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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED).
For the fiscal year ended December 31, 2000.
[ ] 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-0846841
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1625 SHARP POINT DRIVE, FORT COLLINS, CO 80525
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (970) 221-4670
Securities registered pursuant to
Section 12(b) of the Act:
NONE
Securities registered pursuant to
section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's
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knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ].
As of March 12, 2001, there were 31,555,604 shares of the Registrant's Common
Stock outstanding and the aggregate market value of such stock held by
non-affiliates of the Registrant was $409,060,275.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the annual meeting of
stockholders to be held on May 9, 2001 are incorporated by reference into Part
III of this Form 10-K.
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ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS 4
EXECUTIVE OFFICERS OF THE REGISTRANT 30
ITEM 2. PROPERTIES 31
ITEM 3. LEGAL PROCEEDINGS 31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 32
PART II
ITEM 5. MARKET PRICE FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 33
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 34
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 35
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 48
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 50
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES 73
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 74
ITEM 11. EXECUTIVE COMPENSATION 74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 74
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 74
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 75
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PART I
ITEM 1. BUSINESS
GENERAL
We design, manufacture and support products and systems critical to
plasma-based manufacturing processes. These systems are important components in
industrial manufacturing equipment that modifies surfaces or deposits or etches
thin film layers on computer chips, CDs, flat panel displays such as computer
screens, DVDs, windows, eyeglasses, solar panels and other products. Our 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.
We market and sell our systems primarily to large, original equipment
manufacturers 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, Axcelis, Lam Research, Novellus, Singulus,
ULVAC and Unaxis.
We seek to expand our product offerings and customer base. In September
1998 we acquired the assets of Fourth State Technology, Inc. This acquisition
provided us with the capability to design and manufacture power-related process
control systems used to monitor and analyze data in thin film processes.
In October 1998 we acquired RF Power Products, Inc., which designs,
manufactures and markets radio frequency (RF) power conversion and control
systems consisting of generators and matching networks. This acquisition
expanded our existing product line of RF generators and matching networks.
Generators provide radio frequency power and matching networks provide the power
flow control to our customers' equipment. We sell these products principally to
semiconductor capital equipment manufacturers. We also sell similar systems to
capital equipment manufacturers in the flat panel display and thin film disk
media industries. We continue to explore applications for these products in
other industries.
In October 1999 we further expanded our range of product offerings when we
acquired a majority ownership in LITMAS, in which we had previously held a
minority interest. LITMAS is a manufacturer of plasma gas abatement systems and
high-density plasma sources for the semiconductor capital equipment industry.
In April 2000 we acquired Noah Holdings, Inc. ("Noah"), a privately held
manufacturer of solid state temperature control systems used to control process
temperatures during semiconductor manufacturing.
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In August 2000 we acquired Sekidenko, Inc. ("Sekidenko"), a privately held
manufacturer of optical fiber temperature measurement and control systems for
the semiconductor and related industries.
In January 2001 we acquired Engineering Measurements Company ("EMCO"), a
publicly held manufacturer of flowmeters for use in semiconductor manufacturing
and advanced product applications.
Since inception we have sold over 200,000 power conversion and control
systems. Sales to customers in the semiconductor capital equipment industry
constituted 65% of our sales in 1999 and 70% in 2000. We sell our systems
primarily through direct sales personnel to customers in the United States,
Europe and Asia, and through distributors in Australia, China, France, India,
Israel, Italy, Mexico, Singapore and Sweden. International sales represented 27%
of our sales in 1999 and 28% in 2000.
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. 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 principal executive offices are located
at 1625 Sharp Point Drive, Fort Collins, Colorado 80525, and our telephone
number is 970-221-4670.
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. In 1989 we introduced tuners used to match the
characteristics of the plasma with the RF generators. We carried the state of
the art further in 1995 when we introduced the Pinnacle series of DC systems,
which we updated in 1997 with the Pinnacle-II. In 1990 we introduced the first
switchmode RF power conversion and control systems 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 systems, which use new technology to further
reduce size and extend the frequency and power range of our RF product line. 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
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range of our systems to much higher power levels to enable them to supply
products for advanced product applications. The products in these product
families range in price from $3,100 to $175,000, with an average price of
approximately $9,500.
The acquisition of RF Power Products in 1998 expanded our product line of RF
generators and matching networks. Solid-state generators are presently available
for power requirements of up to 10 kW and are sold primarily to capital
equipment manufacturers in the semiconductor equipment, flat panel display, thin
film and analytical equipment markets. RF matching networks are systems composed
primarily of variable inductors and capacitors with application-specific
circuits that can be designed to a customer's specific power requirements. Our
RF generators and matching networks have average selling prices similar to our
DC products.
In 1998 we acquired an ion source technology which can produce a beam of
ions for surface modification and other ion beam processes. In that same year we
also sold our first products having this technology. We also developed and
introduced products using inductively coupled sources of both the solenoidal and
toroidal forms.
In 1998 we also developed sophisticated pulsing power supply specifically
for electroplating processes on semiconductor wafers, which led to the
introduction of the E'Wave product in 1999.
The acquisition of Fourth State Technology in 1998 enhanced our capability
to design and manufacture RF power-related process control systems used to
monitor and analyze data in thin film processes. This technology also is
enabling us to develop power conversion and control systems that incorporate
advanced measurement and control systems.
The acquisition of a majority interest in LITMAS in 1999 expanded our
product line to include plasma abatement systems and high-density plasma
sources. We market these products to semiconductor capital equipment
manufacturers.
The acquisition of Noah 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 in 2000 expanded our product offerings to
include optical fiber temperature measurement and control systems. We market
these products to semiconductor capital equipment manufacturers.
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.
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The following chart sets forth our principal product lines and related basic
information:
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PRODUCT POWER/CURRENT MAJOR PROCESS
PLATFORM DESCRIPTION LEVEL APPLICATIONS
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MDX Power control and 500W-80kW PVD
DIRECT conversion system o Metal sputtering
o Reactive sputtering
---------------- ------------------------ ------------------ ----------------------------
CURRENT MDX II Power control and 15kW-120kW PVD
conversion system o Metal sputtering
PRODUCTS o Reactive sputtering
---------------- ------------------------ ------------------ ----------------------------
Pinnacle(TM) Power control and 6kW-120kW PVD
Pinnacle(TM)- II conversion system o Metal sputtering
o Reactive sputtering
---------------- ------------------------ ------------------ ----------------------------
Pinnacle(TM)Plus Pulsed power control and 5kW - 10kW PVD
conversion system o Metal sputtering
o Reactive sputtering
---------------- ------------------------ ------------------ ----------------------------
Sparc-le(R) Arc management 1kW-60kW For use with MDX
accessory systems - permits precise
control of reactive
sputtering of insulating
films
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E-Chuck Electrostatic chuck <100W General wafer handling in
power system semiconductor PVD, CVD,
and etch applications
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Astral(TM) Pulsed DC power system 20kW, 120kW, 200kW PVD
HIGH-POWER o Reactive sputtering
---------------- ------------------------ ------------------ ----------------------------
Crystal(TM) Mid-frequency power 180kW PVD
PRODUCTS control and conversion CVD
system Reactive sputtering
Dual magnetron sputtering
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PE and PE-II Low frequency 1.25kW-30kW CVD
LOW AND MID- power control and PVD
conversion system o Reactive sputtering
FREQUENCY Surface modification
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PRODUCTS PD Mid-frequency 1.25kW-8kW CVD
power control and PVD
conversion system o Reactive sputtering
Surface modification
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LF Low frequency 500W-1kW Etch
power control and PVD
conversion system
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HFV Power control and 3kW-8kW PVD
conversion system Etch
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RADIO RFX Power control and 600W General R&D
conversion system
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FREQUENCY RFG Power control and 600W-5.5kW Etch
conversion system CVD
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PRODUCTS RFXII Power control and 600W-5.5kW Etch
conversion system CVD
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APEX(TM) Power control and 1kW-10kW Etch
conversion system CVD
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AZX, VZX, Tuner 100W-5kW Impedance matching
SwitchMatch(TM) network
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RF Power control and 500W-5kW Etch
conversion system CVD
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Atlas(TM) Power control and 1.5kW-5kW Etch
conversion system
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Mercury(TM) Tuner 500W-10kW Impedance matching network
---------------- ------------------------ ------------------ ----------------------------
FTMS(TM) Tuner 2kW-5kW Impedance matching network
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12cm multi-cell Round ion beam source 1.5kW-2.0kW Magnetic media
ION BEAM SOURCES ion beam source DLC deposition
Optical ion assist
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PRODUCTS Linear ion beam 38cm, 65cm, 94cm 1.0kW-3.0kW Architectural glass
sources Flat panel displays -
pre-cleaning
Ion assist deposition
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Inductively 3kW linear ICP 3kW Enhanced reactive
coupled plasma deposition
source (ICP - 3) Low energy CVD
Low energy cleaning
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RAPID-F Toroidal fluorine ion 8 kW Chamber cleaning
RAPID-O source 8 kW Reactive gas sputtering
Torodal oxygen ion source
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PRODUCT POWER/CURRENT MAJOR PROCESS
PLATFORM DESCRIPTION LEVEL APPLICATIONS
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Gen-Cal(TM) RF power measurement 50W-3kW Generator diagnostic tool
---------------- ------------------------ ------------------ ----------------------------
OTHER RF-EP RF probe 50W-5kW End-point detection system
---------------- ------------------------ ------------------ ----------------------------
Z-Scan(TM) RF probe 50W-5kW Impedance measurement tool
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PRODUCTS RF-MS RF metrology system 5W-5kW Plasma diagnostic tool
---------------- ------------------------ ------------------ ----------------------------
ID Ion-beam conversion 500W-5kW Ion-beam deposition
and control system Ion implantation
Ion-beam etching/milling
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E'Wave(TM) Bipolar electroplating 400W-8kW Electroplating copper onto
a wafer
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Virtual Front Power system control N/A Computer control of power
Panel systems
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NPSA Products Low voltage, high <1 kW Powering of next
current power regulators generation microprocessors
and ASICs
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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, 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, including its updated version, the Pinnacle(TM) -II, which we introduced
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 the
lowest ever achieved in a switchmode power supply, and 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
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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.
HIGH-POWER PRODUCTS
These products are designed for use in heavy industrial processes such as
architectural glass and other large area coating applications.
Astral(TM) Products. The Astral products, made in 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. 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.
LOW AND MID-FREQUENCY PRODUCTS
The PE and PD 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, CVD and industrial surface modification applications, including
dual cathode sputtering and printed circuit board de-smearing. The PE series
systems range in frequency from 25kHz to 100kHz. The PE-II systems are water
cooled and produce 10kW at 40kHz. The PD series of mid-frequency power
conversion and control systems, introduced in 1990, represented significant
technological advancements by applying switchmode techniques to higher
frequencies. The water-cooled PD systems are used primarily in semiconductor
etch and CVD applications. The PD series range in frequency from 275kHz to
400kHz. Both the PE and PD series systems have cost-effective single-stage power
generation, and include systems with pulsed power technology.
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LF Generators. The LF low-frequency generators were introduced to us as a
result of the acquisition of RF Power Products. The LF-5 is a 500W unit and the
LF-10 is a 1kW unit. Both of these units are variable-frequency,
microprocessor-controlled systems. With a frequency range extending from 50kHz
to 460kHz, these generators are a good complement to the PD and PE series.
RADIO FREQUENCY PRODUCTS
HFV power generator. The HFV power generator produces 3, 5, or 8kW of power
at a variable frequency of about 2MHz for powering inductively coupled plasma
(ICP) systems. It is water cooled and ultra compact, providing up to 8kW of
power in a 5-1/4 inch rack mount enclosure 20-1/4 inches deep, thereby
representing the highest power density in the industry at these frequencies.
The RF Series. The RFX system is a 13.56MHz, 600W, air-cooled platform
introduced in 1985. This low-power system is used primarily in research and
development applications. The RFG and RFXII, introduced in the early 1990s, are
water-cooled power conversion and control systems utilizing a hybrid switchmode
technology. The RFG and RFXII systems operate at frequencies ranging from 4MHz
to 13.56MHz. These systems were the first fully switchmode RF designs. These RF
systems are most commonly used in semiconductor processes, including RF
sputtering, plasma etching/deposition and reactive ion etching applications.
During 1998 we developed the APEX series of power control and conversion
systems, which have the highest power density ever produced at radio
frequencies. One APEX unit produces 10kW at 13.56MHz in a 5-1/4 inch rack mount
enclosure. Another APEX unit produces 5.5kW in a 5x7.5x15 inch enclosure, and
still another produces 3kW in the same enclosure but includes a switchable
matching network and a voltage-current (V-I) probe measurement system integrated
in the package. The APEX line also includes power conversion systems that
produce 1, 2, 4 and 8kW at 27.12MHz.
The RF-5, RF-10, RF-20, RF-30 and RF-50 units that we produce generate
power between 500W and 5kW, and are selectively available with frequencies from
2 MHz to 40 MHz. They use simple 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
from 1.5kW to 5kW at nominal center frequencies of 12.56, 13.56 and 27.12 MHz.
These units complement our new APEX series. For several applications, the
ability to sweep the frequency about the nominal center frequency provides
significant advantages to the customer. Now the customer can choose to have
either the compact package of the fixed-frequency APEX or, where required, the
frequency agility of the Atlas systems.
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The AZX Series. The AZX series tuners are RF matching networks designed as
accessories to match the complex electrical characteristics of a plasma to the
requirements of our RF series of power conversion and control systems. AZX
tuners, introduced in 1989, are also sold separately for incorporation into
other vendors' power conversion and control systems. The AZX tuners typically
operate at a 13.56MHz frequency range. The VZX series tuners, introduced in
1998, are digital automatic impedance matching networks which utilize a
predictive algorithm to provide tuning speeds up to three times faster than the
older AZX series. SwitchMatch(TM) networks, also introduced by us in 1998, are
selectable fixed matching units, which we offer both as part of APEX systems and
as standalone products.
The AM and Mercury Matching Network Series. The mechanical matching networks
are available in power handling capabilities up to 30kW. These matching networks
are extremely compact, utilizing two ceramic envelope vacuum variable
capacitors. The modular construction of the matching networks allows rapid
customization without the delays usually encountered in custom design. Since
most applications require custom refinements for optimum performance, this
feature has benefited us greatly in achieving numerous design wins. In 1998, we
introduced the FTMS (Frequency Transformation Matching System), which is a solid
state matching network with no moving parts. We use this system in conjunction
with our frequency agile Atlas generators. The FTMS is available in power levels
up to 5kW.
ION BEAM SOURCES
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.
OTHER PRODUCTS
The RF-EP End-point Detection System. The RF-EP reduces length of time to
end-point on CVD and etch chambers in comparison to optical detection. This
system uses one of three signals (voltage, current or phase) to precisely and
accurately detect end-point. The RF-EP also greatly reduces the level of
greenhouse emissions by consuming less process gas.
The Z-Scan(TM) Voltage-Current (V-I) Probe. This unit, first delivered in
1998, replaces the RFZ impedance probe introduced in 1993. Z-Scan measures the
RF
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properties of a plasma process and provides condensed information through its
Z-Ware software. The sensing technology incorporated in Z-Scan probe allows
accurate, real-time measurement of power, voltage, current and impedance levels
at both fundamental and harmonic frequencies, under actual powered process
conditions. Such measurements not only help our customers design their process
systems, but are also used as sensitive detectors of process conditions,
including etch endpoint.
The RF-MS Diagnostic System. The RF-MS simultaneously performs endpoint and
excursion detection for multiple CVD chambers. Additionally, the system's
software monitors the long-term transients in the process tool performance such
as wet clean and transition in the film stress. The RF-MS has demonstrated
significant cost savings through improved wafer yields, reduced particle
contamination and higher throughput.
The ID Series. The ID power conversion and control systems, introduced in
1981, were the first products 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.
The Virtual Front End. This product enables one to operate or control the
power system from a laptop or desktop PC. It has a graphing capability, which
permits real-time monitoring of the plasma characteristics and the power
delivered to it.
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). We
sold the first of such products in 1999. Our technology permits smaller, less
expensive power regulators, which are stable under high rates of change of
current draw, without the use of expensive 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 65%
of our sales 1999
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and 70% in 2000. 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:
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 that use our power conversion and control
systems enables the production of integrated circuits with reduced feature sizes
and increased speed and performance. We also sell plasma abatement systems and
high-density plasma sources through LITMAS, solid state temperature control
systems through Noah, and optical fiber thermometers through Sekidenko. 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, computer hard disks,
including both media and thin film heads, CD-ROMs and DVDs. 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
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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. We also sell
low-wattage power supplies to OEMs in the telecommunications, non-impact
printing and laser markets through Tower.
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 Non-impact printing
Photo-resist stripping Optical coatings
Physical vapor deposition (PVD) Photovoltaics
Superconductors
Telecommunications
CUSTOMERS
We have sold our systems worldwide to more than 100 OEMs and directly to
more than 500 end-users. Since inception we have sold more than 200,000 power
conversion and control systems. Our ten largest customers accounted for 60% of
our total sales in 1998, 67% in 1999 and 72% in 2000. 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:
Alcatel Comptech Novellus
Applied Materials Optical Coating Laboratory
Axcelis Singulus
First Light Technology Sony
Fujitsu Texas Instruments
Hewlett-Packard Tokyo Electron, Ltd.
IBM ULVAC
Intevac Unaxis
Lam Research Veeco
Mattson Technologies Verteq
Micron Technology VideoJet International
Motorola
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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 regional sales offices in
Voorhees, New Jersey; Austin, Texas; Milpitas, 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; and Shenzhen, China. These offices have primary responsibility
for sales in their respective markets. We also have distributors in Australia,
China, France, India, Israel, Italy, Mexico, Singapore and Sweden. Noah, located
in San Jose, California, and Sekidenko, located in Vancouver, Washington, sell
through direct sales personnel. Our United States operations also sell through
manufacturers' representatives. EMCO, located in Longmont, Colorado, sells
through direct sales personnel and manufacturers' representatives.
Sales outside the United States represented approximately 27% of our total
sales during 1998, 27% in 1999 and 28% in 2000. 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 we and a number
of our significant non-Japanese customers have established operations in Japan,
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; Austin, Texas; Voorhees, New Jersey; Tokyo, Japan;
Filderstadt, Germany; Bundang, South Korea; Taipei Hsien, Taiwan; and Shenzhen,
China. Noah maintains a customer service office in San Jose, California.
Sekidenko maintains a customer service office in Vancouver, Washington. EMCO has
a repair facility in Longmont, Colorado.
We offer warranty coverage for our systems for periods ranging from 12 to
30 months after shipment against defects in design, materials and workmanship.
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MANUFACTURING
We conduct the majority of our manufacturing at facilities in Fort Collins,
Colorado, and Voorhees, New Jersey. We also conduct manufacturing for one
customer in Austin, Texas. Noah conducts manufacturing at its facility in San
Jose, California, Sekidenko conducts manufacturing at its facility in Vancouver,
Washington, and EMCO conducts manufacturing at its facility in Longmont,
Colorado. 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
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 twenty-seven United States patents and four
foreign patents covering various aspects of our products, and have over fifty
patent applications pending in the United States, Europe and Japan. Our
intellectual property is not protected by patents 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 from time to time may 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
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dependent on our intellectual property but may not be able to protect it
adequately" and "--Intellectual property litigation could be 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 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 Astec America, Inc.; Applied
Science and Technology (ASTeX), a subsidiary of MKS Instruments, Inc.;
Huettinger; Shindingen; Kyosan; Comdel; and Daihen. 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 power conversion and control 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 $24.4 million in 1998, $28.3 million
in
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1999 and $37.0 million in 2000. Such expenses represented 18.2% of our total
sales in 1998, 14.0% in 1999 and 10.2% in 2000. 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, 2000, we had a total of 1,498 employees, of whom 1,343
are full-time continuous employees. There is no union representation of our
employees, and we 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.
EFFECTS OF ENVIRONMENTAL LAWS
We are subject to federal, state and local environmental laws and
regulations. We believe we are in material compliance with all such laws and
regulations.
CAUTIONARY STATEMENTS - RISK FACTORS
This Form 10-K contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, and Section 21E of the Securities Exchange Act of 1934. 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 without limitation
the risks described in this section. We do not have any obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, WHICH
COULD NEGATIVELY IMPACT OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly and we expect
them to continue to experience significant fluctuations. Downward fluctuations
in our quarterly results have historically 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:
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o changes or slowdowns in economic conditions in the semiconductor
and semiconductor capital equipment industries and other
industries in which our customers operate;
o the timing and nature of orders placed by major customers;
o changes in customers' inventory management practices;
o customer cancellations of previously placed orders and shipment
delays;
o pricing competition from our competitors;
o component shortages resulting in manufacturing delays;
o the introduction of new products by us or our competitors;
o costs incurred by responding to specific feature requests by
customers; and
o 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.
In the past, we have incurred charges and costs related to events such as
acquisitions, restructuring and storm damages. 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 the convertible notes may decrease.
THE MARKET PRICE OF OUR COMMON STOCK IS HIGHLY VOLATILE, WHICH COULD LEAD TO
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 February 28, 2001, 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 likely will continue to be subject to
fluctuations. Many factors could cause the trading price of our common stock to
fluctuate substantially, including the following:
o future announcements concerning our business, our technology, our
customers or competitors;
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o variations in our operating results;
o introduction of new products or changes in product pricing
policies by us, our competitors or our customers;
o changes in earnings estimates by securities analysts or
announcements of operating results that are not aligned with the
expectations of analysts and investors;
o the economic and competitive conditions in the industries in
which our customers operate; and
o 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 has often
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.
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. During downturns, some of our customers have
drastically reduced their orders to us and have implemented substantial cost
reduction programs. Sales to customers in the semiconductor capital equipment
industry accounted for 52% of our total sales in 1998, 65% in 1999 and 70% in
2000. We expect that we will continue to depend significantly on the
semiconductor and semiconductor capital equipment industries for the foreseeable
future.
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.
A SIGNIFICANT PORTION OF OUR SALES ARE CONCENTRATED AMONG A FEW CUSTOMERS.
Our ten largest customers accounted for 60% of our total sales in 1998, 67%
in 1999 and 72% in 2000. Our largest customer accounted for 24% of our total
sales in 1998, 34% in 1999 and 39% in 2000. The loss of any of these customers
or a material reduction in
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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 Astec America, Inc.; Applied
Science and Technology (ASTeX), a subsidiary of MKS Instruments, Inc.;
Huettinger; Shindingen; Kyosan; Comdel; 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 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 such pressures could
result in a loss of customers or orders.
WE MAY NOT BE ABLE TO INTEGRATE OUR ACQUISITIONS.
We have experienced significant growth through acquisitions and continue to
actively pursue acquisition opportunities. Prior to 1997, we did not make any
significant acquisitions. In the three years from 1997 through 1999, we acquired
five companies. From January 2000 through February 2001, we acquired three
companies and entered into a strategic partnership arrangement with one other
company. Many of our acquisitions to date have been in markets in which we have
limited experience. We might not be able to compete successfully in these
markets or operate the acquired businesses efficiently.
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. Further, the increased pace of our
acquisitions has required us to try to integrate multiple acquisitions
simultaneously. This has exponentially increased the demands placed on our
management team and has decreased the time and effort that management can give
to integrating each acquisition, while continuing to manage our existing
business.
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Future acquisitions could place additional strain on our operations and
management. Our ability to manage future acquisitions will depend on our success
in:
o evaluating new markets and investments;
o monitoring operations of acquired companies;
o controlling costs and unanticipated expenses of acquired
companies;
o integrating acquired operations and personnel;
o retaining existing customers and strategic partners of acquired
companies;
o maintaining effective quality controls of acquired companies; and
o expanding our internal management, technical and accounting
systems.
Also, in connection with future acquisitions we may issue equity
securities, which could be dilutive, incur debt, recognize substantial one-time
expenses or create goodwill or other intangible assets that could result in
significant amortization expense.
WE ARE GROWING AND MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY.
We have been experiencing a period of growth and expansion. This growth and
expansion is placing significant demands on our management and our operating
systems. We need to continue to improve and expand our management, operational
and financial systems, procedures and controls, including accounting and other
internal management systems, quality control, delivery and service capabilities.
In order to manage our growth, we may also need to spend significant
amounts of cash to:
o fund increases in expenses;
o acquire additional facilities and equipment;
o take advantage of unanticipated opportunities, such as major
strategic alliances or other special marketing opportunities,
acquisitions of complementary businesses or assets, or the
development of new products; or
o otherwise respond to unanticipated developments or competitive
pressures.
If we do not have enough cash on hand, cash generated from our operations
or cash available under our credit facility to meet these cash requirements, we
will need to seek
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alternative sources of financing to carry out our growth and operating
strategies. We may not be able to raise needed cash on terms acceptable to us,
or at all. Financings may be on terms that are dilutive or potentially dilutive.
If alternative sources of financing are required but are insufficient or
unavailable, we will be required to modify our growth and operating plans to the
extent of available funding.
SHORTAGES OF COMPONENTS NECESSARY FOR OUR PRODUCT ASSEMBLY CAN DELAY OUR
SHIPMENTS.
Manufacturing our power conversion and control systems 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 SOURCE 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:
o the potential inability to obtain an adequate supply of required
components;
o reduced control over pricing and timing of delivery of
components; and
o 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.
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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 certain foreign countries might not afford our
intellectual property the same protection as do the laws of the United States.
For example, our intellectual property is not protected by patents 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. Our inability or failure to obtain adequate patent protection in
a particular country could have a material adverse effect on 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 COULD BE 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. 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. Litigation has resulted, and in the future may
result, in substantial costs and diversion of our efforts. Moreover, 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. Any of these events could have a
material adverse effect on our business, financial condition and results of
operations. See Item 3 -- Legal Proceedings.
WE MUST CONSTANTLY DEVELOP AND SELL NEW SYSTEMS IN ORDER TO KEEP UP WITH RAPID
TECHNOLOGICAL CHANGES.
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 timely
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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.
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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, Colorado and in Voorhees, New Jersey. We also conduct manufacturing in
Austin, Texas; San Jose, California; Vancouver, Washington; and Longmont,
Colorado. Each facility generally manufactures different systems and, therefore,
are 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 MIGHT NOT BE ABLE TO COMPETE SUCCESSFULLY IN INTERNATIONAL MARKETS OR TO 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. We maintain
sales and service offices in Germany, Japan, South Korea, the United Kingdom,
Taiwan and China.
Sales to customers outside the United States accounted for 27% of our total
sales in 1998, 27% in 1999 and 28% in 2000, and we expect international sales to
continue to represent a significant portion of our future sales. International
sales are subject to various risks, including:
o currency fluctuations;
o governmental controls;
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o political and economic instability;
o barriers to entry;
o trade restrictions;
o changes in tariffs and taxes; and
o longer payment cycles.
In particular, the Japanese market has historically been difficult for
non-Japanese companies, including us, to penetrate.
Providing support services for our systems on a worldwide basis also is
subject to various risks, including:
o our ability to hire qualified support personnel;
o maintenance of our standard level of support; and
o differences in local customs and practices.
Our international activities are also subject to the difficulties of
managing overseas distributors and representatives and managing foreign
subsidiary operations.
We cannot assure you that we will be successful in addressing any of these
risks.
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 risks as a result of
our international operations. We have experienced fluctuations in foreign
currency exchange rates, particularly against the Japanese yen. We entered into
various forward foreign exchange contracts as a hedge against currency
fluctuations in the yen. We have not employed hedging techniques with respect to
any other currencies. Our current or any future hedging techniques might not
protect us adequately against substantial currency fluctuations.
WE MUST MAINTAIN MINIMUM LEVELS OF CUSTOMIZED INVENTORY TO SUPPORT CERTAIN
CUSTOMER DELIVERY REQUIREMENTS.
We must keep a relatively large number and variety of customized systems in
our inventory to meet client delivery requirements because a portion of our
business involves the just-in-time shipment of systems. 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
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and results of operations.
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 power conversion and control systems. We must ensure that our systems
meet certain safety and emissions standards, 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 certain systems, make capital
expenditures or incur substantial costs. If we do not comply with current or
future regulations, directives and standards:
o we could be subject to fines;
o our production could be suspended; or
o we could be prohibited from offering particular systems in
specified markets.
WE MAY INVEST IN START-UP COMPANIES AND COULD LOSE OUR ENTIRE INVESTMENT.
We have a majority interest in a start-up company and have invested in
other 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.
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 such leases for 2000
totaled approximately $1.6 million. We also lease a condominium in Breckenridge,
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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
rental payments under the condominium lease for 2000 totaled approximately
$36,000. As of March 12, 2001, Mr. Schatz owned approximately 35.9% of our
common stock, and Mr. Backman owned approximately 3.8% of our common stock.
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 41.1% of our
common stock outstanding as of March 12, 2001. Douglas S. Schatz, our Chairman,
President and Chief Executive Officer, owned approximately 35.9% of our common
stock outstanding as of March 12, 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 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.
ANTI-TAKEOVER PROVISIONS LIMIT THE ABILITY OF A PERSON OR ENTITY TO ACQUIRE
CONTROL OF US.
Our certificate of incorporation and bylaws include provisions which:
o 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;
o limit the right of our stockholders to call a special meeting of
stockholders; and
o impose procedural and other requirements that could make it
difficult for stockholders to effect certain 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.
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EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and their ages as of March 20, 2001 are as follows:
NAME AGE POSITION
---- --- --------
Douglas S. Schatz 55 Chief Executive Officer, President and Chairman of the Board
Richard P. Beck 67 Senior Vice President, Chief Financial Officer and Director
James F. Gentilcore 48 Executive Vice President
Joseph R. Monkowski, Ph.D. 47 Senior Vice President, Business Development
William A. Ruff 50 President, Advanced Energy Voorhees, Inc.
Richard A. Scholl 62 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. Mr. Schatz also co-founded Energy
Research Associates, Inc., a designer of custom power supplies, and served as
its Vice President of Engineering from 1977 through 1980. Prior to co-founding
Energy Research Associates, Mr. Schatz held various engineering and management
positions at Applied Materials. He is also a director of Advanced Power
Technology, Inc., a publicly held company.
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. From 1987 to 1992 Mr. Beck served as
Executive Vice President and Chief Financial Officer of Cimage Corporation, a
computer software company. Mr. Beck is a director of Applied Films Corporation,
TTM Technologies and Photon Dynamics, Inc., all publicly held companies.
JAMES F. GENTILCORE 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, one of our wholly owned subsidiaries. In February
2001 he became Executive Vice President. From 1990 to 1996 he served with MKS
Instruments and held the position of Vice President, Marketing.
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,
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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. and in March 2001 became President, Advanced
Energy Voorhees, Inc. Prior to joining us, Mr. Ruff held various engineering
positions in other technology companies.
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.
ITEM 2. PROPERTIES
Our headquarters and main manufacturing facility are located in Fort
Collins, Colorado, in approximately 297,000 square feet of leased space.
Additional manufacturing and office facilities are located in Voorhees, New
Jersey, in approximately 78,000 square feet of leased space; Longmont, Colorado,
in approximately 45,000 square feet of owned space; Austin, Texas, in
approximately 20,000 square feet of leased space; San Jose, California, in
approximately 20,000 square feet of leased space; Vancouver, Washington, in
approximately 20,000 square feet of leased space; and Matthews, North Carolina,
in approximately 4,000 square feet of leased space. To serve the needs of our
customers, we also maintain regional offices in Milpitas, California; Concord,
Massachusetts; Tokyo, Japan; Filderstadt, Germany; Bicester, England; Bundang,
South Korea; Taipei Hsien, Taiwan; and Shenzhen, China. We consider the above
facilities suitable and adequate to meet our 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.
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
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subsidiary of MKS Instruments, Inc., alleges that, by manufacturing and selling
reactive gas generators, we are infringing upon its patent. Applied Science and
Technology seeks injunctive relief and damages in an unspecified amount. The
action is in the discovery stage. We have reviewed the allegations with our
patent counsel and believe we have meritorious defenses to the claim. We have
denied the allegation of infringement and will defend against the claim
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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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 12, 2001, the number of common stockholders of
record was 962, and the last sale price on that day was $24 7/16.
Below is a table showing the range of high and low bid quotations for the
common stock as quoted (without retail markup or markdown and without
commissions) on the Nasdaq National Market; they do not necessarily represent
actual transactions:
High Bid Low Bid
-------- -------
1999 Fiscal Year
First Quarter 30 1/2 17 7/8
Second Quarter 40 3/4 23 1/2
Third Quarter 45 30
Fourth Quarter 49 7/8 30 3/8
2000 Fiscal Year
First Quarter 77 7/16 42 15/16
Second Quarter 72 7/8 35 1/4
Third Quarter 63 32 1/8
Fourth Quarter 35 1/2 15
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.
We issued 12,791 shares of common stock to Curtis Camus, an employee, as of
October 1, 1999. Mr. Camus was a founder of LITMAS, a privately held ion source
company in which we now hold a majority interest. The shares were issued to Mr.
Camus as partial consideration for his shares of LITMAS and were valued at
$385,000. We did not use any underwriters in connection with the sale of shares
to Mr. Camus. We did not register the sale with the Securities and Exchange
Commission, as we relied on the exemption from registration provided by Rule 506
under the Securities Act of 1933.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by
reference to, and should be read with, our 2000 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, 2000, 1999 and 1998, and the related consolidated balance sheet
data as of and for the years ended December 31, 2000 and 1999, 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, 1997 and 1996, and the related consolidated balance sheet data as of
December 31, 1998, 1997 and 1996, were derived from audited consolidated
financial statements not included in this Form 10-K.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales ..................................... $ 359,782 $ 202,849 $ 134,019 $ 188,339 $ 138,074
Gross profit .............................. 176,453 92,202 40,019 71,656 49,706
Total operating expenses .................. 91,253 62,876 54,767 49,889 39,448
Income (loss) from operations ............. 85,200 29,326 (14,748) 21,767 10,258
Net income (loss) ......................... $ 68,034 $ 19,066 $ (11,025) $ 12,931 $ 6,128
========== ========== ========== ========== ==========
Diluted earnings (loss) per share ......... $ 2.10 $ 0.62 $ (0.38) $ 0.48 $ 0.23
Diluted weighted-average common shares
outstanding ............................ 32,425 30,934 29,007 27,057 26,493
DECEMBER 31,
------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................ $189,527 $207,483 $ 28,714 $ 32,551 $12,455
Working capital............................ 279,626 257,484 63,225 77,188 43,365
Total assets............................... 365,835 325,433 107,736 136,545 72,517
Total debt................................. 83,980 139,012 1,603 8,784 5,037
Stockholders' equity....................... 238,798 156,989 92,163 99,969 56,495
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements, within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. For example, statements relating to 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:
o the significant fluctuations in our quarterly operating results;
o the volatility of the semiconductor and semiconductor capital
equipment industries;
o timing and success of integration of recent and potential future
acquisitions; and
o supply constraints and technological changes.
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."
OVERVIEW
We design, manufacture and support products and systems critical to
plasma-based manufacturing processes. These systems are important components of
industrial manufacturing equipment that modifies surfaces or deposits or etches
thin film layers on computer chips, CDs, flat panel displays such as computer
screens, DVDs, windows, eyeglasses and other products. We market and sell our
systems primarily to large global OEMs of semiconductor, data storage and flat
panel display manufacturing equipment and for manufacturers of other products in
advanced product applications markets. We recognize revenues upon shipment of
our systems.
The semiconductor capital equipment industry accounted for approximately
52% of our sales in 1998, 65% in 1999 and 70% in 2000. We have been successful
in achieving a number of design wins each year, which have resulted in our
obtaining new customers and solidifying relationships with our existing
customers. We believe our ability to continue to achieve design wins with
existing and potential customers will be critical to our future success.
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We continue to seek to expand our product offerings and customer base
through internal development and acquisitions. We took a step towards achieving
further market penetration in September 1998 when we acquired the assets of
Fourth State Technology, Inc. This acquisition enhanced our capability to design
and manufacture RF power-related process control systems used to monitor and
analyze data in thin film etch processes.
In October 1998 we acquired RF Power Products, Inc. ("RFPP"), which
designs, manufactures and supports RF power conversion and control systems,
consisting of generators and matching networks. We believe our ability to offer
an expanded line of RF systems to our existing customer base has strengthened
our relationships. We sell these products principally to semiconductor capital
equipment manufacturers. We also sell similar systems to capital equipment
manufacturers in the flat panel display and thin film data storage industries.
In April 1999 we changed the name of RFPP to Advanced Energy Voorhees, Inc. and
conduct business under that name.
In October 1999 we acquired a majority interest in LITMAS, a company that
designs and manufactures plasma gas abatement systems and high-density plasma
sources.
In November 1999 we completed two underwritten public offerings, one for
$135 million of convertible subordinated notes, 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 December 1999 we completed formation of our wholly owned sales and
service subsidiary in Taiwan.
In March 2000 we formed a strategic partnership with Symphony Systems, a
supplier of network-based applications and open-architecture software solutions
to the semiconductor and semiconductor capital equipment industries, to deliver
an advanced network-based infrastructure to our customers.
In April 2000 we acquired Noah Holdings, Inc. ("Noah"), which manufactures
solid state temperature control systems to control process temperatures during
semiconductor manufacturing.
In June 2000 we signed an exclusive distribution agreement with Berkeley
Process Control, Inc., a manufacturer of integrated motion and machine control
technologies.
In July 2000 we entered into an agreement to acquire EMCO, which
manufactures electronic and electromechanical precision instruments for
measuring and controlling the flow of liquids, steam and gases. EMCO became a
wholly owned subsidiary of Advanced Energy in January 2001.
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In August 2000 we acquired Sekidenko, Inc. ("Sekidenko"), which supplies
optical fiber thermometers to the semiconductor capital equipment industry.
In October 2000 we opened a representative office in Shenzhen, China, to be
responsible for market development, sales and technical support in China.
In October and November 2000 we repurchased $53.4 million principal amount
of our convertible subordinated notes on the open market, leaving us with $81.6
million of such long-term debt outstanding. These purchases resulted in an
after-tax net extraordinary gain of $7.6 million.
In November 2000 we entered into a strategic investment agreement with
Dressler HF Technik GmbH, a privately held supplier of RF power solutions for
plasma-based applications located in Germany.
RESULTS OF OPERATIONS
The following table summarizes certain data as a percentage of sales
extracted from our statement of operations:
YEARS ENDED DECEMBER 31,
2000 1999 1998
------ ------ ------
Sales ............................................... 100.0% 100.0% 100.0%
Cost of sales ....................................... 51.0 54.5 70.1
------ ------ ------
Gross margin ........................................ 49.0 45.5 29.9
------ ------ ------
Operating expenses:
Research and development .......................... 10.2 14.0 18.2
Sales and marketing ............................... 6.7 9.0 10.9
General and administrative ........................ 6.8 8.0 9.8
Restructuring charges ............................. 0.3 -- 0.7
Merger costs ...................................... 1.3 -- 2.1
Storm recoveries .................................. -- -- (0.8)
------ ------ ------
Total operating expenses ............................ 25.3 31.0 40.9
------ ------ ------
Income (loss) from operations ....................... 23.7 14.5 (11.0)
Other income (expense) .............................. 2.1 0.7 0.1
------ ------ ------
Net income (loss) before income taxes, minority
interest and extraordinary item .................... 25.8 15.2 (10.9)
Provision (benefit) for income taxes ................ 9.0 5.8
(2.7)
Minority interest in net income ..................... 0.0 0.0 --
------ ------ ------
Net income (loss) before extraordinary item ......... 16.8 9.4 (8.2)
Extraordinary item (net of applicable taxes) ........ 2.1 -- --
------ ------ ------
Net income (loss) ................................... 18.9% 9.4% (8.2)%
====== ====== ======
SALES
We sell power conversion and control systems and related equipment
primarily to the semiconductor capital equipment, data storage and advanced
product applications markets in the United States, to the flat panel display and
data storage markets in Japan, and to data storage and advanced product
applications and industrial markets in Europe. We also sell spare parts and
repair services worldwide through our customer service and technical support
organization.
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Sales were $134.0 million, $202.8 million and $359.8 million in 1998, 1999
and 2000, respectively, representing an increase of 51% from 1998 to 1999 and an
increase of 77% from 1999 to 2000. Our sales increases were due to increased
unit sales.
A substantial portion of our sales growth from 1998 to 2000 was due to
higher system sales to our four largest customers, two of whom are primarily
semiconductor capital equipment OEMs, one of whom is a data storage OEM, and one
of whom is a flat panel display OEM. Our sales in 1999 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 recovery and expansion resulted
in record sales for us in 1999. It also resulted in record sales for us in 1999
to the semiconductor capital equipment industry specifically. This recovery
continued into 2000, and resulted in another record year of sales for us in
total and to the semiconductor capital equipment industry. Our experience has
shown that our sales to semiconductor capital equipment customers is dependent
on the volatility of that industry, as a result of sudden changes in
semiconductor supply and demand, and rapid technological advances in both
semiconductor devices and wafer fabrication processes.
Our sales to the semiconductor capital equipment industry in 1999 increased
88% over sales to that industry in 1998. Sales to the data storage industry
increased 26% from 1998 to 1999. Sales to the flat panel display industry
increased 92% from 1998 to 1999. Sales to advanced product applications
industries decreased 15% from 1998 to 1999.
Our sales to the semiconductor capital equipment industry in 2000 increased
92% over sales to that industry in 1999. Sales to the data storage industry
increased 13% from 1999 to 2000. Sales to the flat panel display industry
increased 162% from 1999 to 2000. Sales to advanced product applications
industries increased 32% from 1999 to 2000.
The following tables summarize annual net sales, and percentages of net
sales, by customer type for us for each of the three years in the period ended
December 31, 2000:
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YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Semiconductor capital equipment ........... $252,889 $131,395 $ 69,894
Data storage .............................. 24,751 21,823 17,300
Flat panel display ........................ 29,273 11,171 5,832
Advanced product applications ............. 37,726 28,563 33,593
Customer service technical support ........ 15,143 9,897 7,400
-------- -------- --------
$359,782 $202,849 $134,019
======== ======== ========
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Semiconductor capital equipment ........ 70% 65% 52%
Data storage ........................... 7 11 13
Flat panel display ..................... 8 5 4
Advanced product applications .......... 11 14 25
Customer service technical support ..... 4 5 6
------ ------ ------
100% 100% 100%
====== ====== ======
The following tables summarize annual net sales, and percentages of net
sales, by geographic region for us for each of the three years in the period
ended December 31, 2000:
YEARS ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
United States and Canada .... $260,596 $148,424 $ 98,042
Europe ...................... 52,893 32,344 25,986
Asia Pacific ................ 45,874 21,583 9,580
Rest of world ............... 419 498 411
-------- -------- --------
$359,782 $202,849 $134,019
======== ======== ========
YEARS ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
United States and Canada ..... 72% 73% 73%
Europe ....................... 15 16 20
Asia Pacific ................. 13 11 7
Rest of world ................ 0 0 0
------ ------ ------
100% 100% 100%
====== ====== ======
GROSS MARGIN
Our gross margins were 29.9%, 45.5% and 49.0% for 1998, 1999 and 2000,
respectively. The improvement in gross margin from 1998 to 1999 was primarily a
result of our efforts to reduce material costs, improve overhead cost controls
and a more favorable absorption of manufacturing costs which resulted from the
higher sales base. 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 sale base. We added new facilities in Fort Collins,
Colorado in the first quarter of 2001 to increase our manufacturing capacity.
Due to substantial fixed costs involved in this expansion, there could be an
adverse impact on overhead absorption in 2001 if the increased capacity is not
fully utilized.
In the fourth quarter of 1997 the semiconductor capital equipment industry
entered a sudden and severe downturn which continued through the end of 1998.
The downturn in this industry, with the resulting underutilization of capacity,
significantly impacted our financial results for 1998. The combination of the
expansion and lower sales resulted in
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an over-capacity situation for us, leading to unfavorable absorption of
manufacturing overhead and a substantially reduced margin. This underutilization
of manufacturing capacity continued to negatively impact gross margins, until
sales to the semiconductor capital equipment market recovered in 1999 and 2000.
Historically, price competition has not had a material effect on margins.
However, competitive pressures may produce a decline in average selling prices
for certain products. Any decline in average selling prices not offset by
reduced costs could result in a decline in our gross margins.
We provide warranty coverage for our systems ranging from 12 to 30 months,
and estimate the anticipated costs of repairing our systems under such
warranties based on the historical average costs of the repairs. To date, we
have not experienced significant warranty costs in excess of our recorded
reserves.
RESEARCH AND DEVELOPMENT
We invest in research and development to identify new technologies, develop
new products and improve existing product designs. Our research and development
expenses were $24.4 million, $28.3 million and $37.0 million for 1998, 1999 and
2000, respectively, representing an increase of 16% from 1998 to 1999 and 31%
from 1999 to 2000. As a percentage of sales, research and development expenses
decreased from 18.2% in 1998 to 14.0% in 1999 and decreased again to 10.2% in
2000 because of the increasingly higher sales base. The increase in expenses
from 1998 to 2000 is primarily due to increases in payroll, materials and
supplies and depreciation of equipment used for new product development.
We believe continued investment in the research and development of new
systems is critical to our ability to serve new and existing markets, and we
continue to invest in new product development during industry downturns. Since
our inception, the majority of our research and development costs generally have
been internally funded and all have been expensed as incurred.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses support domestic and international sales
and marketing activities which include personnel, trade shows, advertising, and
other marketing activities. Sales and marketing expenses were $14.6 million,
$18.3 million and $24.1 million for 1998, 1999 and 2000, respectively. This
represents a 25% increase from 1998 to 1999 and a 32% increase from 1999 to
2000. The increase in expenses from 1998 to 2000 is primarily due to higher
payroll, commissions, promotion, distribution and travel costs. We incurred
these expenses to continue to increase our sales management and product
management capabilities. As a percentage of sales, sales and marketing expenses
decreased from 10.9% in 1998 to 9.0% in 1999 and decreased again to 6.7% in 2000
because of the increasingly higher sales base, while dollars spent increased.
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GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses support our worldwide financial,
administrative, information systems and human resources functions. General and
administrative expenses were $13.1 million, $16.2 million and $24.6 million for
1998, 1999 and 2000, respectively. This represents a 24% increase from 1998 to
1999 and a 51% increase from 1999 to 2000. The increases from 1998 to 2000 are
primarily due to higher spending for payroll and purchased services. As a
percentage of sales, general and administrative expenses decreased from 9.8% in
1998 to 8.0% in 1999 and decreased again to 6.8% in 2000 because of the
increasingly higher sales base.
We continue to implement our management system software, including the
replacement of existing systems in our domestic and foreign locations. We expect
that charges related to personnel training and implementation of the new
software will continue into 2001.
RESTRUCTURING AND MERGER COSTS AND ONE-TIME CREDIT
In 1998 we recorded a $1.1 million recovery, which represented a settlement
with our insurance carrier related to storm damage to our headquarters and main
manufacturing facilities in the Fort Collins area in 1997. We had previously
recorded $2.7 million of storm damages in 1997.
In August 1998 we announced a restructuring plan to respond to the downturn
in the semiconductor capital equipment market. The plan included a reduction of
workforce of 128 people, the closure of one facility in our Fort Collins,
Colorado campus, and the abandonment of plans to construct a new manufacturing
facility in Fort Collins. We achieved other reductions in workforce at the
Voorhees facility throughout 1998. We took a charge of $1.0 million for the
restructuring in the third quarter of 1998.
On October 8, 1998, Advanced Energy acquired RF Power Products, Inc.,
accounted for as a pooling of interests transaction that involved the exchange
of four million shares of Advanced Energy common stock for the publicly-held
common stock of RFPP. As part of the business combination, we incurred $2.7
million of expense recorded in the fourth quarter of 1998 for merger costs. We
incurred additional operating expenses during 1999 relating to consolidating and
integrating operations of this business combination.
On April 6, 2000, Advanced Energy acquired Noah Holdings, Inc. in a pooling
of interests transaction that involved the exchange of approximately 687,000
shares of Advanced Energy common stock for the privately held common stock of
Noah. As part of the business combination, we incurred $2.3 million of expense
in the second quarter of 2000 for merger costs. We incurred additional operating
expenses during 2000 and expect to incur further operating expenses in 2001
relating to consolidating and integrating operations of this business
combination.
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On July 17, 2000, we announced the consolidation of our Tower, Inc.,
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.
On August 18, 2000, Advanced Energy acquired Sekidenko, Inc., 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. We
incurred additional operating expenses during 2000 and expect to incur further
operating expenses in 2001 relating to consolidating and integrating operations
of this business combination.
The $2.7 million of merger costs incurred in 1998 and $4.6 million of
merger costs incurred in 2000 cannot be capitalized, and in certain cases are
nondeductible for income tax purposes.
OTHER INCOME (EXPENSE)
Other income (expense) 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 $1.1 million, $2.2 million
and $10.7 million for the years 1998, 1999 and 2000, respectively. In 1998
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 1999 and 2000 interest income was earned primarily from the
proceeds of our offering of convertible subordinated notes and common stock
offering of November 1999.
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. Interest expense was approximately
$340,000, $1.4 million and $7.7 million for the years 1998, 1999 and 2000,
respectively. The increase of interest expense from 1998 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 gains of $369,000
and $1.5 million for 1998 and 1999, respectively, and a net foreign currency
loss of $196,000 in 2000. The increase from 1998 to 1999 was primarily due to
strengthening of the exchange rate of the Japanese yen to the U.S. dollar. The
loss in 2000 was due to a weakening of the exchange rate of the Japanese yen to
the U.S. dollar offset by the effect of our use of forward foreign exchange
contracts to hedge our exposure to fluctuations in foreign exchange rates. Since
1997 we have entered into various forward foreign exchange contracts as a hedge
against currency fluctuations in the Japanese yen. We will continue to evaluate
various policies to minimize the effect of foreign currency fluctuations.
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Eleven European countries adopted a Single European Currency (the "euro")
as of January 1, 1999 with a transition period continuing through at least
January 1, 2002. As of January 1, 1999, these eleven of the fifteen member
countries of the European Union (the "participating countries") established
fixed conversion rates between their existing sovereign currencies and the euro.
For three years after the introduction of the euro, the participating countries
can perform financial transactions in either the euro or their original local
currencies. This will result in a fixed exchange rate among the participating
countries, whereas the euro (and the participating countries' currencies in
tandem) will continue to float freely against the U.S. dollar and other
currencies of non-participating countries. A twelfth European country adopted
the euro on January 1, 2001. Although we do not expect the introduction of the
euro currency to have a significant impact on our revenues or results of
operations, we are unable to determine what effects, if any, the currency change
in Europe will have on competition and competitive pricing in the affected
regions.
Miscellaneous expense items were $939,000 and $698,000 in 1998 and 1999,
respectively. Miscellaneous income of $4.7 million in 2000 was primarily due to
a $4.8 million gain on a sale of an investment.
PROVISION (BENEFIT) FOR INCOME TAXES
The income tax benefit for 1998 was $3.5 million and represented an
effective tax rate of 24%. The income tax provision of $11.7 million for 1999
represented an effective rate of 38%. 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%. 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.
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.
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, 2000. 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.
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QUARTERS ENDED
----------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ....................................... $ 36,419 $ 45,363 $ 55,626 $ 65,441 $ 75,028 $ 85,701 $ 96,317 $102,736
Cost of sales ............................... 21,187 25,093 30,675 33,692 38,361 43,338 49,492 52,138
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ................................ 15,232 20,270 24,951 31,749 36,667 42,363 46,825 50,598
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development .................. 6,029 6,983 7,211 8,103 8,113 8,504 9,711 10,668
Sales and marketing ....................... 3,432 4,187 4,589 6,117 5,867 5,373 6,232 6,629
General and administrative ................ 3,509 3,746 4,437 4,533 5,639 5,810 6,748 6,376
Restructuring charge ...................... -- -- -- -- -- -- 1,000 --
Merger costs .............................. -- -- -- -- -- 2,333 2,250 --
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses .................... 12,970 14,916 16,237 18,753 19,619 22,020 25,941 23,673
-------- -------- -------- -------- -------- -------- -------- --------
Income from operations ...................... 2,262 5,354 8,714 12,996 17,048 20,343 20,884 26,925
Other (expense) income ...................... (80) 45 1,063 522 120 731 5,598 1.036
-------- -------- -------- -------- -------- -------- -------- --------
Net income before income taxes, minority
interest and extraordinary item ........... 2,182 5,399 9,777 13,518 17,168 21,074 26,482 27,961
Provision for income taxes .................. 951 2,109 3,687 4,994 5,947 8,023 10,195 8,076
Minority interest in net income ............. -- -- -- 69 (17) (67) (2) 106
-------- -------- -------- -------- -------- -------- -------- --------
Net income before extraordinary item ........ 1,231 3,290 6,090 8,455 11,238 13,118 16,289 19,779
Extraordinary item (net of income taxes) .... -- -- -- -- -- -- -- 7,610
-------- -------- -------- -------- -------- -------- -------- --------
Net income .................................. $ 1,231 $ 3,290 $ 6,090 $ 8,455 $ 11,238 $ 13,118 $ 16,289 $ 27,389
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share before
extraordinary item ........................ $ 0.04 $ 0.11 $ 0.20 $ 0.27 $ 0.35 $ 0.40 $ 0.50 $ 0.61
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share from
extraordinary item ........................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.22
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share .................. $ 0.04 $ 0.11 $ 0.20 $ 0.27 $ 0.35 $ 0.40 $ 0.50 $ 0.83
======== ======== ======== ======== ======== ======== ======== ========
Diluted weighted-average common
shares outstanding ........................ 30,814 30,604 30,932 31,816 32,512 32,543 32,417 34,078 *
======== ======== ======== ======== ======== ======== ======== ========
* Includes dilution from subordinated notes
QUARTERS ENDED
--------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
PERCENTAGE OF SALES:
Sales ..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................. 58.2 55.3 55.1 51.5 51.1 50.7 51.4 50.7
------- ------- ------- ------- ------- ------- ------- -------
Gross margin .............................. 41.8 44.7 44.9 48.5 48.9 49.3 48.6 49.3
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development ................ 16.6 15.4 13.0 12.4 10.8 9.9 10.0 10.4
Sales and marketing ..................... 9.4 9.2 8.2 9.3 7.9 6.2 6.5 6.5
General and administrative .............. 9.6 8.3 8.0 6.9 7.5 6.8 7.0 6.2
Restructuring charge .................... -- -- -- -- -- -- 1.0 --
Merger costs ............................ -- -- -- -- -- 2.7 2.4 --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses .................. 35.6 32.9 29.2 28.6 26.2 25.6 26.9 23.1
------- ------- ------- ------- ------- ------- ------- -------
Income from operations .................... 6.2 11.8 15.7 19.9 22.7 23.7 21.7 26.2
Other (expense) income .................... (0.2) 0.1 1.9 0.8 0.2 0.9 5.8 1.0
------- ------- ------- ------- ------- ------- ------- -------
Net income before income taxes, minority
interest and extraordinary item ......... 6.0 11.9 17.6 20.7 22.9 24.6 27.5 27.2
Provision for income taxes ................ 2.6 4.6 6.7 7.7 7.9 9.4 10.6 7.8
Minority interest in net income ........... -- -- -- 0.1 0.0 (0.1) 0.0 0.1
------- ------- ------- ------- ------- ------- ------- -------
Net income before extraordinary item ...... 3.4 7.3 10.9 12.9 15.0 15.3 16.9 19.3
Extraordinary item (net of income taxes) .. -- -- -- -- -- -- -- 7.4
------- ------- ------- ------- ------- ------- ------- -------
Net income ................................ 3.4% 7.3% 10.9% 12.9% 15.0% 15.3% 16.9% 26.7%
======= ======= ======= ======= ======= ======= ======= =======
We have experienced and expect to continue to experience significant
fluctuations in our quarterly operating results. Our expense levels are based,
in part, on expectations of future revenues. If revenue levels in a particular
quarter do not meet expectations, operating results may be adversely affected. A
variety of factors have an influence on the level of our revenues in a
particular quarter. These factors include:
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o general economic conditions;
o specific economic conditions in the semiconductor and
semiconductor capital equipment industries and other industries
in which our customers operate;
o timing and nature of orders from major customers;
o changes in customers' inventory management practices;
o customer cancellations of previously placed orders and shipment
delays;
o pricing competition from our competitors;
o costs incurred by responding to specific feature requests by
customers;
o component shortages resulting in manufacturing delays;
o exchange rate fluctuations;
o management decisions to commence or discontinue product lines;
o our ability to design, introduce and manufacture new products on
a cost effective and timely basis;
o the introduction of new products by us or our competitors;
o the timing of research and development expenditures; and
o expenses related to acquisitions, strategic alliances, and the
further development of marketing and service capabilities.
We are dependent on obtaining orders for shipment in a particular quarter
to achieve our revenue objectives for that quarter. Accordingly, it is difficult
for us to predict accurately the timing and level of sales in a particular
quarter. We anticipate quarterly fluctuations in sales to continue.
Our quarterly operating results in 1999 and 2000 reflect the changing
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 1999 and 2000. Data storage sales were flat from the first quarter of
1999 to the second quarter of 1999, then increased in the third and fourth
quarters of 1999. Data storage sales then decreased in the first and second
quarters of 2000, increased in the third quarter of 2000 and decreased in the
fourth quarter of 2000. Sales to the flat panel display industry increased each
quarter of 1999 and 2000. Sales to advanced product applications markets, though
fluctuating on a
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46
quarterly basis throughout 1999 and 2000, were higher in the second half of 1999
than in the first half of 1999, were higher again in the first half of 2000 and
again in the second half of 2000. Our revenue from all sectors is heavily
influenced by general economic conditions in each of the industries we serve.
Our gross margin improved on a quarterly basis in 1999 and reached a
relatively consistent level in each of the quarters in 2000. Gross margin
improved from 41.8% in the first quarter of 1999 to 44.7% in the second quarter
of 1999, then improved to 44.9% in the third quarter of 1999 and to 48.5% in the
fourth quarter of 1999. These increases were due to increased utilization of
capacity from the recovery in the semiconductor capital equipment industry and
from our increased efforts to lower material costs. Gross margin improved
slightly to 48.9% in the first quarter of 2000 and again to 49.3% in the second
and fourth quarters of 2000, with a slight decrease to 48.6% in the third
quarter of 2000.
Operating expenses were $13.0 million, $14.9 million, $16.2 million and
$18.8 million during the first, second, third and fourth quarters of 1999,
respectively, but declined as a percentage of sales throughout 1999 as the sales
base increased each quarter. Operating expenses excluding restructuring and
merger costs were $19.6 million, $19.7 million, $22.7 million and $23.7 million
during the first, second, third and fourth quarters of 2000, respectively.
Operating expenses, excluding restructuring and merger costs, declined as a
percentage of sales in the first and second quarters of 2000, and increased
slightly as a percentage of sales in the third and fourth quarters 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 ability to
add personnel and facilities to support the growth. Operating expenses as a
percentage of sales have generally increased during periods of flat or decreased
sales, when our infrastructure is retained to support anticipated future growth.
Other income (expense) consists primarily of interest income and expense,
foreign currency gain and loss, and miscellaneous gains, losses, income and
expense items. Interest income and expense increased significantly in the fourth
quarter of 1999, when the interest income and expense from the proceeds of the
convertible subordinated notes and the interest from the proceeds of the common
stock sale began. Interest income and expense stayed at higher levels throughout
2000. During 1999 we recorded a net foreign exchange gain of $1.5 million, which
occurred mostly in the second half of the year, and in 2000 we recorded a
$196,000 foreign currency loss. We continue to utilize forward foreign exchange
contracts in Japan to mitigate the effects of foreign currency fluctuations. The
third quarter of 2000 included a $4.8 million gain on a sale of an investment.
Our effective rate for income tax provision fluctuated throughout 1999 and
2000, varying from 31% to 44%. The fluctuations were due to certain
nondeductible expenses including merger costs, and due to initiatives we
implemented in 2000 to reduce our overall rate.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations, acquired equipment
and met our working capital requirements through borrowings under our revolving
lines of credit, long-term loans secured by property and equipment, cash flow
from operations and proceeds from underwritten public offerings of our common
stock and convertible subordinated debt.
Operating activities provided cash of $10.4 million in 1999, primarily as a
result of net income, depreciation, amortization, increases in accounts payable
and increased accruals for payroll, employee benefits and income taxes, offset
by increases in accounts receivable and inventories. Operating activities
provided cash of $22.8 million in 2000, primarily as a result of net income,
depreciation, amortization and increases in accounts payable and increased
accruals for payroll, employee benefits and income taxes, partially offset by
increases in receivables and inventories, gains on retirement of convertible
subordinated notes and a sale of an investment, and earnings from marketable
securities. We expect future receivable and inventory balances to fluctuate with
net sales. We are required to maintain higher levels of buffer stock inventory
to satisfy our customers' delivery requirements. Any increase in our inventory
levels will require the use of cash to finance the inventory.
Investing activities used cash of $176.2 million in 1999, and consisted of
a net increase in marketable securities of $168.9 million, the purchase of
property and equipment of $7.2 million and an addition to an investment of
$175,000. Investing activities provided cash of $27.4 million in 2000, and
consisted of a net decrease in marketable securities of $38.1 million, proceeds
from a sale of an investment of $4.5 million and proceeds from a sale of
equipment of $150,000, offset by purchases of property and equipment of $14.1
million, a purchase of technology of $1.0 million and an addition to an
investment of $250,000.
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 employee
stock purchase plan ("ESPP") of $4.5 million, and other proceeds of $1.7
million. Financing activities used cash of $37.5 million in 2000, and consisted
of open market repurchases of our convertible notes of $40.8 million and other
uses of $1.6 million, offset by proceeds from the exercise of employee stock
options and sale of common stock through our ESPP of $4.9 million.
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. The note purchases were
funded from our available cash. We may repurchase additional notes in the open
market from time to time, if market conditions and our financial position are
deemed favorable for such purchases.
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48
We plan to spend approximately $12.5 million in 2001 for the acquisition of
equipment, leasehold improvements and furnishings, with depreciation expense for
2001 projected to be $9.5 million. In January 2001 we used cash to purchase the
outstanding common stock of EMCO for approximately $30 million.
As of December 31, 2000, we had working capital of $279.6 million. Our
principal sources of liquidity consisted of $31.7 million of cash and cash
equivalents, $157.8 million of marketable securities, and a credit facility
consisting of a $30.0 million revolving line of credit, with options to convert
up to $10.0 million to a three-year term loan. Advances under the revolving line
of credit bear interest at either the prime rate (8.5% at February 28, 2001)
minus 1.25% or the LIBOR 360-day rate (4.88375% at February 28, 2001) plus 150
basis points, at our option. All advances under this revolving line of credit
will be due and payable April 7, 2001. As of December 31, 2000 there was an
advance outstanding of $875,000 to our Japanese subsidiary, Advanced Energy
Japan K.K. We also had another line of credit of $1.9 million of which there was
no balance outstanding at December 31, 2000. This credit line expired in January
2001.
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 2001. 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.
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, 2000, our
investments consisted primarily of commercial paper, municipal bonds and notes
and mutual funds.
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
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49
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. At December 31, 2000, we held foreign forward
exchange contracts with nominal amounts of $11.5 million and market settlement
amounts of $10.7 million for an unrealized gain position of $826,000.
OTHER RISK
We have invested in a start-up company and may in the future make
additional investments in start-up companies that develop products which we
believe may provide future benefits. The current start-up investment and any
future start-up investments will be subject to all of the risks inherent in
investing in companies that are not established.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants............................................ 51
Consolidated Balance Sheets as of December 31, 2000 and 1999............................................. 52
Consolidated Statement of Operations for the Years Ended December 31, 2000, 1999 and 1998................ 54
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998...... 55
Consolidated Statement of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998................ 56
Notes to Consolidated Financial Statements............................................................... 57
Schedule II - Valuation and Qualifying Accounts.......................................................... 73
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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,
2000 and 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Energy
Industries, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 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
consolidated financial statements taken as a whole. The schedule attached to the
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not a part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in our audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in
relation to the basic consolidated financial statements taken as a whole.
Denver, Colorado ARTHUR ANDERSEN LLP
February 12, 2001.
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52
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-----------------------
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 31,716 $ 21,043
Marketable securities - trading ...................................... 157,811 186,440
Accounts receivable --
Trade (less allowances for doubtful accounts of approximately
$784 and $639 at December 31, 2000 and 1999, respectively) ...... 72,732 44,652
Related parties ................................................... 38 32
Other ............................................................. 3,775 1,787
Notes receivable ..................................................... 2,472 --
Income tax receivable ................................................ 74 1,453
Inventories .......................................................... 45,266 28,410
Other current assets ................................................. 2,508 1,803
Deferred income tax assets, net ...................................... 7,483 3,753
---------- ----------
Total current assets ......................................... 323,875 289,373
---------- ----------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $24,427 and $18,629 at December 31,
2000 and 1999, respectively .......................................... 24,101 17,699
---------- ----------
OTHER ASSETS:
Deposits and other ................................................... 995 559
Goodwill and intangibles, net of accumulated amortization of
$6,061 and $3,860 at December 31, 2000 and 1999, respectively ..... 9,890 11,040
Investments - available for sale ..................................... 1,824 --
Demonstration and customer service equipment, net of
accumulated depreciation of $2,302 and $2,235 at December 31,
2000 and 1999, respectively ....................................... 2,889 2,352
Deferred debt issuance costs, net .................................... 2,261 4,410
---------- ----------
17,859 18,361
---------- ----------
Total assets ................................................. $ 365,835 $ 325,433
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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53
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------
2000 1999
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade ........................................ $ 18,250 $ 15,702
Accrued payroll and employee benefits ......................... 11,723 7,606
Other accrued expenses ........................................ 4,383 3,040
Customer deposits ............................................. 104 804
Accrued income taxes payable .................................. 7,923 1,266
Capital lease obligations, current portion .................... 53 100
Notes payable, current portion ................................ 1,284 2,485
Accrued interest payable on convertible subordinated notes .... 529 886
---------- ----------
Total current liabilities ............................. 44,249 31,889
---------- ----------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion ............. -- 46
Notes payable, net of current portion ......................... 1,043 1,381
Convertible subordinated notes payable ........................ 81,600 135,000
---------- ----------
82,643 136,427
---------- ----------
Total liabilities ..................................... 126,892 168,316
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST ............................................... 145 128
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $0.001 par value, 1,000 shares
authorized, none issued and outstanding .................... -- --
Common stock, $0.001 par value, 40,000 shares authorized;
31,537 and 30,981 shares issued and outstanding at
December 31, 2000 and 1999, respectively ................... 32 31
Additional paid-in capital .................................... 124,930 108,997
Retained earnings ............................................. 116,971 48,937
Deferred compensation ......................................... (1,620) (86)
Accumulated other comprehensive loss .......................... (1,515) (890)
---------- ----------
Total stockholders' equity ............................ 238,798 156,989
---------- ----------
Total liabilities and stockholders' equity ............ $ 365,835 $ 325,433
========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
SALES ........................................................................... $ 359,782 $ 202,849 $ 134,019
COST OF SALES ................................................................... 183,329 110,647 94,000
---------- ---------- ----------
Gross profit .................................................................. 176,453 92,202 40,019
---------- ---------- ----------
OPERATING EXPENSES:
Research and development ...................................................... 36,996 28,326 24,405
Sales and marketing ........................................................... 24,101 18,325 14,616
General and administrative .................................................... 24,573 16,225 13,121
Restructuring charges ......................................................... 1,000 -- 1,000
Merger costs .................................................................. 4,583 -- 2,742
Storm recoveries .............................................................. -- -- (1,117)
---------- ---------- ----------
Total operating expenses .................................................... 91,253 62,876 54,767
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS ................................................... 85,200 29,326 (14,748)
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income ............................................................... 10,727 2,174 1,111
Interest expense .............................................................. (7,698) (1,430) (340)
Foreign currency (loss) gain .................................................. (196) 1,504 369
Other income (expense), net ................................................... 4,652 (698) (939)
---------- ---------- ----------
7,485 1,550 201
---------- ---------- ----------
Net income (loss) before income taxes, minority interest and extraordinary
item ................................................................... 92,685 30,876 (14,547)
PROVISION (BENEFIT) FOR INCOME TAXES ............................................ 32,241 11,741 (3,522)
MINORITY INTEREST IN NET INCOME ................................................. 20 69 --
---------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ..................................... 60,424 19,066 (11,025)
EXTRAORDINARY ITEM (LESS APPLICABLE INCOME TAXES OF
$4,566) (Note 11) ............................................................. 7,610 -- --
---------- ---------- ----------
NET INCOME (LOSS) ............................................................... $ 68,034 $ 19,066 $ (11,025)
========== ========== ==========
NET EARNINGS (LOSS) PER SHARE BEFORE EXTRAORDINARY ITEM:
BASIC ......................................................................... $ 1.93 $ 0.64 $ (0.38)
========== ========== ==========
DILUTED ....................................................................... $ 1.86 $ 0.62 $ (0.38)
========== ========== ==========
EARNINGS PER SHARE FROM EXTRAORDINARY ITEM:
BASIC ......................................................................... $ 0.24 $ -- $ --
========== ========== ==========
DILUTED ....................................................................... $ 0.24 $ -- $ --
========== ========== ==========
NET EARNINGS (LOSS) PER SHARE:
BASIC ......................................................................... $ 2.17 $ 0.64 $ (0.38)
========== ========== ==========
DILUTED ....................................................................... $ 2.10 $ 0.62 $ (0.38)
========== ========== ==========
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ................................................................... 31,336 29,706 29,007
========== ========== ==========
DILUTED WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING ............................................................ 32,425 30,934 29,007
========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
54
55
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
ACCUMULATED
COMMON STOCK ADDITIONAL STOCKHOLDERS' OTHER TOTAL
---------------------- PAID-IN RETAINED NOTES DEFERRED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE COMPENSATION (LOSS) INCOME EQUITY
---------- ---------- ---------- ---------- ------------- ------------ ------------- ------------
BALANCES, December 31,
1997 .................... 27,241 $ 27 $ 59,357 $ 41,378 $ (67) $ (34) $ (692) $ 99,969
Exercise of stock
options for cash ..... 219 -- 728 -- -- -- -- 728
Proceeds from
stockholders'
notes receivable...... -- -- -- -- 67 -- -- 67
Sale of common
stock through
employee stock
purchase plan ........ 20 -- 133 -- -- -- -- 133
Amortization of
deferred
compensation ......... -- -- -- -- -- 34 -- 34
Issuance of common
stock for
intangibles .......... 1,680 2 2,094 -- -- -- -- 2,096
Tax benefit related
to shares acquired
by employees under
stock compensation
plans ................ -- -- 365 -- -- -- -- 365
Adjustment to
conform year-end
of merged entity ..... -- -- -- (482) -- -- -- (482)
Comprehensive loss:
Equity adjustment
from foreign
currency
translation .......... -- -- -- -- -- -- 278 --
Net loss .............. -- -- -- (11,025) -- -- -- --
Total comprehensive
loss ................ -- -- -- -- -- -- -- (10,747)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
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
========== ========== ========== ========== ========== ========== ========== ==========
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
55
56
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................. $ 68,034 $ 19,066 $ (11,025)
Adjustment for conforming year-end of merged entity ................................ -- -- (482)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities -
Depreciation and amortization ................................................... 10,506 8,356 7,113
Amortization of deferred debt issuance costs .................................... 616 81 --
Provision for restructuring ..................................................... 1,000 -- 1,000
Minority interest ............................................................... 17 69 --
Stock issued for services rendered and merger costs ............................. 2,430 136 --
Provision for deferred income taxes ............................................. (3,730) 851 (1,620)
Amortization of deferred compensation ........................................... 461 23 34
(Gain) loss on disposal of property and equipment ............................... (54) (15) 120
Gain on sale of investment ...................................................... (4,841) -- --
Gain on retirement of convertible subordinated notes ............................ (12,176) -- --
Earnings from marketable securities, net ........................................ (9,471) (1,724) (765)
Writedown of LITMAS investment .................................................. -- 322 600
Changes in operating assets and liabilities -
Accounts receivable-trade, net ............................................... (28,080) (28,822) 20,648
Related parties and other receivables ........................................ (1,994) (1,306) 1,473
Notes receivable ............................................................. (2,472) -- --
Inventories .................................................................. (16,856) (4,882) 10,305
Other current assets ......................................................... (705) (252) 2,109
Deposits and other ........................................................... (502) 280 (991)
Demonstration and customer service equipment ................................. (1,282) (563) (1,034)
Accounts payable trade ....................................................... 2,548 9,171 (9,603)
Accrued payroll and employee benefits ........................................ 4,117 4,467 (2,585)
Customer deposits and other accrued expenses ................................. 558 1,022 916
Income taxes payable/receivable, net ......................................... 14,631 4,088 (5,929)
---------- ---------- ----------
Net cash provided by operating activities .................................. 22,755 10,368 10,284
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities .................................................. (10,000) (170,805) (1,000)
Sale of marketable securities ...................................................... 48,100 1,928 6,100
Proceeds from sale of investment ................................................... 4,464 -- --
Proceeds from sale of equipment .................................................... 150 -- --
Purchase of property and equipment, net ............................................ (14,062) (7,168) (5,410)
Purchase of technology ............................................................. (981) -- --
Purchase of LITMAS, net of cash acquired ........................................... (250) (175) (1,000)
Acquisition of assets of Fourth State Technology, Inc. ............................. -- -- (2,500)
---------- ---------- ----------
Net cash provided by (used in) investing activities ........................ 27,421 (176,220) (3,810)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ........................................................ 1,491 3,304 2,201
Repayment of notes payable and capital lease obligations ........................... (3,123) (1,637) (9,382)
Proceeds from convertible debt, net ................................................ -- 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 .......................... 520 345 133
Proceeds from exercise of stock options and warrants ............................... 4,394 4,148 728
Proceeds from stockholders' notes receivable ....................................... -- -- 67
---------- ---------- ----------
Net cash (used in) provided by financing activities ............................. (37,513) 174,496 (6,253)
---------- ---------- ----------
EFFECT OF CURRENCY TRANSLATION ON CASH ............................................... (1,990) (476) 278
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ................................................ 10,673 8,168 499
CASH AND CASH EQUIVALENTS, beginning of period ....................................... 21,043 12,875 12,376
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period ............................................. $ 31,716 $ 21,043 $ 12,875
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Tax benefit related to shares acquired by employees under stock option plans .... $ 6,595 $ 1,422 $ 365
========== ========== ==========
Conversion of royalty payable to note payable ................................... $ -- $ 742 $ --
========== ========== ==========
Deferred compensation on stock options issued ................................... $ 1,995 $ 109 $ --
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ............................................................. $ 7,385 $ 459 $ 423
========== ========== ==========
Cash paid for income taxes, net .................................................... $ 25,791 $ 6,221 $ 2,395
========== ========== ==========
The accompanying notes to consolidated financial statements are
an integral part of these consolidated statements.
56
57
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Advanced Energy Industries, Inc. (the "Company") was incorporated in Colorado in
1981 and reincorporated in Delaware in 1995. The Company is primarily engaged in
the development and production of 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") and Advanced
Energy Taiwan, Ltd. ("AE-Taiwan"). The Company also owns 100% of Advanced Energy
Voorhees, Inc. ("AEV"), formerly RF Power Products, Inc. ("RFPP"), Tower
Electronics, Inc. ("Tower"), Noah Holdings, Inc. ("Noah") and Sekidenko, Inc.
("Sekidenko") and 59.5% of LITMAS. As discussed in Note 3, Noah was merged into
the Company on April 6, 2000, and Sekidenko was merged into the Company on
August 18, 2000. The acquisitions of Noah and Sekidenko have been 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. AEV is a New Jersey-based designer and manufacturer of radio
frequency power systems, matching networks and peripheral products primarily
used by original equipment providers in the semiconductor capital equipment,
commercial coating, flat panel display and analytical instrumentation markets.
Tower is a Minnesota-based designer and manufacturer of custom, high-performance
switchmode power supplies used principally in the telecommunications, medical
and non-impact printing industries. Noah is a California-based manufacturer of
solid state temperature control systems used to control process temperatures
during semiconductor manufacturing. Sekidenko is a Washington-based manufacturer
and supplier of optical fiber thermometers to the semiconductor capital
equipment industry. LITMAS is a start-up company that designs and manufactures
plasma gas abatement systems and high-density plasma sources.
The Company continues to be subject to certain risks similar to other companies
in its industry. These risks include significant fluctuations of quarterly
operating results, the volatility of the semiconductor and semiconductor capital
equipment industries, customer concentration within the markets the Company
serves, manufacturing facilities risks, recent and potential future
acquisitions, management of growth, supply constraints and dependencies,
dependence on design wins, barriers to obtaining new customers, the high level
of customized designs, rapid technological changes, competition, international
sales risks, the Asian financial markets, intellectual property rights,
governmental regulations, and the volatility of the market price of the
Company's common stock. A significant change in any of these risk factors could
have a material impact on the Company's business.
(2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS -- For cash flow purposes, the Company considers all
cash and highly liquid investments with an original maturity of 90 days or less
to be cash and cash equivalents.
INVENTORIES -- Inventories include costs of materials, direct labor and
manufacturing overhead. Inventories are valued at the lower of market or cost,
computed on a first-in, first-out basis.
57
58
MARKETABLE SECURITIES - TRADING -- The Company has investments in marketable
equity securities and municipal bonds, which have original maturities of 90 days
or more. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the
investments are classified as trading securities and reported at fair value with
unrealized gains and losses included in earnings.
DEMONSTRATION AND CUSTOMER SERVICE EQUIPMENT -- Demonstration and customer
service equipment are manufactured products utilized for sales demonstration and
evaluation purposes. The Company also utilizes this equipment in its customer
service function as replacement and loaner equipment to existing customers.
The Company depreciates the equipment based on its estimated useful life in the
sales and customer service functions. The depreciation is computed based on a
three-year life.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost. Additions,
improvements, and major renewals are capitalized. Maintenance, repairs, and
minor renewals are expensed as incurred.
Depreciation is provided using straight-line and accelerated methods over three
to ten years for machinery and equipment 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. Amortization is provided over the estimated
useful lives ranging from five to seven years for both the goodwill and the
intangible assets.
CONCENTRATIONS OF CREDIT RISK -- The Company's revenues generally are
concentrated among a small number of customers, the majority of which are in the
semiconductor capital equipment industry. The Company's foreign subsidiaries
sales are primarily denominated in currencies other than the U.S. dollar (see
Note 15). The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
WARRANTY POLICY -- The Company estimates the costs of repairing products under
warranty based on the historical average cost of the repairs. The Company offers
warranty coverage for its systems for periods ranging from 12 to 30 months after
shipment.
CUMULATIVE TRANSLATION ADJUSTMENT -- The functional currency for the Company's
foreign operations is the applicable local currency.
The Company records a cumulative translation adjustment from translation of the
financial statements of AE-Japan, AE-Germany, AE-Korea, AE-UK and AE-Taiwan.
This equity account includes the results of translating balance sheet assets and
liabilities at current exchange rates as of the balance sheet date, and the
statements of operations and cash flows at the average exchange rates during the
respective year.
The Company recognizes gain or loss on foreign currency transactions, which are
not considered to be of a long-term investment nature. The Company recognized a
loss on foreign currency transactions of $196,000 for the year ended December
31, 2000, and gains on foreign currency transactions of $1,504,000 and $369,000
for the years ended December 31, 1999 and 1998, respectively.
REVENUE RECOGNITION -- The Company recognizes revenue upon shipment of its
systems and spare parts, at which time title passes to the customer. For most of
its customers, the Company has established a warranty policy as part of its
contract with the customer, to provide for repairs and replacement of defective
systems. The Company records an estimate for such repairs based upon its
experience, and does not record an offset against revenue for such temporary
returns.
58
59
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. Also, the Company's deferred income tax assets include
certain future tax benefits. The Company records a valuation allowance against
any portion of those deferred income tax assets which it believes it will more
likely than not fail to realize.
EARNINGS PER SHARE -- Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. The computation of diluted EPS is similar to the computation
of basic EPS except that the 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 potentially dilutive common
shares had been issued. For the periods presented, 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. Basic
and diluted EPS were the same for fiscal 1998 as the Company incurred losses
from operations, therefore, making the effect of all potentially dilutive common
shares anti-dilutive.
COMPREHENSIVE INCOME (LOSS) -- SFAS No. 130, "Reporting Comprehensive Income,"
established rules for the reporting of comprehensive income (loss) and its
components. Comprehensive income (loss) for the Company consists of net income
(loss), foreign currency translation adjustments and unrealized holding gains
and is presented in the Consolidated Statement of Stockholders' Equity.
SEGMENT REPORTING -- 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.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. Management operates and manages the Company's business as one
operating segment because all of its products and systems have similar economic
characteristics and production processes.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1998 the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company is
required to adopt 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
59
60
are met. SFAS No. 133 also establishes uniform hedge accounting criteria for all
derivatives. The Company will not seek specific hedge accounting treatment for
its foreign currency forward contracts (Note 18). The Company has assessed its
position with regard to its derivative and hedging activities and does not
believe that the adoption of SFAS No. 133 will have a material impact on the
Company's financial condition or results of operations.
In December 1999 the staff of the Securities and Exchange Commission issued its
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." SAB No. 101
provides guidance on the measurement and timing of revenue recognition in
financial statements of public companies. Changes in accounting policies to
apply the guidance of SAB No. 101 must be adopted by recording the cumulative
effect of the change in the fiscal quarter ending December 31, 2000. The
adoption of SAB No. 101 did not have a material effect on the Company's
financial position or results of operations.
In March 2000 the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44
provides clarification and guidance on applying APB No. 25. Generally, FIN No.
44 provides for prospective application for grants or modifications to existing
stock options or awards made after June 30, 2000. The adoption of FIN No. 44 in
2000 did not have a material effect 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 amounts reported and disclosed in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
ASSET IMPAIRMENTS -- The Company reviews its long-lived assets and certain
identifiable intangibles to be held and used by the Company for impairment
whenever events or changes in circumstances indicate their carrying amount may
not be recoverable. In so doing, the Company estimates the future net cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future net cash flows (undiscounted and without interest
charges) is less than the carrying amount of the asset, an impairment loss is
recognized to reduce the asset to its estimated fair value. Otherwise, an
impairment loss is not recognized. Long-lived assets and certain identifiable
intangibles to be disposed of, if any, are reported at the lower of carrying
amount or fair value less cost to sell.
RECLASSIFICATIONS -- Certain reclassifications have been made to the 1998 and
1999 financial statements to conform to the 2000 presentation.
(3) ACQUISITIONS
SEKIDENKO, INC. -- On August 18, 2000, Sekidenko, Inc. ("Sekidenko"), a
privately held, Vancouver, Washington-based supplier of optical fiber
thermometers to the semiconductor capital 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.
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61
AEV -- On October 8, 1998, RF Power Products, Inc., since renamed Advanced
Energy Voorhees, Inc. ("AEV"), a New Jersey-based designer and manufacturer of
radio frequency power systems, matching networks and peripheral products
primarily for original equipment providers in the semiconductor capital
equipment, commercial coating, flat panel display and analytical instrumentation
markets, was merged with a wholly owned subsidiary of the Company. The Company
issued approximately four million shares of its common stock to the former
shareholders of AEV. In addition, outstanding AEV stock options were converted
into options to purchase approximately 148,000 shares of the Company's common
stock.
AEV's operating results for the month of December 1998 are not reflected in the
accompanying consolidated statement of operations. This is due to changing AEV's
year-end from November 30 to December 31 to conform to the Company's year-end.
AEV's month of December 1998 operating results were revenues of approximately
$723,000 and a net loss of $482,000, which has been charged directly to retained
earnings in order to report only twelve months' operating results. In connection
with the merger, the Company recorded in the fourth quarter of 1998 a charge to
operating expenses of $2,742,000 for direct merger-related costs.
Each of the above mergers constituted a tax-free reorganization and have been
accounted for as a pooling of interests under Accounting Principles Board
Opinion No. 16. Accordingly, all prior period consolidated financial statements
presented have been restated to include the combined balance sheet, statements
of operations and cash flows of AEV, Noah and Sekidenko as though each had
always been part of the Company. There were no transactions between the Company,
AEV, Noah and Sekidenko prior to the combinations, and immaterial adjustments
were recorded at AEV, Noah and Sekidenko to conform their accounting policies.
Certain reclassifications were made to conform the AEV, 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 1998
---------- ---------- ----------
(IN THOUSANDS)
Sales:
Pre-AEV merger
Advanced Energy .................................. $ -- $ -- $ 86,289
AEV .............................................. -- -- 18,436
Advanced Energy and AEV combined before Noah and
Sekidenko mergers ............................... 67,171 183,958 19,973
Noah before Noah and Sekidenko mergers ............. 3,080 7,617 5,639
Sekidenko before Noah and Sekidenko mergers ........ 4,777 11,274 3,682
Post-Noah merger
Advanced Energy combined with AEV and Noah ....... 123,190 -- --
Sekidenko ........................................ 7,034 -- --
Post-Sekidenko merger .............................. 154,530 -- --
---------- ---------- ----------
Consolidated .................................... $ 359,782 $ 202,849 $ 134,019
========== ========== ==========
Net income (loss):
Pre-AEV merger
Advanced Energy .................................. $ -- $ -- $ (2,748)
AEV .............................................. -- -- (3,859)
Advanced Energy and AEV combined before Noah and
Sekidenko mergers ............................... 9,996 16,838 (168)
AEV merger costs ................................... -- -- (2,742)
Noah before Noah and Sekidenko mergers ............. 43 184 (1,620)
Sekidenko before Noah and Sekidenko mergers ........ 1,199 2,044 112
Post-Noah merger
Advanced Energy combined with AEV and Noah ....... 20,809 -- --
Sekidenko ........................................ 1,367 -- --
Noah merger costs .................................. (2,333) -- --
Post-Sekidenko merger .............................. 39,203 -- --
Sekidenko merger costs ............................. (2,250) -- --
---------- ---------- ----------
Consolidated .................................... $ 68,034 $ 19,066 $ (11,025)
========== ========== ==========
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OTHER INTANGIBLES -- During 1999 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. The entire purchase price was
allocated to other intangibles and is being amortized over a seven-year useful
life.
During 1998 Sekidenko acquired various intangible assets, primarily a license
agreement, by issuing approximately 1,680,000 shares of common stock valued at
$2,096,000. 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 start-up 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%.
FST -- Effective September 3, 1998, the Company acquired substantially all of
the assets of Fourth State Technology, Inc. ("FST"), a privately held,
Texas-based designer and manufacturer of process controls used to monitor and
analyze data in the RF process. The purchase price consisted of $2.5 million in
cash, assumption of a $113,000 liability, and an earn-out provision, which is
based on profits over a twelve-quarter period beginning October 1, 1998.
Approximately $2.6 million of the initial purchase price was allocated to
intangible assets. During the fourth quarter of 1999, the Company accrued
$240,000 to intangible assets as a result of the earn-out provision being met
during the fifth quarter period. The results of operations of FST are included
within the accompanying consolidated financial statements from the date of
acquisition.
(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 - TRADING
MARKETABLE SECURITIES - TRADING are reported at their fair value and consisted
of the following:
DECEMBER 31,
---------- ----------
2000 1999
---------- ----------
(IN THOUSANDS)
Commercial paper .................. $ 85,827 $ 118,894
Municipal bonds and notes ......... 54,022 67,453
Mutual funds ...................... 17,962 93
---------- ----------
$ 157,811 $ 186,440
========== ==========
These marketable securities have original costs of $157,112,000 and $185,069,000
as of December 31, 2000 and 1999, respectively.
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(6) ACCOUNTS RECEIVABLE - TRADE
ACCOUNTS RECEIVABLE - TRADE consisted of the following:
DECEMBER 31,
---------- ----------
2000 1999
---------- ----------
(IN THOUSANDS)
Domestic .................................... $ 41,545 $ 21,877
Foreign ..................................... 31,971 23,414
Allowance for doubtful accounts ............. (784) (639)
---------- ----------
$ 72,732 $ 44,652
========== ==========
(7) INVENTORIES
INVENTORIES consisted of the following:
DECEMBER 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
Parts and raw materials ................ $34,462 $19,381
Work in process ........................ 3,777 2,526
Finished goods ......................... 7,027 6,503
------- -------
$45,266 $28,410
======= =======
(8) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT consisted of the following:
DECEMBER 31,
----------------------
2000 1999
------- --------
(IN THOUSANDS)
Machinery and equipment................................ $ 25,075 $ 18,121
Computers and communication equipment.................. 12,484 8,967
Furniture and fixtures................................. 4,026 3,781
Vehicles............................................... 197 161
Leasehold improvements................................. 6,746 5,298
-------- --------
48,528 36,328
Less - accumulated depreciation........................ (24,427) (18,629)
-------- --------
$ 24,101 $ 17,699
======== ========
(9) INVESTMENTS IN MARKETABLE SECURITIES, AVAILABLE FOR SALE
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. 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 have been classified as
available-for-sale securities and are reflected as an investment of
approximately $1.7 million in the accompanying balance sheet.
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(10) NOTES PAYABLE
DECEMBER 31,
------------------------
2000 1999
---------- ----------
(IN THOUSANDS)
Revolving line of credit of $30,000,000, expiring April 7, 2001, interest at
bank's prime rate minus 1.25% or the LIBOR 360-day rate plus 150 basis
points, (average 1.98718% during 2000, 2.39857% at December 31, 2000)
This line includes $20,000,000 available for general use, with an option
to convert up to $10,000,000 to a three-year term loan; additional
advances up to $5,000,000 each for Optional Currency Rate Advances and
Foreign Exchange Contracts. Borrowing base consists of the sum of 80% 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 ..................................... $ 875 $ 1,958
Revolving line of credit of $1,875,000, expired January 2001, interest at bank's
prime rate plus 3.5% (minimum 12% plus 1% discount rate). Loan is secured by a
Certificate of Deposit, certain accounts receivable, inventory, equipment and
intangibles, and is guaranteed by a stockholder. Agreement provides for an early
termination fee of $30,000 if the line is terminated prior to maturity ............. -- 241
Note payable, shareholder (see Note 16) .............................................. 356 447
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 ........ 704 738
Note payable, other .................................................................. 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 ............................................................ 109 216
Note payable, shareholder (see Note 16) .............................................. 163 266
---------- ----------
2,327 3,866
Less -- current portion .............................................................. (1,284) (2,485)
---------- ----------
$ 1,043 $ 1,381
========== ==========
(11) CONVERTIBLE SUBORDINATED NOTES PAYABLE
In November 1999 the Company issued $135 million of convertible subordinated
notes payable at 5.25%. 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
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 convert the notes on or after November 19, 2002 at a redemption price of
103.00% times the principal amount, and may convert at successively lesser
amounts thereafter until November 15, 2006, at which time the Company may
convert at a redemption price equal to the principal amount. At December 31,
2000, $529,000 of interest expense 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 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, which had a fair market value of
approximately $66.7 million as of December 31, 2000. The Company may continue to
purchase additional notes in the open market from time to time, if market
conditions and its financial position are deemed favorable for such purposes.
(12) INCOME TAXES
For the years ended December 31, 2000, 1999 and 1998, the provision for income
taxes consisted of an amount for taxes currently payable and a provision for tax
effects deferred to future periods. In 1997 the
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\Company's statutory U.S. tax rate increased from 34% to 35%.
The provision (benefit) for income taxes for the years ended December 31, 2000,
1999 and 1998 was as follows:
DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Federal ................. $ 28,869 $ 8,087 $ (3,843)
State and local ......... 3,592 1,376 (561)
Foreign taxes ........... 4,346 2,278 882
---------- ---------- ----------
$ 36,807 $ 11,741 $ (3,522)
========== ========== ==========
Current ................. $ 40,537 $ 10,890 $ (1,902)
Deferred ................ (3,730) 851 (1,620)
---------- ---------- ----------
$ 36,807 $ 11,741 $ (3,522)
========== ========== ==========
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 2000, 1999 and 1998:
DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Income tax expense (benefit) per federal statutory rate ...... $ 36,703 $ 10,807 $ (5,091)
State income taxes, net of federal deduction ................. 2,232 894 (365)
Foreign sales corporation .................................... (2,516) (331) --
Nondeductible merger costs ................................... 1,604 (228) 960
Nondeductible intangible and goodwill amortization ........... 618 553 500
Other permanent items, net ................................... (2,262) (137) (159)
Effect of foreign taxes ...................................... 578 1,000 80
Foreign operating loss with no benefit provided .............. -- -- 610
Change in valuation allowance ................................ -- (717) 107
Tax credits .................................................. (150) (100) (164)
---------- ---------- ----------
$ 36,807 $ 11,741 $ (3,522)
========== ========== ==========
The Company's deferred income tax assets are summarized as follows:
DECEMBER 31, 2000 CHANGE DECEMBER 31, 1999
----------------- ---------- -----------------
(IN THOUSANDS)
Employee bonuses and commissions ... $ 1,851 $ 1,821 $ 30
Warranty reserve ................... 1,046 437 609
Bad debt reserve ................... 229 (4) 233
Vacation accrual ................... 1,076 551 525
Royalties .......................... -- (280) 280
Obsolete and excess inventory ...... 2,433 1,546 887
Investment in LITMAS ............... 395 52 343
Depreciation and amortization ...... 312 (161) 473
Other .............................. 141 (232) 373
---------- ---------- ----------
$ 7,483 $ 3,730 $ 3,753
========== ========== ==========
The domestic versus foreign component of the Company's net income (loss) before
income taxes at December 31, 2000, 1999 and 1998, was as follows:
DECEMBER 31,
-------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Domestic ........... $ 94,094 $ 25,177 $ (15,021)
Foreign ............ 10,767 5,699 474
---------- ---------- ----------
$ 104,861 $ 30,876 $ (14,547)
========== ========== ==========
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(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.
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 $1,291,000,
$848,000 and $754,000 for the years ended December 31, 2000, 1999 and 1998,
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 $63,000 for 1998 and $62,000 for 2000. The
Company made no contributions in 1999.
(14) COMMITMENTS AND CONTINGENCIES
CAPITAL LEASES
The Company finances a portion of its property and equipment under capital lease
obligations at interest rates ranging from 7.63% to 24.7%. The future minimum
lease payments under capitalized lease obligations as of December 31, 2000 are
as follows:
(IN THOUSANDS)
Total minimum lease payments, all 2001 ...... $ 56
Less - amount representing interest ......... (3)
Less - current portion ...................... (53)
--------
$ 0
========
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and office
and production space (Note 16). Lease expense under operating leases was
approximately $5,155,000, $4,926,000 and $4,822,000 for the years ended December
31, 2000, 1999 and 1998, respectively.
The future minimum rental payments required under noncancelable operating leases
as of December 31, 2000 are as follows:
(IN THOUSANDS)
2001 .................... $ 5,556
2002 .................... 4,980
2003 .................... 4,017
2004 .................... 3,525
2005 .................... 3,200
Thereafter .............. 18,156
----------
$ 39,434
==========
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GUARANTEE
On April 12, 2000, the Company committed to a lease guarantee of approximately
$1,000,000 through April 12, 2005, to a private company. The Company received
25,000 shares of the private company's common stock, which is valued at
approximately $4,000 and is reflected on the Company's balance sheet in
investments.
(15) FOREIGN OPERATIONS
The Company operates in a single operating segment with operations in the U.S.,
Asia and Europe. The following is a summary of the Company's foreign operations:
YEARS ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Sales:
Originating in Japan to unaffiliated customers ........... $ 32,404 $ 16,270 $ 6,300
Originating in Europe to unaffiliated customers .......... 24,375 12,724 8,489
Originating in U.S. and sold to foreign customers ........ 35,504 23,996 21,188
Originating in U.S. and sold to domestic customers ....... 260,596 148,424 98,042
Originating in South Korea to unaffiliated customers ..... 2,989 1,435 --
Originating in Taiwan to unaffiliated customers .......... 3,914 -- --
Transfers between geographic areas ....................... 48,963 24,053 10,304
Intercompany eliminations ................................ (48,963) (24,053) (10,304)
---------- ---------- ----------
$ 359,782 $ 202,849 $ 134,019
========== ========== ==========
Income (loss) from operations:
Japan .................................................... $ 6,533 $ 1,758 $ (1,505)
Europe ................................................... 3,805 2,379 1,722
U.S ...................................................... 73,508 25,390 (14,944)
South Korea .............................................. 751 188 (186)
Taiwan ................................................... 594 -- --
Intercompany eliminations ................................ 9 (389) 165
---------- ---------- ----------
$ 85,200 $ 29,326 $ (14,748)
========== ========== ==========
Identifiable assets:
Japan .................................................... $ 21,567 $ 13,967
Europe ................................................... 19,263 11,950
U.S ...................................................... 387,953 345,431
South Korea .............................................. 2,609 1,393
Taiwan ................................................... 5,105 --
Intercompany eliminations ................................ (70,662) (47,308)
---------- ----------
$ 365,835 $ 325,433
========== ==========
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
(16) RELATED PARTY TRANSACTIONS
The Company leases office and production spaces from a limited liability
partnership consisting of certain officers of the Company and other individuals.
The leases relating to these spaces expire in 2009 and 2011 with monthly
payments of approximately $52,000 and $60,000, respectively. The Company also
leases other office and production space from another limited liability
partnership consisting of certain officers of the Company and other individuals.
The lease relating to this space expires in 2002 with a monthly payment of
approximately $28,000.
Approximately $1,637,000, $1,693,000 and $1,359,000 were charged to rent expense
attributable to these leases for the years ended December 31, 2000, 1999 and
1998, respectively.
The Company also leases office and production space from a shareholder.
Approximately $228,000, $197,000 and $199,000 were charged to rent expense
attributable to this lease for the years ended
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December 31, 2000, 1999 and 1998, respectively.
The Company leases, for business purposes, a condominium owned by a partnership
of certain stockholders. The Company paid the partnership approximately $36,000
for each of the years ended December 31, 2000, 1999 and 1998, relating to this
lease.
During 1999 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 will 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 $23,000 and $461,000 was recognized
in 1999 and 2000, respectively.
In prior years, certain stockholders of the Company exercised options to
purchase shares of the Company's common stock in exchange for notes receivable
in the amount of the exercise price. These notes receivable and accrued interest
have been paid in full.
The Company has an unsecured note payable to a stockholder of $356,000, less
current portion of $45,000, with interest at 7%, due November 1, 2002. The note
is payable in installments of principal and interest of $135,000 in 2001 and
$306,000 in 2002.
The Company has a note payable to a stockholder of $163,000, less current
portion of $107,000, with interest at 5%, due January 2002. The note is payable
in installments of principal and interest due semi-annually on January 13th and
July 13th.
(17) MAJOR CUSTOMERS
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, 2000, 1999 and 1998:
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Customer A .............. 39% 34% 24%
==== ==== ====
(18) FORWARD CONTRACTS
AE-Japan enters into foreign currency forward contracts to buy U.S. dollars to
offset foreign currency risk for trade purchases payable 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 one to eight months,
with contracts outstanding at December 31, 2000, maturing through August 2001.
All forward contracts are held until maturity. At December 31, 2000, the Company
held foreign forward exchange contracts with nominal amounts of $11,500,000 and
market settlement amounts of $10,674,000 for an unrealized gain position of
$826,000 that has been included in other income and expense in the accompanying
statement of operations.
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(19) STOCK PLANS
EMPLOYEE STOCK OPTION PLAN -- During 1993 the Company adopted an Employee Stock
Option Plan (the "Employee Option Plan") which was amended and restated in
September 1995, February 1998, February 1999 and December 2000. 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 issued in 2000, 1999 and
1998 were issued at 100% 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 5,625,000 shares of common stock for
the issuance of stock under the Employee Option Plan, which terminates in June
2003.
In connection with the grant of certain stock options in the second quarter of
1995, the Company recorded $142,000 of deferred compensation for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Company at the date of grant. This amount was presented as a
reduction of stockholders' equity and was amortized over the three-year vesting
period of the related stock options.
In connection with the grant of certain stock options in the third quarter of
1999, the Company recorded $109,000 of deferred compensation for the difference
between the deemed fair value for accounting purposes and the option price as
determined by the Company at the date of grant. In connection with the grant of
certain stock options in 2000, the Company recorded $950,000 and $1,045,000 of
deferred compensation in the first and second quarters of 2000, respectively.
These amounts also reflected the difference between the deemed fair value for
accounting purposes and the option price as determined by the Company at the
dates of grant. These amounts are presented as a reduction of stockholders'
equity, and are 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 2000, 1999 and 1998, employees
purchased an aggregate of 13,025, 22,390 and 20,264 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 February 1999 the plan was amended to
increase the number of shares of common stock issuable under such plan to
100,000 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.
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The following summarizes the activity relating to options for the years ended
December 31, 2000, 1999 and 1998:
2000 1999 1998
------------------------------- ------------------------------- ------------------------------
(in thousands, except shares prices)
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------------- -------------- -------------- -------------- -------------- --------------
Stock options:
Incentive stock
options --
Options outstanding at
beginning of period ......... 1,850 $ 13.90 1,987 $ 9.01 1,475 $ 7.02
Granted ...................... 461 44.45 417 30.31 937 10.23
Exercised .................... (488) 9.12 (487) 8.44 (219) 3.35
Terminated ................... (104) 19.26 (67) 10.44 (206) 6.35
-------------- -------------- --------------
Options outstanding at
end of period ............... 1,719 23.29 1,850 13.90 1,987 9.01
============== ============== ==============
Options exercisable at
end of period ............... 689 14.09 801 9.10 651 6.89
============== ============== ==============
Weighted-average fair value
of options granted during
the period ...................... $ 32.75 $ 18.78 $ 6.71
============== ============== ==============
Price range of
outstanding options ......... $0.67 - $60.75 $ 0.67 -$44.97 $0.67 - $31.63
============== ============== ==============
Price range of options
terminated .................. $0.83 - $43.69 $3.88- $28.16 $0.83 - $12.75
============== ============== ==============
Non-employee directors stock
options--
Options outstanding at
beginning of period 55 $ 18.34 40 $ 12.18 20 $ 14.67
Granted ...................... 20 46.48 18 32.94 20 7.55
Exercised .................... -- -- (3) 11.05 -- --
Terminated ................... -- -- -- -- -- --
-------------- --------------
Options outstanding at
end of period ............... 75 26.31 55 18.34 40 12.18
============== ============== ==============
Options exercisable at
end of period ............... 32 18.65 22 17.27 15 11.40
============== ============== ==============
Weighted-average fair value
of options granted during
the period ...................... $ 30.83 $ 20.11 $ 4.93
============== ============== ==============
Price range of
outstanding options ......... $6.13 - $64.94 $6.13 - $36.94 $8.63 - $29.88
============== ============== ==============
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 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:
2000 1999 1998
------- ------- -------
Risk-free interest rates 6.06% 5.92% 5.06%
Expected dividend yield rates 0.0% 0.0% 0.0%
Expected lives 4 years 4 years 4 years
Expected volatility 103.69% 77.33% 87.48%
The total fair value of options granted was computed to be approximately
$15,719,000, $8,192,000 and $6,056,000 for the years ended December 31, 2000,
1999 and 1998, respectively. These amounts are amortized ratably over the
vesting period of the options. Cumulative compensation cost recognized in pro
forma net income or loss with respect to options that are forfeited prior to
vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Pro forma stock-based compensation, net of the effect of
forfeitures and tax, was approximately $4,554,000, $2,999,000 and $2,033,000 for
2000, 1999
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and 1998, 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:
2000 1999 1998
------------ ------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net Income (Loss):
As reported ........................ $ 68,034 $ 19,066 $ (11,025)
Pro forma .......................... 63,480 16,067 (13,058)
Diluted Earnings (Loss) Per Share:
As reported ........................ $ 2.10 $ 0.62 $ (0.38)
Pro forma .......................... 1.96 0.52 (0.45)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
The following table summarizes information about the stock options outstanding
at December 31, 2000:
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 17,000 2.8 years $ 1.19 17,000 $ 1.19
$ 3.11 to $ 6.75 200,000 6.9 years $ 5.68 106,000 $ 4.91
$ 7.13 to $ 9.00 308,000 6.6 years $ 8.19 154,000 $ 8.37
$11.05 to $ 16.52 391,000 6.8 years $ 13.18 279,000 $ 12.94
$17.32 to $ 26.63 90,000 8.7 years $ 20.47 42,000 $ 19.86
$28.16 to $ 40.00 326,000 8.4 years $ 29.94 98,000 $ 29.25
$43.69 to $ 64.94 462,000 9.1 years $ 47.08 25,000 $ 47.17
---------- ----------- ------- -------- -------
1,794,000 7.7 years $ 23.51 721,000 $ 14.29
========== =========== ======= ======== =======
(20) SUBSEQUENT EVENTS
ENGINEERING MEASUREMENTS CO.-- On July 6, 2000, the Company entered into a
definitive agreement to acquire Engineering Measurements Company ("EMCO"), a
Longmont, Colorado-based company which manufactures electronic and
electromechanical precision instruments for measuring and controlling the flow
of liquids, steam and gases, for 900,000 shares of the Company's common stock.
The Company and EMCO renegotiated the agreement as of October 20, 2000 to change
the consideration from stock to cash. Completion of the merger was subject to
approval by EMCO's shareholders and certain other conditions. On January 2,
2001, the merger was completed, and the Company paid the EMCO shareholders cash
in an aggregate amount of approximately $30 million, which included the exercise
prices paid in cash by EMCO option holders on exercise of any EMCO stock options
after October 20, 2000 and before the completion of the merger. Options not
exercised before the completion of the merger were converted into options to
acquire the Company's common stock. The acquisition will be accounted for using
the purchase method of accounting.
71
72
(21) QUARTERLY FINANCIAL DATA
The following table presents unaudited quarterly financial data for each of the
eight quarters in the period ended December 31, 2000. The quarters ended March
31, 1999 through 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,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ...................................... $ 36,419 $ 45,363 $ 55,626 $ 65,441 $ 75,028 $ 85,701 $ 96,317 $102,736
Gross profit ............................... 15,232 20,270 24,951 31,749 36,667 42,363 46,825 50,598
Income from operations ..................... 2,262 5,354 8,714 12,996 17,048 20,343 20,884 26,925
Net income before extraordinary item ....... 1,231 3,290 6,090 8,455 11,238 13,118 16,289 19,779
Extraordinary item (net of income taxes) ... -- -- -- -- -- -- -- 7,610
Net income ................................. $ 1,231 $ 3,290 $ 6,090 $ 8,455 $ 11,238 $ 13,118 $ 16,289 $ 27,389
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share before
extraordinary item ....................... $ 0.04 $ 0.11 $ 0.20 $ 0.27 $ 0.35 $ 0.40 $ 0.50 $ 0.61
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share from
extraordinary item ....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.22
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share ................. $ 0.04 $ 0.11 $ 0.20 $ 0.27 $ 0.35 $ 0.40 $ 0.50 $ 0.83
======== ======== ======== ======== ======== ======== ======== ========
The following table presents unaudited quarterly financial data for the quarters
ended March 31, 1999 through 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, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- -------- -------- ------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ...................................... $ 3,691 $ 3,848 $ 4,484 $ 6,868 $ 7,857 $ 5,115 $ -- $ --
Gross profit ............................... 2,134 1,977 2,407 3,827 4,493 3,024 -- --
Income from operations ..................... 1,191 886 1,007 901 2,179 1,809 -- --
Net income before extraordinary item ....... 697 520 555 456 1,242 1,088 -- --
Extraordinary item (net of income taxes) ... -- -- -- -- -- -- -- --
Net income ................................. $ 697 $ 520 $ 555 $ 456 $ 1,242 $ 1,088 $ -- $ --
======= ======= ======= ======= ======= ======= ====== =====
Diluted earnings per share before
extraordinary item ....................... $ 0.02 $ 0.01 $ -- $ (0.01) $ 0.01 $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ====== =====
Diluted earnings per share from
extraordinary item ....................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ====== =====
Diluted earnings per share ................. $ 0.02 $ 0.01 $ -- $ (0.01) $ 0.01 $ -- $ -- $ --
======= ======= ======= ======= ======= ======= ====== =====
The following table presents unaudited quarterly financial data for the Company
for each of the eight quarters in the period ended December 31, 2000, as each
period had been originally presented in quarterly financial statements as
reported on Forms 10-Q for the quarterly periods ended March 31, 1999, June 30,
1999, September 30, 1999, March 31, 2000 and June 30, 2000, and on Form 10-K for
the quarterly period ended December 31, 1999. The quarterly period ended
September 30, 2000 reflects the same financial data as previously reported on
the Company's Form 10-Q for that period, and the quarterly period ended December
31, 2000 reflects the same financial data as reported in the Management's
Discussion and Analysis of Financial Condition and Results of Operations
elsewhere in this document.
72
73
QUARTERS ENDED
-------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999 2000 2000 2000 2000
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales ..................................... $ 32,728 $ 41,515 $ 51,142 $ 58,573 $ 67,171 $ 80,586 $ 96,317 $102,736
Gross profit .............................. 13,098 18,293 22,544 27,922 32,174 39,339 46,825 50,598
Income from operations .................... 1,071 4,468 7,707 12,095 14,869 18,534 20,884 26,925
Net income before extraordinary item ...... 534 2,770 5,535 7,999 9,996 12,030 16,289 19,779
Extraordinary item (net of income taxes) .. -- -- -- -- -- -- -- 7,610
Net income ................................ $ 534 $ 2,770 $ 5,535 $ 7,999 $ 9,996 $ 12,030 $ 16,289 $ 27,389
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share before
extraordinary item ...................... $ 0.02 $ 0.10 $ 0.20 $ 0.28 $ 0.34 $ 0.40 $ 0.50 $ 0.61
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share from
extraordinary item ...................... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 0.22
======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings per share ................ $ 0.02 $ 0.10 $ 0.20 $ 0.28 $ 0.34 $ 0.40 $ 0.50 $ 0.83
======== ======== ======== ======== ======== ======== ======== ========
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT
BEGINNING OF ADDITIONS CHARGED BALANCE AT
PERIOD TO EXPENSE DEDUCTIONS END OF PERIOD
-------------- ----------------- -------------- --------------
(IN THOUSANDS)
Year ended December 31, 1998:
Inventory obsolescence reserve ........... $ 3,281 $ 6,712 $ 7,367 $ 2,626
Allowance for doubtful accounts .......... 587 229 194 622
-------------- -------------- -------------- --------------
$ 3,868 $ 6,941 $ 7,561 $ 3,248
============== ============== ============== ==============
Year ended December 31, 1999:
Inventory obsolescence reserve ........... $ 2,626 $ 5,254 $ 5,576 $ 2,304
Allowance for doubtful accounts .......... 622 101 84 639
-------------- -------------- -------------- --------------
$ 3,248 $ 5,355 $ 5,660 $ 2,943
============== ============== ============== ==============
Year ended December 31, 2000:
Inventory obsolescence reserve ........... $ 2,304 $ 1,437 $ 1,488 $ 2,253
Allowance for doubtful accounts .......... 639 145 -- 784
-------------- -------------- -------------- --------------
$ 2,943 $ 1,582 $ 1,488 $ 3,037
============== ============== ============== ==============
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
73
74
PART III
In accordance with General Instruction G(3) of Form 10-K, the information
required by this Part III is incorporated by reference to the Advanced Energy's
definitive proxy statement relating to its 2001 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
2000.
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.
74
75
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
page
----
(a)(i) Financial Statements:
Report of Independent Public Accountants 51
Consolidated Financial Statements:
Balance Sheets at December 31, 2000 and 1999 52
Statement of Operations for each of the three years
in the period ended December 31, 2000 54
Statement of Stockholders' Equity for each of the
three years in the period ended December 31, 2000 55
Statement of Cash Flows for each of the three years
in the period ended December 31, 2000 56
Notes to Consolidated Financial Statements 57
(ii) Financial Statement Schedules for each of the three years
in the period ended December 31, 2000
Schedule II--Valuation and Qualifying Accounts 73
(iii) Exhibits:
2.1 Agreement and Plan of Reorganization, dated as of June 1,
1998, by and among the Company, Warpspeed, Inc., a wholly
owned subsidiary of the Company, and RF Power Products,
Inc.(1)
3.1 The Company's Restated Certificate of Incorporation, as
amended(2)
3.2 The Company's By-laws(3)
4.1 Form of Specimen Certificate for the Company's Common
Stock(3)
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)(4)
4.3 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(4)
10.3 Purchase Agreement, dated November 1, 1995, between Eaton
Corporation and the Company(5)+
10.4 Loan and Security Agreement, dated August 15, 1997, among
Silicon Valley Bank, Bank of Hawaii and the Company(6)
10.5 Loan Agreement dated December 8, 1997, by and among Silicon
Valley Bank, as Servicing Agent and a Bank, and Bank of
Hawaii, as a Bank, and the Company, as borrower(7)
10.6 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property
in Fort Collins, Colorado(3)
10.7 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort
Collins, Colorado(3)
75
76
10.8 Lease, dated May 19, 1995, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(3)
10.9 Lease agreement, dated March 18, 1996, and amendments dated
June 21, 1996 and August 30, 1996, between RF Power
Products, Inc., and Laurel Oak Road, L.L.C. for property in
Voorhees, New Jersey(8)
10.10 Form of Indemnification Agreement(3)
10.11 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach(9)
10.12 1995 Stock Option Plan, as amended and restated*
10.13 1995 Non-Employee Directors' Stock Option Plan, as amended
and restated(9)*
10.14 License Agreement, dated May 13, 1992 between RF Power
Products and Plasma-Therm, Inc.(10)
10.15 Lease Agreement dated March 18, 1996 and amendments dated
June 21, 1996 and August 30, 1996 between RF Power Products,
Inc. and Laurel Oak Road, L.L.C. for office, manufacturing
and warehouse space at 1007 Laurel Oak Road, Voorhees, New
Jersey(8)
10.16 Direct Loan Agreement dated December 20, 1996 between RF
Power Products, Inc. and the New Jersey Economic Development
Authority(8)
10.17 Lease, dated April 15, 1998, between Cross Park Investors,
Ltd., and the Company for property in Austin, Texas(1)
10.18 Lease, dated April 15, 1998, between Cameron Technology
Investors, Ltd., and the Company for property in Austin,
Texas(1)
10.19 Lease dated March 20, 2000, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado
10.20 Agreement and Plan of Reorganization, dated April 5, 2000,
between the Registrant, Noah Holdings, Inc. and AE Cal
Merger Sub, Inc.(11)
10.21 Escrow and Indemnity Agreement, dated April 5, 2000, between
the Registrant, the former stockholders of Noah Holdings,
Inc. and Commercial Escrow Services, Inc.(11)
10.22 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)
10.23 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)
(b) The Company filed a report on Form 8-K on December 1, 2000. The report
contains a summary description of the Company's repurchase in the open
market of a portion of its convertible subordinated notes and that such
purchased notes have been cancelled.
- ----------
76
77
(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 Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (File No.
000-26966), filed July 28, 1999.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September
20, 1995, as amended.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File No.
000-26966).
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No.
000-26966), filed March 28, 1996, as amended.
(6) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-34039), filed August 21,
1997, as amended.
(7) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No.
000-26966), filed March 24, 1998.
(8) Incorporated by reference to RF Power Products' Annual
Report on Form 10-K for the fiscal year ended November 30,
1996 (File No. 0-20229), filed February 25, 1997.
(9) 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.
(10) Incorporated by reference to RF Power Products' Registration
Statement on Form 10 (File No. 0-020229), filed May 19, 1992
as amended.
(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.
77
78
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 and March 27, 2001
- -------------------------- Chairman of the Board
Douglas S. Schatz (Principal Executive Officer)
/s/ Richard P. Beck Senior Vice President, Chief Financial March 27, 2001
- -------------------------- Officer, Assistant Secretary and
Richard P. Beck Director (Principal Financial Officer
and Principal Accounting Officer)
/s/ G. Brent Backman Director March 27, 2001
- --------------------------
G. Brent Backman
/s/ Trung Doan Director March 27, 2001
- --------------------------
Trung Doan
/s/ Arthur A. Noeth Director March 27, 2001
- --------------------------
Arthur A. Noeth
/s/ Elwood Spedden Director March 27, 2001
- --------------------------
Elwood Spedden
/s/ Gerald Starek Director March 27, 2001
- --------------------------
Gerald Starek
/s/ Arthur W. Zafiropoulo Director March 27, 2001
- --------------------------
Arthur W. Zafiropoulo
78
79
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Reorganization, dated as of June 1,
1998, by and among the Company, Warpspeed, Inc., a wholly
owned subsidiary of the Company, and RF Power Products,
Inc.(1)
3.1 The Company's Restated Certificate of Incorporation, as
amended(2)
3.2 The Company's By-laws(3)
4.1 Form of Specimen Certificate for the Company's Common
Stock(3)
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)(4)
4.3 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(4)
10.3 Purchase Agreement, dated November 1, 1995, between Eaton
Corporation and the Company(5)+
10.4 Loan and Security Agreement, dated August 15, 1997, among
Silicon Valley Bank, Bank of Hawaii and the Company(6)
10.5 Loan Agreement dated December 8, 1997, by and among Silicon
Valley Bank, as Servicing Agent and a Bank, and Bank of
Hawaii, as a Bank, and the Company, as borrower(7)
10.6 Lease, dated June 12, 1984, amended June 11, 1992, between
Prospect Park East Partnership and the Company for property
in Fort Collins, Colorado(3)
10.7 Lease, dated March 14, 1994, as amended, between Sharp Point
Properties, L.L.C., and the Company for property in Fort
Collins, Colorado(3)
10.8 Lease, dated May 19, 1995, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado(3)
10.9 Lease agreement, dated March 18, 1996, and amendments dated
June 21, 1996 and August 30, 1996, between RF Power
Products, Inc., and Laurel Oak Road, L.L.C. for property in
Voorhees, New Jersey(8)
10.10 Form of Indemnification Agreement(3)
10.11 Employment Agreement, dated June 1, 1998, between RF Power
Products, Inc., and Joseph Stach(9)
10.12 1995 Stock Option Plan, as amended and restated*
10.13 1995 Non-Employee Directors' Stock Option Plan, as amended
and restated(9)*
10.14 License Agreement, dated May 13, 1992 between RF Power
Products and Plasma-Therm, Inc.(10)
79
80
10.15 Lease Agreement dated March 18, 1996 and amendments dated
June 21, 1996 and August 30, 1996 between RF Power Products,
Inc. and Laurel Oak Road, L.L.C. for office, manufacturing
and warehouse space at 1007 Laurel Oak Road, Voorhees, New
Jersey(8)
10.16 Direct Loan Agreement dated December 20, 1996 between RF
Power Products, Inc. and the New Jersey Economic Development
Authority(8)
10.17 Lease, dated April 15, 1998, between Cross Park Investors,
Ltd., and the Company for property in Austin, Texas(1)
10.18 Lease, dated April 15, 1998, between Cameron Technology
Investors, Ltd., and the Company for property in Austin,
Texas(1)
10.19 Lease dated March 20, 2000, between Sharp Point Properties,
L.L.C. and the Company for a building in Fort Collins,
Colorado
10.20 Agreement and Plan of Reorganization, dated April 5, 2000,
between the Registrant, Noah Holdings, Inc. and AE Cal
Merger Sub, Inc.(11)
10.21 Escrow and Indemnity Agreement, dated April 5, 2000, between
the Registrant, the former stockholders of Noah Holdings,
Inc. and Commercial Escrow Services, Inc.(11)
10.22 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)
10.23 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)
- ----------
(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 Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999 (File No.
000-26966), filed July 28, 1999.
(3) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 33-97188), filed September
20, 1995, as amended.
(4) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999 (File No.
000-26966).
(5) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No.
000-26966), filed March 28, 1996, as amended.
(6) Incorporated by reference to the Company's Registration
Statement on Form S-3 (File No. 333-34039), filed August 21,
1997, as amended.
(7) Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (File No.
000-26966), filed March 24, 1998.
80
81
(8) Incorporated by reference to RF Power Products' Annual
Report on Form 10-K for the fiscal year ended November 30,
1996 (File No. 0-20229), filed February 25, 1997.
(9) 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.
(10) Incorporated by reference to RF Power Products' Registration
Statement on Form 10 (File No. 0-020229), filed May 19, 1992
as amended.
(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.
81