapid decrease in demand for our products can
occur with limited advance notice because we supply subsystems to equipment
manufacturers and make a portion of our shipments on a just-in-time basis. This
decrease in demand can adversely impact our business and financial results
disproportionately because of its unanticipated nature.
During downturns, some of our customers have drastically reduced their
orders to us and have implemented substantial cost reduction programs. The
semiconductor industry is currently involved in one of the most significant
downturns in its history and there is no reason to believe that this situation
will significantly improve in the near term. Sales to customers in the
semiconductor capital equipment industry accounted for 59% of our total sales in
2001, 70% in 2000 and 65% in 1999. We expect that our business will continue to
depend significantly on the semiconductor and semiconductor capital equipment
industries for the foreseeable future.
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE, WHICH COULD LEAD TO
FLUCTUATING PRICES FOR OUR CONVERTIBLE NOTES, LOSSES FOR INDIVIDUAL INVESTORS
AND COSTLY SECURITIES CLASS ACTION LITIGATION.
The market for technology stocks, including our common stock, has
experienced significant price and volume fluctuations. These fluctuations often
have been unrelated or disproportionate to the operating performance of the
companies. From our IPO in November 1995 through March 18, 2002, the closing
prices of our common stock on the Nasdaq National Market have ranged from $3.50
to $73.25. The market for our common stock, and any market for our convertible
notes, likely will continue to be subject to fluctuations. Many factors could
cause the trading price of our common stock and notes to fluctuate
substantially, including the following:
19
- future announcements concerning our business, technology,
customers or competitors;
- variations in our operating results;
- introduction of new products or changes in product pricing
policies by us, our competitors or our customers;
- changes in earnings estimates by securities analysts or
announcements of operating results that are not aligned with
the expectations of analysts and investors;
- reduced spending for consumer electronic items;
- the economic and competitive conditions in the industries in
which our customers operate; and
- general stock market trends.
In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation often has
been brought against that company. Many technology companies have been subject
to this type of litigation. We may also become involved in this type of
litigation. Litigation is often expensive and diverts management's attention and
resources, which could significantly harm our business, financial condition and
results of operations.
A SIGNIFICANT PORTION OF OUR SALES IS CONCENTRATED AMONG A FEW CUSTOMERS.
Our ten largest customers accounted for 53% of our total sales in 2001,
72% in 2000 and 67% in 1999. Our largest customer, Applied Materials, accounted
for 24% of our total sales in 2001, 39% in 2000 and 34% in 1999. The loss of any
of these customers or a material reduction in any of their purchase orders would
significantly harm our business, financial condition and results of operations.
THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.
We face substantial competition, primarily from established companies,
some of which have greater financial, marketing and technical resources than we
do. Our primary competitors are ENI, a subsidiary of MKS Instruments; Applied
Science and Technology (ASTeX), another subsidiary of MKS Instruments;
Huettinger Elektronik; Shindingen; Kyosan Electric; Comdel; STEC; Kinetics;
Mykrolis; and Daihen. We expect that our competitors will continue to develop
new products in direct competition with ours, improve the design and performance
of their systems and introduce new systems with
20
enhanced performance characteristics.
To remain competitive, we need to continue to improve and expand our
systems and system offerings. In addition, we need to maintain a high level of
investment in research and development and expand our sales and marketing
efforts, particularly outside of the United States. We may not be able to make
the technological advances and investments necessary to remain competitive.
New products developed by competitors or more efficient production of
their products could increase pressure on the pricing of our systems. In
addition, electronics companies, including companies in the semiconductor
capital equipment industry, have been facing pressure to reduce costs. Either of
these factors may require us to make significant price reductions to avoid
losing orders. Further, our current and prospective customers consistently exert
pressure on us to lower prices, shorten delivery times and improve the
capability of our systems. Failure to respond adequately to these pressures
could result in a loss of customers and orders.
WE RECENTLY ACQUIRED A NUMBER OF COMPANIES AND TECHNOLOGIES, AND PLAN TO
CONTINUE SEEKING ACQUISITIONS, BUT MIGHT NOT BE ABLE TO INTEGRATE OUR
ACQUISITIONS SUCCESSFULLY OR EFFICIENTLY.
We have significantly expanded our product offerings through acquisitions
and continue to seek acquisition opportunities actively. Prior to 1997, we did
not make any significant acquisitions. In the three years from 1997 through
1999, we acquired five companies. In 2000 and 2001, we acquired three companies
and entered into a strategic partnership arrangement with one other company. In
January 2002, we acquired Aera Japan Limited, a Japanese corporation with
approximately $110 million in revenues in its fiscal year ended June 2001 and
approximately 220 employees in six locations worldwide.
Integrating the companies and technologies that we have acquired has
placed substantial demands on our management team. Further, the increased pace
of our acquisitions has required us to try to integrate multiple acquisitions
simultaneously. This has decreased the time and effort that management can give
to integrating each acquisition, while continuing to manage our existing
business.
Some of our acquisitions have been in technology and geographic markets in
which we have limited experience. We might not be able to compete successfully
in these markets or operate the acquired businesses efficiently. While we may be
able to reduce some costs through consolidation, such as the elimination of
redundant locations and personnel, other unanticipated costs of operating
acquired companies or integrating them into our operations may emerge after
acquisition. Our business and results of operations could be adversely affected
if integrating our acquisitions results in substantial costs, delays or other
operational or financial problems.
Future acquisitions could place additional strain on our operations and
management. Our ability to manage future acquisitions will depend on our success
in:
21
- evaluating new markets and investments;
- monitoring operations of acquired companies;
- controlling costs and unanticipated expenses of acquired
companies;
- integrating acquired operations and personnel;
- retaining existing customers and strategic partners of
acquired companies;
- maintaining effective quality controls of acquired companies;
and
- expanding our internal management, technical and accounting
systems.
FUTURE ACQUISITIONS MAY RESULT IN DILUTION TO EXISTING STOCKHOLDERS, ADVERSELY
AFFECT OUR FINANCIAL RESULTS OR THE MARKET PRICE OF OUR SECURITIES OR LIMIT OUR
FINANCIAL FLEXIBILITY.
In connection with future acquisitions we may issue equity securities,
incur or assume debt, recognize substantial one-time expenses or create goodwill
or other intangible assets that could result in significant amortization expense
or future charges for impairment. Parties to whom we issue equity securities in
acquisitions may seek to liquidate their ownership following an acquisition,
which may lead to increased pressure on the market price of our stock and
convertible notes. The market price of our securities may also decline upon
announcement of an acquisition, if investors do not view it favorably. Also,
many acquisition opportunities are for foreign companies or for divisions of
larger companies, for whom cash is generally a more attractive consideration
than securities. The use of cash for these acquisitions may reduce our future
financial flexibility.
WE MIGHT NOT BE SUCCESSFUL IN ACQUIRING THE COMPANIES OR DEVELOPING THE
TECHNOLOGIES NECESSARY TO IMPLEMENT OUR BUSINESS STRATEGY.
We continue to look for ways to expand our product offerings to existing
customers, to new customers and into new markets through acquisitions, internal
development and refinement of technologies, and sales and marketing efforts.
However, whether or not we are successful in implementing our goal of becoming a
single-source provider of integrated solutions will depend on many factors,
several of which are out of our control. For example, we may not be able to
identify or acquire companies or develop internally products which complement
our present product offerings. If we identify appropriate target companies or
technologies, we may not be able to afford to acquire them or may be otherwise
unsuccessful in doing so due to market conditions, competition, failure to agree
on terms and other circumstances. Implementation of our growth, acquisition and
product integration strategy may be delayed or altered as these factors affect
management's acquisition and development decisions.
OUR NEWLY ACQUIRED FOREIGN OPERATIONS, AS WELL AS OUR FOREIGN SALES AND SERVICE
OFFICES, PRESENT DIFFICULTIES THAT WE HAVE LIMITED EXPERIENCE ADDRESSING.
Our acquisition of Aera Japan Limited significantly increased our
operations outside of the United States. In addition to our operations in Japan,
we maintain sales and service offices in Germany, South Korea, the United
Kingdom, Taiwan and China. In
22
implementing our business strategy, we may acquire other companies or relocate
some of our current domestic operations outside of the United States.
Our foreign operations subject us to risks and uncertainties that we have
limited experience addressing. For example, we face greater difficulty outside
the United States:
- managing and staffing our offices;
- safeguarding our intellectual property;
- understanding and complying with local business customs and
laws; and
- competing for customers and supplies with companies based in
the foreign country.
In addition, our foreign operations are subject to risks in each
country, including:
- currency controls and exchange rate fluctuations;
- government regulations and controls; and
- political and economic instability.
Our ability to integrate the operations of Aera Japan Limited and our
overall financial results might be adversely affected, if we are unable to
address these difficulties and risks successfully.
WE MIGHT NOT BE ABLE TO COMPETE SUCCESSFULLY IN INTERNATIONAL MARKETS OR MEET
THE SERVICE AND SUPPORT NEEDS OF OUR INTERNATIONAL CUSTOMERS.
Our customers increasingly require service and support on a worldwide
basis as the markets in which we compete become increasingly globalized. Our
success in competing in international markets is subject to our ability to
manage various risks and difficulties, including:
- compliance with product safety requirements and standards that
are different from those of the United States;
- barriers to entry;
- import and export requirements and controls;
- trade restrictions;
- collecting past due accounts receivable from foreign
customers; and
- changes in tariffs and taxes.
Sales to customers outside the United States accounted for 36% of our
total sales in 2001, 28% in 2000 and 27% in 1999. As a result of our acquisition
of Aera Japan Limited, we expect international sales to represent a larger
portion of our future sales. Providing support services for our systems on a
worldwide basis also is subject to various risks, including:
23
- our ability to hire qualified support personnel;
- maintenance of our standard level of support;
- difficulties managing overseas distributors and
representatives; and
- differences in local customs and practices.
Our ability to implement our business strategies and maintain market share
will be jeopardized, if we are unable to manage these risks successfully.
FLUCTUATIONS IN THE CURRENCY EXCHANGE RATE BETWEEN THE U.S. DOLLAR AND FOREIGN
CURRENCIES COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
A portion of our sales is subject to currency exchange risk as a result of
our international operations. Approximately 25% of our revenues in 2001 were
subject to this risk. As a result of our expanded international operations and
sales, including through the acquisition of Aera Japan Limited, we expect a
greater portion of our future revenues to be subject to this risk.
We have experienced fluctuations in foreign currency exchange rates,
particularly against the Japanese yen, which have negatively affected our
operating results from time to time. We have in the past entered into various
forward foreign exchange contracts to mitigate currency fluctuations in the yen
and intend to continue to do so. We have not employed derivative techniques with
respect to any other currencies. Our current or any future derivative techniques
might not protect us adequately against substantial currency fluctuations.
SHORTAGES OF COMPONENTS NECESSARY FOR OUR PRODUCT ASSEMBLY CAN DELAY OUR
SHIPMENTS.
Manufacturing our products and control systems for the semiconductor
capital equipment industry requires numerous electronic components. Dramatic
growth in the electronics industry has significantly increased demand for these
components. This demand has resulted in periodic shortages and allocations of
needed components, and we expect to experience additional shortages and
allocations from time to time. Shortages and allocations could cause shipping
delays for our systems, adversely affecting our results of operations. Shipping
delays also could damage our relationships with current and prospective
customers.
OUR DEPENDENCE ON SOLE AND LIMITED SUPPLIERS COULD AFFECT OUR ABILITY TO
MANUFACTURE PRODUCTS AND SYSTEMS.
We rely on sole and limited source suppliers for some of our components
and subassemblies that are critical to the manufacturing of our systems. This
reliance involves several risks, including the following:
24
- the potential inability to obtain an adequate supply of
required components;
- reduced control over pricing and timing of delivery of
components; and
- the potential inability of our suppliers to develop
technologically advanced products to support our growth and
development of new systems.
We believe that in time we could obtain and qualify alternative sources
for most sole and limited source parts or could manufacture the parts ourselves.
Seeking alternative sources or commencing internal manufacture of the parts
could require us to redesign our systems, resulting in increased costs and
likely shipping delays. We may be unable to manufacture the parts internally or
redesign our systems, which could result in further costs and shipping delays.
These increased costs would decrease our profit margins if we could not pass the
costs to our customers. Further, shipping delays could damage our relationships
with current and potential customers and have a material adverse effect on our
business and results of operations.
OUR CURRENT AND FUTURE INVESTMENTS IN START-UP COMPANIES MIGHT NOT BE
ECONOMICALLY OR OTHERWISE REWARDING AND MIGHT CAUSE US TO REALIZE LOSSES.
We have invested in start-up companies that develop products and
technologies that we believe may provide us with future benefits. These
investments may not provide us with any benefit, and we may not achieve any
economic return on any of these investments. Our investments in these start-up
companies are subject to all of the risks inherent in investing in companies
that are not established. We could lose all or any part of our investments in
these companies. Over the last twelve months the implied value of a number of
start-up companies has decreased dramatically and a number of technology
companies have been forced to write off all or a portion of their investments in
these companies. In 2001, we recorded a writedown related to an investment in a
start-up company totaling $6.8 million.
As we make additional investments, we may be required to reflect all or a
portion of such investments as a charge against earnings or record our share of
the start-up company's income or losses. As of December 31, 2001, the aggregate
book value of our investments in start-up companies was $1.1 million.
WE ARE HIGHLY DEPENDENT ON OUR INTELLECTUAL PROPERTY BUT MAY NOT BE ABLE TO
PROTECT IT ADEQUATELY.
Our success depends in part on our proprietary technology. We attempt to
protect our intellectual property rights through patents and non-disclosure
agreements. However, we might not be able to protect our technology, and
competitors might be able to develop similar technology independently. In
addition, the laws of some foreign countries might not afford our intellectual
property the same protections as do the laws of the United
25
States. Our intellectual property is not protected by patents in several
countries in which we do business, and we have limited patent protection in some
other countries. The costs of applying for patents in foreign countries and
translating the applications into foreign languages require us to select
carefully the inventions for which we apply for patent protection and the
countries in which we seek protection. Generally, we have concentrated our
efforts to obtain international patents in the United Kingdom, Germany, France,
Italy and Japan because there are other manufacturers and developers of similar
products and control systems in those countries, as well as customers for those
systems. Our inability or failure to obtain adequate patent protection in a
particular country could threaten our ability to compete effectively in that
country.
Our patents also might not be sufficiently broad to protect our
technology, and any existing or future patents might be challenged, invalidated
or circumvented. Additionally, our rights under our patents may not provide
meaningful competitive advantages.
INTELLECTUAL PROPERTY LITIGATION IS COSTLY.
We do not believe that any of our products are infringing any patents or
proprietary rights of others, although infringements may exist or might occur in
the future and are currently alleged in a litigation in which we are a
defendant. Litigation may be necessary to enforce patents issued to us, to
protect our trade secrets or know-how, to defend ourselves against claimed
infringement of the rights of others or to determine the scope and validity of
the proprietary rights of others. This type of litigation often requires
substantial management time and attention, as well as financial and other
resources. We currently are in litigation with a subsidiary of MKS Instruments.
The litigation involves our inductively coupled plasma source product line,
which has represented less than 5% of our total revenues since January 1, 2000.
This and other litigation in the future may result in substantial costs and
diversion of our efforts.
An adverse determination in any current or future litigation could cause
us to lose proprietary rights, subject us to significant liabilities to third
parties, require us to seek licenses or alternative technologies from others or
prevent us from manufacturing or selling our products and impact future revenue.
Any of these events could threaten our business, financial condition and results
of operations.
WE MUST CONSTANTLY DEVELOP AND SELL NEW SYSTEMS IN ORDER TO KEEP UP WITH RAPID
TECHNOLOGICAL CHANGE.
The markets for our systems and the markets in which our customers compete
are characterized by ongoing technological developments and changing customer
requirements. We must continue to improve existing systems and to develop new
systems that keep pace with technological advances and meet the needs of our
customers in order to succeed. We might not be able to continue to improve our
systems or develop new systems. The systems we do develop might not be
cost-effective or introduced in a
26
timely manner. Developing and introducing new systems may involve significant
and uncertain costs. Our business, financial condition and results of
operations, as well as our customer relationships, could be adversely affected
if we fail to develop or introduce improved systems and new systems in a timely
manner.
WE MUST ACHIEVE DESIGN WINS TO RETAIN OUR EXISTING CUSTOMERS AND TO OBTAIN NEW
CUSTOMERS.
The constantly changing nature of semiconductor fabrication technology
causes equipment manufacturers to continually design new systems. We often must
work with these manufacturers early in their design cycles to modify our
equipment to meet the requirements of the new systems. Manufacturers 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. It is critical that we achieve these design wins in order to retain
existing customers and to obtain new customers.
We typically must customize our systems for particular customers to use in
their equipment to achieve design wins. This customization increases our
research and development expenses and can strain our engineering and management
resources. These investments do not always result in design wins.
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. Our sales and growth could experience material and prolonged adverse
effects if we fail to achieve design wins. In addition, design wins do not
always result in substantial sales or profits.
We believe that equipment manufacturers often select their suppliers based
on factors such as long-term relationships. Accordingly, we may have difficulty
achieving design wins from equipment manufacturers who are not currently
customers. In addition, we must compete for design wins for new systems and
products of our existing customers, including those with whom we have had
long-term relationships.
OUR EFFORTS TO BE RESPONSIVE TO CUSTOMERS MAY LEAD TO INCURRING COSTS THAT ARE
NOT READILY RECOVERABLE.
We may incur manufacturing overhead and other costs, many of which are
fixed, to meet anticipated customer demand. Accordingly, operating results could
be adversely affected if orders or revenues in a particular period or for a
particular system do not meet expectations.
We often require long lead times for development of our systems during
which times we must expend substantial funds and management effort. We may incur
significant development and other expenses as we develop our systems without
realizing corresponding revenue in the same period, or at all.
27
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our success depends upon the continued efforts of our senior management
team and our technical, marketing and sales personnel. These employees may
voluntarily terminate their employment with us at any time. Our success also
depends on our ability to attract and retain additional highly qualified
management, technical, marketing and sales personnel. The process of hiring
employees with the combination of skills and attributes required to carry out
our strategy can be extremely competitive and time-consuming. We may not be able
to successfully retain existing personnel or identify, hire and integrate new
personnel. If we lose the services of key personnel for any reason, including
retirement, or are unable to attract additional qualified personnel, our
business, financial condition and results of operations could be materially and
adversely affected.
WE CONDUCT MANUFACTURING AT ONLY A FEW SITES AND OUR SITES ARE NOT GENERALLY
INTERCHANGEABLE.
We conduct the majority of our manufacturing at our facilities in Fort
Collins and Longmont, Colorado; Voorhees, New Jersey; and Vancouver, Washington.
In connection with the acquisition of Aera, we now have major manufacturing
facilities in Hachioji, Japan and Austin, Texas and smaller sites in Bundang,
South Korea; Dresden, Germany; and Edinburgh, Scotland. Each facility generally
manufactures different systems and, therefore, is not readily interchangeable.
In July 1997, a severe rainstorm in Fort Collins caused substantial damage to
our Fort Collins facilities and to some equipment and inventory. The damage
caused us to stop manufacturing at that facility temporarily and prevented us
from resuming full production there until mid-September 1997. Our insurance
policies did not cover all of the costs that we incurred in connection with the
rainstorm. Future natural or other uncontrollable occurrences at any of our
primary manufacturing facilities that negatively impact our manufacturing
processes may not be fully covered by insurance and could cause significant harm
to our operations and results of operations.
WE MUST MAINTAIN MINIMUM LEVELS OF CUSTOMIZED INVENTORY TO SUPPORT SOME CUSTOMER
DELIVERY REQUIREMENTS.
We must keep a relatively large number and variety of customized systems
in our inventory to meet client delivery requirements. Our inventory may become
obsolete as we develop new systems and as our customers develop new systems.
Inventory obsolescence could have a material adverse effect on our financial
condition and results of operations.
WARRANTY COSTS ON CERTAIN PRODUCTS MAY BE EXCESSIVE.
In recent years we have experienced higher than expected levels of
warranty costs on certain products. We have been required to repair, rework, and
in some cases, replace, the products. Warranty costs in 2001 were higher than
expected by more than $3 million. If such problems persist in the future, our
results of operations may be materially adversely affected.
WE ARE SUBJECT TO NUMEROUS GOVERNMENTAL REGULATIONS.
We are subject to federal, state, local and foreign regulations, including
environmental regulations and regulations relating to the design and operation
of our products and control systems. We must ensure that our systems meet safety
and emissions standards,
28
many of which vary across the states and countries in which our systems are
used. For example, the European Union has published directives specifically
relating to power supplies. We must comply with these directives in order to
ship our systems into countries that are members of the European Union. In the
past, we have invested significant resources to redesign our systems to comply
with these directives. We believe we are in compliance with current applicable
regulations, directives and standards and have obtained all necessary permits,
approvals and authorizations to conduct our business. However, compliance with
future regulations, directives and standards could require us to modify or
redesign some systems, make capital expenditures or incur substantial costs. If
we do not comply with current or future regulations, directives and standards:
- we could be subject to fines;
- our production could be suspended; or
- we could be prohibited from offering particular systems in
specified markets.
WE LEASE OUR FORT COLLINS, COLORADO FACILITIES AND A CONDOMINIUM FROM ENTITIES
IN WHICH TWO INDIVIDUALS WHO ARE INSIDERS AND MAJOR STOCKHOLDERS HAVE FINANCIAL
INTERESTS.
We lease our executive offices and manufacturing facilities in Fort
Collins, Colorado from Prospect Park East Partnership and from Sharp Point
Properties, LLC. Douglas S. Schatz, our Chairman, President and Chief Executive
Officer, holds a 26.7% interest in each of the leasing entities. G. Brent
Backman, a member of our board of directors, holds a 6.6% interest in each of
the leasing entities. Aggregate rental payments under these leases for 2001
totaled approximately $2.23 million. We also lease a condominium in
Breckenridge, Colorado to provide rewards and incentives to our customers,
suppliers and employees. We lease the condominium from AEI Properties, a
partnership in which Mr. Schatz holds a 60% interest and Mr. Backman holds a 40%
interest. Aggregate payments under the condominium lease for 2001 totaled
approximately $47,000. As of December 31, 2001, Mr. Schatz owned approximately
34.7% of our common stock, and Mr. Backman owned approximately 3.8% of our
common stock. It is possible that the interests of these individuals may not
coincide with our interests with respect to these properties.
OUR EXECUTIVE OFFICERS AND DIRECTORS OWN A SIGNIFICANT PERCENTAGE OF OUR
OUTSTANDING COMMON STOCK, WHICH COULD ENABLE THEM TO CONTROL OUR BUSINESS AND
AFFAIRS.
Our executive officers and directors owned approximately 39.8% of our
common stock outstanding as of December 31, 2001. Douglas S. Schatz, our
Chairman, President and Chief Executive Officer, owned approximately 34.7% of
our common stock outstanding as of December 31, 2001. These stockholdings give
our executive officers and directors collectively, and Mr. Schatz individually,
significant voting power. Depending on the number of shares that abstain or
otherwise are not voted on a particular matter, our
29
executive officers collectively may be able to elect all of the members of our
board of directors and to control our business affairs for the foreseeable
future.
WE RECENTLY HAVE INCREASED OUR LEVERAGE SIGNIFICANTLY.
In August 2001, we issued $125 million of convertible notes. As a result
of this indebtedness, our principal and interest payment obligations increased
and such debt increased from $81.6 million to $206.6 million at that time.
This debt is due in 2006. The degree to which we will be leveraged could
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable to industry
downturns and competitive pressures. Our ability to meet our debt service
obligations will be dependent upon our future performance, which will be
subject to the financial, business and other factors affecting our operations,
many of which are beyond our control. Our note holders and other creditors
might require us to sell some of our assets, terminate some of our operations
or take other actions, including completely liquidating the company, if we are
unable to meet our debt service obligations.
ANTI-TAKEOVER PROVISIONS LIMIT THE ABILITY OF A PERSON OR ENTITY TO ACQUIRE
CONTROL OF US AND MAY ADVERSELY AFFECT THE VALUE OF OUR COMMON STOCK AND
OUR CONVERTIBLE NOTES.
Our certificate of incorporation and bylaws include provisions
which:
- allow the board of directors to issue preferred stock with
rights senior to those of the common stock without any vote or
other action by the holders of the common stock;
- limit the right of our stockholders to call a special meeting
of stockholders; and
- impose procedural and other requirements that could make it
difficult for stockholders to effect particular corporate
actions.
In addition, we are subject to the anti-takeover provisions of the
Delaware General Corporation Law. Any of these provisions could delay or prevent
a person or entity from acquiring control of us. The effect of these provisions
may be to limit the price that investors are willing to pay in the future for
our securities. These provisions might also discourage potential acquisition
proposals or could diminish the opportunities for our stockholders to
participate in a tender offer, even if the acquisition proposal or tender offer
is at a price above the then current market price for our common stock.
30
EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and their ages as of February 28, 2002 are as
follows:
NAME AGE POSITION
---- --- --------
Douglas S. Schatz 56 Chief Executive Officer and Chairman of the Board
James F. Gentilcore 49 Executive Vice President and Chief Operating Officer
Michael El-Hillow 50 Senior Vice President of Finance and Administration and Chief Financial Officer
Richard P. Beck 68 Senior Vice President and Director (former Chief Financial Officer)
James R. Gordley 50 Vice President and General Manager, Flow Products
Joseph R. Monkowski, Ph.D. 48 Senior Vice President, Business Development
William A. Ruff 51 Vice President and General Manager, RF Products
Brenda M. Scholl 45 Vice President and General Manager, DC Products
Richard A. Scholl 63 Senior Vice President and Chief Technology Officer
- ----------
DOUGLAS S. SCHATZ is a co-founder and has been our Chief Executive Officer
and Chairman of the Board since our incorporation in 1981. From our
incorporation to July 1999, Mr. Schatz also served as our President. In March
2001 he began serving again as our President. Since December 1995, Mr. Schatz
has also served as a director of Advanced Power Technology, Inc., a publicly
held company which provides high power, high voltage and high performance
semiconductors and power modules.
JAMES F. GENTILCORE became Executive Vice President and Chief Operating
Officer in February 2001. He joined us in March 1996 as Vice President of Sales
and Marketing. He became Senior Vice President of Sales and Marketing in April
1998 and President of Advanced Energy Voorhees, Inc. in October 1999. In January
2001 he became President of EMCO. From 1990 to 1996 he served with MKS
Instruments Inc. and held the position of Vice President, Marketing.
MICHAEL EL-HILLOW joined us in October 2001 as Senior Vice President of
Finance and Administration and Chief Financial Officer, replacing Mr. Beck. From
April 1997 to July 2001, Mr. El-Hillow was Senior Vice President and Chief
Financial Officer at Helix Technology Corporation. He was Senior Vice President
and Chief Financial Officer of Spike Broadband Systems, Inc. from July 2001 to
October 2001. Prior to Helix he was Vice President, Finance, Treasurer and Chief
Financial Officer at A.T. Cross Company and an audit partner at Ernst & Young.
RICHARD P. BECK joined us in March 1992 as Vice President and Chief
Financial Officer and became Senior Vice President in February 1998. He joined
our board of directors in September 1995. In October 2001, Mr. Beck announced
that he will retire in mid-2002 and will work with Mr. El-Hillow through a
transition period. In addition to Advanced Energy, Mr. Beck is also Chairman of
the Board of Applied Films Corporation, a director of TTM
31
Technologies, Inc. and a director of Photon Dynamics, Inc., all publicly held
companies.
JAMES R. GORDLEY joined us in February 1998 as Vice President of Sales,
and became Vice President of Mergers and Acquisitions in August 2000. In January
2002 he became Vice President and General Manager, Flow Products. Prior to
joining us, he was Vice President of Sales at Semitool's Thermal Products
Division from 1989 to 1998. Prior to Semitool he had various marketing positions
with 3M.
JOSEPH R. MONKOWSKI, PH.D. joined RF Power Products, Inc. in February 1998
as Senior Vice President and General Manager of the Electronics Technology
Business Group. In October 1998, upon the merger of Advanced Energy and RF Power
Products, Dr. Monkowski became our Senior Vice President of Sales and Marketing.
In August 2000 he became Senior Vice President, Business Development. Prior to
joining RF Power Products, Dr. Monkowski held various executive positions with
technology companies, including President of the instruments group of Pacific
Scientific Company from 1994 to 1997.
WILLIAM A. RUFF joined us in 1990 as the Product Manager - RF Power
Systems. From 1995 to 1997 he was the Business Unit Engineering Manager -
Applied Materials Business Unit, and from 1997 to 1999 he was an Engineering
Director of Advanced Energy. In 1999 Mr. Ruff became Vice President Engineering,
Advanced Energy Voorhees, Inc. In March 2001 he became President, Advanced
Energy Voorhees, Inc., and in May 2001 became Vice President and General
Manager, RF Products. Prior to joining us, Mr. Ruff held various engineering
positions in other technology companies.
BRENDA M. SCHOLL joined us in 1988 as Product Manager for DC products and
held several positions in marketing thereafter, until becoming Vice President
and General Manager, DC Products in May 2001. Prior to joining us, she held
positions in marketing and sales for Varian Associates and LFE Corporation.
RICHARD A. SCHOLL joined us in 1988 as Vice President, Engineering. Mr.
Scholl became our Chief Technology Officer in September 1995. Prior to joining
us, Mr. Scholl was General Manager, Vacuum Products Division at Varian
Associates, Inc., a manufacturer of high-technology systems and components.
32
ITEM 2. PROPERTIES
Information concerning our principal properties is set forth below:
LOCATION TYPE PRINCIPAL USE SQ. FOOTAGE OWNERSHIP
- -------- ---- ------------- ----------- ---------
Tempe, AZ Office Distribution 2,000 Leased
Milpitas, CA Office Distribution 9,000 Leased
San Jose, CA Office Distribution 20,000 Leased
Fort Collins, CO Office, plant Headquarters, 297,000 Leased
Research and development,
Manufacturing, Distribution
Longmont, CO Office, plant Research and development, 45,000 Owned
Manufacturing, Distribution
Matthews, NC Office, plant Research and development, 10,000 Leased
Manufacturing, Distribution
Voorhees, NJ Office, plant Research and development, 78,000 Leased
Manufacturing, Distribution
Beaverton, OR Office Distribution 2,000 Leased
Austin, TX Office, plant Manufacturing, Distribution 26,000 Leased
Dallas, TX Office Distribution 2,000 Leased
Vancouver, WA Office, plant Research and development, 32,000 Leased
Manufacturing, Distribution
Shenzhen, China Office Distribution 3,000 Leased
Bicester, England Office Distribution 1,000 Leased
Dresden, Germany Office, plant Manufacturing, Distribution 2,000 Leased
Filderstadt, Germany Office Research and development, 9,000 Leased
Distribution
Kirchheim, Germany Office Distribution 2,000 Leased
Hachioji, Japan Office, plant Research and development, 50,000 Owned
Manufacturing, Distribution
Tokyo, Japan Office Distribution 8,000 Leased
Edinburgh, Scotland Office, plant Manufacturing, Distribution 2,000 Leased
Bundang, South Korea Office Distribution 6,000 Leased
Bundang, South Korea Office, plant Manufacturing, Distribution 6,000 Owned
Hsinchu, Taiwan Office Distribution 3,000 Leased
Taipei Hsien, Taiwan Office Distribution 12,000 Leased
We consider all of the above facilities suitable and adequate to meet our
production and office space needs for the foreseeable future. We believe that
suitable additional or alternative space will be available in the future on
commercially reasonable terms as needed.
In 2001, we phased out our Austin, Texas manufacturing facility, to
outsource assembly of certain DC power products, and we began to transition our
Voorhees, New Jersey facility from a manufacturing site to a design center. We
also closed our manufacturing facility in San Jose, California, to transfer the
manufacturing of our solid-state temperature control systems to Vancouver,
Washington, to be co-located with the manufacturing of our optical fiber
temperature measurement and control systems.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are party to various legal proceedings relating to
our business. We are not currently party to any material legal proceedings,
except as described below:
We are the defendant in an action filed by Applied Science and Technology,
Inc., a Delaware corporation. The civil action was filed in the U.S. District
Court for the District of Delaware on November 30, 2000. Applied Science and
Technology, which is a subsidiary of MKS Instruments, Inc., alleges that we are
infringing upon its patent by manufacturing and selling reactive gas generators.
Applied Science and Technology seeks injunctive relief and damages in an
unspecified amount. A trial date has been set for May 13, 2002. We have retained
counsel to defend us and we believe we have meritorious defenses to the claim.
We have denied the allegation of infringement, claimed the existence of prior
art which would invalidate the MKS patent, and believe that we have a reasonable
chance of prevailing at trial.
33
We are also a defendant in an action filed by Sierra Applied Sciences,
Inc., a Colorado corporation. The civil action was filed in the U.S. District
Court for the District of Colorado on September 17, 2001. The action is a
Complaint for Declaratory Judgment. An answer was filed on November 9, 2001.
Discovery and Settlement Discussions are in progress. Plaintiffs seek a
declaratory judgment from the court that our patent is invalid or that the
plaintiffs' products do not infringe on the patent. We are confident that the
validity of this patent will be upheld. Based on the information available, we
believe there is no potential liability in this action.
An interference action has been filed in the United States Patent Office
by Unaxis, wherein Unaxis claims prior invention of one of our concepts, for
which we filed a patent application in 1992 and which ultimately resulted in
U.S. Patent No. 6,001,224 being issued to us. Should Unaxis prevail, the
effective result would be transference of the patent rights over the concept to
Unaxis. Unaxis could then choose to license those rights to us, or could block
use of this idea, forcing us to drop certain of our products or to limit their
sale to noninfringing uses. We have reason to believe that we will prevail in
the interference proceeding, and are vigorously defending ourselves before the
Board of Interferences in the United States Patent Office."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
34
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Advanced Energy's common stock is traded on the Nasdaq National Market
under the symbol AEIS. At March 18, 2002, the number of common stockholders of
record was 783, and the last sale price on that day was $33.560.
Below is a table showing the range of high and low trades for the common
stock as quoted (without retail markup or markdown and without commissions) on
the Nasdaq National Market; quotations do not necessarily represent actual
transactions:
High Trade Price Low Trade Price
---------------- ---------------
2000 Fiscal Year
First Quarter 77.438 42.938
Second Quarter 72.875 35.250
Third Quarter 63.000 32.125
Fourth Quarter 35.500 15.000
2001 Fiscal Year
First Quarter 35.750 19.813
Second Quarter 45.060 22.250
Third Quarter 43.400 16.350
Fourth Quarter 29.250 15.400
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, Advanced Energy's revolving credit facility
prohibits the declaration or payment of any cash dividends on its common stock.
35
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read with, our 2001 Consolidated Financial
Statements, related notes and management's discussion included in this Form
10-K. The selected consolidated statement of operations data for the years ended
December 31, 2001, 2000 and 1999, and the related consolidated balance sheet
data as of and for the years ended December 31, 2001 and 2000, 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, 1998 and 1997, and the related consolidated balance sheet data as of
December 31, 1999, 1998 and 1997, were derived from audited consolidated
financial statements not included in this Form 10-K.
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999 1998 1997
--------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales .................................... $ 193,600 $359,782 $202,849 $ 134,019 $188,339
Gross profit ............................. 57,432 176,453 92,202 40,019 71,656
Total operating expenses ................. 104,319 91,253 62,876 54,767 49,889
(Loss) income from operations ............ (46,887) 85,200 29,326 (14,748) 21,767
Net (loss) income ........................ $ (31,379) $ 68,034 $ 19,066 $ (11,025) $ 12,931
========= ======== ======== ========= ========
Diluted (loss) earnings per share ........ $ (0.99) $ 2.10 $ 0.62 $ (0.38) $ 0.48
Diluted weighted-average common shares
outstanding ............................ 31,712 32,425 30,934 29,007 27,057
DECEMBER 31,
------------
2001 2000 1999 1998 1997
--------- -------- -------- --------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities ............................ $ 271,978 $189,527 $207,483 $ 28,714 $ 32,551
Working capital .......................... 350,443 277,154 257,484 63,225 77,188
Total assets ............................. 450,195 365,835 325,433 107,736 136,545
Total debt ............................... 207,730 83,980 139,012 1,603 8,784
Stockholders' equity ..................... 214,345 238,798 156,989 92,163 99,969
36
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. Statements that are other than historical information are
forward-looking statements. For example, statements relating to our 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, our 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:
- changes or slowdowns in general economic conditions or
conditions in the semiconductor and semiconductor capital
equipment industries and other industries in which our
customers operate;
- the timing and nature of orders placed by major customers;
- changes in customers' inventory management practices;
- customer cancellations of previously placed orders and
shipment delays;
- pricing competition from our competitors;
- component shortages or allocations or other factors that
change our levels of inventory or substantially increase our
spending on inventory;
- the introduction of new products by us or our competitors;
- costs incurred by responding to specific feature requests by
customers;
- declines in macroeconomic conditions;
- timing and challenges of integrating recent and potential
future acquisitions and strategic alliances; and
- our ability to attract and retain key personnel.
For a discussion of these and other factors that may impact our realization of
our forward-looking statements, see Part I "Cautionary Statements - Risk
Factors."
37
OVERVIEW
We design, manufacture and support a group of key subsystems for vacuum
process systems. Our primary subsystems include complex power conversion and
control systems. Our products also control the flow of gases into the process
chambers and provide thermal control and sensing within the chamber. Our
customers use our products in plasma-based thin-film processing equipment that
is essential to the manufacture of semiconductors; compact disks, DVDs and other
digital storage media; flat-panel computer and television screens; coatings for
architectural glass and optics; and a power supply for advanced technology
computer workstations. We also sell spare parts and repair services worldwide
through our customer service and technical support organization.
We provide solutions to a diversity of markets and geographic regions.
However, we are focused on the semiconductor capital equipment industry, which
accounted for approximately 59% of our sales in 2001, 70% in 2000 and 65% in
1999. In 1999 and 2000, the semiconductor capital equipment industry was at its
historical peak for sales. Conversely, the year 2001 saw the steepest cutback in
capital equipment purchases in industry history. These cyclical changes
accounted for the 55% reduction in our sales to the semiconductor capital
equipment industry between 2000 and 2001. However, during this period, we
continued to achieve significant design wins on new equipment at manufacturers,
which have resulted in solidifying relationships with our existing customers. We
expect future sales to the semiconductor capital equipment industry to represent
approximately 55% to 70% of our total revenue, depending upon the strength or
weakness of the industry cycles.
In order to provide higher-value products, the semiconductor capital
equipment industry is in the midst of significant consolidation. To help insure
our continued growth and maintain our competitive advantage, we have done the
following:
- In April 2000, we acquired Noah Holdings, Inc., which
manufactures solid-state temperature control systems to
control process temperatures during semiconductor
manufacturing.
- In August 2000, we acquired Sekidenko, Inc., which supplies
optical fiber thermometers to the semiconductor capital
equipment industry.
- In January 2001, we acquired Engineering Measurements Company,
or EMCO, which manufactures electronic and electromechanical
precision instruments for measuring and controlling the flow
of liquids, steam and gases for the semiconductor and other
industries.
- In January 2002, we acquired Aera Japan Limited. Aera
primarily supplies the semiconductor capital equipment
industry with product lines that include
38
digitial mass flow controllers, pressure-based mass flow
controllers, liquid mass flow controllers, ultrasonic liquid
flow meters and liquid vapor delivery systems.
These product offerings complement our position as a global leader for
complex power conversion and control systems, and process instruments, allowing
us to provide best of breed components and develop systems to increase the
precision and productivity of our customers' products. It is also possible that
we will acquire other companies or form strategic alliances as the industry
consolidation continues.
We have taken strategic financing actions to enable us to pursue these
investments. In November 1999, we completed two public offerings, one for $135
million of convertible subordinated notes with a conversion price of $49.53, due
in 2006, and one for 1,000,000 shares of our common stock, at a price of $39 per
share. These offerings provided aggregate net proceeds of approximately $167.1
million. In the fourth quarter of 2000, we repurchased $53.4 million of these
notes on the open market, leaving us with $81.6 million outstanding. These
purchases resulted in an after-tax net extraordinary gain of $7.6 million. In
August 2001, we completed an additional offering of convertible subordinated
notes, providing aggregate net proceeds of approximately $121.25 million with a
conversion price of $29.83, also due in 2006. These financings are discussed in
more detail in the "Liquidity and Capital Resources" section.
We have also taken strategic marketing actions to provide for improved
distribution channels. In December 1999, we completed formation of our wholly
owned sales and service subsidiary in Taiwan. In October 2000, we opened a
representative office in Shenzhen, China, to be responsible for market
development, sales and technical support in China. We have also begun developing
a sales force focused on selling to end users of our products.
Historically, our sales have primarily been to OEM manufacturers of
semiconductor manufacturing equipment, but many of our newer products can be
marketed directly to the end user for new or previously installed equipment. In
some cases, the end user can direct the OEM to utilize our subsystems rather
than our competitors.
RESULTS OF OPERATIONS
SALES
Sales were $193.6 million in 2001, $359.8 million in 2000 and $202.8
million in 1999, representing a decrease of 46% from 2000 to 2001 and an
increase of 77% from 1999 to 2000. The changes in the level of our sales were
primarily due to changes in demand for our systems from semiconductor capital
equipment manufacturers, including many of our largest customers. The volatility
in the semiconductor industry impacted overall investment activities, which led
to semiconductor manufacturers purchasing less capital
39
equipment.
While sales of semiconductor capital equipment have grown at a compounded
annual growth rate of approximately 19% since 1960, the industry is highly
cyclical and is impacted by changes in the macroeconomic environment, changes in
semiconductor supply and demand, and rapid technological advances in both
semiconductor devices and wafer fabrication processes. Rapid growth and
expansion during 1999 and part of 2000 was followed by the most sudden and
pronounced slump in industry history, with year-to-year revenues falling
approximately 40% throughout the industry from 2000 to 2001. Our sales over the
last three years illustrate this cyclicality.
Sales in 1999 and 2000 reflected the recovery in the semiconductor capital
equipment industry from the severe downturn of 1998, and resulted from capacity
expansion and increased investment in advanced technology by the semiconductor
industry. This two-year recovery resulted in record sales for us, driven by
sales to the semiconductor capital equipment industry. The decrease in sales in
2001 was due to a worldwide slowdown in demand for semiconductors, which
resulted in a sudden and rapid decline in demand for semiconductor manufacturing
equipment. Inventory buildups, slower than expected personal computer sales and
slower global economic growth resulted in reduced capital investment by
semiconductor manufacturers and their suppliers.
The following tables summarize annual net sales, and percentages of net
sales, by customer type for each of the three years in the period ended December
31, 2001:
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Semiconductor capital equipment ...... $114,273 $252,889 $131,395
Data storage ......................... 10,043 24,751 21,823
Flat panel display ................... 18,145 29,273 11,171
Advanced product applications ........ 35,698 37,726 28,563
Customer service technical support ... 15,441 15,143 9,897
-------- -------- --------
$193,600 $359,782 $202,849
======== ======== ========
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
-------- -------- --------
Semiconductor capital equipment ...... 59% 70% 65%
Data storage ......................... 5 7 11
Flat panel display ................... 10 8 5
Advanced product applications ........ 18 11 14
Customer service technical support ... 8 4 5
--- --- ---
100% 100% 100%
=== === ===
The following table summarizes annual percentage changes in net sales by
customer type for us from 2000 to 2001 and from 1999 to 2000:
2001 CHANGE 2000 CHANGE
FROM 2000 FROM 1999
Semiconductor capital equipment ................. (55)% 92%
Data storage .................................... (59)% 13%
Flat panel display .............................. (38)% 162%
Advanced product applications ................... (5)% 32%
Customer service technical support .............. 2% 53%
Total sales ..................................... (46)% 77%
40
The following tables summarize annual net sales, and percentages of net
sales, by geographic region for each of the three years in the period ended
December 31, 2001:
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
United States and Canada ....... $124,746 $260,596 $148,424
Europe ......................... 28,957 52,893 32,344
Asia Pacific ................... 39,038 45,874 21,583
Rest of world .................. 859 419 498
-------- -------- --------
$193,600 $359,782 $202,849
======== ======== ========
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
-------- -------- --------
United States and Canada ....... 64% 72% 73%
Europe ......................... 15 15 16
Asia Pacific ................... 21 13 11
Rest of world .................. -- -- --
--- --- ---
100% 100% 100%
=== === ===
GROSS MARGIN
Our gross margin was 29.7% in 2001, 49.0% in 2000 and 45.5% in 1999.
The major items affecting the reduction in our margin in 2001 were:
- The adverse impact of much lower sales on the absorption of
higher year-over-year fixed overhead. Historically, the rapid
changes in industry demand have resulted in significant
increases in manufacturing capacity during upturns followed by
severe underutilization of these facilities in subsequent
downturns. As the semiconductor capital equipment market's
expansion of 1999 and 2000 was forecasted to continue into
2001, we increased our manufacturing capacity in Fort Collins,
Colorado to meet this continued expected growth. This facility
was completed in the first quarter of 2001 when the industry
downturn was just beginning. While we understood that there
was a risk of opening up a new facility after eight quarters
of industry growth, the new facility was necessary to ensure
our continued ability to meet demand and maintain our
reputation as a leading supplier to the semiconductor capital
equipment industry. This new facility also positions us to
take advantage of the next up cycle in a much more efficient
manner, which should have a positive impact on future
operating results.
- The industry is moving to 300mm equipment and smaller line
widths. These technology changes require new products that we
have developed or are developing. Typical of products early in
their life cycle and at low production levels, these products
have lower margins than our established products. Margins on
these products should improve over the next 12 months.
41
- We reduced our fixed overhead through headcount reductions in
force of some of our manufacturing staff, when we saw our
level of sales decline in 2001, though we do retain certain
knowledgeable employees with specific skill sets, to be ready
for unexpected industry ramp-ups.
- Our cost of sales has also been adversely affected by periodic
writedowns of excess and obsolete inventory, often exacerbated
by industry cycles, and recent warranty expenses in excess of
historical rates related to certain products, which required
substantial rework, repair, and in some cases, replacement.
Given the rapid change in technology, we monitor and forecast expected
inventory needs based on our constantly changing sales forecast. Inventory is
written down or written off when it becomes obsolete, generally because of
engineering changes to a product or discontinuance of a product line, or when it
is deemed excess. Charges for obsolete and excess inventory were $6.4 million in
2001, $654,000 in 2000 and $1.5 million in 1999, which affected gross margins by
3.3%, 0.2% and 0.8% in these years. The amount of inventory written down in 2001
is primarily attributable to the severe decrease in product sales, which caused
a larger than normal amount of inventory to become excess based on recent sales
forecasts.
We provide warranty coverage for our systems ranging from 12 to 36 months,
with the majority of our products ranging from 18 to 24 months, and estimate the
anticipated costs of repairing our systems under such warranties based on the
historical average costs of the repairs. We recognized charges for warranty
expense of $7.6 million in 2001, $4.6 million in 2000 and $3.1 million in 1999.
The assumptions we use to estimate warranty accruals are reevaluated
periodically in light of actual experience and, when appropriate, the accruals
are adjusted. Our determination of the appropriate level of warranty accrual is
subjective, and based on estimates, and actual experience can be different than
our expectations.
The improvement in gross margin from 1999 to 2000 was primarily a result
of a more favorable absorption of manufacturing costs, which resulted from the
higher sales base.
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 declines in our gross margins.
RESEARCH AND DEVELOPMENT
We believe continued investment in the research and development of new
systems is critical to our ability to serve new and existing markets, develop
new products and improve existing product designs to achieve our vision of
convergent technologies. We continue to invest heavily in new product
development even during industry downturns,
42
to be advantageously positioned for turnaround in demand for old and new
products, which often occurs during sudden and unpredictable industry upturns.
Since our inception, all of our research and development costs have been
expensed as incurred.
Our research and development expenses were $45.2 million in 2001, $37.0
million in 2000 and $28.3 million in 1999, representing an increase of 22% from
2000 to 2001 and 31% from 1999 to 2000. As a percentage of sales, research and
development expenses increased from 10.2% in 2000 to 23.3 % in 2001 because of
the lower sales base, but decreased from 14.0% in 1999 to 10.2% in 2000 because
of increased levels of revenue in 2000. The annual increases in expenditures
from 1999 to 2001 are primarily due to increases in payroll, materials and
supplies and depreciation of equipment used for new product development and
partially due to the acquisition of EMCO in 2001.
SALES AND MARKETING EXPENSES
As we continue our worldwide expansion, and expand our product offerings
through acquisitions, our sales and marketing efforts have become increasingly
complex. We continue to refine our sales and marketing functions as we acquire
and integrate new companies. We have begun an effort to market directly to end
users of our systems, in addition to our traditional marketing to manufacturers
of semiconductor capital equipment and other industries. Our sales and marketing
expenses support domestic and international sales and marketing activities that
include personnel, trade shows, advertising, and other selling and marketing
activities.
Sales and marketing expenses were $23.8 million in 2001, $24.1 million in
2000 and $18.3 million in 1999. This represents a 32% increase from 1999 to
2000, and essentially no change from 2000 to 2001. The increase in expenses from
1999 to 2000 was to support the sales growth during the 2000 upturn in the
semiconductor capital equipment industry. As a percentage of sales, sales and
marketing expenses increased from 6.7% to 12.3% in 2001 due to the lower sales
base in 2001, but decreased from 9.0% in 1999 to 6.7% in 2000 because of the
higher sales base in 2000, even while dollars spent increased.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses support our worldwide corporate
legal, patent, tax, financial, administrative, information systems and human
resources functions in addition to our general management. General and
administrative expenses were $21.5 million in 2001, $24.6 million in 2000 and
$16.2 million in 1999. The 12% decrease from 2000 to 2001 is primarily due to
lower spending for payroll, primarily employee bonuses, which were eliminated in
2001 due to the decline in operating profitability. The 51% increase from 1999
to 2000 is primarily due to higher spending for payroll, including employee
bonuses, and purchased services. As a percentage of sales, general and
administrative expenses increased from 6.8% in 2000 to 11.1% in 2001 because of
the lower sales base in 2001, and decreased from 8.0% in 1999 to 6.8% in 2000
because of
43
the higher sales base in 2000. General and administrative expenses in 2001 also
included approximately $500,000 of legal costs in connection with patent
infringement litigation.
GOODWILL IMPAIRMENT
During the second quarter of 2001, we terminated the operations of our
Tower Electronics, Inc. subsidiary and our Fourth State Technology, or FST,
product line, due to significant softening in the projected demand for these
products. Revenue contributed by Tower and FST operations for 2001, 2000 and
1999 represented less than five percent of our total revenue in each of these
years. As a result of these actions, estimated related future cash flows no
longer supported the carrying amounts of related goodwill, and we recorded
goodwill impairment charges of $5.4 million in 2001 related to Tower and FST.
OTHER OPERATING EXPENSES
Beginning in April 2000, we made periodic advances to or investments in
Symphony Systems, Inc., a privately held, early-stage developer of equipment
productivity management software. In addition to the approximately $8 million
received from us as investments, advances and license payments, Symphony
received investments of $7 million from other parties. In 2000, we obtained an
exclusive license, for which we paid $1.5 million, to use Symphony's products in
the semiconductor industry. In connection with certain of our 2001 advances, we
obtained a security interest in all of Symphony's intellectual and proprietary
property.
Beginning in the third quarter of 2001, and continuing through the end of
the year, Symphony's financial situation began to deteriorate significantly, and
we determined that due to its need for immediate liquidity, its declining
business prospects (including the indefinite postponement of a significant order
for its products from a major semiconductor equipment manufacturer) and other
factors, the value of our investment in and advances to Symphony had
substantially declined. Given the precarious financial condition of Symphony, we
valued our investments in and advances to Symphony at December 31, 2001, at
approximately $1 million, which reflects our assessment of the value of the
Symphony technology license, which has continuing value to us. The amount of the
writedown related to Symphony was $6.8 million, all of which was recorded in
2001 as an operating expense.
Since Symphony effectively ceased operations in February 2002, we have
hired its key employees and we intend to purchase Symphony's remaining assets in
a foreclosure, liquidation or bankruptcy sale in the near future. At no time did
our percentage ownership in the voting stock of Symphony exceed approximately
1.7%, and we have never had the ability to exercise significant influence over
Symphony.
44
RESTRUCTURING AND MERGER COSTS AND ONE-TIME CREDIT
In April 2000, we acquired Noah in a pooling of interests under the
previous rules of Accounting Principles Board (APB) Opinion No. 16. The merger
involved the exchange of 687,000 shares of Advanced Energy common stock for the
privately held common stock of Noah. As part of the business combination, we
took a charge of $2.3 million in the second quarter of 2000 for merger costs,
which cannot be capitalized and which in certain cases were nondeductible for
income tax purposes.
In July 2000, we announced the consolidation of our Tower facility in
Fridley Minnesota, into our existing facility in Voorhees, New Jersey. We
recorded a restructuring charge of $1.0 million in the third quarter of 2000
related to the consolidation, which was completed during the fourth quarter of
2000.
In August 2000, we acquired Sekidenko in a merger that was accounted for
as a pooling of interests. This merger involved the exchange of 2.1 million
shares of Advanced Energy common stock for the privately held common stock of
Sekidenko. As part of the business combination, we took a charge of $2.3 million
in the third quarter of 2000 for merger costs, which cannot be capitalized and
which in certain cases were nondeductible for income tax purposes.
In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, which requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001.
In the first quarter of 2001, we received a $1.5 million settlement for
recovery of legal expenses pertaining to a patent infringement suit in which we
were the plaintiff.
During the second quarter of 2001, in response to the downturn in the
semiconductor capital equipment industry, we implemented two reductions in force
totaling approximately 135 regular employees and 90 temporary employees and
recorded a charge of $614,000 for restructuring and severance costs, including
fringe benefits. We paid cash to the affected employees in this amount during
the second quarter of 2001, and at December 31, 2001 the remaining liability was
not significant.
During the fourth quarter of 2001, in response to the sustained downturn
in the semiconductor capital equipment industry and global economy, we announced
and implemented additional cost-reduction measures, and recorded a charge of
$2.5 million. Such measures included a reduction in force of 107 employees;
phasing out our Austin, Texas manufacturing facility to begin outsourcing the
assembly of certain DC power products; the transition of our Voorhees, New
Jersey facility from a manufacturing site to a design center; and the closure of
Noah's manufacturing and office facilities in San Jose, California, due to the
transfer of Noah's manufacturing to Vancouver, Washington, to be co-located with
Sekidenko. These costs included payments required under operating
45
lease contracts and costs for writing down related leasehold improvements for
facilities. At December 31, 2001, approximately $1.3 million related to the
fourth quarter of 2001 restructuring and severance actions was accrued as a
current liability.
OTHER (EXPENSE) INCOME
Other (expense) income consists primarily of interest income and expense,
foreign exchange gains and losses and other miscellaneous gains, losses, income
and expense items.
Interest income was approximately $6.6 million in 2001, $10.7 million in
2000 and $2.2 million in 1999. Our interest income in 2001 was lower than in
2000 due to our use of cash and marketable securities to repurchase a portion
of our 5.25% convertible subordinated notes in the fourth quarter of 2000 and
because of our purchase of EMCO in January 2001. The lower interest income in
2001 was also due to the decline in interest rates throughout 2001 resulting
from the Federal Reserve's lowering of interest rates. In 1999, interest income
was earned primarily from earnings on investments made from the proceeds of our
initial public offering in 1995 and our underwritten public offering in 1997. In
November 1999, our cash and marketable securities increased substantially from
the proceeds of additional offerings of convertible subordinated notes and
common stock, resulting in higher interest income in 2000.
Interest expense consists principally of accruals of interest on our
convertible subordinated notes, on borrowings under our bank credit and capital
lease facilities and a state government loan, the latter of which has been
repaid. Interest expense was approximately $7.4 million in 2001, $7.7 million in
2000 and $1.4 million in 1999. The increase of interest expense from 1999 to
2000 was primarily due to interest on the convertible subordinated notes.
Our foreign subsidiaries' sales are primarily denominated in currencies
other than the U.S. dollar. We recorded net foreign currency losses of $235,000
in 2001 and $196,000 in 2000, and a net foreign currency gain of $1.5 million in
1999. The losses in 2000 and 2001 were due to a weakening of the exchange rate
of the Japanese yen to the U.S. dollar, partially offset by the effect of our
use of forward foreign exchange contracts. The gain in 1999 was primarily due to
strengthening of the exchange rate of the Japanese yen to the U.S. dollar. Since
1997, we have entered into various forward foreign exchange contracts to
mitigate currency fluctuations in the Japanese yen. We continue to evaluate
various policies to minimize the effect of foreign currency fluctuations. At
December 31, 2001, we had $6.5 million of foreign currency forward contracts
outstanding.
Miscellaneous expense items were $1.0 million in 2001 and $698,000 in
1999. Miscellaneous income of $4.7 million in 2000 was primarily due to a $4.8
million gain on a sale of an investment.
46
(BENEFIT) PROVISION FOR INCOME TAXES
The income tax benefit of $17.4 million for 2001 represented an effective
rate of 36%. The income tax provision of $36.8 million in 2000, which included
$4.6 million of provision for an extraordinary item, represented an effective
rate of 35%. The income tax provision of $11.7 million for 1999 represented an
effective rate of 38%. Changes in our relative earnings and the earnings of our
foreign subsidiaries affect our consolidated effective tax rate. We adjust our
income taxes periodically based upon the anticipated tax status of all foreign
and domestic entities, and have adopted income tax planning strategies to reduce
our worldwide income tax expense.
EXTRAORDINARY GAIN
In the fourth quarter of 2000, we repurchased an aggregate of
approximately $53.4 million principal amount of our convertible subordinated
notes in the open market, for a cost of approximately $40.8 million. These
purchases resulted in a pretax extraordinary gain of $12.2 million, or $7.6
million after tax, and reduced the level of our fixed cost interest expense
until we acquired additional subordinated debt in the third quarter of 2001.
SUMMARY RESULTS OF OPERATIONS
The following table summarizes certain data as a percentage of sales
extracted from our statement of operations:
YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
----- ----- -----
Sales ......................................................... 100.0% 100.0% 100.0%
Cost of sales ................................................. 70.3 51.0 54.5
----- ----- -----
Gross margin .................................................. 29.7 49.0 45.5
----- ----- -----
Operating expenses:
Research and development .................................... 23.3 10.2 14.0
Sales and marketing ......................................... 12.3 6.7 9.0
General and administrative .................................. 11.1 6.8 8.0
Goodwill impairment ......................................... 2.8 -- --
Other impairments ........................................... 3.6 -- --
Restructuring charges ....................................... 1.6 0.3 --
Merger costs ................................................ -- 1.3 --
Litigation recovery ......................................... (0.8) -- --
----- ----- -----
Total operating expenses ...................................... 53.9 25.3 31.0
----- ----- -----
(Loss) income from operations ................................. (24.2) 23.7 14.5
Other (expense) income ........................................ (1.1) 2.1 0.7
----- ----- -----
Net (loss) income before income taxes, minority
interest and extraordinary item .............................. (25.3) 25.8 15.2
(Benefit) provision for income taxes .......................... (9.0) 9.0 5.8
Minority interest in net (loss) income ........................ (0.1) -- --
----- ----- -----
Net (loss) income before extraordinary item ................... (16.2) 16.8 9.4
Extraordinary item (net of applicable taxes) .................. -- 2.1 --
----- ----- -----
Net (loss) income ............................................. (16.2)% 18.9% 9.4%
===== ===== =====
47
QUARTERLY RESULTS OF OPERATIONS
The following tables present unaudited quarterly results in dollars and as
a percentage of sales for each of the eight quarters in the period ended
December 31, 2001. We believe that all necessary 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.
QUARTERS ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- --------
(In thousands, except per share data)
Sales ................................. $ 75,028 $ 85,701 $ 96,317 $102,736 $ 74,714 $ 46,171 $ 38,722 $ 33,993
Cost of sales ......................... 38,361 43,338 49,492 52,138 43,491 38,390 27,686 26,601
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit .......................... 36,667 42,363 46,825 50,598 31,223 7,781 11,036 7,392
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development ............ 8,113 8,504 9,711 10,668 12,389 11,040 10,967 10,755
Sales and marketing ................. 5,867 5,373 6,232 6,629 6,629 5,963 5,694 5,498
General and administrative .......... 5,639 5,810 6,748 6,376 6,174 5,645 4,817 4,886
Goodwill impairment ................. -- -- -- -- -- 5,446 --
Other impairments ................... -- -- -- -- -- -- 1,221 5,625
Restructuring charges ............... -- -- 1,000 -- -- 614 -- 2,456
Merger costs ........................ -- 2,333 2,250 -- -- -- -- --
Litigation recovery ................. -- -- -- -- (1,500) -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses .............. 19,619 22,020 25,941 23,673 23,692 28,708 22,699 29,220
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ......... 17,048 20,343 20,884 26,925 7,531 (20,927) (11,663) (21,828)
Other income (expense) ................ 120 731 5,598 1,036 187 (70) (711) (1,484)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before income
taxes, minority interest and
extraordinary item .................. 17,168 21,074 26,482 27,961 7,718 (20,997) (12,374) (23,312)
Provision (benefit) for income taxes .. 5,947 8,023 10,195 8,076 2,689 (6,553) (4,704) (8,873)
Minority interest in net (loss) income (17) (67) (2) 106 (65) 105 (188) 3
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) before
extraordinary item .................. 11,238 13,118 16,289 19,779 5,094 (14,549) (7,482) (14,442)
Extraordinary item (net of income
taxes) .............................. -- -- -- 7,610 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ..................... $ 11,238 $ 13,118 $ 16,289 $ 27,389 $ 5,094 $(14,549) $ (7,482) $(14,442)
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share
before extraordinary item ........... $ 0.36 $ 0.42 $ 0.52 $ 0.63 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
before extraordinary item ........... $ 0.35 $ 0.40 $ 0.50 $ 0.61 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings per share
from extraordinary item ............. $ -- $ -- $ -- $ 0.24 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share
from extraordinary item ............. $ -- $ -- $ -- $ 0.22 $ -- $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share ....... $ 0.36 $ 0.42 $ 0.52 $ 0.87 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share ..... $ 0.35 $ 0.40 $ 0.50 $ 0.83 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======== ======== ======== ======== ======== ======== ======== ========
Basic weighted-average common
shares outstanding .................. 31,161 31,314 31,339 31,517 31,547 31,698 31,784 31,821
======== ======== ======== ======== ======== ======== ======== ========
Diluted weighted-average common
shares outstanding .................. 32,512 32,543 32,417 34,078 * 32,187 31,698 31,784 31,821
======== ======== ======== ======== ======== ======== ======== ========
* Includes dilution from subordinated notes
48
QUARTERS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000 2001 2001 2001 2001
-------- -------- --------- -------- -------- -------- --------- --------
Percentage of Sales:
Sales ......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ................................. 51.1 50.7 51.4 50.7 58.2 83.1 71.5 78.3
----- ----- ----- ----- ----- ----- ----- -----
Gross margin .................................. 48.9 49.3 48.6 49.3 41.8 16.9 28.5 21.7
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research and development .................... 10.8 9.9 10.0 10.4 16.6 23.9 28.3 31.6
Sales and marketing ......................... 7.9 6.2 6.5 6.5 8.9 12.9 14.7 16.2
General and administrative .................. 7.5 6.8 7.0 6.2 8.3 12.2 12.4 14.4
Goodwill impairment ......................... -- -- -- -- -- 11.8 -- --
Other impairments ........................... -- -- -- -- -- -- 3.2 16.5
Restructuring charges ....................... -- -- 1.0 -- -- 1.4 -- 7.2
Merger costs ................................ -- 2.7 2.4 -- -- -- -- --
Litigation recovery ......................... -- -- -- -- (2.1) -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses ...................... 26.2 25.6 26.9 23.1 31.7 62.2 58.6 85.9
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations ................. 22.7 23.7 21.7 26.2 10.1 (45.3) (30.1) (64.2)
Other income (expense) ........................ 0.2 0.9 5.8 1.0 0.2 (0.2) (1.9) (4.4)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before income taxes,
minority interest and extraordinary
item ........................................ 22.9 24.6 27.5 27.2 10.3 (45.5) (32.0) (68.6)
Provision (benefit) for income taxes .......... 7.9 9.4 10.6 7.8 3.6 (14.2) (12.2) (26.1)
Minority interest in net (loss) income ........ -- (0.1) -- 0.1 (0.1) 0.2 (0.5) --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before extraordinary
item ........................................ 15.0 15.3 16.9 19.3 6.8 (31.5) (19.3) (42.5)
Extraordinary item (net of income taxes) ...... -- -- -- 7.4 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ............................. 15.0% 15.3% 16.9% 26.7% 6.8% (31.5)% (19.3)% (42.5)%
===== ===== ===== ===== ===== ===== ===== =====
Due to the cyclical nature of the semiconductor capital equipment
industry, and the sudden changes resulting in severe downturns and upturns, we
have experienced and expect to continue to experience significant fluctuations
in our quarterly operating results. Our levels of operating expenditures are
based, in part, on expectations of future revenues that such expenses support.
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 our revenues in a particular quarter, which include the risk factors
listed above in the opening section of this management discussion and analysis.
Our quarterly operating results in 2000 and 2001 reflect the fluctuating
demand for our products during this period, principally from manufacturers of
semiconductor capital equipment, data storage equipment and flat panel displays,
and our ability to adjust our manufacturing capacity to meet this demand. Sales
to the semiconductor capital equipment industry increased each quarter
throughout 2000 then decreased each quarter throughout 2001 when that industry
shifted into a sudden and severe downturn. Data storage sales fluctuated
significantly throughout both years. Our revenue from all sectors is heavily
influenced by general economic conditions in each of the industries we serve.
Our gross margin maintained a relatively consistent level in each of the
quarters in 2000, at approximately 49%. We added new facilities in Fort Collins,
Colorado in the first quarter of 2001 to increase our manufacturing capacity to
continue meeting this expected growth, which substantially increased our fixed
costs. Then, as we entered the sudden and steep decline in volume from the
semiconductor capital equipment industry in that quarter, the combination of
declining sales and higher fixed costs resulted in lower absorption of fixed
overhead and greatly reduced our gross margins throughout 2001. In
49
addition, the industry slowdown caused more inventory to be deemed excess or
obsolete, and warranty costs associated with certain products in excess of
historical experience also adversely affected margins, particularly in the
second and fourth quarters of 2001.
Research and development, selling and marketing, and general and
administrative expenses remained relatively stable throughout the eight quarters
of 2000 and 2001, though they generally increased in the second half of 2000. As
a percentage of sales, operating expenses have generally declined during periods
of rapid sales growth, when sales increased at a rate faster than our need or
ability to add personnel and facilities to support the growth. These operating
expenses as a percentage of sales have generally increased during periods of
flat or decreased sales, when our infrastructure is retained to support strong
customer relationships and anticipated future growth.
Other (expense) income consists primarily of interest income and expense,
foreign currency gains and losses, and miscellaneous gains, losses, income and
expense items. Changes in interest rates and changes in our level of investments
in marketable securities drive the quarterly fluctuations in our interest
income. Because the interest rates we pay on our long-term debt are fixed, our
levels of such debt determine our quarterly interest expense, which decrease
when we repurchase such debt and which increase when we make new offerings.
Changes in exchange rates and our ability to manage foreign currency exposure
determine the quarterly fluctuations in our foreign currency gains and losses.
Miscellaneous expense items vary according to the frequency of non-operating
events. The largest single item in this category was in the third quarter of
2000 when we recorded a $4.8 million gain on a sale of an investment.
Our effective rate for income tax provision fluctuated on a quarterly
basis throughout 2000 and 2001, varying from 29% to 39%. The fluctuations were
due to the timing of certain nondeductible expenses including merger costs, and
due to initiatives we implemented in 2000 to reduce our overall rate.
LIQUIDITY AND CAPITAL RESOURCES
Our financing strategy has been to raise capital from debt and equity
markets to provide liquidity to enable our investments in acquisitions and
alliances, which support our strategic vision of being a single source provider
of integrated solutions. We maintain substantial levels of cash and marketable
securities to have funding readily available for such investment opportunities
when they arise. Since 1995, to better enable such strategic investments, we
have attained this liquidity with proceeds from underwritten public offerings of
our common stock and, since 1999, offerings of convertible subordinated debt.
Operating activities generated cash of $7.9 million in 2001, primarily
reflecting the impact on net loss of non-cash items and impairments. As part of
this net cash provided of $7.9 million, decreases in accounts receivable and
accounts payable provided cash of
50
$39.6 million. Operating activities provided cash of $34.7 million in 2000,
primarily as a result of net income exclusive of non-cash charges and credits,
reduced by a net increase in working capital other than cash. As part of this
net cash provided of $34.7 million, the net increase in accounts receivable,
inventories and accounts payable used cash of $45.5 million. Operating
activities provided cash of $12.1 million in 1999, reflecting net income
adjusted for non-cash charges, offset by approximately $27.4 million of net
increases in receivables, inventories and payables. We expect future receivable
and inventory balances to fluctuate with net sales. Any increase in our
inventory levels may require the use of cash to finance the inventory.
Additionally, we may experience changes in our ability to collect payments from
our customers because most of our customers experience the same volatility of
the semiconductor capital equipment industry as we.
Investing activities used cash of $81.2 million in 2001, and consisted of
the acquisition of EMCO for $29.9 million, the net purchase of investments of
$38.8 million and the purchase of property and equipment of $12.4 million.
Investing activities provided cash of $15.5 million in 2000, and consisted
primarily of the purchase of property and equipment of $14.1 million and the
purchase of investments of $3.5 million, offset by proceeds from the sale of
investments and marketable securities of $33.1 million. Investing activities
used cash of $177.9 million in 1999, and consisted of a net increase in
marketable securities of $170.6 million and the purchase of property and
equipment of $7.2 million. Investing cash flows experience significant
fluctuations from year to year as we buy and sell marketable securities, which
we convert to cash to fund strategic investments, and as we transfer cash into
marketable securities when we attain levels of cash that are greater than needed
for current operations.
Financing activities provided cash of $124.1 million in 2001, and
consisted primarily of proceeds from convertible debt of $121.25 million and
proceeds from the exercise of employee stock options and sale of common stock
through our employee stock purchase plan, or ESPP, of $4.0 million. Financing
activities used cash of $37.5 million in 2000, and consisted primarily of open
market repurchases of our convertible notes of $40.8 million, offset by proceeds
from the exercise of employee stock options and sale of common stock through our
ESPP of $4.9 million. Financing activities provided cash of $174.5 million in
1999, and consisted of net proceeds from convertible subordinated debt of $130.5
million, net proceeds from the sale of common stock of $37.8 million, proceeds
from the exercise of employee stock options and sale of common stock through our
ESPP of $4.5 million, and other proceeds of $1.7 million.
We plan to spend approximately $10 million in 2002 for the acquisition of
equipment, leasehold improvements and furnishings, with depreciation expense for
2002 projected to be $12 million. Our planned level of capital expenditures is
subject to frequent revisions because our business experiences sudden changes as
we move into industry upturns and downturns and expected sales levels change. In
January 2002, we used cash of approximately $44 million, in addition to assuming
approximately $34 million of debt, to purchase the outstanding common stock of
Aera. In February 2002, we agreed to
51
purchase a privately owned, Germany-based provider of power supplies and
matching networks, for approximately $13.5 million to $20 million. We have also
agreed in principle to acquire the remaining 40.5% of LITMAS for approximately
130,000 shares of our common stock. The expected annual capital needs of these
acquired companies for 2002 are less than $3 million.
As of December 31, 2001, we had working capital of $350.4 million. Our
principal sources of liquidity consisted of $82.0 million of cash and cash
equivalents, $190.0 million of marketable securities, and a credit facility
consisting of a $30.0 million revolving line of credit. Advances under the
revolving line of credit bear interest at either the prime rate (4.75% at
February 28, 2002) minus 1% or the LIBOR 360-day rate (3.61288% at February 28,
2002) plus 175 basis points, at our option. All advances under this revolving
line of credit will be due and payable June 18, 2003. As of December 31, 2001,
there was an advance outstanding under this line of credit of $760,000 to our
Japanese subsidiary, Advanced Energy Japan K.K. We are subject to covenants on
our line of credit that provide certain restrictions related to working capital,
leverage, net worth, and payment and declaration of dividends. We were out of
compliance with the maximum loss covenant as of December 31, 2001. We received a
written waiver of the covenant and expect to be in compliance with all covenants
during 2002. Currently we are restricted from further use of our credit line
because the low interest debt of approximately $34 million that we assumed as
part of the Aera acquisition is not subordinated to our line of credit. We are
in the process of negotiating a new line of credit. Due to our very liquid
balance sheet, we do not expect this restriction, which we believe to be
temporary, to impact our operating or financing strategy.
To finance the facilities for our headquarters and main manufacturing, we
lease our executive offices and manufacturing facilities in Fort Collins,
Colorado from a limited liability partnership consisting of two of our
directors, one of whom is an officer, and other individuals. The leases relating
to these spaces expire in 2011, 2013 and 2016. We also lease other office and
production space from another limited liability partnership consisting of
certain of our directors and other individuals.
We believe that our cash and cash equivalents, marketable securities, cash
flow from operations and available borrowings, will be sufficient to meet our
working capital needs through at least the end of 2002. After that time, we may
require additional equity or debt financing to address our working capital,
capital equipment or expansion needs. In addition, any significant acquisitions
we make may require additional equity or debt financing 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
us. In 2006, when our convertible subordinated notes become due, it is possible
we may need substantial funds to repay such debt, which was $206.6 million at
December 31, 2001. Our 5.00% convertible subordinated notes of $125.0 million
are due September 1, 2006, and our 5.25% convertible subordinated notes of $81.6
million are
52
due November 15, 2006. This could occur if our stock price remains at low levels
throughout this period, the prices at which we can effect conversion are not met
in the market in which our stock is traded, and the holders of our notes choose
not to otherwise convert. In such a situation there can be no assurance that we
will be able to refinance the debt.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and long-term debt obligations. We
generally place our investments with high credit quality issuers and by policy
are averse to principal loss and seek to protect and preserve our invested funds
by limiting default risk, market risk and reinvestment risk. As of December 31,
2001, our investments in marketable securities consisted primarily of commercial
paper, municipal bonds and notes and mutual funds. These securities are highly
liquid and of short maturities. Earnings on our marketable securities are
typically invested into similar securities. In 2001, the rates we earned on our
marketable securities ranged from as high as 8.7% to 2.0% before tax. As the
Federal Reserve repeatedly lowered interest rates throughout 2001, the interest
rates we earn on our investments likewise decreased substantially. This, in
conjunction with using our available cash and cash reserves for acquisitions,
including the EMCO acquisition in early 2001 and the Aera acquisition in early
2002, has greatly reduced our recent and anticipated interest income. The impact
on interest income of a 10 percent decrease in the average interest rate would
have resulted in approximately $700,000 less interest income in 2001, $1.1
million in 2000 and $200,000 in 1999.
The interest rates on our subordinated debt are at fixed rates,
specifically, at 5.25% for the $81.6 million of our debt due November 2006, and
at 5.00% for the $125.0 million of our debt that is due September 2006. Our
offerings of subordinated debt in 1999 and 2001 increased our fixed interest
expense upon each issuance, though interest expense was partially reduced
temporarily by the repurchase of a portion of the first offering in 2000.
Because these rates are fixed, we believe there is no risk of increased interest
expense.
FOREIGN CURRENCY EXCHANGE RATE RISK
We transact business in various foreign countries. Our primary foreign
currency cash flows are generated in countries in Asia and Europe. We have
entered into various forward foreign exchange contracts to hedge against
currency fluctuations in the Japanese yen. We will continue to evaluate various
methods to minimize the effects of currency fluctuations for when we translate
the financial statements of our foreign subsidiaries into US dollars. At
December 31, 2001, we held foreign forward exchange contracts in Japan with
notional amounts of $6.5 million and market settlement amounts of $6.1 million
for an unrealized gain position of $367,000.
54
OTHER RISK
We have invested in start-up companies and strategic alliances and may in
the future make additional investments in such companies that develop products
which we believe may provide future benefits. We have written down the majority
of the cost of one such investment in 2001, related to a strategic alliance we
started in 2000. Such current investments and any future investments will be
subject to all of the risks inherent in investing in companies that are not
established, or in which, due to our level of investment, we do not exercise
significant management control.
We are subject to covenants on our line of credit that provide certain
restrictions related to working capital, leverage, net worth, and payment and
declaration of dividends. We were out of compliance with the maximum loss
covenant as of December 31, 2001. We received a written waiver of the covenant
and expect to be in compliance with all covenants during 2002. Currently we are
restricted from further use of our credit line because the low interest debt of
approximately $34 million that we assumed as part of the Aera acquisition is not
subordinated to our line of credit. We are in the process of negotiating a new
line of credit. Due to our very liquid balance sheet, we do not expect this
restriction, which we believe to be temporary, to impact our operating or
financing strategy.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants.......................................... 57
Consolidated Balance Sheets as of December 31, 2001 and 2000........................................... 58
Consolidated Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999............. 60
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999.... 61
Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999............. 62
Notes to Consolidated Financial Statements............................................................. 63
Schedule II - Valuation and Qualifying Accounts........................................................ 84
56
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,
2001 and 2000, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
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 to
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 the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Denver, Colorado, ARTHUR ANDERSEN LLP
February 28, 2002.
57
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------------
2001 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 81,955 $ 31,716
Marketable securities - available-for-sale .............................. 190,023 157,811
Accounts receivable --
Trade (less allowances for doubtful accounts of approximately
$1,049 and $784 at December 31, 2001 and 2000, respectively) ....... 26,871 72,732
Related parties ...................................................... 23 38
Other ................................................................ 3,918 3,775
Income tax receivable ................................................... 15,862 74
Inventories ............................................................. 45,248 45,266
Other current assets .................................................... 4,178 2,508
Deferred income tax assets, net ......................................... 11,200 7,483
-------- --------
Total current assets ............................................ 379,278 321,403
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $31,946 and $24,427 at December 31,
2001 and 2000, respectively ............................................. 31,095 24,101
-------- --------
OTHER ASSETS:
Deposits and other ...................................................... 6,482 2,819
Notes receivable ........................................................ -- 2,472
Goodwill and intangibles, net of accumulated amortization of
$6,007 and $6,061 at December 31, 2001 and 2000, respectively ........ 23,072 9,890
Demonstration and customer service equipment, net of
accumulated depreciation of $3,115 and $2,302 at December 31,
2001 and 2000, respectively .......................................... 4,532 2,889
Deferred debt issuance costs, net ....................................... 5,736 2,261
-------- --------
39,822 20,331
-------- --------
Total assets .................................................... $450,195 $365,835
======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
58
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA[PAR VALUE])
DECEMBER 31,
--------------------------
2001 2000
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ....................................................... $ 10,231 $ 17,775
Accrued payroll and employee benefits ........................................ 6,978 11,723
Accrued warranty expense ..................................................... 4,471 3,975
Accrued restructuring charges ................................................ 1,427 475
Other accrued expenses ....................................................... 1,387 408
Customer deposits ............................................................ 515 104
Accrued income taxes payable ................................................. -- 7,923
Capital lease obligations, current portion ................................... 6 53
Notes payable, current portion ............................................... 1,124 1,284
Accrued interest payable on convertible subordinated notes ................... 2,696 529
--------- ---------
Total current liabilities ............................................ 28,835 44,249
--------- ---------
LONG-TERM LIABILITIES:
Notes payable, net of current portion ........................................ -- 1,043
Convertible subordinated notes payable ....................................... 206,600 81,600
Deferred income tax liabilities, net ......................................... 415 --
--------- ---------
207,015 82,643
--------- ---------
Total liabilities .................................................... 235,850 126,892
--------- ---------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST .............................................................. -- 145
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 1,000 shares authorized, none
issued and outstanding .................................................... -- --
Common stock, $0.001 par value, 55,000 and 40,000 shares authorized;
31,848 and 31,537 shares issued and outstanding at
December 31, 2001 and 2000, respectively .................................. 32 32
Additional paid-in capital ................................................... 131,698 124,930
Retained earnings ............................................................ 85,592 116,971
Deferred compensation ........................................................ (1,094) (1,620)
Unrealized holding gains on available-for-sale securities .................... 1,257 1,365
Cumulative translation adjustments ........................................... (3,140) (2,880)
--------- ---------
Total stockholders' equity ........................................... 214,345 238,798
--------- ---------
Total liabilities and stockholders' equity ........................... $ 450,195 $ 365,835
========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
59
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
SALES .............................................................................. $ 193,600 $ 359,782 $ 202,849
COST OF SALES ...................................................................... 136,168 183,329 110,647
--------- --------- ---------
Gross profit ..................................................................... 57,432 176,453 92,202
--------- --------- ---------
OPERATING EXPENSES:
Research and development ......................................................... 45,151 36,996 28,326
Sales and marketing .............................................................. 23,784 24,101 18,325
General and administrative ....................................................... 21,522 24,573 16,225
Goodwill impairment .............................................................. 5,446 -- --
Impairment of investments and advances ........................................... 6,846 -- --
Restructuring charges ............................................................ 3,070 1,000 --
Merger costs ..................................................................... -- 4,583 --
Litigation recovery .............................................................. (1,500) -- --
--------- --------- ---------
Total operating expenses ....................................................... 104,319 91,253 62,876
--------- --------- ---------
(LOSS) INCOME FROM OPERATIONS ...................................................... (46,887) 85,200 29,326
--------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income .................................................................. 6,581 10,727 2,174
Interest expense ................................................................. (7,399) (7,698) (1,430)
Foreign currency (loss) gain ..................................................... (235) (196) 1,504
Other (expense) income, net ...................................................... (1,025) 4,652 (698)
--------- --------- ---------
(2,078) 7,485 1,550
--------- --------- ---------
Net (loss) income before income taxes, minority interest and extraordinary
item ...................................................................... (48,965) 92,685 30,876
(BENEFIT) PROVISION FOR INCOME TAXES ............................................... (17,441) 32,241 11,741
MINORITY INTEREST IN NET (LOSS) INCOME ............................................. (145) 20 69
--------- --------- ---------
NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM ........................................ (31,379) 60,424 19,066
EXTRAORDINARY ITEM (LESS APPLICABLE INCOME TAXES OF
$4,566) (Note 10) ................................................................ -- 7,610 --
--------- --------- ---------
NET (LOSS) INCOME .................................................................. $ (31,379) $ 68,034 $ 19,066
========= ========= =========
NET (LOSS) EARNINGS PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC ............................................................................ $ (0.99) $ 1.93 $ 0.64
========= ========= =========
DILUTED .......................................................................... $ (0.99) $ 1.86 $ 0.62
========= ========= =========
EARNINGS PER SHARE FROM EXTRAORDINARY ITEM:
BASIC ............................................................................ $ -- $ 0.24 $ --
========= ========= =========
DILUTED .......................................................................... $ -- $ 0.24 $ --
========= ========= =========
NET (LOSS) EARNINGS PER SHARE:
BASIC ............................................................................ $ (0.99) $ 2.17 $ 0.64
========= ========= =========
DILUTED .......................................................................... $ (0.99) $ 2.10 $ 0.62
========= ========= =========
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ...................................................................... 31,712 31,336 29,706
========= ========= =========
DILUTED WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING ............................................................... 31,712 32,425 30,934
========= ========= =========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
60
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
-------------- PAID-IN RETAINED DEFERRED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION (LOSS) INCOME EQUITY
------ ------ ---------- -------- ------------ ------------- -------------
BALANCES, December 31, 1998 ...................... 29,160 $ 29 $ 62,677 $ 29,871 $ -- $ (414) $ 92,163
Exercise of stock options for cash .............. 490 1 4,147 -- -- -- 4,148
Sale of common stock through employee
stock purchase plan ........................... 22 -- 345 -- -- -- 345
Issuance of common stock for intangibles ........ 227 -- 2,335 -- -- -- 2,335
Tax benefit related to shares acquired by
employees under stock compensation plans ...... -- -- 1,422 -- -- -- 1,422
Sale of common stock through private and public
offerings, net of approximately $2,448 of
expenses ...................................... 1,070 1 37,826 -- -- -- 37,827
Issuance of common stock for services rendered .. 12 -- 136 -- -- -- 136
Deferred compensation on stock options issued ... -- -- 109 -- (109) -- --
Amortization of deferred compensation ........... -- -- -- -- 23 -- 23
Comprehensive income:
Equity adjustment from foreign
currency translation .......................... -- -- -- -- -- (476) --
Net income ...................................... -- -- -- 19,066 -- -- --
Total comprehensive income ...................... -- -- -- -- -- -- 18,590
------ ---- -------- -------- ------- -------- --------
BALANCES, December 31, 1999 ...................... 30,981 31 108,997 48,937 (86) (890) 156,989
Exercise of stock options for cash .............. 488 1 4,393 -- -- -- 4,394
Issuance of common stock for services provided
and merger costs .............................. 55 -- 2,430 -- -- -- 2,430
Sale of common stock through employee
stock purchase plan ........................... 13 -- 520 -- -- -- 520
Tax benefit related to shares acquired by
employees under stock compensation plans ...... -- -- 6,595 -- -- -- 6,595
Deferred compensation on stock options issued ... -- -- 1,995 -- (1,995) -- --
Amortization of deferred compensation ........... -- -- -- -- 461 -- 461
Comprehensive income:
Equity adjustment from foreign
currency translation .......................... -- -- -- -- -- (1,990) --
Unrealized holding gains ........................ -- -- -- -- -- 1,365 --
Net income ...................................... -- -- -- 68,034 -- -- --
Total comprehensive income ...................... -- -- -- -- -- -- 67,409
------ ---- -------- -------- ------- -------- --------
BALANCES, December 31, 2000 ...................... 31,537 32 124,930 116,971 (1,620) (1,515) 238,798
Exercise of stock options for cash .............. 273 -- 3,342 -- -- -- 3,342
Sale of common stock through employee
stock purchase plan ........................... 38 -- 628 -- -- -- 628
Tax benefit related to shares acquired by
employees under stock compensation plans ...... -- -- 1,588 -- -- -- 1,588
Fair value of stock options assumed in EMCO
acquisition ................................... -- -- 1,126 -- -- -- 1,126
Deferred compensation on stock options issued ... -- -- 84 -- (84) -- --
Amortization of deferred compensation ........... -- -- -- -- 610 -- 610
Comprehensive income:
Equity adjustment from foreign
currency translation .......................... -- -- -- -- -- (260) --
Unrealized holding losses ....................... -- -- -- -- -- (108) --
Net loss ........................................ -- -- -- (31,379) -- -- --
Total comprehensive loss......................... -- -- -- -- -- -- (31,747)
------ ---- -------- -------- ------- -------- --------
BALANCES, December 31, 2001 ...................... 31,848 $ 32 $131,698 $ 85,592 $(1,094) $ (1,883) $214,345
====== ==== ======== ======== ======= ======== ========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
61
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------
2001 2000 1999
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income .................................................................... $ (31,379) $ 68,034 $ 19,066
Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities -
Depreciation of property and equipment ............................................ 9,973 7,564 6,240
Amortization of intangibles and demonstration and customer service equipment ...... 5,930 2,942 2,116
Amortization of deferred debt issuance costs ...................................... 775 616 81
Amortization of deferred compensation ............................................. 610 461 23
Minority interest ................................................................. (145) 17 69
Stock issued for services rendered and merger costs ............................... -- 2,430 136
Provision for deferred income taxes ............................................... (3,579) (3,730) 851
Provision for excess and obsolete inventory ....................................... 6,412 654 1,520
Impairment of goodwill ............................................................ 5,446 -- --
Impairment of investment .......................................................... 6,846 -- 322
Loss (gain) on disposal of property and equipment ................................. 13 (54) (15)
Gain on sale of investment ........................................................ -- (4,841) --
Gain on retirement of convertible subordinated notes .............................. -- (12,176) --
Changes in operating assets and liabilities -
Accounts receivable-trade, net ................................................. 45,254 (28,080) (28,822)
Related parties and other receivables .......................................... (128) (1,994) (1,306)
Inventories .................................................................... (5,484) (17,510) (6,402)
Other current assets ........................................................... (1,752) (705) (252)
Deposits and other ............................................................. (180) (502) 280
Demonstration and customer service equipment ................................... (2,754) (1,282) (563)
Trade accounts payable ......................................................... (5,528) 2,073 9,171
Accrued payroll and employee benefits .......................................... (5,099) 4,117 4,467
Accrued warranty expense ....................................................... 496 2,528 1,447
Accrued restructuring charges .................................................. 952 475 --
Customer deposits and other accrued expenses ................................... 3,134 (970) (425)
Income taxes payable/receivable, net ........................................... (21,949) 14,631 4,088
--------- -------- ---------
Net cash provided by operating activities .................................... 7,864 34,698 12,092
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities .................................................... (64,925) (19,471) (172,529)
Sale of marketable securities ........................................................ 33,312 48,100 1,928
Proceeds from sale of investment ..................................................... -- 4,464 --
Proceeds from sale of equipment ...................................................... -- 150 --
Purchase of property and equipment, net .............................................. (12,435) (14,062) (7,168)
Purchase of investments and advances ................................................. (7,186) (3,453) --
Purchase of LITMAS, net of cash acquired ............................................. -- (250) (175)
Acquisition of Engineering Measurements Company, net of cash acquired ................ (29,932) -- --
--------- -------- ---------
Net cash (used) in provided by investing activities .......................... (81,166) 15,478 (177,944)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable .......................................................... 837 1,491 3,304
Repayment of notes payable and capital lease obligations ............................. (1,973) (3,123) (1,637)
Proceeds from convertible debt, net .................................................. 121,250 -- 130,509
Repurchase of convertible debt, net .................................................. -- (40,795) --
Sale of common stock, net of expenses ................................................ -- -- 37,827
Sale of common stock through employee stock purchase plan ............................ 628 520 345
Proceeds from exercise of stock options and warrants ................................. 3,342 4,394 4,148
--------- -------- ---------
Net cash provided by (used in) financing activities ............................... 124,084 (37,513) 174,496
--------- -------- ---------
EFFECT OF CURRENCY TRANSLATION ON CASH ................................................. (543) (1,990) (476)
--------- -------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS .................................................. 50,239 10,673 8,168
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 31,716 21,043 12,875
--------- -------- ---------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 81,955 $ 31,716 $ 21,043
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Tax benefit related to shares acquired by employees under stock option plans ...... $ 1,588 $ 6,595 $ 1,422
========= ======== =========
Conversion of royalty payable to note payable ..................................... $ -- $ -- $ 742
========= ======== =========
Deferred compensation on stock options issued ..................................... $ 84 $ 1,995 $ 109
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................... $ 4,457 $ 7,385 $ 459
========= ======== =========
Cash paid for income taxes, net ...................................................... $ 9,572 $ 25,791 $ 6,221
========= ======== =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
62
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Advanced Energy Industries, Inc. (the "Company"), a Delaware corporation,
is primarily engaged in the development and production of products and systems
critical to plasma-based manufacturing processes, 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"), Advanced Energy Industries
Korea, Inc. ("AE-Korea"), Advanced Energy Taiwan, Ltd. ("AE-Taiwan"), Advanced
Energy Industries (ShenZhen) Co., Ltd. ("AE-China"), Advanced Energy Voorhees,
Inc. ("AEV"), Tower Electronics, Inc. ("Tower"), Noah Holdings, Inc. ("Noah"),
Sekidenko, Inc. ("Sekidenko"), and Engineering Measurements Company ("EMCO").
The Company owns 59.5% of LITMAS. As discussed in Note 3, Noah was merged into
the Company on April 6, 2000, Sekidenko was merged into the Company on August
18, 2000, and EMCO was merged into the Company on January 2, 2001. The
acquisitions of Noah and Sekidenko were accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, all prior period
consolidated financial statements have been restated to include Noah and
Sekidenko as though they had always been part of the Company. The acquisition of
EMCO was accounted for under the purchase method of accounting, and EMCO's
results of operations are included since the acquisition date.
On January 18, 2002, the Company completed the acquisition of Aera Japan
Ltd. ("Aera"), a supplier of digital, pressure-based and liquid mass flow
controllers, ultrasonic liquid flow meters and liquid vapor delivery systems to
the semiconductor capital equipment industry. The aggregate purchase price for
Aera was 5.73 billion Japanese yen (approximately $44 million, based upon the
approximate exchange rate at closing of 130:1), which was funded from the
Company's available cash. In addition, the Company assumed approximately $34
million of Aera's senior debt, most of which is with Japanese banks at rates
ranging from 1.4% to 3.3%. For its fiscal year ended June 30, 2001, Aera had
sales of approximately $110 million and operating income of approximately $17
million, compared with sales of $84.5 million and operating income of $7.0
million in the previous fiscal year. As of June 30, 2001, Aera had assets of
approximately $94 million. Aera owns 100% of each of the following subsidiaries:
Aera Corporation, Aera U.K. Ltd., Aera GmbH and Aera Korea Ltd.
The Company is subject to many risks, some of which are 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 and 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, competition,
international operating risks, intellectual property rights, governmental
regulations, dependence on key personnel 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 wholly owned or controlled subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
63
CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, the
Company considers all amounts on deposit with financial institutions 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 -- 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 available-for-sale securities and reported at fair
value with unrealized gains and losses included in other comprehensive income.
Due to the short-term, highly liquid nature of the marketable securities held by
the Company, the cost, including accrued interest of such investments, is
typically the same as their fair value.
DEMONSTRATION AND CUSTOMER SERVICE EQUIPMENT -- Demonstration and customer
service equipment are manufactured products that are 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
on a three-year life.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost or
estimated fair value upon acquisition. 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 and furniture and fixtures, with
computers and communication equipment depreciated over a three-year life.
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. Goodwill represents the excess of
the cost of businesses acquired over the aggregate fair value of identifiable
tangible and intangible net assets at the dates of acquisition. Amortization is
provided over the estimated useful lives ranging from five to seven years for
both 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's foreign subsidiaries
sales are primarily denominated in currencies other than the U.S. dollar (see
Note 18). 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 offers warranty coverage for its products
for periods ranging from 12 to 36 months after shipment, with the majority of
its products ranging from 18 to 24 months. The Company estimates the costs of
repairing products under warranty based on the historical average cost of the
repairs. The assumptions used to estimate warranty accruals are reevaluated
periodically in light of actual experience and, when appropriate, the accruals
are adjusted. Estimated warranty costs are recorded at the time of sale of the
related product, and are considered a cost of sale.
FOREIGN CURRENCY TRANSLATION -- The functional currency of the Company's
foreign subsidiaries is their local currency. Assets and liabilities of
international subsidiaries are translated to U.S.
64
dollars at year-end exchange rates, and income statement items are translated at
average exchange rates during the year. Resulting translation adjustments are
recorded as a separate component of equity. Gains and losses resulting from
foreign currency transactions are included in income.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in foreign currency transaction gains and
losses which are reflected in income as unrealized (based on period-end
translation) or realized (upon settlement of the transactions). Unrealized
transaction gains and losses applicable to permanent investments by the Company
in its foreign subsidiaries are included as cumulative translation adjustments,
and unrealized translation gains or losses applicable to short-term intercompany
receivables from or payables to the Company and its foreign subsidiaries are
included in income. The Company recognized losses on foreign currency
transactions of approximately $235,000 and $196,000 for the years ended December
31, 2001 and 2000, respectively, and a gain on foreign currency transactions of
$1,504,000 for the year ended December 31, 1999.
Financial statement activity for AE-China was immaterial in 2001, 2000 and
1999.
REVENUE RECOGNITION -- The Company recognizes revenue upon shipment of its
systems and spare parts, at which time title passes to the customer, as its
shipping terms are FOB shipping point.
The Company has an arrangement with one of its major customers, a
semiconductor capital equipment manufacturer, in which completed systems are
shipped to the customer and held by them on a consignment basis. The customer
draws systems from this inventory as needed, at which time title passes to the
customer and the Company recognizes revenue. The customer is subject to the
Company's normal warranty policy for repair of defective systems.
In some instances the Company delivers systems to customers for evaluation
purposes. In these arrangements, the customer retains the systems for specified
periods of time without commitment to purchase. On or before the expiration of
the evaluation period, the customer either rejects the system, and returns it to
the Company, or accepts the system. Upon acceptance, title passes to the
customer, the Company invoices the customer for the system, and revenue is
recognized. Pending acceptance by the customer, such systems are reported on the
Company's balance sheet at an estimated value based on the lower of cost or
market, and are included in the amount for demonstration and customer service
equipment, net of accumulated depreciation.
INCOME TAXES -- The Company accounts for income taxes in accordance with
SFAS No. 109, "Accounting for Income Taxes." SFAS No. 109 requires deferred tax
assets and liabilities to be recognized for temporary differences between the
tax basis and financial reporting basis of assets and liabilities, computed at
current tax rates, as well as for the expected tax benefit of net operating loss
and tax credit carryforwards. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not that
such assets will be realized.
RESTRUCTURING COSTS -- Restructuring charges include the costs associated
with actions taken by the Company in response to the continuing downturn in the
semiconductor capital equipment industry and in responses to changes in the
Company's strategy. Restructuring charges totaling $3,070,000 and $1,000,000
were recorded for 2001 and 2000, respectively. These charges consisted of costs
that were incremental to the Company's ongoing operations, and were incurred to
exit an activity or cancel an existing contractual obligation, closure of
facilities and employee termination related charges. Other related costs,
consisting primarily of employee relocation, were expensed as incurred.
STOCK-BASED COMPENSATION -- The Company accounts for employee stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Reference is made to Note 19, for a
summary of the pro forma effect of SFAS No. 123 "Accounting for Stock Based
Compensation," on the
65
Company's results of operations for the years ended December 31, 2001, 2000 and
1999.
EARNINGS PER SHARE -- Basic Earnings Per Share ("EPS") is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that the numerator is
increased to include certain charges which would not have been incurred, and the
denominator is increased to include the number of additional common shares that
would have been outstanding (using the treasury stock and if-converted methods),
if securities containing potentially dilutive common shares (convertible notes
payable, options and warrants) had been converted to such common shares, and if
such assumed conversion is dilutive. For the years ended December 31, 2000 and
1999, certain stock options outstanding and conversion of the convertible
subordinated notes payable were not included in this calculation because to do
so would be anti-dilutive. The anti-dilutive stock options would have increased
the weighted-average number of diluted shares by 239,000 and 131,000 in 2000 and
1999, respectively, and the anti-dilutive convertible subordinated notes, if
converted, would have increased the number of diluted shares by 2,546,000 and
341,000 in 2000 and 1999, respectively. Due to the Company's net loss for the
year ended December 31, 2001, basic and diluted EPS are the same, as the assumed
conversion of all potentially dilutive securities would be anti-dilutive.
Potential shares of common stock issuable under these securities at December 31,
2001 were approximately 2,200,000 shares of common stock issuable under options
and warrants for common stock and 5,838,000 shares of common stock issuable upon
conversion of subordinated notes payable.
The following is a reconciliation of the numerators and denominators used
in the calculation of basic and diluted EPS for the years ended December 31,
2001, 2000 and 1999:
2001 2000 1999
----------------------------- ---------------------------- ---------------------------
NET PER SHARE NET PER SHARE NET PER SHARE
(LOSS) SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------ --------- ------- ------- --------- ------- ------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Basic EPS:
Net (loss) income attributable to
common stock and share amounts .... $(31,379) 31,712 $(0.99) $68,034 31,336 $2.17 $19,066 29,706 $0.64
Dilutive securities:
Stock options ....................... -- -- -- -- 1,089 -- -- 1,228 --
Convertible subordinated debt ....... -- -- -- -- -- -- -- -- --
-------- ------ ------ ------- ------ ----- ------- ------ -----
Diluted EPS:
Net (loss) income attributable to
common stock and assumed
share amounts ..................... $(31,379) 31,712 $(0.99) $68,034 32,425 $2.10 $19,066 30,934 $0.62
======== ====== ====== ======= ====== ===== ======= ====== =====
COMPREHENSIVE INCOME (LOSS) -- Comprehensive income (loss) for the Company
consists of net income (loss), foreign currency translation adjustments and net
unrealized holding gains on available-for-sale marketable investment securities
and is presented in the Consolidated Statement of Stockholders' Equity.
SEGMENT REPORTING -- The Company operates in one segment for the
manufacture, marketing and servicing of key subsystems for vacuum process
systems. In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," the Company's chief operating decision
maker has been identified as the Office of the Chief Executive Officer, which
reviews operating results to make decisions about allocating resources and
assessing performance for the entire company. All material operating units
qualify for aggregation under SFAS No. 131 due to their identical customer base
and similarities in: economic characteristics; nature of products and services;
and procurement, manufacturing and distribution processes. Since the Company
operates in one segment, all financial information required by SFAS No. 131 can
be found in the consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 2001, the FASB issued SFAS No.
141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." These statements
66
prohibit pooling-of-interests accounting for transactions initiated after June
30, 2001, require the use of the purchase method of accounting for all
combinations after June 30, 2001, and establish new standards for accounting for
goodwill and other intangibles acquired in business combinations. Goodwill will
continue to be recognized as an asset, but will not be amortized as previously
required by APB Opinion No. 17, "Intangible Assets." Certain other intangible
assets with indefinite lives, if present, may also not be amortized. Instead,
goodwill and other intangible assets will be subject to periodic (at least
annual) tests for impairment, and recognition of impairment losses in the future
could be required based on a new fair value-based methodology for measuring
impairments prescribed by these pronouncements. The revised standards include
transition rules and requirements for identification, valuation and recognition
of a much broader list of intangibles as part of business combinations than
prior practice, most of which will continue to be amortized. The Company's
prospective financial statements may be significantly affected by the results of
future periodic tests for impairment.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and addresses financial accounting and reporting for
the impairment of long-lived assets and for long-lived assets to be disposed of.
The Company is in the process of assessing the effect of adopting SFAS No. 144,
which will be effective for the Company's fiscal year ending December 31, 2002.
DERIVATIVE INSTRUMENTS -- In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
adopted SFAS No. 133, as amended by SFAS No. 137, on January 1, 2001. SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activity by requiring 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
did not seek specific hedge accounting treatment for its foreign currency
forward contracts (Note 18). The adoption of SFAS No. 133 did not have a
material impact on the Company's financial condition or results of operations.
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 reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Significant estimates are used when
accounting for allowances for doubtful accounts, depreciation and amortization,
impairment charges, restructuring accruals, warranty reserves, purchase price
allocations, income taxes, excess and obsolete inventory and various others
items.
ASSET IMPAIRMENTS -- Long-lived assets are comprised of intangible assets
and property, plant and equipment. Long-lived assets, including certain
identifiable intangibles and the goodwill related to those assets to be held and
used, are reviewed 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. 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.
During 2001, the Company reviewed certain amounts recorded as goodwill for
impairment. Due to declines in the related businesses and changes in the
Company's strategy, it was determined that the related expected future cash
flows no longer supported the recorded amounts of goodwill, and the Company
recorded an impairment in the amount of approximately $5.4 million.
Approximately $3.6 million of this was related to impairment of goodwill
associated with Tower and approximately $1.8 million was related
67
to impairment of goodwill associated with the Company's Fourth State Technology
("FST") product line.
RECLASSIFICATIONS -- Certain prior period amounts have been reclassified
to conform to the current period presentation.
(3) ACQUISITIONS
EMCO -- On January 2, 2001, Engineering Measurements Company ("EMCO"), a
publicly held, Longmont, Colorado-based manufacturer of electronic and
electromechanical precision instruments for measuring and controlling the flow
of liquids, steam and gases, was merged with a wholly owned subsidiary of the
Company. The Company paid the EMCO shareholders cash in an aggregate amount of
approximately $30 million. In connection with the acquisition, the Company
issued stock options to purchase approximately 71,000 shares of its common stock
for the assumption of outstanding, fully vested options for EMCO common stock.
The fair value of the options granted was estimated by the Company (using the
Black-Scholes option pricing model) to be approximately $1.1 million. The
acquisition was accounted for using the purchase method of accounting, and the
operating results of EMCO are reflected in the accompanying consolidated
financial statements prospectively from the date of acquisition. The assets
acquired and liabilities assumed were recorded at estimated fair values as
determined by the Company's management based on information currently available
and on current assumptions as to future operations. The Company has obtained
preliminary independent appraisals of the fair values of the acquired property,
plant and equipment, and identified intangible assets, and their remaining
useful lives. Goodwill and intangibles includes $20.9 million allocated to
goodwill and $3.4 million allocated to other intangibles.
(In thousands)
Cash and cash equivalents $ 459
Marketable securities 674
Accounts receivable 1,167
Inventories 1,678
Deferred income tax assets, current 584
Other current assets 88
Fixed assets 4,596
Goodwill 20,878
Other intangibles 3,400
Accounts payable (355)
Accrued payroll (405)
Other accrued expenses (391)
Deferred income tax liability (856)
--------
$ 31,517
========
There were no transactions between the Company and EMCO prior to the
combination. The excess purchase price over the estimated fair value of tangible
net assets acquired was allocated to goodwill and other intangibles, which was
amortized in 2001 over an average of a seven-year life. In accordance with SFAS
No. 141 and 142, the Company ceased amortization of goodwill on January 1, 2002,
and will continue to review these assets in the future for impairment. The
amount of annual goodwill amortization which will no longer be recorded is
approximately $3.3 million.
Had this combination occurred on January 1, 2000, the pro forma,
unaudited, combined results of operations for the Company and EMCO would have
generated revenue of approximately $369.8 million, net income before
extraordinary items of approximately $55.9 million, net income of approximately
$63.5 million, basic earnings per share of $2.03 and diluted earnings per share
of $1.96.
SEKIDENKO, INC. -- On August 18, 2000, Sekidenko, Inc. ("Sekidenko"), a
privately held, Vancouver, Washington-based supplier of optical fiber
thermometers to the semiconductor capital
68
equipment industry, was merged with a wholly owned subsidiary of the Company.
The Company issued 2.1 million shares of its common stock to the former
shareholders of Sekidenko. In connection with the merger, the Company recorded
in the third quarter of 2000 a charge to operating expenses of $2.3 million for
direct merger-related costs.
NOAH HOLDINGS, INC. -- On April 6, 2000, Noah Holdings, Inc. ("Noah"), a
privately held, California-based manufacturer of solid state temperature control
systems used to control process temperatures during semiconductor manufacturing,
was merged with a wholly owned subsidiary of the Company. The Company issued
approximately 687,000 shares of its common stock in connection with the
acquisition. In addition, outstanding Noah stock options were converted into
options to purchase approximately 40,000 shares of the Company's common stock.
In connection with the merger, the Company recorded in the second quarter of
2000 a charge to operating expenses of $2.3 million for direct merger-related
costs.
The Sekidenko and Noah mergers have been accounted for as poolings 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
Noah and Sekidenko as though each had always been part of the Company. There
were no transactions between the Company, Noah and Sekidenko prior to the
combinations. Certain reclassifications were made to conform the Noah and
Sekidenko 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:
YEARS ENDED DECEMBER 31,
----------------------------
2000 1999
--------- --------
(IN THOUSANDS)
Sales:
Pre-Noah and Sekidenko mergers (prior to April 6, 2000)
Advanced Energy ...................................................... $ 67,171 $183,958
Noah ................................................................. 3,080 7,617
Sekidenko ............................................................ 4,777 11,274
Advanced Energy and Noah combined before Sekidenko merger ............... 123,190 --
Sekidenko before Sekidenko merger (April 6 to August 18, 2000) .......... 7,034 --
Post-Sekidenko merger (August 18 to December 31, 2000) .................. 154,530 --
--------- --------
Consolidated ......................................................... $ 359,782 $202,849
========= ========
Net income (loss):
Pre-Noah and Sekidenko mergers (prior to April 6, 2000)
Advanced Energy ....................................................... $ 9,996 $ 16,838
Noah .................................................................. 43 184
Sekidenko ............................................................. 1,199 2,044
Advanced Energy and Noah combined before Sekidenko merger ............... 20,809 --
Sekidenko before Sekidenko merger (April 6 to August 18, 2000) .......... 1,367 --
Noah merger costs ....................................................... (2,333) --
Post-Sekidenko merger (August 18 to December 31, 2000) .................. 39,203 --
Sekidenko merger costs .................................................. (2,250) --
--------- --------
Consolidated ......................................................... $ 68,034 $ 19,066
========= ========
OTHER INTANGIBLES -- During 1999, prior to its acquisition by the Company,
Noah acquired various intangible assets, primarily a license agreement and
patents, by issuing approximately 214,000 shares of common stock valued at
$1,950,000. Noah management estimated the value of the common stock, since, as a
privately held company, there was no public market for Noah's common stock. The
entire purchase price was allocated to other intangibles and is being amortized
over a seven-year useful life.
During 1998, prior to the acquisition of Sekidenko by the Company,
Sekidenko acquired various intangible assets, primarily a license agreement, by
issuing approximately 1,680,000 shares of common stock valued at $2,096,000.
Sekidenko's management estimated the value of the common stock, since, as a
69
privately held company, there was no public market for Sekidenko's common stock.
The entire purchase price was allocated to other intangibles and is being
amortized over a five-year useful life.
LITMAS -- During 1998, the Company acquired a 29% ownership interest in
LITMAS, a privately held, North Carolina-based early-stage company that designs
and manufactures plasma gas abatement systems and high-density plasma sources.
The purchase price consisted of $1 million in cash. On October 1, 1999, the
Company acquired an additional 27.5% interest in LITMAS for an additional
$560,000. The purchase price consisted of $385,000 in the Company's common stock
and $175,000 in cash. The acquisition was accounted for using the purchase
method of accounting and resulted in $523,000 allocated to intangible assets as
goodwill. The results of operations of LITMAS are included within the
accompanying consolidated financial statements from the date the controlling
interest of 56.5% was acquired. On October 1, 2000, the Company acquired an
additional 3.0% interest in LITMAS for an additional $250,000, bringing the
Company's ownership interest in LITMAS to 59.5%. Subsequent to year-end, the
Company agreed in principle to acquire the remaining 40.5% of LITMAS for
approximately 130,000 shares of the Company's common stock. Based on the Nasdaq
closing price of the Company's common stock on February 28, 2002 of $25.100 per
share, the purchase price would have been valued at approximately $3.3 million.
(4) PUBLIC OFFERING OF COMMON STOCK
In November 1999, the Company closed on an additional offering of its
common stock. In connection with the offering, 1,000,000 shares of common shares
were sold at a price of $39 per share, providing gross proceeds of $39,000,000,
less $2,448,000 in offering costs.
(5) MARKETABLE SECURITIES
MARKETABLE SECURITIES consisted of the following:
DECEMBER 31,
--------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Commercial paper ................................................... $172,506 $ 85,827
Municipal bonds and notes .......................................... 12,622 54,022
Mutual funds ....................................................... 4,895 17,962
-------- --------
$190,023 $157,811
======== ========
These marketable securities are stated at period end market value, which
are equal to their original costs plus accrued interest income.
(6) ACCOUNTS RECEIVABLE - TRADE
ACCOUNTS RECEIVABLE - TRADE consisted of the following:
DECEMBER 31,
--------------------------
2001 2000
-------- --------
(IN THOUSANDS)
Domestic ........................................................ $ 13,463 $ 41,545
Foreign ......................................................... 14,457 31,971
Allowance for doubtful accounts ................................. (1,049) (784)
-------- --------
Total accounts receivable ....................................... $ 26,871 $ 72,732
======== ========
70
(7) INVENTORIES
INVENTORIES consisted of the following:
DECEMBER 31,
----------------------
2001 2000
------- -------
(IN THOUSANDS)
Parts and raw materials ............................................................ $31,273 $34,462
Work in process .................................................................... 2,521 3,777
Finished goods ..................................................................... 11,454 7,027
------- -------
Total inventories .................................................................. $45,248 $45,266
======= =======
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. Inventory is expensed as cost of sales upon shipment
of product.
(8) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT consisted of the following:
DECEMBER 31,
----------------------
2001 2000
------- -------
(IN THOUSANDS)
Land ............................................................................... $ 1,127 $ --
Building ........................................................................... 1,673 --
Building equipment ................................................................. 64 --
Machinery and equipment ............................................................ 29,410 25,075
Computers and communication equipment .............................................. 15,619 12,484
Furniture and fixtures ............................................................. 4,694 4,026
Vehicles ........................................................................... 222 197
Leasehold improvements ............................................................. 10,232 6,746
------- -------
63,041 48,528
Less - accumulated depreciation .................................................... (31,946) (24,427)
------- -------
Total property and equipment ....................................................... $31,095 $24,101
======= =======
(9) NOTES PAYABLE
DECEMBER 31,
----------------------
2001 2000
------- -------
(IN THOUSANDS)
Revolving line of credit of $30,000,000, expiring June 2003, interest at
bank's prime rate minus 1% or the LIBOR 360-day rate plus 175 basis
points, (3.75% at December 31, 2001). Borrowing base consists of the sum
of 80% of eligible accounts receivable plus the lesser of 20% 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 ....................................... $ 760 $ 875
Note payable, shareholder, paid in full in 2001 .................................... -- 356
Note payable, royalties, with interest at 7%, with monthly payments ranging from
$5,000 to $15,000, including interest, due July 2002. The note is unsecured ...... 244 704
Note payable, other ................................................................ 120 120
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 .......................................................... -- 109
Note payable, shareholder, paid in full in 2001 .................................... -- 163
------- -------
1,124 2,327
Less - current portion ............................................................. (1,124) (1,284)
------- -------
$ -- $ 1,043
======= =======
The Company is subject to covenants on its line of credit that provide
certain restrictions related to working capital, leverage, net worth, and
payment and declaration of dividends. The Company was out of
71
compliance with the maximum loss covenant as of December 31, 2001, and received
a written waiver of the covenant and expects to be in compliance with all
covenants during 2002. As of December 31, 2001, the Company had an advance of
approximately $760,000 related to AE-Japan and approximately $350,000 of letters
of credit against the line of credit, for total available credit at that time of
approximately $28.9 million.
Currently the Company is restricted from further use of its credit line
because the low interest debt of approximately $34 million that it assumed as
part of the Aera acquisition is not subordinated to its line of credit. The
Company is in the process of negotiating a new line of credit.
(10) CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1999, the Company issued $135 million of 5.25% convertible
subordinated notes. These notes mature November 15, 2006, with interest payable
on May 15th and November 15th each year beginning May 15, 2000. Net proceeds to
the Company were approximately $130.5 million, after deducting $4.5 million of
offering costs, which have been capitalized and are being amortized as
additional interest expense over a period of seven years. Holders of the notes
may convert the notes at any time into shares of the Company's common stock, at
$49.53 per share. The Company may redeem the notes on or after November 19, 2002
at a redemption price of 103.00% times the principal amount, and may redeem at
successively lesser amounts thereafter until November 15, 2006, at which time
the Company may redeem at a redemption price equal to the principal amount. At
December 31, 2001, approximately $500,000 of interest expense related to these
notes was accrued as a current liability.
In October and November 2000, the Company repurchased an aggregate of
approximately $53.4 million principal amount of its 5.25% convertible
subordinated notes in the open market, for a cost of approximately $40.8
million. These purchases resulted in an after-tax extraordinary gain of $7.6
million. The purchased notes have been cancelled. Approximately $81.6 million
principal amount of the notes remains outstanding. The Company may continue to
purchase additional notes in the open market from time to time, if market
conditions and the Company's financial position are deemed favorable for such
purposes.
In August 2001, the Company issued $125 million of 5.00% convertible
subordinated notes. These notes mature September 1, 2006, with interest payable
on March 1st and September 1st of each year beginning March 1, 2002. Net
proceeds to the Company were $121.25 million, after deducting $3.75 million of
offering costs, which have been capitalized and are being amortized as
additional interest expense over a period of five years. Holders of the notes
may convert the notes at any time before maturity into shares of the Company's
common stock at a conversion rate of 33.5289 shares per each $1,000 principal
amount of notes, equivalent to a conversion price of approximately $29.83 per
share. The conversion rate is subject to adjustment in certain circumstances.
The Company may redeem the notes, in whole or in part, at any time before
September 4, 2004, at specified redemption prices plus accrued and unpaid
interest, if any, to the date of redemption if the closing price of the
Company's common stock exceeds 150% of the conversion price then in effect for
at least 20 trading days within a period of 30 consecutive trading days ending
on the trading day before the date of mailing of the provisional redemption
notice. Upon any provisional redemption, the Company will make an additional
payment in cash with respect to the notes called for redemption in an amount
equal to $150.56 per $1,000 principal amount of notes, less the amount of any
interest paid on the note. The Company may also make this additional payment in
shares of its common stock, and any such payment will be valued at 95% of the
average of the closing prices of the Company's common stock for the five
consecutive trading days ending on the day prior to the redemption date. The
Company will be obligated to make an additional payment on all notes called for
provisional redemption. The Company may also redeem the notes from September 4,
2004 through August 31, 2005 at 102% times the principal amount, from September
1, 2005 through August 31, 2006 at 101% times the principal amount, and
thereafter at 100% of the principal amount. The notes are subordinated to the
Company's present and potential future senior debt, and are effectively
72
subordinated in right of payment to all indebtedness and other liabilities of
the Company's subsidiaries. At December 31, 2001, approximately $2.2 million of
interest expense related to these notes was accrued as a current liability.
(11) INCOME TAXES
The income tax benefit of $17.4 million for 2001 represents an effective
rate of 36%. The income tax provision of $36.8 million in 2000, which included a
$4.6 million provision for an extraordinary item, represented an effective rate
of 35%. The income tax provision of $11.7 million for 1999 represented an
effective rate of 38%.
The (benefit) provision for income taxes for the years ended December 31,
2001, 2000 and 1999 was as follows:
DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Federal ............................................................. $(17,468) $ 28,869 $ 8,087
State and local ..................................................... (469) 3,592 1,376
Foreign taxes ....................................................... 496 4,346 2,278
-------- -------- --------
$(17,441) $ 36,807 $ 11,741
======== ======== ========
Current ............................................................. $(13,462) $ 40,537 $ 10,890
Deferred ............................................................ (3,979) (3,730) 851
-------- -------- --------
$(17,441) $ 36,807 $ 11,741
======== ======== ========
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 2001, 2000 and 1999:
DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Income tax (benefit) expense per federal statutory rate ............. $(17,138) $ 36,703 $ 10,807
State income taxes, net of federal deduction ........................ (1,259) 2,232 894
Foreign sales corporation ........................................... (688) (2,516) (331)
Nondeductible merger costs .......................................... -- 1,604 (228)
Nondeductible intangible and goodwill amortization .................. 2,818 618 553
Other permanent items, net .......................................... (1,716) (2,262) (137)
Effect of foreign taxes ............................................. 2 578 1,000
Change in valuation allowance ....................................... 790 -- (717)
Tax credits ......................................................... (250) (150) (100)
-------- -------- --------
$(17,441) $ 36,807 $ 11,741
======== ======== ========
The Company's deferred income tax assets are summarized as follows:
DECEMBER 31, 2001 CHANGE DECEMBER 31, 2000
----------------- ------ -----------------
(IN THOUSANDS)
Employee bonuses and commissions .................................... $ 386 $ (1,465) $ 1,851
State net operating loss carryforward ............................... 790 790 --
Warranty reserve .................................................... 1,423 377 1,046
Bad debt reserve .................................................... 301 72 229
Vacation accrual .................................................... 948 (128) 1,076
Obsolete and excess inventory ....................................... 4,011 1,578 2,433
Investments ......................................................... 2,476 2,081 395
Depreciation and amortization ....................................... (415) (727) 312
Other ............................................................... 1,655 1,514 141
Valuation allowance ................................................. (790) (790) --
-------- -------- --------
$ 10,785 $ 3,302 $ 7,483
-------- -------- --------
Depreciation and amortization acquired in EMCO acquisition .......... -- 677 --
$ 10,785 $ 3,979 $ 7,483
======== ======== ========
73
The domestic versus foreign component of the Company's net (loss) income
before income taxes at December 31, 2001, 2000 and 1999, was as follows:
DECEMBER 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)
Domestic ............................................................ $(50,377) $ 94,094 $ 25,177
Foreign ............................................................. 1,412 10,767 5,699
-------- -------- --------
$(48,965) $104,861 $ 30,876
======== ======== ========
(12) OTHER INCOME AND EXPENSE ITEMS
GAIN ON SALE OF INVESTMENT -- In the third quarter of 2000, the Company
exercised warrants of a supplier in a cashless transaction and received 458,000
shares of the supplier's common stock, which is publicly traded. The Company had
received the warrants in a series of transactions with the supplier since 1995.
Concurrent with the exercise, the Company sold 320,000 shares of the supplier's
common stock and recognized a gain of approximately $4.8 million. The remaining
138,000 shares are valued at approximately $1.6 million and are included in
other long-term assets.
OTHER OPERATING EXPENSES - SYMPHONY -- Beginning in April 2000, the
Company made periodic advances to and investments in Symphony Systems, Inc., a
privately held, early-stage developer of equipment productivity management
software. In addition to the approximately $8 million from the Company as
investments, advances and license payments, Symphony received investments of $7
million from other parties. In 2000, the Company obtained an exclusive license,
for which the Company paid $1.5 million, to use Symphony's products in the
semiconductor industry. In connection with certain of the Company's advances in
2001, it obtained a security interest in all of Symphony's intellectual and
proprietary property.
Beginning in the third quarter of 2001, and continuing through the end of
the year, Symphony's financial situation began to deteriorate significantly, and
the Company determined that due to Symphony's need for immediate liquidity, its
declining business prospects (including the indefinite postponement of a
significant order for its products from a major semiconductor equipment
manufacturer) and other factors, the value of the Company's investment in and
advances to Symphony had substantially declined. Given the precarious financial
condition of Symphony, the Company valued its investments in and advances to
Symphony at December 31, 2001, at approximately $1 million, which reflects its
assessment of the value of the Symphony technology license, which has continuing
value to the Company. The amount of the impairment related to Symphony was $6.8
million, all of which was recorded in 2001 as an operating expense.
Since Symphony effectively ceased operations in February 2002, the Company
hired its key employees and intends to purchase Symphony's remaining assets in a
foreclosure, liquidation or bankruptcy sale in the near future. At no time did
the Company's percentage ownership in the voting stock of Symphony exceed
approximately 1.7%, and the Company has never had the ability to exercise
significant influence over Symphony.
(13) RETIREMENT PLAN
The Company has 401(k) Profit Sharing Plans which cover most full-time
employees who have completed six months of full-time continuous service and are
age eighteen or older. Depending on the plan in which a participant is enrolled,
participants may defer up to either 10% or 15% of their gross pay up to a
maximum limit determined by law. Participants are immediately vested in their
contributions.
74
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) Plans up to a
50% matching on contributions by employees up to 6% of the employee's
compensation. The Company's total contributions to the plans were approximately
$1,433,000, $1,291,000 and $848,000 for the years ended December 31, 2001, 2000
and 1999, respectively. Vesting in the profit sharing contribution account is
based on years of service, with most participants fully vested after five years
of credited service.
The Company also has a Money Purchase Pension Plan, which covers certain
employees. This plan was frozen, effective July 1, 1998, and the Company is not
required to make contributions to the plan for future years. The Company's
contributions to this plan were $62,000 for 2000. The Company made no
contributions in 2001 and 1999.
(14) COMMITMENTS AND CONTINGENCIES
DISPUTES AND LEGAL ACTIONS
The Company is involved in disputes and legal actions arising in the
normal course of its business. The Company does not believe that the ultimate
resolution of such litigation will have a material adverse effect on the
Company's financial position, results of operations or cash flows. The Company
accrues loss contingencies in connection with its litigation when it is probable
that a loss has occurred and the amount of the loss can be reasonably estimated.
CAPITAL LEASES
The Company finances a portion of its property and equipment under capital
lease obligations. The future minimum lease payments under capitalized lease
obligations as of December 31, 2001 were approximately $6,000, all a current
liability.
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and
office and production facilities (Note 17). Lease expense under operating leases
was approximately $5,770,000, $5,155,000 and $4,926,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
The future minimum rental payments required under noncancelable operating
leases as of December 31, 2001 are as follows:
(IN THOUSANDS)
2002.............................................................. $ 5,211
2003.............................................................. 4,194
2004.............................................................. 3,610
2005.............................................................. 3,189
2006.............................................................. 3,018
Thereafter........................................................ 17,117
-------
$36,339
=======
(15) RESTRUCTURING
The Company recorded $3,070,000 of restructuring charges in 2001,
primarily associated with reductions in force to respond to the downturn in the
semiconductor capital equipment industry and the global economy. The Company's
restructuring plans and associated costs consisted of $2,124,000 to terminate
330 employees and $946,000 to close three facilities. These costs were recorded
in the
75
accompanying consolidated statements of operations as "Restructuring Charges" as
a component of operating expenses.
The employee termination costs of $2,124,000 included severance benefits
and notice pay. All terminations and termination benefits were communicated to
the affected employees prior to year-end, and severance benefits are expected to
be paid in full in 2002. The affected employees were all part of the Company's
U.S. operations and included full-time permanent and temporary employees, and
consisted primarily of manufacturing and administrative personnel.
The facility related costs of $946,000 resulted from the phase out the
Company's Austin, Texas manufacturing facility to begin outsourcing the assembly
of certain DC power products; the transition of its Voorhees, New Jersey
facility from a manufacturing site to a design center; and the closure of Noah's
manufacturing and office facilities in San Jose, California, due to the transfer
of Noah's manufacturing to Vancouver, Washington, to be co-located with
Sekidenko. These costs accrued reflect payments required under operating lease
contracts and costs for writing down related leasehold improvements of
facilities.
At December 31, 2001, outstanding liabilities related to the 2001
restructuring charges were approximately $1.3 million, and were reported on the
consolidated balance sheet.
The Company also recorded a $1,000,000 restructuring charge in 2000
related to the termination of employees associated with Tower in Fridley,
Minnesota, and charges related to closing that facility, resulting from the
relocation of Tower's operations to the Company's facility in Voorhees, New
Jersey. This restructuring was completed in the fourth quarter of 2000. As of
December 31, 2000, approximately $475,000 related to this restructuring was
reported on the Company's consolidated balance sheet as an accrued liability.
Approximately $80,000 of this restructuring charge related to the lease of the
facility was still outstanding as of December 31, 2001.
The following table summarizes the components of the restructuring
charges, the payments and non-cash charges, and the remaining accrual as of
December 31, 2001:
EMPLOYEE
SEVERANCE AND FACILITY TOTAL
TERMINATION CLOSURE RESTRUCTURING
COSTS COSTS CHARGES
-------------- -------- -------------
(IN THOUSANDS)
2000 restructuring charges .......................................... $ 681 $ 319 $ 1,000
Payments in 2000 .................................................... (380) (145) (525)
-------- -------- --------
Accrual balance December 31, 2000 ................................... $ 301 $ 174 $ 475
======== ======== ========
Second quarter 2001 restructuring charge ............................ 614 -- 614
Fourth quarter 2001 restructuring charge ............................ 1,510 946 2,456
-------- -------- --------
Total restructuring charges 2001 .................................... 2,124 946 3,070
Payments in 2001 .................................................... (1,460) (658) (2,118)
-------- -------- --------
Accrual balance December 31, 2001 ................................... $ 965 $ 462 $ 1,427
======== ======== ========
(16) INDUSTRY SEGMENT, FOREIGN OPERATIONS AND MAJOR CUSTOMERS
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. SFAS No. 131,
which is based on a management approach to segment reporting, establishes
requirements to report selected segment information quarterly and to report
annually entity-wide disclosures about products and services, major customers,
and the countries in which the entity holds material assets and reports revenue.
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 assess
performance. Management operates and manages the
76
Company's business for the manufacture, marketing and servicing of its products
and related systems as one operating segment. All material operating units
qualify for aggregation under SFAS No. 131 because all the Company's products
and systems have similar economic characteristics, and procurement, production
and distribution processes. To report revenues from external customers for each
product and service or each group of similar products and services would be
impracticable. Since the Company operates in one segment, all financial segment
information required by SFAS No. 131 is found in the accompanying consolidated
financial statements.
The Company has operations in the U.S., Europe and Asia Pacific. The
following is a summary of the Company's operations by region:
YEARS ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Sales:
Originating in U.S. and sold to domestic customers ................ $ 124,746 $ 260,596 $ 148,424
Originating in U.S. and sold to foreign customers ................. 19,687 35,504 23,996
Originating in Europe to unaffiliated customers ................... 18,239 24,375 12,724
Originating in Asia Pacific to unaffiliated customers ............. 30,928 39,307 17,705
Transfers between geographic areas ................................ 40,774 48,963 24,053
Intercompany eliminations ......................................... (40,774) (48,963) (24,053)
--------- --------- ---------
$ 193,600 $ 359,782 $ 202,849
========= ========= =========
(Loss) income from operations:
U.S ............................................................... $ (47,532) $ 73,508 $ 25,390
Europe ............................................................ 1,517 3,805 2,379
Asia Pacific ...................................................... 1,157 7,878 1,946
Intercompany eliminations ......................................... (2,029) 9 (389)
--------- --------- ---------
$ (46,887) $ 85,200 $ 29,326
========= ========= =========
Identifiable assets:
U.S ............................................................... $ 529,465 $ 387,953
Europe ............................................................ 21,357 19,263
Asia Pacific ...................................................... 23,633 29,281
Intercompany eliminations ......................................... (124,260) (70,662)
--------- ---------
$ 450,195 $ 365,835
========= =========
Intercompany sales among the Company's geographic areas are recorded on
the basis of intercompany prices established by the Company.
The Company has a major customer (sales in excess of 10% of total sales)
that is a manufacturer of semiconductor capital equipment. Sales to this
customer accounted for the following percentages of sales for the years ended
December 31, 2001, 2000 and 1999:
DECEMBER 31,
--------------------------------
2001 2000 1999
---------- ---------- -------
Applied Materials, Inc................................................ 24% 39% 34%
=== === ===
The Company had trade accounts receivable from this customer of
approximately $8.0 million as of December 31, 2000, which was approximately
11.0% of the Company's total trade accounts receivable. The Company had no other
trade accounts receivable from any customers in excess of 10% of its total trade
accounts receivable as of December 31, 2001 and 2000.
(17) RELATED PARTY TRANSACTIONS
The Company leases its executive offices and manufacturing facilities in
Fort Collins, Colorado from a limited liability partnership consisting of
certain directors of the Company and other individuals. The leases relating to
these spaces expire in 2011, 2013 and 2016, and contain monthly payments of
approximately $52,000, $52,000 and $62,000, respectively. The Company also
leases other office and production space from another limited liability
partnership consisting of certain directors of the Company and other
individuals. The lease relating to this space expires in 2002 with a monthly
payment of approximately $28,000.
77
Approximately $2,229,000, $1,637,000 and $1,693,000 were paid and charged
to rent expense attributable to these leases for the years ended December 31,
2001, 2000 and 1999, respectively. In 2000, the Company also paid an additional
$637,000 to one of the partnerships for leasehold improvements made in the
normal course of the Company's operations, which are capitalized and reported as
leasehold improvements on the balance sheet as part of property and equipment.
The Company leases, for business purposes, a condominium owned by a
partnership of certain stockholders. The Company paid the partnership $47,000,
$36,000 and $36,000 in 2001, 2000 and 1999, respectively.
The Company charters aircraft from time to time from companies owned by a
certain shareholder. Aggregate payments for the use of such aircraft were
$0, $57,000 and $238,000 in 2001, 2000 and 1999, respectively.
(18) CONCENTRATIONS OF CREDIT RISK
FORWARD CONTRACTS -- The Company's subsidiary AE-Japan enters into foreign
currency forward contracts to buy U.S. dollars to mitigate currency exposure
from 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. 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 four to eight
months, with contracts outstanding at December 31, 2001 maturing through July
2002. All forward contracts are held until maturity. At December 31, 2001, the
Company held foreign forward exchange contracts with notional amounts of
$6,500,000 and market settlement amounts of $6,133,000 for an unrealized gain
position of $367,000 that has been included in foreign currency (loss) gain in
the accompanying consolidated statement of operations.
OTHER CONCENTRATIONS OF CREDIT RISK -- The Company uses financial
instruments that potentially subject it to concentrations of credit risk. Such
instruments include cash equivalents, short-term investments, accounts
receivable, and foreign currency forward contracts. The Company invests its cash
in cash deposits, money market funds, commercial paper, certificates of deposit
and readily marketable debt securities. The Company places its investments with
high credit quality financial institutions and limits the credit exposure from
any one financial institution or instrument. To date, the Company has not
experienced significant losses on these investments. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral. Because the Company's receivables are primarily related
to companies in the semiconductor capital equipment industry, the Company is
exposed to credit risk generally related to this industry.
(19) STOCK PLANS
1995 EMPLOYEE STOCK OPTION PLAN -- During 1993, the Company adopted an
Employee Stock Option Plan (the "Employee Option Plan") that has been amended
and restated various times through December 2001. 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 85% of the stock's
fair market value on the date of grant. Options the Company (exclusive of
acquired subsidiaries) issued under this plan in 2001, 2000 and 1999 were at
100%
78
of fair market value with typical vesting over three to four 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 8,125,000 shares of common stock for the issuance of stock
under the Employee Option Plan, which terminates in June 2003.
During 1999, prior to its acquisition by the Company, a shareholder of
Sekidenko granted employees options under a preexisting arrangement to purchase
shares of his common stock already outstanding at exercise prices below fair
market value. Under this agreement, 29,700 and 34,250 of such options were
exercised in 1999 and 2000, respectively. These options result in the Company
recognizing $109,000 as compensation expense over the four-year vesting period
related to the 1999 purchases, and $1,995,000 as compensation expense over the
four-year vesting period related to the 2000 purchases. Compensation expense of
$526,000, $461,000 and $23,000 was recognized in 2001, 2000 and 1999,
respectively. These amounts are presented as a reduction of stockholders'
equity, and the remaining amount of deferred compensation of $1,094,000 is being
amortized over the four-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) 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 2001, 2000
and 1999, employees purchased an aggregate of 37,376, 13,025 and 22,390 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. In May 2001, the plan was amended to
increase the number of shares of common stock issuable under such plan to
200,000 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.
2001 EMPLOYEE STOCK OPTION PLAN -- In 2001, the Company adopted the 2001
Stock Option Plan (the "2001 Option Plan"), which was not required to be
approved by the Company's stockholders. The 2001 Option Plan is a broad-based
plan for employees and consultants in which executive officers and directors of
the Company are not allowed to participate. The board of directors currently
administers the plan, and makes all decisions concerning which employees and
consultants are granted options, how many to grant to each optionee, when
options are granted, how the plan should be properly interpreted, whether to
amend or terminate the plan, and whether to delegate administration of the plan
to a committee. The 2001 Option Plan allows issuance of only non-qualified
options. The exercise price of the options shall not be less than 100% of the
stock's fair market value on the date of grant, and the options vest over four
years. The options are exercisable for ten years from the date of grant. The
Company has reserved up to 600,000 shares of common stock under the plan. The
2001 Option Plan will expire in January 2011, unless the administrator of the
plan terminates it earlier.
79
The following summarizes the activity relating to options for the years
ended December 31, 2001, 2000 and 1999:
2001 2000 1999
------------------------- ----------------------- ----------------------
(IN THOUSANDS, EXCEPT SHARE PRICES)
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ---------- --------- ---------- --------- ----------
Stock options:
Employee stock options --
Options outstanding at beginning of
period ................................ 1,719 $23.39 1,850 $13.90 1,987 $ 9.01
Granted ................................. 845 25.64 461 45.45 417 30.31
Exercised ............................... (273) 12.13 (488) 9.12 (487) 8.44
Terminated .............................. (183) 31.22 (104) 19.26 (67) 10.44
------- ------- -------
Options outstanding at end of period .... 2,108 25.07 1,719 23.39 1,850 13.90
======= ======= =======
Options exercisable at end of period .... 938 20.45 689 14.09 801 9.10
======= ======= =======
Weighted-average fair value of
options granted during the period ..... $ 25.61 $ 32.75 $ 18.78
======= ======= =======
Price range of outstanding options ...... $0.67 - $64.94 $0.67 - $60.75 $0.67 - $44.97
=============== ============== ==============
Price range of options terminated ....... $7.50 - $60.75 $0.83 - $43.69 $3.88 - $28.16
=============== ============== ==============
Non-employee directors stock options--
Options outstanding at beginning of period 75 $27.25 55 $19.04 40 $12.18
Granted .................................. 15 24.44 20 49.81 18 32.94
Exercised ................................ -- -- -- -- (3) 11.05
Terminated ............................... -- -- -- -- -- --
------- ------- -------
Options outstanding at end of period ..... 90 26.92 75 27.25 55 19.04
======= ======= =======
Options exercisable at end of period ..... 45 16.97 32 18.65 22 17.27
======= ======= =======
Weighted-average fair value of options
granted during the period ............... $ 24.85 $ 30.83 $ 20.11
======= ======= =======
Price range of outstanding options ....... $6.13 - $60.75 $6.13 - $64.94 $6.13 - $36.94
=============== ============== ==============
Price range of options terminated ........ $ -- $ -- $ --
======= ======= =======
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 employee stock-based compensation plans
under APB No. 25, under which compensation expense, if any, is recognized based
on the intrinsic value of stock options and other stock awards, generally
measured at the date of grant.
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:
2001 2000 1999
------- ------- -------
Risk-free interest rates 4.51% 6.06% 5.92%
Expected dividend yield rates 0.0% 0.0% 0.0%
Expected lives 7 years 7 years 7 years
Expected volatility 87.94% 103.69% 77.33%
The total fair value of options granted was computed to be approximately
$17,675,000, $15,719,000 and $8,192,000 for the years ended December 31, 2001,
2000 and 1999, 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
80
of the effect of forfeitures and tax, was approximately $5,413,000, $4,554,000
and $2,999,000 for 2001, 2000 and 1999, respectively.
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income (loss) would have been reduced (increased) to
the following pro forma amounts:
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net (loss) income:
As reported $ (31,379) $ 68,034 $ 19,066
Pro forma (36,792) 63,480 16,067
Diluted (loss) earnings per share:
As reported $ (0.99) $ 2.10 $ 0.62
Pro forma (1.16) 1.96 0.52
The following table summarizes information about the stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
--------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ------------ --------- ----------- ---------
$ 0.67 to $ 2.57 16,000 1.8 years $ 1.23 16,000 $ 1.20
$ 3.11 to $ 6.75 190,000 6.0 years $ 5.78 149,000 $ 5.58
$ 7.50 to $ 9.00 239,000 5.1 years $ 8.25 184,000 $ 8.44
$ 9.53 to $ 16.51 244,000 6.0 years $ 13.69 227,000 $ 13.69
$17.32 to $26.63 438,000 9.1 years $ 21.07 66,000 $ 20.05
$27.57 to $40.00 665,000 8.6 years $ 30.86 159,000 $ 29.60
$43.69 to $64.94 406,000 8.1 years $ 47.05 182,000 $ 46.28
--------- --------- ------- ------- -------
2,198,000 7.7 years $ 25.15 983,000 $ 20.29
========= ========= ======= ======= =======
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, trade receivables, trade
payables, marketable securities, short-term and long-term debt, and foreign
currency forward exchange contracts (see Note 18). The fair values of cash,
trade receivables, trade payables and short-term debt approximate the carrying
values due to the short term nature of these instruments. Marketable securities
are stated at fair value (see Note 5). At December 31, 2001 and 2000, the
carrying value of long-term debt was $206.6 million and $82.6 million,
respectively. At December 31, 2001, the estimated fair value of the Company's
5.25% convertible subordinated notes that are due November 15, 2006, was
approximately $72 million, compared to a book value of $81.6 million. The
estimated fair value of the Company's 5.00% convertible subordinated notes that
are due September 1, 2006, was approximately $141 million, compared to a book
value of $125 million.
(21) GOODWILL IMPAIRMENT
During the second quarter of 2001, the Company terminated the operations
of Tower and FST, due to significant softening in the projected demand for these
products. Revenue contributed by Tower and FST operations for 2001, 2000 and
1999 represented less than five percent of total revenue for each period.
Because the expected future cash flows for these products were insignificant
after the second quarter of 2001, the Company recognized an impairment charge of
$3.6 million related to the termination of Tower
81
and a charge of $1.8 million related to the termination of FST. These amounts
represented the carrying values of these assets on June 30, 2001, before the
writedown. These charges are disclosed as "Goodwill Impairment" in the Operating
Expenses section of the accompanying consolidated statement of operations.
(22) SUBSEQUENT EVENTS
AERA -- On January 18, 2002, the Company completed its acquisition of Aera
Japan Limited, a Japanese corporation ("Aera"). The acquisition was effected
through AE-Japan, which purchased all of the outstanding stock of Aera. The
aggregate purchase price paid by AE-Japan was 5.73 billion Japanese yen
(approximately $44 million, based upon an exchange rate of 130:1), which was
funded from the Company's available cash. In connection with the acquisition,
AE-Japan assumed approximately $34 million of Aera's debt. Aera, which is
headquartered in Hachioji, Japan, has manufacturing facilities there and
manufacturing, sales and service offices in Austin, Texas; Dresden, Germany;
Edinburgh, Scotland; and Bundang, South Korea; and sales and service offices in
Kirchheim, Germany; and Hshinchu, Taiwan. Aera supplies the semiconductor
capital equipment industry with product lines that include digital mass flow
controllers, pressure-based mass flow controllers, liquid mass flow controllers,
ultrasonic liquid flow meters and liquid vapor delivery systems.
PRIVATE COMPANY -- On February 28, 2002, the Company agreed to purchase a
privately owned Germany-based provider of power supplies and matching networks,
for a purchase price ranging from $13.5 million to $20 million, depending on the
outcome of contingencies. The Company is performing due diligence and expects to
complete the transaction by April 30, 2002.
LITMAS -- The Company has an agreement in principle to acquire the 40.5%
that it currently does not own for approximately 130,000 shares of the Company's
common stock. Based on the Nasdaq closing price of the Company's common stock on
February 28, 2002 of $25.100 per share, the purchase price would have been
valued at approximately $3.3 million.
(23) QUARTERLY FINANCIAL DATA
The following table presents unaudited quarterly financial data for each
of the eight quarters in the period ended December 31, 2001. The quarters ended
March 31, 2000 and June 30, 2000 have been restated to include the combined
selected financial data of Noah and Sekidenko as though each had always been
part of the Company. The Company believes that all necessary 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.
QUARTERS ENDED
------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
2000 2000 2000 2000 2001 2001 2001 2001
------- ------- -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ............................... $75,028 $85,701 $96,317 $102,736 $74,714 $ 46,171 $ 38,722 $ 33,993
Gross profit ........................ 36,667 42,363 46,825 50,598 31,223 7,781 11,036 7,392
Income (loss) from operations ....... 17,048 20,343 20,884 26,925 7,531 (20,927) (11,663) (21,828)
Net income (loss) before
extraordinary item ................ 11,238 13,118 16,289 19,779 5,094 (14,549) (7,482) (14,442)
Extraordinary item (net of income
taxes) ............................ -- -- -- 7,610 -- -- -- --
Net income (loss) ................... $11,238 $13,118 16,289 $ 27,389 $ 5,094 $(14,549) $ (7,482) $(14,442)
======= ======= ======= ======== ======= ======== ======== ========
Diluted earnings (loss) per share
before extraordinary item ......... $ 0.35 $ 0.40 $ 0.50 $ 0.61 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======= ======= ======= ======== ======= ======== ======== ========
Diluted earnings per share from
extraordinary item ................ $ -- $ -- $ -- $ 0.22 $ -- $ -- $ -- $ --
======= ======= ======= ======== ======= ======== ======== ========
Diluted earnings (loss) per share ... $ 0.35 $ 0.40 $ 0.50 $ 0.83 $ 0.16 $ (0.46) $ (0.24) $ (0.45)
======= ======= ======= ======== ======= ======== ======== ========
82
The following table presents unaudited quarterly financial data for the
two quarters ended June 30, 2000, retroactively combining the selected financial
data of Noah and Sekidenko for the periods prior to the periods in which each
was merged with the Company.
QUARTERS ENDED
------------------------
MAR. 31, JUNE 30,
2000 2000
------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Sales ........................................ $ 7,857 $ 5,115
Gross profit ................................. 4,493 3,024
Income from operations ....................... 2,179 1,809
Net income ................................... $ 1,242 $ 1,088
======= =======
Diluted earnings per share ................... $ 0.01 $ --
======= =======
The following table presents unaudited quarterly financial data for the
Company for the two quarters ended March 31, 2000 and June 30, 2000, as
previously reported on the Company's Forms 10-Q for those periods.
QUARTERS ENDED
------------------------
MAR. 31, JUNE 30,
2000 2000
------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
Sales ........................................ $67,171 $80,586
Gross profit ................................. 32,174 39,339
Income from operations ....................... 14,869 18,534
Net income ................................... $ 9,996 $12,030
======= =======
Diluted earnings per share ................... $ 0.34 $ 0.40
======= =======
83
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT ADDITIONS ADDITIONS BALANCE AT
BEGINNING OF DUE TO CHARGED END OF
PERIOD ACQUISITION TO EXPENSE DEDUCTIONS PERIOD
------ ----------- ---------- ---------- ------
(IN THOUSANDS)
Year ended December 31, 1999:
Inventory obsolescence reserve ................ $2,626 $ -- $1,520 $1,842 $2,304
Allowance for doubtful accounts ............... 622 -- 101 84 639
------ ------ ------ ------ ------
$3,248 $ -- $1,621 $1,926 $2,943
====== ====== ====== ====== ======
Year ended December 31, 2000:
Inventory obsolescence reserve ................ $2,304 $ -- $ 654 $ 705 $2,253
Allowance for doubtful accounts ............... 639 -- 145 -- 784
------ ------ ------ ------ ------
$2,943 $ -- $ 799 $ 705 $3,037
====== ====== ====== ====== ======
Year ended December 31, 2001:
Inventory obsolescence reserve ................ $2,253 $ 180 $6,412 $3,214 $5,631
Allowance for doubtful accounts ............... 784 100 282 117 1,049
------ ------ ------ ------ ------
$3,037 $ 280 $6,694 $3,331 $6,680
====== ====== ====== ====== ======
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
84
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 Advanced Energy's
definitive proxy statement relating to its 2002 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
2001.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the Proxy Statement under the captions
"Proposal 1/ 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.
85
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
page
----
(a) (i) Financial Statements:
Report of Independent Public Accountants 57
Consolidated Financial Statements:
Balance Sheets at December 31, 2001 and 2000 58
Statements of Operations for each of the three years
in the period ended December 31, 2001 60
Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 2001 61
Statements of Cash Flows for each of the three years
in the period ended December 31, 2001 62
Notes to Consolidated Financial Statements 63
(ii) Financial Statement Schedules for each of the three years
in the period ended December 31, 2001
Schedule II--Valuation and Qualifying Accounts 84
(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)
2.2 Stock Purchase Agreement dated November 16, 2001, by and among
the Company, Advanced Energy Japan K.K., a wholly owned
subsidiary of the Company, Aera Japan Limited and Certain
Stockholders of Aera Japan Limited(2)
2.3 Amendment No. 1 to Stock Purchase Agreement, dated December
25, 2001, by and among the Company, Advanced Energy Japan
K.K., a wholly owned subsidiary of the Company, Aera Japan
Limited and Certain Stockholders of Aera Japan Limited(3)
2.4 Forms of Minority Stock Purchase Agreement(3)
3.1 The Company's Restated Certificate of Incorporation, as
amended(4)
3.2 The Company's By-laws(5)
4.1 Form of Specimen Certificate for the Company's Common Stock(5)
4.2 Indenture dated November 1, 1999 between State Street Bank and
Trust Company of California, N.A., as trustee, and the Company
(including form of 5 1/4% Convertible Subordinated Note due
2006)(6)
4.3 Indenture dated August 27, 2001 between State Street Bank and
Trust Company of California, N.A., as trustee, and the Company
(including form of 5.00% Convertible Subordinated Note due
September 1, 2006)(7)
4.4 Registration Rights Agreement dated as of August 22, 2001,
between the Company and Goldman, Sachs and Co.(7)
4.5 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.
86
and the Company(1)+
10.2 Purchase Order and Sales Agreement, dated October 12, 1999,
between Lam Research Corporation and the Company(6)
10.3 Loan Agreement dated June 18, 2001, by and among Silicon
Valley Bank, as Servicing Agent and a Bank, and United
Overseas Bank, as a Bank, and the Company, as borrower
10.4 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property in
Fort Collins, Colorado(5)
10.5 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort
Collins, Colorado(5)
10.6 Lease, dated May 19, 1995, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(5)
10.7 Form of Indemnification Agreement(5)
10.8 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach(8)
10.9 1995 Stock Option Plan, as amended and restated through
February 7, 2001(9)*
10.10 1995 Non-Employee Directors' Stock Option Plan, as amended and
restated through February 7, 2001(9)*
10.11 Lease dated March 20, 2000, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(10)
10.12 Agreement and Plan of Reorganization, dated April 5, 2000,
between the Company, Noah Holdings, Inc. and AE Cal Merger
Sub, Inc.(11)
10.13 Escrow and Indemnity Agreement, dated April 5, 2000, between
the Company, the former stockholders of Noah Holdings, Inc.
and Commercial Escrow Services, Inc.(11)
10.14 Agreement and Plan of Reorganization, dated July 21, 2000, by
and among the Company, Mercury Merger Corporation, a wholly
owned subsidiary of the Company, Sekidenko, Inc. and Dr. Ray
R. Dils.(12)
10.15 Agreement and Plan of Reorganization, dated July 6, 2000,
amended and restated as of October 20, 2000, by and among the
Company, Flow Acquisition Corporation, a wholly owned
subsidiary of the Company, and Engineering Measurements
Company(13)
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP, Independent Accountants
24.1 Power of Attorney (included on the signature pages to this
Annual Report on Form 10-K)
99.1 Assurance Letter pursuant to SEC Release Nos. 33-8070;
34-45590; 35-27503; 39-2395; IA-2018; IC-25464; FR-62; File
No. S7-03-02 (filed herewith).
(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, 2001.
- ----------
(1) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998 (File No.
000-26966), filed August 7, 1998.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-72748), filed February 8,
2002, as amended.
87
(3) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 000-26966), filed February 1, 2002.
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 (File No.
000-26966), filed August 13, 2001.
(5) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September 20,
1995, as amended.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File No.
000-26966), filed March 20, 2000.
(7) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 000-26966), filed September 10, 2001.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No.
000-26966), filed March 24, 1999.
(9) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001 (File No.
000-26966), filed May 9, 2001.
(10) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File No.
000-26966), filed March 27, 2001.
(11) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-37378), filed May 19,
2000.
(12) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 (File No.
000-26966), filed August 4, 2000.
(13) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 (File No.
000-26966), filed October 30, 2000.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
88
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
Chief Executive Officer, President and Chairman of the Board
Each person whose signature appears below hereby appoints Douglas S.
Schatz and Richard P. Beck, and each of them severally, acting alone and without
the other, his true and lawful attorney-in-fact with authority to execute in the
name of each such person, and to file with the Securities and Exchange
Commission, together with any exhibits thereto and other documents therewith,
any and all amendments to this Annual Report on Form 10-K necessary or advisable
to enable the registrant to comply with the Securities Exchange Act of 1934, as
amended, and any rules, regulations and requirements of the Securities and
Exchange Commission in respect thereof, which amendments may make such other
changes in the Annual Report on Form 10-K as the aforesaid attorney-in-fact
deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ Douglas S. Schatz Chief Executive Officer, President March 25, 2002
------------------------- and Chairman of the Board
Douglas S. Schatz (Principal Executive Officer)
/s/ Michael El-Hillow Senior Vice President and Chief March 25, 2002
------------------------- Financial Officer (Principal Financial
Michael El-Hillow Officer and Principal Accounting
Officer)
/s/ G. Brent Backman Director March 25, 2002
-------------------------
G. Brent Backman
/s/ Richard P. Beck Director March 25, 2002
-------------------------
Richard P. Beck
/s/ Trung Doan Director March 25, 2002
-------------------------
Trung Doan
/s/ Arthur A. Noeth Director March 25, 2002
-------------------------
Arthur A. Noeth
/s/ Elwood Spedden Director March 25, 2002
-------------------------
Elwood Spedden
/s/ Gerald Starek Director March 25, 2002
-------------------------
Gerald Starek
/s/ Arthur W. Zafiropoulo Director March 25, 2002
-------------------------
Arthur W. Zafiropoulo
89
INDEX TO 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)
2.2 Stock Purchase Agreement dated November 16, 2001, by and among
the Company, Advanced Energy Japan K.K., a wholly owned
subsidiary of the Company, Aera Japan Limited and Certain
Stockholders of Aera Japan Limited(2)
2.3 Amendment No. 1 to Stock Purchase Agreement, dated December
25, 2001, by and among the Company, Advanced Energy Japan
K.K., a wholly owned subsidiary of the Company, Aera Japan
Limited and Certain Stockholders of Aera Japan Limited(3)
2.4 Forms of Minority Stock Purchase Agreement(3)
3.1 The Company's Restated Certificate of Incorporation, as
amended(4)
3.2 The Company's By-laws(5)
4.1 Form of Specimen Certificate for the Company's Common Stock(5)
4.2 Indenture dated November 1, 1999 between State Street Bank and
Trust Company of California, N.A., as trustee, and the Company
(including form of 5 1/4% Convertible Subordinated Note due
2006)(6)
4.3 Indenture dated August 27, 2001 between State Street Bank and
Trust Company of California, N.A., as trustee, and the Company
(including form of 5.00% Convertible Subordinated Note due
September 1, 2006)(7)
4.4 Registration Rights Agreement dated as of August 22, 2001,
between the Company and Goldman, Sachs and Co.(7)
4.5 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 October 12, 1999,
between Lam Research Corporation and the Company(6)
10.3 Loan Agreement dated June 18, 2001, by and among Silicon
Valley Bank, as Servicing Agent and a Bank, and United
Overseas Bank, as a Bank, and the Company, as borrower
10.4 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property in
Fort Collins, Colorado(5)
10.5 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort
Collins, Colorado(5)
10.6 Lease, dated May 19, 1995, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(5)
10.7 Form of Indemnification Agreement(5)
10.8 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach(8)
10.9 1995 Stock Option Plan, as amended and restated through
February 7, 2001(9)*
90
10.10 1995 Non-Employee Directors' Stock Option Plan, as amended and
restated through February 7, 2001(9)*
10.11 Lease dated March 20, 2000, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(10)
10.12 Agreement and Plan of Reorganization, dated April 5, 2000,
between the Company, Noah Holdings, Inc. and AE Cal Merger
Sub, Inc.(11)
10.13 Escrow and Indemnity Agreement, dated April 5, 2000, between
the Company, the former stockholders of Noah Holdings, Inc.
and Commercial Escrow Services, Inc.(11)
10.14 Agreement and Plan of Reorganization, dated July 21, 2000, by
and among the Company, Mercury Merger Corporation, a wholly
owned subsidiary of the Company, Sekidenko, Inc. and Dr. Ray
R. Dils.(12)
10.15 Agreement and Plan of Reorganization, dated July 6, 2000,
amended and restated as of October 20, 2000, by and among the
Company, Flow Acquisition Corporation, a wholly owned
subsidiary of the Company, and Engineering Measurements
Company(13)
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP, Independent Accountants
24.1 Power of Attorney (included on the signature pages to this
Annual Report on Form 10-K)
99.1 Assurance Letter pursuant to SEC Release Nos. 33-8070;
34-45590; 35-27503; 39-2395; IA-2018; IC-25464; FR-62; File
No. S7-03-02 (filed herewith).
- -------------------
(1) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1998 (File No.
000-26966), filed August 7, 1998.
(2) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-72748), filed February
8, 2002, as amended.
(3) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 000-26966), filed February 1, 2002.
(4) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No.
000-26966), filed August 13, 2001.
(5) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September
20, 1995, as amended.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File No.
000-26966), filed March 20, 2000.
(7) Incorporated by reference to the Company's Current Report on
Form 8-K (File No. 000-26966), filed September 10, 2001.
(8) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No.
000-26966), filed March 24, 1999.
(9) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001 (File No.
000-26966), filed May 9, 2001.
91
(10) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 2000 (File No.
000-26966), filed March 27, 2001.
(11) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-37378), filed May 19,
2000.
(12) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000 (File No.
000-26966), filed August 4, 2000.
(13) Incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2000 (File
No. 000-26966), filed October 30, 2000.
* Compensation Plan
+ Confidential treatment has been granted for portions of this
agreement.
92