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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): AUGUST 10, 2000
---------------
ADVANCED ENERGY INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE 000-26966 84-0846841
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(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
1625 SHARP POINT DRIVE, FORT COLLINS, COLORADO 80525
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (970) 221-4670
-----------------------------
N/A
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS.
On April 6, 2000, Advanced Energy acquired Noah Holdings, Inc. by
issuing approximately 687,000 shares of its common stock and assuming stock
options to purchase approximately 40,000 shares of Advanced Energy's common
stock. The merger constituted a tax-free reorganization in which Noah Holdings,
Inc. became a wholly owned subsidiary of Advanced Energy. The merger has been
accounted for as a pooling of interests. Accordingly, the prior period
consolidated financial statements for 1995 through 1999 have been restated to
include Noah Holdings, Inc., as though it had always been part of Advanced
Energy. Such audited restated financial statements for Advanced Energy as of
December 31, 1999 and 1998, and for the three years in the period ended December
31, 1999 are set forth herein.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Arthur Andersen LLP, Independent Public Accountants ..................................... 2
Report of KPMG LLP, Independent Public Accountants ................................................ 3
Consolidated Balance Sheets as of December 31, 1999 and 1998 ...................................... 4
Consolidated Statement of Operations for the Years Ended December 31, 1999, 1998 and 1997 ......... 6
Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 7
Consolidated Statement of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 ......... 8
Notes to Consolidated Financial Statements ........................................................ 9
Schedule II - Valuation and Qualifying Accounts ................................................... 24
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Advanced Energy Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Advanced Energy
Industries, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits. The consolidated financial
statements give retroactive effect to the mergers of the Company with both Noah
Holdings, Inc. and RF Power Products, Inc., which have been accounted for as
pooling of interests as described in Notes 3 and 19 to the consolidated
financial statements. We did not audit the consolidated statements of
operations, shareholders' equity and cash flows of RF Power Products, Inc. for
the year ended November 30, 1997 (the previous year-end of RF Power Products,
Inc. - see Note 3), which statements reflect total revenues of 18% of the
related consolidated totals for the year ended December 31, 1997. These
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to amounts included for RF Power
Products, Inc., is based solely upon the report of the other auditors.
We conducted our audits in accordance with 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 and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Advanced Energy Industries, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule attached to the consolidated
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in our audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
February 8, 2000 (except with respect to the matters discussed
in Notes 1 and 19, as to which the date is July 24, 2000).
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
RF Power Products, Inc.:
We have audited the consolidated statement of income, shareholders' equity, and
cash flows of RF Power Products, Inc. and subsidiary for the year ended November
30, 1997 (not separately presented herein). In connection with our audit of
these consolidated financial statements, we also have audited the related
consolidated financial statement schedule (not separately presented herein).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of RF Power
Products, Inc. and subsidiary and their cash flows for the year ended November
30, 1997 in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
January 16, 1998
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
----------------------
1999 1998
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 20,303 $ 12,325
Marketable securities - trading ................................................. 186,440 15,839
Accounts receivable --
Trade (less allowances for doubtful accounts of approximately
$577 and $622 at December 31, 1999 and 1998, respectively) ................. 42,940 15,238
Related parties .............................................................. 32 221
Other ........................................................................ 1,787 542
Income tax receivable ........................................................... 1,353 3,658
Inventories ..................................................................... 26,456 22,351
Other current assets ............................................................ 1,707 796
Deferred income tax assets, net ................................................. 3,668 4,577
-------- --------
Total current assets .................................................... 284,686 75,547
-------- --------
PROPERTY AND EQUIPMENT, at cost, net of accumulated
depreciation of $18,256 and $14,524 at December 31,
1999 and 1998, respectively ..................................................... 17,295 15,961
-------- --------
OTHER ASSETS:
Deposits and other .............................................................. 535 1,007
Goodwill and intangibles, net of accumulated amortization of $3,021 and $1,505 at
December 31, 1999 and 1998, respectively ..................................... 9,783 8,586
Demonstration and customer service equipment, net of
accumulated depreciation of $2,235 and $1,743 at December 31,
1999 and 1998, respectively .................................................. 2,352 2,505
Deferred debt issuance costs, net ............................................... 4,410 --
-------- --------
17,080 12,098
-------- --------
Total assets ............................................................ $319,061 $103,606
======== ========
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 BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
------------------------
1999 1998
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable trade ........................................................... $ 15,072 $ 6,228
Accrued payroll and employee benefits ............................................ 7,448 3,054
Other accrued expenses ........................................................... 2,759 3,258
Customer deposits ................................................................ 804 66
Accrued income taxes payable ..................................................... 1,266 567
Capital lease obligations, current portion ....................................... 100 123
Notes payable, current portion ................................................... 2,383 330
Accrued interest payable on convertible subordinated notes ....................... 886 --
--------- ---------
Total current liabilities ................................................ 30,718 13,626
--------- ---------
LONG-TERM LIABILITIES:
Capital lease obligations, net of current portion ................................ 46 110
Notes payable, net of current portion ............................................ 1,217 677
Convertible subordinated notes payable ........................................... 135,000 --
--------- ---------
136,263 787
--------- ---------
Total liabilities ........................................................ 166,981 14,413
--------- ---------
COMMITMENTS AND CONTINGENCIES (Note 13)
MINORITY INTEREST .................................................................. 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 and 30,000 shares authorized, respectively;
28,881 and 27,060 shares issued and outstanding, respectively ................. 29 27
Additional paid-in capital ....................................................... 106,694 60,483
Retained earnings ................................................................ 46,119 29,097
Accumulated other comprehensive loss ............................................. (890) (414)
--------- ---------
Total stockholders' equity ............................................... 151,952 89,193
--------- ---------
Total liabilities and stockholders' equity ............................... $ 319,061 $ 103,606
========= =========
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,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
SALES ......................................................... $ 191,575 $ 130,336 $ 183,247
COST OF SALES ................................................. 106,208 92,333 114,280
--------- --------- ---------
Gross profit ................................................ 85,367 38,003 68,967
--------- --------- ---------
OPERATING EXPENSES:
Research and development .................................... 26,618 23,862 19,336
Sales and marketing ......................................... 17,628 14,246 12,258
General and administrative .................................. 15,232 12,440 11,452
Restructuring charge ........................................ -- 1,000 --
Merger costs ................................................ -- 2,742 --
Storm (recoveries) damages .................................. -- (1,117) 2,700
Purchased in-process research and development ............... -- -- 3,080
--------- --------- ---------
Total operating expenses .................................. 59,478 53,173 48,826
--------- --------- ---------
INCOME (LOSS) FROM OPERATIONS ................................. 25,889 (15,170) 20,141
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income ............................................. 2,140 1,111 582
Interest expense ............................................ (1,415) (306) (527)
Foreign currency gain ....................................... 1,504 369 97
Other, net .................................................. (674) (931) (384)
--------- --------- ---------
1,555 243 (232)
--------- --------- ---------
Net income (loss) before income taxes and minority interest 27,444 (14,927) 19,909
PROVISION (BENEFIT) FOR INCOME TAXES .......................... 10,353 (3,790) 7,603
MINORITY INTEREST IN NET INCOME ............................... 69 -- --
--------- --------- ---------
NET INCOME (LOSS) ............................................. $ 17,022 $ (11,137) $ 12,306
========= ========= =========
BASIC EARNINGS (LOSS) PER SHARE ............................... $ 0.62 $ (0.41) $ 0.48
========= ========= =========
DILUTED EARNINGS (LOSS) PER SHARE ............................. $ 0.59 $ (0.41) $ 0.46
========= ========= =========
BASIC WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ................................................. 27,606 26,907 25,858
========= ========= =========
DILUTED WEIGHTED-AVERAGE COMMON
SHARES OUTSTANDING .......................................... 28,834 26,907 26,637
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
--------- --------- --------- ---------
BALANCES, December 31, 1996 ............................ 25,588 $ 25 $ 29,666 $ 28,410
Exercise of stock options for cash .................. 135 -- 268 --
Exercise of stock options in exchange for
stockholders' notes receivable ..................... 90 -- 470 --
Proceeds from stockholders' notes receivable ........ -- -- -- --
Sale of common stock through employee
stock purchase plan ................................ 8 -- 102 --
Amortization of deferred compensation ............... -- -- -- --
Sale of common stock through public
offering, net of approximately $2,276 of expenses .. 1,000 1 28,723 --
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- 29 --
Comprehensive income:
Equity adjustment from foreign
currency translation ............................... -- -- -- --
Net income .......................................... -- -- -- 12,306
Total comprehensive income ......................... -- -- -- --
--------- --------- --------- ---------
BALANCES, December 31, 1997 ............................ 26,821 26 59,258 40,716
Exercise of stock options for cash .................. 219 1 727 --
Proceeds from stockholders' notes receivable ........ -- -- -- --
Sale of common stock through employee
stock purchase plan ................................ 20 -- 133 --
Amortization of deferred compensation ............... -- -- -- --
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- 365 --
Adjustment to conform year-end of merged entity ..... -- -- -- (482)
Comprehensive loss:
Equity adjustment from foreign
currency translation ............................... -- -- -- --
Net loss ............................................ -- -- -- (11,137)
Total comprehensive loss ........................... -- -- -- --
--------- --------- --------- ---------
BALANCES, December 31, 1998 ............................ 27,060 27 60,483 29,097
Exercise of stock options for cash .................. 490 1 4,147 --
Sale of common stock through employee
stock purchase plan ................................ 22 -- 345 --
Issuance of common stock for acquisitions ........... 227 -- 2,335 --
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- 1,422 --
Sale of common stock through private and public
offerings, net of approximately $2,448 of expenses . 1,070 1 37,826 --
Issuance of common stock for services rendered ...... 12 -- 136 --
Comprehensive income:
Equity adjustment from foreign
currency translation ............................... -- -- -- --
Net income .......................................... -- -- -- 17,022
Total comprehensive loss ........................... -- -- -- --
--------- --------- --------- ---------
BALANCES, December 31, 1999 ............................ 28,881 $ 29 $ 106,694 $ 46,119
========= ========= ========= =========
ACCUMULATED
STOCKHOLDERS' OTHER TOTAL
NOTES DEFERRED COMPREHENSIVE STOCKHOLDERS'
RECEIVABLE COMPENSATION (LOSS) INCOME EQUITY
--------- --------- --------- ---------
BALANCES, December 31, 1996 ............................ $ (1,161) $ (82) $ (500) $ 56,358
Exercise of stock options for cash .................. -- -- -- 268
Exercise of stock options in exchange for
stockholders' notes receivable ..................... (470) -- -- --
Proceeds from stockholders' notes receivable ........ 1,564 -- -- 1,564
Sale of common stock through employee
stock purchase plan ................................ -- -- -- 102
Amortization of deferred compensation ............... -- 48 -- 48
Sale of common stock through public
offering, net of approximately $2,276 of expenses .. -- -- -- 28,724
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- -- 29
Comprehensive income:
Equity adjustment from foreign
currency translation ............................... -- -- (192) --
Net income .......................................... -- -- -- --
Total comprehensive income ......................... -- -- -- 12,114
--------- --------- --------- ---------
BALANCES, December 31, 1997 ............................ (67) (34) (692) 99,207
Exercise of stock options for cash .................. -- -- -- 728
Proceeds from stockholders' notes receivable ........ 67 -- -- 67
Sale of common stock through employee
stock purchase plan ................................ -- -- -- 133
Amortization of deferred compensation ............... -- 34 -- 34
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- -- 365
Adjustment to conform year-end of merged entity ..... -- -- -- (482)
Comprehensive loss:
Equity adjustment from foreign
currency translation ............................... -- -- 278 --
Net loss ............................................ -- -- -- --
Total comprehensive loss ........................... -- -- -- (10,859)
--------- --------- --------- ---------
BALANCES, December 31, 1998 ............................ -- -- (414) 89,193
Exercise of stock options for cash .................. -- -- -- 4,148
Sale of common stock through employee
stock purchase plan ................................ -- -- -- 345
Issuance of common stock for acquisitions ........... -- -- -- 2,335
Tax benefit related to shares acquired by employees
under stock compensation plans ..................... -- -- -- 1,422
Sale of common stock through private and public
offerings, net of approximately $2,448 of expenses . -- -- -- 37,827
Issuance of common stock for services rendered ...... -- -- -- 136
Comprehensive income:
Equity adjustment from foreign
currency translation ............................... -- -- (476) --
Net income .......................................... -- -- -- --
Total comprehensive loss ........................... -- -- -- 16,546
--------- --------- --------- ---------
BALANCES, December 31, 1999 ............................ $ -- $ -- $ (890) $ 151,952
========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................. $ 17,022 $ (11,137) $ 12,306
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 .............................................. 7,809 6,599 4,882
Amortization of deferred debt issuance costs ............................... 81 -- --
Minority interest .......................................................... 69 -- --
Stock issued for services rendered ......................................... 136 -- --
Provision for deferred income taxes ........................................ 909 (1,619) (2,040)
Amortization of deferred compensation ...................................... -- 34 48
Purchased in-process research and development .............................. -- -- 3,080
(Gain) loss on disposal of property and equipment .......................... (15) 120 1,046
Earnings from marketable securities, net ................................... (1,724) (765) (174)
Writedown of LITMAS investment ............................................. 322 600 --
Changes in operating assets and liabilities -
Accounts receivable-trade, net .......................................... (27,542) 20,575 (13,289)
Related parties and other receivables ................................... (1,306) 1,473 (460)
Inventories ............................................................. (4,105) 10,265 (11,511)
Other current assets .................................................... (169) 2,120 (1,334)
Deposits and other ...................................................... 291 (37) 777
Demonstration and customer service equipment ............................ (563) (1,034) (641)
Accounts payable trade .................................................. 8,632 (9,569) 10,687
Accrued payroll and employee benefits ................................... 4,393 (2,596) 2,546
Customer deposits and other accrued expenses ............................ 1,124 592 699
Income taxes payable/receivable, net .................................... 4,426 (5,825) 1,040
--------- --------- ---------
Net cash provided by operating activities ............................. 9,790 9,314 7,662
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities ............................................. (170,805) (1,000) (20,000)
Sale of marketable securities ................................................. 1,928 6,100 --
Purchase of property and equipment, net ....................................... (6,878) (5,292) (7,542)
Purchase of LITMAS, net of cash acquired ...................................... (175) (1,000) --
Acquisition of assets of Fourth State Technology, Inc. ........................ -- (2,500) --
Acquisition of Tower Electronics, Inc., net of cash acquired .................. -- -- (12,995)
--------- --------- ---------
Net cash used in investing activities ................................. (175,930) (3,692) (40,537)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ................................................... 3,304 2,201 15,828
Repayment of notes payable and capital lease obligations ...................... (1,539) (8,745) (13,813)
Proceeds from convertible debt, net ........................................... 130,509 -- --
Sale of common stock, net of expenses ......................................... 37,827 -- 28,724
Sale of common stock through employee stock purchase plan ..................... 345 133 102
Proceeds from exercise of stock options and warrants .......................... 4,148 728 268
Proceeds from stockholders' notes receivable .................................. -- 67 1,564
--------- --------- ---------
Net cash provided by (used in) financing activities ........................ 174,594 (5,616) 32,673
--------- --------- ---------
EFFECT OF CURRENCY TRANSLATION ON CASH .......................................... (476) 278 (192)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 7,978 284 (394)
CASH AND CASH EQUIVALENTS, beginning of period .................................. 12,325 12,041 12,435
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 20,303 $ 12,325 $ 12,041
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Tax benefit related to shares acquired by employees under stock option plans $ 1,422 $ 365 $ 29
========= ========= =========
Conversion of royalty payable to note payable .............................. $ 742 $ -- $ --
========= ========= =========
Note payable assumed in Tower acquisition .................................. $ -- $ -- $ 1,389
========= ========= =========
Exercise of stock options in exchange for stockholders' notes receivable ... $ -- $ -- $ 470
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest ........................................................ $ 442 $ 398 $ 522
========= ========= =========
Cash paid for income taxes, net ............................................... $ 4,726 $ 2,327 $ 8,004
========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
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ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS
Advanced Energy Industries, Inc. (the "Company") was incorporated in Colorado in
1981 and reincorporated in Delaware in 1995. The Company is primarily engaged in
the development and production of power conversion and control systems, which
are used by manufacturers of semiconductors and in industrial thin film
manufacturing processes. The Company owns 100% of each of the following
subsidiaries: Advanced Energy Japan K.K. ("AE-Japan"), Advanced Energy
Industries GmbH ("AE-Germany"), Advanced Energy Industries U.K. Limited
("AE-UK"), 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") and Noah Holdings, Inc. ("Noah") and 56.5% of
LITMAS. As discussed in Note 19, Noah was merged into the Company on April 6,
2000. The acquisition of Noah has been accounted for as a pooling of interests
under Accounting Principles Board Opinion No. 16. Accordingly, all prior period
consolidated financials statements have been restated to include Noah as though
it 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. 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.
MARKETABLE SECURITIES - TRADING -- The Company has investments in marketable
equity securities and
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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
3-year life.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost. Additions,
improvements, and major renewals are capitalized. Maintenance, repairs, and
minor renewals are expensed as incurred.
Depreciation is provided using straight-line and accelerated methods over three
to ten years for machinery and equipment. Amortization of leasehold improvements
and leased equipment is provided using the straight-line method over the life of
the lease term or the life of the assets, whichever is shorter.
GOODWILL AND INTANGIBLES -- Goodwill and intangibles are recorded at the date of
acquisition at their allocated cost. Amortization is provided over the estimated
useful lives of approximately 7 years for both the goodwill and the intangible
assets.
CONCENTRATIONS OF CREDIT RISK -- The Company's revenues generally are
concentrated among a small number of customers, the majority of which are in the
semiconductor capital equipment industry. The Company's foreign subsidiaries
sales are primarily denominated in currencies other than the U.S. dollar (see
Note 14). The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
WARRANTY POLICY -- The Company estimates the anticipated costs of repairing
products under warranty based on the historical average cost of the repairs. The
Company offers warranty coverage for its systems for periods ranging from 12 to
24 months after shipment.
CUMULATIVE TRANSLATION ADJUSTMENT -- The functional currency for the Company's
foreign operations is the applicable local currency.
The Company records a cumulative translation adjustment from translation of the
financial statements of AE-Japan, AE-Germany, AE-Korea, 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
gain on foreign currency transactions of $1,504,000, $369,000 and $97,000 for
the years ended December 31, 1999, 1998 and 1997, respectively.
REVENUE RECOGNITION -- The Company recognizes revenue when products are shipped.
INCOME TAXES -- The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." In accordance with SFAS No. 109,
deferred tax assets and liabilities are recognized for temporary differences
between the tax basis and financial reporting basis of assets and liabilities,
computed at current tax rates. Also, the Company's deferred income tax assets
include certain future tax benefits. The Company records a valuation allowance
against any portion of those deferred income tax assets which it believes it
will more likely than not fail to realize.
10
13
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 denominator is increased to include the number of
additional common shares that would have been outstanding (using the treasury
stock method) if dilutive potential common shares had been issued. Basic and
diluted EPS were the same for fiscal 1998 as the Company incurred losses from
operations, therefore, making the effect of all potential 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) and foreign currency translation adjustments 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 its business of supplying power
conversion and control systems as one operating segment, as their products 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, in fiscal 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activity by requiring all derivatives to be recorded
on the balance sheet as either an asset or liability and measured at their fair
value. Changes in the derivative's fair value will be recognized currently in
earnings unless specific hedging accounting criteria are met. SFAS No. 133 also
establishes uniform hedge accounting criteria for all derivatives. The Company
does not believe that the adoption of SFAS No. 133 will have a material impact
on the consolidated financial statements.
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. Management
does not believe that the adoption of SAB No. 101 will have a material effect on
the Company's financial position 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.
11
14
(3) ACQUISITIONS
OTHER INTANGIBLES -- During 1999 the Company acquired various intangible assets,
primarily a license agreement and patents, by issuing approximately 214,000
shares of its 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.
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 approximately 13,000 shares of the Company's common
stock valued at $385,000 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.
AEV -- On October 8, 1998, AEV (formerly RF Power Products, Inc.), a New
Jersey-based designer and manufacturer of radio frequency power systems,
matching networks and peripheral products primarily for original equipment
providers in the semiconductor capital equipment, commercial coating, flat panel
display and analytical instrumentation markets, was merged with a wholly owned
subsidiary of the Company. The Company issued approximately 4 million shares of
its common stock to the former shareholders of AEV. Each share of AEV common
stock was exchanged for 0.3286 of one share of the Company's common stock. In
addition, outstanding AEV stock options were converted at the same exchange
factor into options to purchase approximately 148,000 shares of the Company's
common stock.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined balance sheet, statements of operations
and cash flows of AEV as though it had always been part of the Company. AEV's
year-end was November 30, and therefore, the combined statements of operations
and cash flows for fiscal 1997 include AEV's results for the year ended November
30, 1997.
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. There were no
transactions between the Company and AEV prior to the combination, and
immaterial adjustments were recorded to conform AEV's accounting policies.
Certain reclassifications were made to conform the AEV 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. These amounts also include the acquisition of Noah discussed
in Note 19.
12
15
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997
--------- ---------
(IN THOUSANDS)
Sales:
Pre-AEV merger
Advanced Energy ........................................ $ 86,289 $ 141,923
AEV .................................................... 18,436 33,835
Post-AEV merger .......................................... 19,973 --
Noah (see Note 19) ....................................... 5,638 7,489
--------- ---------
Consolidated .......................................... $ 130,336 $ 183,247
========= =========
Net (loss) income:
Pre-AEV merger
Advanced Energy ........................................ $ (2,748) $ 10,362
AEV .................................................... (3,859) 1,694
Post-AEV merger .......................................... (168) --
Merger costs ............................................. (2,742) --
Noah (see Note 19) ....................................... (1,620) 250
--------- ---------
Consolidated .......................................... $ (11,137) $ 12,306
========= =========
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.
TOWER -- Effective August 15, 1997, the Company acquired all of the outstanding
stock of Tower, a Minnesota-based designer and manufacturer of custom,
high-performance switchmode power supplies used principally in the
telecommunications, medical and non-impact printing industries. The purchase
price consisted of $14.5 million in cash and a $1.5 million non-interest-bearing
promissory note to the seller (the "Note"), which was paid in full during August
1998. Total consideration, including the effect of imputing interest on the
Note, equaled $15,889,000. The acquisition was accounted for using the purchase
method of accounting and resulted in a one-time charge of $3,080,000 for
in-process research and development costs acquired as a result of the
transaction. Acquisition costs totaled approximately $209,000.
The purchase price was allocated to the net assets of Tower as summarized below:
(In thousands)
--------------
Cash and cash equivalents .................................. $ 1,714
Accounts receivable ........................................ 2,555
Inventories ................................................ 2,691
Deferred tax asset ......................................... 57
Fixed assets ............................................... 280
Goodwill ................................................... 7,490
Purchased in-process research and development .............. 3,080
Other assets ............................................... 39
Accounts payable ........................................... (1,292)
Accrued liabilities ........................................ (516)
--------
$ 16,098
========
The purchase agreement included a contingent purchase price based on Tower
exceeding a certain sales level in 1998. No additional purchase price was
recorded during 1998 as the sales level was not achieved.
The results of operations of Tower are included within the accompanying
consolidated financial statements from the date of acquisition.
13
16
(4) PUBLIC OFFERINGS OF COMMON STOCK
In October 1997 the Company closed on an offering of its common stock. In
connection with the offering, 1,000,000 shares of common shares were sold at a
price of $31 per share, providing gross proceeds of $31,000,000, less $2,276,000
in offering costs.
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,
----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Commercial paper ....................... $118,894 $ 12,290
Municipal bonds and notes .............. 67,453 2,815
Mutual funds ........................... 93 734
-------- --------
$186,440 $ 15,839
======== ========
These marketable securities have original costs of $185,069,000 and $14,900,000
as of December 31, 1999 and 1998, respectively.
(6) ACCOUNTS RECEIVABLE - TRADE
ACCOUNTS RECEIVABLE - TRADE consisted of the following:
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Domestic ............................... $ 20,126 $ 8,708
Foreign ................................ 23,391 7,152
Allowance for doubtful accounts ........ (577) (622)
-------- --------
$ 42,940 $ 15,238
======== ========
(7) INVENTORIES
INVENTORIES consisted of the following:
DECEMBER 31,
--------------------
1999 1998
------- -------
(IN THOUSANDS)
Parts and raw materials ................ $17,512 $13,778
Work in process ........................ 2,526 2,115
Finished goods ......................... 6,418 6,458
------- -------
$26,456 $22,351
======= =======
14
17
(8) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT consisted of the following:
DECEMBER 31,
-----------------------
1999 1998
-------- --------
(IN THOUSANDS)
Machinery and equipment .................................... $ 17,762 $ 14,704
Computers and communication equipment ...................... 8,868 7,435
Furniture and fixtures ..................................... 3,637 3,679
Vehicles ................................................... 161 179
Leasehold improvements ..................................... 5,123 4,488
-------- --------
35,551 30,485
Less - accumulated depreciation ............................ (18,256) (14,524)
-------- --------
$ 17,295 $ 15,961
======== ========
(9) NOTES PAYABLE
DECEMBER 31,
---------------------
1999 1998
------- -------
(IN THOUSANDS)
Revolving line of credit of $30,000,000,
expiring December 7, 2000, interest at bank's
prime rate minus 1.25% or the LIBOR 360-day rate
plus 150 basis points, (average 2.06848% during
1999, 2.02857% at December 31, 1999). 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 .................................... $ 1,958 $ --
Revolving line of credit of $1,875,000, expiring
July 6, 2000, 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 ......................................... 241 230
Note payable, shareholder (see Note 15) ........... 447 447
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 ............................ 738 --
Note payable, other ............................... -- 14
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 ............... 216 316
------- -------
3,600 1,007
Less -- current portion ..................... (2,383) (330)
------- -------
$ 1,217 $ 677
======= =======
(10) 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 7 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, 1999, $886,000
of interest expense was accrued as a current liability.
15
18
(11) INCOME TAXES
For the years ended December 31, 1999, 1998 and 1997, 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 Company increased its statutory
U.S. tax rate from 34% to 35%.
The provision (benefit) for income taxes for the years ended December 31, 1999,
1998 and 1997 was as follows:
DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Federal ...................... $ 6,785 $ (4,081) $ 6,075
State and local .............. 1,290 (591) 1,457
Foreign taxes ................ 2,278 882 71
-------- -------- --------
$ 10,353 $ (3,790) $ 7,603
======== ======== ========
Current ...................... $ 9,444 $ (2,171) $ 9,643
Deferred ..................... 909 (1,619) (2,040)
-------- -------- --------
$ 10,353 $ (3,790) $ 7,603
======== ======== ========
The following reconciles the Company's effective tax rate to the federal
statutory rate for the years ended December 31, 1999, 1998 and 1997:
DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Income tax expense (benefit) per federal statutory rate ... $ 9,605 $ (5,224) $ 6,943
State income taxes, net of federal deduction .............. 839 (384) 846
Foreign sales corporation ................................. (331) -- (209)
Nondeductible merger costs ................................ (228) 960 --
Nondeductible intangible and goodwill amortization ........ 406 353 132
Nondeductible purchased in-process research and development -- -- 1,078
Other permanent items, net ................................ (121) (128) (37)
Effect of foreign taxes ................................... 1,000 80 275
Foreign operating loss with no benefit provided ........... -- 610 --
Change in valuation allowance ............................. (717) 107 (530)
Tax credits ............................................... (100) (164) (511)
Other ..................................................... -- -- (384)
-------- -------- --------
$ 10,353 $ (3,790) $ 7,603
======== ======== ========
The Company's deferred income tax assets are summarized as follows:
DECEMBER 31, DECEMBER 31,
1999 CHANGE 1998
------- ------- -------
(IN THOUSANDS)
Employee bonuses and commissions ................................ $ 30 $ (164) $ 194
Warranty reserve ................................................ 565 108 457
Bad debt reserve ................................................ 211 (9) 220
Vacation accrual ................................................ 506 211 295
Royalties ....................................................... 280 87 193
Obsolete and excess inventory ................................... 887 (368) 1,255
Foreign operating loss carryforwards ............................ -- (1,253) 1,253
Research and development credit carryforwards ................... -- (324) 324
Alternative minimum tax credit carryforwards .................... -- (276) 276
Investment in LITMAS ............................................ 343 112 231
Depreciation and amortization ................................... 473 237 236
Other ........................................................... 373 13 360
Less: Valuation allowance on foreign operating loss carryforwards -- 717 (717)
------- ------- -------
$ 3,668 $ (909) $ 4,577
======= ======= =======
16
19
The domestic versus foreign component of the Company's net income (loss) before
income taxes at December 31, 1999, 1998 and 1997, was as follows:
DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Domestic ..................... $ 21,745 $(15,401) $ 18,980
Foreign ...................... 5,699 474 929
-------- -------- --------
$ 27,444 $(14,927) $ 19,909
======== ======== ========
(12) RETIREMENT PLAN
The Company has a 401(k) Profit Sharing Plan which covers most full-time
employees who have completed six months of full-time continuous service and are
age eighteen or older. Participants may defer up to 20% of their gross pay up to
a maximum limit determined by law. Participants are immediately vested in their
contributions.
The Company may make discretionary contributions based on corporate financial
results for the fiscal year. Effective January 1, 1998, the Company increased
its matching contribution for participants in the 401(k) Plan up to a 50%
matching on contributions by employees up to 6% of the employee's compensation.
The Company's total contributions to the plan were approximately $831,000,
$746,000 and $620,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Vesting in the profit sharing contribution account is based on
years of service, with a participant 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 and $206,000 for 1998 and 1997,
respectively. The Company made no contributions in 1999.
(13) 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, 1999 are
as follows:
(IN THOUSANDS)
2000 ............................................. $ 101
2001 ............................................. 56
-----
Total minimum lease payments ............. 157
Less -- amount representing interest ..... (11)
Less -- current portion .................. (100)
-----
$ 46
=====
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and office
and production space (Note 15). Lease expense under operating leases was
approximately $4,825,000, $4,755,000 and $3,139,000 for the years ended December
31, 1999, 1998 and 1997, respectively.
The future minimum rental payments required under noncancelable operating leases
as of December 31, 1999 are as follows:
17
20
(IN THOUSANDS)
-------
2000 ......................... $ 4,782
2001 ......................... 3,714
2002 ......................... 3,131
2003 ......................... 2,740
2004 ......................... 2,428
Thereafter ................... 11,466
-------
$28,261
=======
GUARANTEE
Subsequent to year-end, the Company extended a guarantee for a $2,500,000 bank
term loan through March 31, 2000, entered into by a non-public entity that
serves as a supplier to the Company. An officer of the Company serves as a
director of such entity. The Company has received warrants to purchase shares of
the supplier for providing this guarantee. No value has currently been assigned
to these warrants.
(14) 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,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Sales:
Originating in Japan to unaffiliated customers ........... $ 16,270 $ 6,300 $ 11,431
Originating in Europe to unaffiliated customers .......... 12,724 8,489 7,487
Originating in U.S. and sold to foreign customers ........ 23,883 20,911 22,809
Originating in U.S. and sold to domestic customers ....... 137,263 94,636 141,520
Originating in South Korea to unaffiliated customers ..... 1,435 -- --
Transfers between geographic areas ....................... 24,053 10,304 14,523
Intercompany eliminations ................................ (24,053) (10,304) (14,523)
--------- --------- ---------
$ 191,575 $ 130,336 $ 183,247
========= ========= =========
Income (loss) from operations:
Japan .................................................... $ 1,758 $ (1,505) $ (73)
Europe ................................................... 2,379 1,722 1,488
U.S ...................................................... 21,953 (15,366) 19,029
South Korea .............................................. 188 (186) --
Intercompany eliminations ................................ (389) 165 (303)
--------- --------- ---------
$ 25,889 $ (15,170) $ 20,141
========= ========= =========
Identifiable assets:
Japan .................................................... $ 13,967 $ 6,039
Europe ................................................... 11,950 5,073
U.S ...................................................... 339,059 123,246
South Korea .............................................. 1,393 610
Intercompany eliminations ................................ (47,308) (31,362)
--------- ---------
$ 319,061 $ 103,606
========= =========
Intercompany sales among the Company's geographic areas are recorded on the
basis of intercompany prices established by the Company.
(15) 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 $58,000, 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
18
21
in 2002 with a monthly payment of approximately $28,000.
Approximately $1,693,000, $1,359,000 and $1,320,000 was charged to rent expense
attributable to these leases for the years ended December 31, 1999, 1998 and
1997, respectively.
The Company also leases office and production space from a shareholder.
Approximately $197,000, $199,000 and $164,000 was charged to rent expense
attributable to this lease for the years ended 1999, 1998 and 1997,
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, 1999, 1998 and 1997, relating to this
lease.
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 $447,000, 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 $75,000 in 2000,
$135,000 in 2001 and $306,000 in 2002.
(16) MAJOR CUSTOMERS
The Company's sales to major customers (sales in excess of 10% of total sales)
are to entities which are primarily manufacturers of semiconductor capital
equipment and disk storage equipment and, for the years ended December 31, 1999,
1998 and 1997 are as follows:
DECEMBER 31,
----------------------
1999 1998 1997
---- ---- ----
Customer A ....................................... 31% 22% 30%
Customer B ....................................... 7% 6% 11%
Customer C ....................................... 6% 10% 4%
-- -- --
44% 38% 45%
== == ==
(17) FORWARD CONTRACTS
AE-Japan enters into foreign currency forward contracts to buy U.S. dollars to
hedge its payable position arising from trade purchases and intercompany
transactions with its parent. Foreign currency forward contracts reduce the
Company's exposure to the risk that the eventual net cash outflows resulting
from the purchase of products denominated in 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 1 to 4 months, with
contracts outstanding at December 31, 1999, maturing through April 2000. At
December 31, 1999, the Company held foreign forward exchange contracts with
nominal amounts of $4,500,000 and market settlement amounts of $4,498,000 for an
unrealized gain position of $2,000.
(18) 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 and
19
22
February 1999. The Employee Option Plan allows issuance of incentive stock
options, non-qualified options, and stock purchase rights. The exercise price of
incentive stock options shall not be less than 100% of the stock's fair market
value on the date of grant. The exercise price of non-qualified stock options
shall not be less than 50% of the stock's fair market value on the date of
grant. Options issued in 1999, 1998 and 1997 were issued at 100% of fair market
value with typical vesting over three to five years. Under the Employee Option
Plan, the Company has the discretion to accelerate the vesting period. The
options are exercisable for ten years from the date of grant. The Company has
reserved 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 on June 30, 1995, the
Company recorded $142,000 of deferred compensation for the difference between
the deemed fair value for accounting purposes and the option price as determined
by the Company at the date of grant. This amount is presented as a reduction of
stockholders' equity and has been amortized over the 3-year vesting period of
the related stock options.
EMPLOYEE STOCK PURCHASE PLAN -- In September 1995 stockholders approved an
Employee Stock Purchase Plan (the "Stock Purchase Plan") covering an aggregate
of 200,000 shares of common stock. Employees are eligible to participate in the
Stock Purchase Plan if employed by the Company for at least 20 hours per week
during at least five months per calendar year. Participating employees may have
up to 15% (subject to a 5% limitation set by the Company) 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 1999, 1998 and 1997, employees
purchased an aggregate of 22,390, 20,264 and 8,186 shares under the Stock
Purchase Plan, respectively.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN -- In September 1995 the Company
adopted the 1995 Non-Employee Directors Stock Option Plan (the "Directors Plan")
covering 50,000 shares of common stock. 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.
The following summarizes the activity relating to options for the years ended
December 31, 1999, 1998 and 1997:
20
23
1999 1998 1997
----------------------- ------------------- -------------------
(IN THOUSANDS, EXCEPT SHARE 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 ................................ 1,987 $ 9.01 1,475 $ 7.02 1,017 $ 3.57
Granted ................................. 417 30.31 937 10.23 731 11.60
Exercised ............................... (487) 8.44 (219) 3.35 (225) 3.25
Terminated .............................. (67) 10.44 (206) 6.35 (48) 4.96
------- ------ ------
Options outstanding at end of period .... 1,850 13.90 1,987 9.01 1,475 7.02
======= ====== ======
Options exercisable at end of period .... 801 9.10 651 6.89 489 4.35
======= ====== ======
Weighted-average fair value of
options granted during the period ..... $ 18.78 $ 6.71 $ 7.41
============ ============ ============
Price range of outstanding options ...... $0.67-$44.97 $0.67-$31.63 $0.67-$31.63
============ ============ ============
Price range of options terminated ....... $3.88-$28.16 $0.83-$12.75 $ 3.40-$9.00
============ ============ ============
Non-employee directors stock options--
Options outstanding at beginning of period 45 $12.18 25 $14.67 20 $ 9.82
Granted .................................. 18 32.94 20 7.55 17 16.64
Exercised ................................ (3) 11.05 -- -- (2) 7.13
Terminated ............................... -- -- -- -- (10) 9.82
------- ------
Options outstanding at end of period ..... 60 18.34 45 12.18 25 14.67
======= ====== ======
Options exercisable at end of period ..... 22 17.27 15 11.40 8 14.62
======= ====== ======
Weighted-average fair value of options
granted during the period ............... $ 20.11 $ 4.93 $ 11.43
============ ============ ============
Price range of outstanding options ....... $6.13-$36.94 $8.63-$29.88 $8.63-$31.63
============ ============ ============
Price range of options terminated ........ $ -- $ -- $6.13-$11.05
============ ============ ============
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), defines a fair value based method of accounting
for employee stock options or similar equity instruments. However, SFAS No. 123
allows the continued measurement of compensation cost for such plans using the
intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"), provided that pro forma disclosures
are made of net income or loss and net income or loss per share, assuming the
fair value based method of SFAS No. 123 had been applied. The Company has
elected to account for stock-based compensation plans under APB No. 25, under
which no compensation expense is recognized.
For SFAS No. 123 purposes, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:
1999 1998 1997
------- ------- -------
Risk-free interest rates 5.92% 5.06% 6.17%
Expected dividend yield rates .......... 0.0% 0.0% 0.0%
Expected lives ......................... 4 years 4 years 4 years
Expected volatility .................... 77.33% 87.48% 101.16%
The total fair value of options granted was computed to be approximately
$8,192,000, $6,056,000 and $4,912,000 for the years ended December 31, 1999,
1998 and 1997, respectively. These amounts are amortized ratably over the
vesting period of the options. Cumulative compensation cost recognized in pro
forma net income or loss with respect to options that are forfeited prior to
vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Pro forma stock-based compensation, net of the effect of
forfeitures and tax, was approximately $2,999,000, $2,033,000 and $906,000 for
1999, 1998 and 1997, respectively.
Had compensation cost for these plans been determined consistent with SFAS No.
123, the Company's net income would have been reduced to the following pro forma
amounts:
21
24
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net Income (Loss):
As reported $ 17,022 $ (11,137) $ 12,306
Pro forma 13,839 (11,550) 11,150
Diluted Earnings (Loss) Per Share:
As reported $ 0.59 $ (0.41) $ 0.46
Pro forma 0.48 (0.43) 0.42
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, 1999:
Options Outstanding Options Exercisable
-------------------------- -------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Year Range of Number Contractual Exercise Number Exercise
Granted Exercise Prices Outstanding Life Price Exercisable Price
------- --------------- ----------- ---- ----- ----------- -----
1993 - 1994 $ 0.67 to $ 8.76 43,000 4.0 years $ 2.69 43,000 $ 2.69
1995 $ 2.57 to $11.05 40,000 5.0 years $ 6.42 39,000 $ 6.42
1996 $ 3.88 to $11.05 176,000 6.6 years $ 4.97 165,000 $ 4.99
1997 $ 7.13 to $31.63 468,000 6.9 years $ 11.46 320,000 $ 11.16
1998 $ 6.75 to $17.32 756,000 8.5 years $ 10.03 241,000 $ 10.27
1999 $17.32 to $44.97 427,000 9.3 years $ 30.44 15,000 $ 33.06
--------- --------- ------- ------- -------
1,910,000 7.9 years $ 14.22 823,000 $ 9.39
========= ========= ======= ======= =======
(19) SUBSEQUENT EVENTS
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 to the former shareholders of
Noah, including approximately 33,000 shares issued for a financial advisory fee
on Noah, which was accounted for as merger costs of the acquisition in fiscal
2000. Each share of Noah common stock was exchanged for 0.0577 of one share of
the Company's common stock. In addition, outstanding Noah stock options were
converted into options to purchase approximately 40,000 shares of the Company's
common stock.
The merger constituted a tax-free reorganization and has been accounted for as a
pooling of interests under Accounting Principles Board Opinion No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined balance sheet, statements of operations
and cash flows of Noah as though it had always been part of the Company. There
were no transactions between the Company and Noah prior to the combination, and
immaterial adjustments were recorded at Noah to conform Noah's accounting
policies. Certain reclassifications were made to conform the Noah 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:
22
25
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
Sales:
Pre-Noah merger
Advanced Energy .................... $ 183,958 $ 124,698 $ 175,758
Noah ............................... 7,617 5,638 7,489
--------- --------- ---------
Consolidated ...................... $ 191,575 $ 130,336 $ 183,247
========= ========= =========
Net income (loss):
Pre-Noah merger
Advanced Energy .................... $ 16,838 $ (9,517) $ 12,056
Noah ............................... 184 (1,620) 250
--------- --------- ---------
Consolidated ...................... $ 17,022 $ (11,137) $ 12,306
========= ========= =========
ENGINEERING MEASUREMENTS CO. - On July 6, 2000, the Company entered into a
definitive agreement to acquire Engineering Measurements Company ("EMCO") in an
exchange of stock. The shareholders and option holders of EMCO will receive
approximately 900,000 shares of the Company's common stock in the transaction,
which is subject to approval by EMCO's stockholders and certain other
conditions. The Company believes the acquisition will be accounted for as a
pooling of interests, and will operate EMCO as a wholly owned subsidiary. EMCO,
a Longmont, Colorado-based company, manufactures electronic and
electromechanical precision instruments for measuring and controlling the flow
of liquids, steam and gases.
SEKIDENKO, INC. - On July 24, 2000, the Company entered into a definitive
agreement to acquire Sekidenko, Inc. ("Sekidenko") in an exchange of stock
ranging from 1.5 million to two million shares of the Company's common stock.
The Company believes the acquisition will be accounted for as a pooling of
interests, and will operate Sekidenko as a wholly owned subsidiary. Sekidenko, a
Vancouver, Washington-based company, is a supplier of optical fiber thermometers
to the semiconductor capital equipment industry.
23
26
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, 1997:
Inventory obsolescence reserve ............ $2,077 $4,526 $3,322 $3,281
Allowance for doubtful accounts ........... 382 263 58 587
------ ------ ------ ------
$2,459 $4,789 $3,380 $3,868
====== ====== ====== ======
Year ended December 31, 1998:
Inventory obsolescence reserve ............ $3,281 $6,712 $7,367 $2,626
Allowance for doubtful accounts ........... 587 229 194 622
------ ------ ------ ------
$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 39 84 577
------ ------ ------ ------
$3,248 $5,293 $5,660 $2,881
====== ====== ====== ======
24
27
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
EXH. NO. DESCRIPTION
-------- -----------
23.1 Consent of Arthur Andersen, dated August 10, 2000
23.2 Consent of KPMG, dated August 10, 2000
27.1 Restated Financial Data Schedule
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: August 10, 2000 Advanced Energy Industries, Inc.
By: /s/ Douglas S. Schatz
----------------------------
Title: Chairman of the Board and
Chief Executive Officer
29
EXHIBIT INDEX
EXH. NO. DESCRIPTION
-------- -----------
23.1 Consent of Arthur Andersen, dated August 10, 2000
23.2 Consent of KPMG, dated August 10, 2000