UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2004.
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number:
000-26966
ADVANCED ENERGY INDUSTRIES, INC.
84-0846841
(I.R.S. Employer Identification No.)
80525
(Zip Code)
Registrants 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 þ No o .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants 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. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o .
The approximate aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $210.8 million as of June 30, 2004.
32,767,792
(Number of shares of Common
Stock outstanding as of March 24, 2005)
DOCUMENTS INCORPORATED BY REFERENCE
Incorporated By
Document
Reference In Part No.
III
1
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
2
PART I
ITEM 1. BUSINESS
Overview
We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. In 1995, we
effected the initial public offering of our Common Stock. Unless the context otherwise requires,
as used in this Form 10-K, references to Advanced Energy refer to Advanced Energy Industries,
Inc., and references to the Company, we, us or our refer to Advanced Energy and its
consolidated subsidiaries. Our executive offices are located at 1625 Sharp Point Drive, Fort
Collins, Colorado 80525, and our telephone number is 970-221-4670. Our website address is
www.advanced-energy.com
. We make available, free of charge on our website, our Annual Report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these
reports as soon as reasonably practicable after filing such reports with, or furnishing them to,
the Securities and Exchange Commission (the SEC). Such reports are also available at
www.sec.gov.
We design, manufacture and support a group of key components and subsystems primarily for
vacuum process systems. Our primary products are complex power conversion and control systems.
Our products also control the flow of liquids into the process chambers for semiconductor equipment
and provide thermal control and sensing within the chamber. Our customers use our products in
plasma-based thin-film processing equipment that is essential to the manufacture of, among other
things:
We also sell spare parts and repair services worldwide through our customer service and
technical support organization.
We market and sell our products primarily to large, original equipment manufacturers (OEMs)
of semiconductor, flat panel display, data storage and other industrial thin-film manufacturing
equipment. Sales to customers in the semiconductor capital equipment industry comprised 60% of our
sales in 2004, 59% in 2003 and 68% in 2002. We sell our products primarily through direct sales
personnel to customers in the United States, Europe and Asia, and through distributors in regions
both inside and outside the United States. International sales represented 47% of our sales in
2004, 53% in 2003 and 40% in 2002. Additionally, many of our products sold domestically are placed
on systems shipped overseas by our customers.
Products
Our major products fall into four categories: Power, Flow Control, Thermal Instrumentation
and Source Technology. Our products are designed to improve productivity and lower the cost of
ownership for our customers.
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POWER
Our power systems include direct current (DC), high power, low and mid frequency, and radio
frequency (RF) power supplies, matching networks and RF instrumentation. Our power systems
refine, modify and control the raw electrical power from a utility and convert it into power that
is uniform, predictable and repeatable. Our power systems are primarily used by semiconductor and
flat panel display manufacturers in the following applications: physical vapor deposition;
chemical vapor deposition; reactive sputtering; electroplating; plasma vacuum processes and bias;
oxide, poly and conductor etch; carbon dioxide laser excitation; data storage; and architectural
glass.
FLOW CONTROL
Our flow control products include thermal mass flow controllers (MFCs), pressure-based MFCs,
liquid MFCs, liquid vapor delivery systems, pressure control systems and ultrasonic control
systems. Our flow control products control or monitor the flow of high-purity liquids, liquid
vapor, and gases encompassing a wide range of input pressures. Our flow control products are
primarily used in semiconductor applications, fiber optics, safe delivery system applications,
chemical vapor deposition and silica industries.
THERMAL INSTRUMENTATION
Our thermal instrumentation products, primarily used in the semiconductor industry, provide
thermal management and control solutions for applications where time-temperature cycles affect
productivity and yield. They are used in physical vapor deposition, chemical vapor deposition,
rapid thermal processing and other semiconductor applications requiring non-contact temperature
measurement, chemical mechanical polishing, track and lithography.
SOURCE TECHNOLOGY
Our source technology products include plasma and ion beam sources which are used in the
direct deposition of thin films of diamond-like carbon, ion-assisted deposition, ion beam etching,
optical coating, industrial coating, pre-cleaning and chamber clean. Our plasma-source platform is
a complete system, including a remote plasma source, a power supply and an active matching network.
OTHER PRODUCTS
We also offer DC-to-DC converters specifically designed to power low voltage, high-current
microprocessors, application-specific integrated circuits, logic and memory chips and servers.
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The following summarizes our portfolio of product platforms:
5
Markets, Applications and Customers
MARKETS
Most of our sales have historically been to customers in the semiconductor capital equipment
industry. Sales to customers in this industry represented 60% of our sales in 2004, 59% in 2003
and 68% in 2002. Our power, flow control, thermal instrumentation, source technology as well as
other products 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 products.
SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING MARKET.
We sell our products primarily to
semiconductor capital equipment manufacturers for incorporation into equipment used to make
integrated circuits, as well as other equipment manufacturers discussed below. Our products are
currently used in the major semiconductor processing steps, including:
Our power systems provide the energy to drive the chemical reaction for thin-film processes
such as deposition and etch. Our flow control products control the fluid or gas being delivered to
ensure high-purity, our thermal instrumentation products measure the temperature of the process
chamber and our source technology products optimize CVD clean, deposition and etch processes. The
precise control over plasma-based processes enables the production of integrated circuits with
reduced feature sizes and increased speed and performance. We anticipate that the semiconductor
capital equipment industry will continue to be a substantial part of our business for the
foreseeable future.
FLAT PANEL DISPLAY MANUFACTURING EQUIPMENT MARKET.
We sell our products 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 devices to laptop and
desktop computer monitors to plasma and liquid crystal display-screen televisions. The transition
to larger panel sizes and higher display resolution is driving the need for tighter process
controls to reduce manufacturing costs and defects. There are three major types of flat panel
displays: liquid crystal displays, field emitter displays, and gas plasma displays. There are two
types of flat panel projection devices: liquid crystal projection and digital micro-mirror
displays. We sell our products to all five of these flat panel markets.
DATA STORAGE MANUFACTURING EQUIPMENT MARKETS.
We sell products to manufacturers of data
storage equipment and data storage devices for use in producing a variety of products, including
CDs, CD-ROMs and DVDs; computer hard discs, including both media and thin-film heads; and optical
storage media. 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
requires denser, thinner and more precise films. The use of equipment incorporating magnetic media
to store analog and digital data expands with the growth
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of the laptop, desktop and workstation computer markets and the consumer electronics audio and
video markets.
ADVANCED PRODUCT APPLICATIONS MARKETS.
We sell our products to OEMs and producers of end
products in a variety of industrial markets. Thin-film optical coatings are used in the
manufacture of many industrial products, including solar panels, architectural glass, eyeglasses,
lenses, barcode readers and front surface mirrors. Thin films of diamond-like coatings and other
materials are currently applied to products in plasma-based processes to strengthen and harden
surfaces on such diverse products as tools, razor blades, automotive parts and hip joint
replacements. Other thin-film processes that use our products 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.
Also included in the advanced product applications markets are our sales to OEMs of high-end
computing, automated test equipment and DataCom products.
APPLICATIONS
We have sold our products for use in connection with the following processes and applications:
CUSTOMERS
Our products are sold worldwide to more than 100 OEMs and directly to more than 500 end users.
Our ten largest customers accounted for 59% of our total sales in 2004, 54% in 2003 and 53% in
2002. We expect that sales of our products to these customers will continue to account for a large
percentage of our sales in the foreseeable future.
Applied Materials, our largest customer, accounted for 27% of our sales in 2004, 20% in 2003
and 27% in 2002. No other customer exceeded 10% of our sales during these yearly periods.
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Backlog
Our backlog decreased from $53.7 million at December 31, 2003 to $33.9 million at December 31,
2004. We schedule production of our systems based on order backlog and customer commitments.
Backlog includes only orders scheduled to ship in the following quarter for which written
authorizations have been accepted and revenue has not been recognized. Due to possible customer
changes in delivery schedules and cancellations of orders, our backlog at any particular date is
not necessarily indicative of actual sales for any succeeding period. Delays in delivery schedules
and/or a reduction of backlog during any particular period could have a material adverse effect on
our business and results of operations.
Marketing, Sales and Service
We sell our products primarily through direct sales personnel to customers in the United
States, Europe and Asia. Our sales personnel are located at our headquarters in Fort Collins,
Colorado, and in sales offices in San Jose, California; Austin and Dallas, Texas; and Vancouver,
Washington. To serve customers in Asia and Europe, we have offices in Shenzhen and Shanghai,
China; Bicester, England; Dresden, Filderstadt and Stolberg, Germany; Hachioji and Tokyo, Japan;
Bundang, South Korea; and Hsinchu and Taipei Hsien, Taiwan. These offices have primary
responsibility for sales in their respective markets. We also have distributors inside and outside
the United States.
Sales outside the United States represented approximately 47% of our total sales in 2004, 53%
in 2003 and 40% in 2002. International sales are subject to certain risks, including exposure to
foreign 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.
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; San Jose, California; Austin and
Dallas, Texas; Vancouver, Washington; Shanghai, China; Bicester, England; Dresden, Filderstadt and
Stolberg, Germany; Hachioji and Tokyo, Japan; Bundang, South Korea; and Hsinchu and Taipei Hsien,
Taiwan.
Manufacturing
Our manufacturing locations are in Fort Collins, Colorado; Shenzhen, China; Stolberg, Germany;
Hachioji, Japan; and Vancouver, Washington. In 2004, we continued the realignment of our worldwide
manufacturing infrastructure, with Shenzhen, China expected to be the central high-volume
manufacturing site by the end of 2005. We announced plans to realign the Fort Collins, Colorado
and Hachioji, Japan locations to focus on service and support, new product introduction and
advanced manufacturing. We expect to complete the realignment by the end of
2005.
With the exception of our Fort Collins, Colorado and Shenzhen, China facilities, we generally
manufacture different products at each facility. Of the total number of product lines planned for
transfer to Shenzhen, China, we have completed approximately 75% of the power product transfers
from Fort Collins, Colorado and have transferred approximately 60% of mass flow control products
from Hachioji, Japan as of the end of 2004. Our manufacturing activities consist
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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 our customers. We purchase a wide range of electronic, mechanical and electrical
components, some of which are designed to our specifications. We are increasingly outsourcing more
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
reduces control over pricing and delivery time of components. An inability to obtain adequate
supplies would require us to seek alternative sources of supply or might require us to redesign our
products to accommodate different components or subassemblies. We could be prevented from the
timely shipment of our products to our customers if we are forced to seek alternative sources of
supply, manufacture such components or subassemblies internally, or redesign our products.
Further, due to our customers strict and extensive requirements, most supplier changes require
vendor requalification, which can be time consuming and costly.
Intellectual Property
We have a practice of seeking patents on inventions governing new products or technologies as
part of our ongoing research, development and manufacturing activities. We currently hold 86
United States patents, 37 foreign-issued patents, and have over 100 patent applications pending in
the United States, Europe and Asia. Generally, our efforts to obtain international patents have
been concentrated in the United Kingdom, Germany, France and the Pacific Rim, because there are
other manufacturers and developers of power conversion and control systems in those countries as
well as customers for those systems.
Litigation may from time to time be necessary to enforce patents issued to us, to protect
trade secrets or know-how owned by us, to defend us against claimed infringement of the rights of
others or to determine the scope and validity of the proprietary rights of others. See Cautionary
Statements Risk Factors We are highly dependent on our intellectual property.
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
we cannot assure 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
Asian 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. We expect our competitors will
continue to improve the design and performance of their products and to introduce new products with
competitive performance characteristics. We believe we will be required to maintain a high level
of investment in both research and development and sales and marketing in order to remain
competitive.
9
Operating Segment
We operate and manage our business of manufacturing, marketing and servicing components and
subsystems for plasma-based manufacturing processes as one segment. All material operating units
qualify for aggregation under Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures About Segments of an Enterprise and Related Information, because all of our products
and systems have similar economic characteristics, procurement, production and distribution
processes. To report revenues from external customers for each product and service or each group
of similar products and services would be impracticable. Since we operate in one segment, all
financial segment information required by SFAS No. 131 is found in the accompanying consolidated
financial statements. Please refer to Note 15 Foreign Operations and Major
Customers, included in Part II, Item 8 of this Form 10-K for further discussion regarding our
operations.
Research and Development
The market for our subsystems for vacuum process systems and related accessories is
characterized by ongoing technological changes. We believe that continued and timely development
of new highly differentiated products and enhancements to existing products 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 in order to remain responsive to their product requirements. Research and
development expenses were $51.5 million in 2004, $51.6 million in 2003 and $49.0 million in 2002,
representing 13.0% of total sales in 2004, 19.7% in 2003 and 20.5% in 2002.
Number of Employees
As of December 31, 2004, we had a total of 1,651 employees, 1,486 of whom were full-time
employees. There is no union representation of our employees, and we have never experienced an
involuntary work stoppage. We consider our employee relations to be good.
Effect of Environmental Laws
We are subject to federal, state and local environmental laws and regulations, as well as the
environmental laws and regulations of the foreign federal and local jurisdictions in which we have
manufacturing facilities. We believe we are in compliance with all such laws and regulations.
Cautionary Statements Risk Factors
This Form 10-K includes forward-looking statements within the meanings of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements contained or incorporated by reference in this Form 10-K, other than
statements of historical fact, are forward-looking statements. For example, statements relating
to our beliefs, expectations, plans and projections are forward-looking statements as are
statements that specified actions, conditions or circumstances will continue or change.
Forward-looking statements involve risks and uncertainties. In some cases, forward-looking
statements can be identified by the inclusion of words such as believe, expect, plan,
anticipate, estimate and similar words.
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Some of the forward-looking statements in this Form 10-K are expectations or projections
relating to:
Our actual results could differ materially from those projected or assumed in our
forward-looking statements, because forward-looking statements by their nature are subject to risks
and uncertainties. Factors that could contribute to these differences or prove our forward-looking
statements, by hindsight, to be overly optimistic or unachievable include the factors described in
this section. Other factors might also contribute to the differences between our forward-looking
statements and our actual results. We assume no obligation to update any forward-looking statement
or the reasons why our actual results might differ.
We have $187.7 million of convertible subordinated notes outstanding with maturity dates in
the second half of 2006. Our current cash reserves are insufficient to repay this debt in full.
We will not be able to internally generate sufficient cash from operations to repay this debt by
the maturity dates. Depending upon the price of our stock, refinancing our debt obligations, if
possible, may result in dilution of our common shareholders equity.
We will be required to repay the notes at maturity, unless we can refinance the debt or the
noteholders convert their notes into common stock before the maturity dates. Our 5.0% convertible
subordinated notes with a principal balance of $121.5 million are due September 1, 2006, and our
5.25% convertible subordinated notes with a principal balance of $66.2 million are due November 15,
2006. Our 5.0% notes are convertible into common stock at $29.83 per share. Our 5.25% notes are
convertible into common stock at $49.53 per share. Noteholders will be unlikely to convert their
notes unless our stock price rises above the conversion levels of the
notes. On March 24, 2005
the closing price of our common stock on the Nasdaq National Market
was $9.35 per share.
We are exploring ways to refinance the notes, as well as potential sales of assets that are
not critical to our core operations. We might not be able to refinance the notes prior to their
maturity on commercially reasonable terms, or at all. Refinancing the debt, if possible, might
result in dilution to our common stockholders equity. If we are unable to repay or refinance the
notes at or before maturity, the trustee of the notes will have the right to bring judicial
proceedings against us to enforce the noteholders rights, including the right to repayment prior
and in preference to our common stockholders and potentially the right to force us to liquidate
some of our assets.
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The semiconductor, semiconductor capital equipment and flat panel display industries are
highly cyclical, which impacts our operating results.
These industries have historically been growth cyclical because of sudden changes in demand
for semiconductors, flat panel displays and the related manufacturing capacity. The rate of
changes in demand, including end demand, is accelerating, and the effect of these changes is
occurring sooner, exacerbating the volatility of these cycles. These changes affect the timing and
amount of our customers equipment purchases and investments in new technology, as well as our
costs and operations.
During periods of declining demand, our customers typically reduce purchases, delay delivery
of products and cancel orders. We might incur significant charges as we seek to align our cost
structure with the reduction in sales. In addition, we might not be able to respond adequately or
quickly to the declining demand. We may also be required to record significant reserves for excess
and obsolete inventory as demand for our products changes. Our inability to reduce costs and the
charges resulting from other actions taken in response to changes in demand for our products would
adversely affect our operating results.
Our quarterly and annual operating results fluctuate significantly and are difficult to
predict.
Beginning in 2001 and through late 2003, demand for our products from the semiconductor
capital equipment industry declined substantially from its peak in 2000, and we incurred
significant losses each quarter from the second quarter of 2001 through the fourth quarter of 2003.
We were able to generate net income of $11.4 million in the first half of 2004 followed by a net
loss of $24.1 million in the second half of 2004. Fluctuations in our operating results
historically have resulted in corresponding changes in the market prices of our securities. Our
operating results are affected by a variety of factors, many of which are beyond our control and
difficult to predict. These factors include:
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Our near-term profitability will be impacted by our transition of the production of
substantially all of our product lines to our manufacturing facility in Shenzhen, China, which
transition has taken longer than initially anticipated.
We have invested significant human and financial resources to establish our manufacturing
facility in Shenzhen, China. These investments are being made in anticipation of reducing our
labor costs by increasing our workforce in China and correspondingly decreasing our workforce in
the United States.
Slower than expected customer acceptance of products manufactured in our Shenzhen facility has
required us to operate duplicate manufacturing facilities throughout 2004, which has negatively
affected our gross margin and operating expenses, including logistics costs. By the end of 2004,
we had transferred production of 19 of the 25 product lines we had planned to transfer to the
Shenzhen facility, with the remaining 6 product lines expected to be transferred by the end of 2005. Some of our major customers have strict and extensive requirements, which
may continue to delay or prevent them from accepting the remaining 6 product lines to be
transferred to our Shenzhen facility. We will continue to experience operating inefficiencies, and
thus might not achieve profitability until we can complete the transfer of a sufficient volume of
our manufacturing to our Shenzhen facility.
We might not realize all of the intended benefits of transitioning our supply base to Tier 1
Asian suppliers.
We anticipate purchasing a substantial portion of components for our products from Asian
suppliers by the end of 2005 to lower our materials costs and shipping expenses. These components
might require us to incur higher than anticipated testing or repairing costs, which would have an
adverse effect on our operating results. Customers, including major customers who have strict and
extensive requirements, might not accept our products if they contain these lower-priced
components. A delay or refusal by our customers to accept such products might require us to
continue to purchase higher-priced components from our existing suppliers or might cause us to lose
sales to these customers, which would have an adverse effect on our operating results.
Governmental or regulatory actions in China, Japan, the United States or any other country in
which we operate might increase our costs, including new costs incurred to comply with such
actions. Any such action could have an adverse effect on our operating results.
The regulatory environments in every country in which we operate are subject to change, and as
a result new governmental or regulatory actions may be mandated, with which we may be required to
comply. We might incur higher than anticipated costs to comply with such regulations or might be
limited in the nature or amount of business that we can conduct. Specifically, a future decision
by the Chinese government to allow the Chinese yuan to float against the U.S. dollar could
significantly increase the labor and other costs incurred in the operation of our Shenzhen
facility.
13
Component shortages exacerbated by our dependence on sole and limited source suppliers could
affect our ability to manufacture products and systems and could delay our shipments.
Our business depends on our ability to manufacture products that meet the rapidly changing
demands of our customers. Our ability to manufacture depends in part on the timely delivery of
parts, components and subassemblies from suppliers. We rely on sole and limited source suppliers
for some of our parts, components and subassemblies that are critical to the manufacturing of our
products. This reliance involves several risks, including the following:
If we are unable to successfully qualify additional suppliers and manage relationships with
our existing and future suppliers, we will experience shortages of parts, components or
subassemblies, increased material costs and shipping delays for our products, which will adversely
affect our results of operations and relationships with current and prospective customers.
We are highly dependent on our intellectual property.
Our success depends significantly on our proprietary technology. We attempt to protect our
intellectual property rights through patents and non-disclosure agreements; however, we might not
be able to protect our technology, and competitors might be able to develop similar technology
independently. In addition, the laws of some foreign countries might not afford our intellectual
property the same protections as do the laws of the United States. Our intellectual property is
not protected by patents in several countries in which we do business, and we have limited patent
protection in other countries, including China. The cost of applying for patents in foreign
countries and translating the applications into foreign languages requires us to select carefully
the inventions for which we apply for patent protection and the countries in which we seek such
protection. Generally, our efforts to obtain international patents have been concentrated in the
United Kingdom, Germany, France and the Pacific Rim, because there are other manufacturers and
developers of power conversion and control systems in those countries as well as customers for
those systems. If we are unable to protect our intellectual property successfully, our results of
operations will be adversely affected.
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Intellectual property rights are difficult to enforce in China.
Commercial law in China is relatively undeveloped compared to the commercial law in the United
States. Limited protection of intellectual property is available under Chinese law. Consequently,
manufacturing our products in China may subject us to an increased risk that unauthorized parties
may attempt to copy or otherwise obtain or use our intellectual property. We cannot assure you
that we will be able to protect our intellectual property rights effectively or have adequate legal
recourse in the event that we encounter infringements of our intellectual property under Chinese
law.
We have been and continue to be involved in patent litigation, which has resulted in
substantial costs and could result in additional costs, restrictions on our ability to sell certain
products and an inability to prevent others from using technology we have developed.
In May 2002, a jury determined that we had infringed a patent held by MKS Instruments, Inc.
(MKS) by selling one of our reactive gas generators, known as our RAPID product. Following the
jury verdict, we entered into a settlement agreement with MKS, pursuant to which we paid MKS $4.2
million and agreed to pay royalties in connection with future sales of the infringing RAPID
product.
MKS filed a patent infringement suit against us in the United States District Court in
Wilmington, Delaware, in May 2003 and a counterpart action in Germany in June 2004, alleging that
our Xstream With Active Matching Network products (Xstream products) infringe patents held by
MKS. Our Xstream products are reactive gas generators. In July 2004, a jury in the U.S.
litigation returned a verdict against us, finding that our Xstream products infringe three MKS
patents. A hearing regarding damages has not been held or scheduled. The court has not enjoined
us from selling our Xstream products. A decision on the infringement
allegation in Germany is expected on April 8, 2005, while an action
for nullity of MKSs German patent remains pending.
We also have been involved in patent litigation with other parties, including Sierra Applied
Sciences and the Unaxis Corporation. In 2004, we incurred approximately $4.9 million in legal fees
in connection with patent litigation.
Further patent litigation might:
Any of these events could have a significant adverse effect on our business, financial condition
and results of operations.
15
A significant portion of our sales is concentrated among a few customers.
Our ten largest customers accounted for 59% of our total sales during 2004, 54% in 2003 and
53% in 2002. Our largest customer, Applied Materials, accounted for 27% of our total sales in
2004, 20% in 2003 and 27% in 2002. No other customer represented greater than 10% of our total
sales for any of the three yearly periods ended December 31, 2004. The loss of any of our
significant customers or a material reduction in any of their purchase orders would significantly
harm our business, financial condition and results of operations.
Our customers continuously exert pressure on us to reduce our prices and extend payment terms.
Given the nature of our customer base and the highly competitive markets in which we compete, we
may be required to issue price concessions to our customers to remain competitive. A ten percent
reduction in our historical selling prices could lead to a nine percent or greater decline in gross
margin. We may not be able to reduce our other operating expenses in an amount sufficient to
offset potential margin declines.
Certain of our largest customers also exert pressure on us to restrict our product
distribution including, limiting the sale of our products to certain original equipment
manufacturers, based on shared technological development, and prohibiting sales to our end user
customer base entirely. Given our size relative to certain of our largest customers, we may be
required to agree to limitations of this nature to remain competitive. Such limitations of our
customer base would significantly harm our business.
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. We expect our competitors will
continue to develop new products in direct competition with ours, improve the design and
performance of their products and introduce new products with enhanced performance characteristics.
To remain competitive, we must improve and expand our products and product offerings. In
addition, we may 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 might not be able
to make the technological advances and investments necessary to remain competitive. Our inability
to improve and expand our products and product offerings would have an adverse affect on our sales
and results of operations.
We might not be able to compete successfully in international markets or meet the service and
support needs of our international customers.
Our sales to customers outside the United States were approximately 47% in 2004, 53% in 2003
and 40% in 2002. Our success in competing in international markets is subject to our ability to
manage various risks and difficulties, including, but not limited to:
16
Our ability to implement our business strategies, maintain market share and compete
successfully in international markets will be compromised if we are unable to manage these and
other international risks successfully.
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 must work with these manufacturers early in
their design cycles to modify our equipment or design new equipment to meet the requirements of
their new systems. Manufacturers typically choose one or two vendors to provide the components 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.
Once a manufacturer chooses a component for use in a particular product, it is likely to
retain that component for the life of that product. Our sales and growth could experience material
and prolonged adverse effects if we fail to achieve design wins. However, 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. If we are not successful in achieving design wins our sales and results of
operations will be adversely impacted.
Our Chief Executive Officer has announced his intent to retire in 2005. Our success may
depend upon our ability to identify and recruit a new chief executive officer who can lead and
manage the company.
Douglas S. Schatz, our President, Chief Executive Officer and Chairman of the Board, notified
our Board of Directors on December 30, 2004, of his intent to retire from his executive positions
as soon as his successor can be recruited. The search for Mr. Schatzs successor requires
substantial time and attention from our Board of Directors and senior management. The impending
retirement of Mr. Schatz also creates uncertainty among our employees, including senior management.
If we are unable to identify and recruit an appropriate successor for Mr. Schatz or if we are
unable to retain our senior management team during the process, our ability to realize fully the
benefits of our investments in research and development, our Shenzhen facility and other business
plans may be at risk.
17
Warranty costs on certain products may be in excess of historical experience.
In recent years, we have experienced higher than expected levels of warranty costs on some
products. We have been required to repair, rework and, in some cases, replace these products. Our
warranty costs generally increase when we introduce newer, more complex products. We recorded
warranty expense of approximately $10.5 million in 2004, $8.1 million in 2003 and $13.2 million in
2002. These expenses represented approximately 2.6% of our sales in 2004, 3.1% in 2003 and 5.5% in
2002. If such levels of warranty costs increase in the future, our financial condition and results
of operations will be adversely affected.
We are subject to numerous governmental regulations.
We are subject to federal, state, local and foreign regulations, including environmental
regulations and regulations relating to the design and operation of our products and control
systems. We might incur significant costs as we seek to ensure that our products meet safety and
emissions standards, many of which vary across the states and countries in which our products are
used. In the past, we have invested significant resources to redesign our products to comply with
these directives. We believe we are in compliance with current applicable regulations, directives
and standards and have obtained all necessary permits, approvals and authorizations to conduct our
business. However, compliance with future regulations, directives and standards could require us
to modify or redesign some products, make capital expenditures or incur substantial costs. If we
do not comply with current or future regulations, directives and standards:
Our inability to comply with current or future regulations, directives and standards will
adversely affect our operating results.
Our Chief Executive Officer owns a significant percentage of our outstanding common stock,
which could enable him to control our business and affairs.
Douglas
S. Schatz, our Chief Executive Officer, owned approximately 33% of our common stock
outstanding as of March 24, 2005. This stockholding gives Mr. Schatz significant voting power.
Depending on the number of shares that abstain or otherwise are not voted on a particular matter,
Mr. Schatz may be able to elect all of the members of our board of directors and to control our
business affairs for the foreseeable future in a manner with which our other stockholders may not
agree.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
Our
executive officers, their positions and their ages as of March 24, 2005, are as follows:
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, Mr. Schatz was reappointed as President. Mr. Schatz also
serves as a Director of Advanced Power Technology, Inc., a manufacturer of power semiconductors.
Mr. Schatz is a member of the CEO Committee of the Mountain States Council of the American
Electronics Association and serves on the Engineering Advisory Board of Colorado State University.
Michael El-Hillow
joined us in November 2001 as Senior Vice President of Finance and
Administration and Chief Financial Officer; in February 2003 he was named Executive Vice President.
From April 1997 to July 2001, Mr. El-Hillow was Senior Vice President and Chief Financial Officer
of Helix Technology Corporation, a manufacturer of vacuum products for semiconductors, flat panel
display and data storage markets. He was Senior Vice President and Chief Financial Officer of
Spike Broadband Systems, Inc. from July 2001 to October 2001. Prior to his roles at Helix
Technology Corporation, he was Vice President, Finance, Treasurer and Chief Financial Officer at
A.T. Cross Company and an audit partner at Ernst & Young LLP. Mr. El-Hillow serves on the Board of
Directors of Evergreen Solar, Inc., a manufacturer of solar panels and related products.
Linda A. Capuano
serves as Executive Vice President and Chief Technology Officer. Prior to
joining us in October 2004, Dr. Capuano served in various capacities at Honeywell (formerly
AlliedSignal, Inc.) since July 1995. Most recently, she was Corporate Vice President of Technology
Strategy at Honeywell International, Inc. since September 2001; her previous roles spanned
marketing, technology innovation, new business development, and general business management. She
also served as Vice President of Operations and Business Development from June 1988 to July 1995
and as Chief Financial Officer from 1992 to 1994, at Conductus, Inc., a company which she
co-founded. Dr. Capuano is also an associate member of the National Academy of Sciences.
Charles S. Rhoades
joined us in September 2002 as Senior Vice President and General Manager of
Control Systems and Instrumentation; in November 2004 he was named Executive Vice President of
Products and Operations. From March 2000 to September 2002, Mr. Rhoades was Vice President,
Corporate Development at Portera Systems. Prior to Portera Systems,
he was Managing Director of Product Development at Lam Research.
19
James G. Guilmart
joined us in September 1999 as Director of Applied Materials Account
Team and was named Senior Vice President of Sales in October 2000. From October 1998 to August 1999,
he was Senior Vice President, SAP Business Unit at Siemens Information and Communications Products,
LLC. Prior to Siemens, he was Vice President, Business Implementation at Unisys Corporation.
ITEM 2. PROPERTIES
Information concerning our principal properties at December 31, 2004 is set forth below.
During 2005, we expect to reduce the square footage of our Fort Collins, Colorado
facility by approximately 15% 20%. We consider all of the above facilities suitable and adequate
to meet our production and office space needs for the foreseeable future.
In 2004, we closed the following facilities:
20
ITEM 3. LEGAL PROCEEDINGS
On May 14, 2003, MKS Instruments, Inc. (MKS) filed a patent infringement suit against us in
the United States District Court in Wilmington, Delaware, alleging that our Xstream With Active
Matching Network products (Xstream products) infringe patents held by MKS. On July 23, 2004, a
jury returned a verdict against us, finding that our Xstream products infringe three MKS patents.
A hearing regarding damages has not been held or scheduled, nor has
the court enjoined us from
selling our Xstream products.
On June 2, 2004, as a counterpart to the Delaware litigation described above, MKS filed a
petition in the District Court in Munich, Germany, alleging infringement by our Xstream products of
a German patent owned by MKS, which is a counterpart patent to one of the patents subject to the
Delaware litigation. On August 4, 2004, the German court dismissed MKSs petition and assessed
costs of the proceeding against MKS. MKS has refiled an infringement petition in the district
court of Mannheim. A decision on the infringement allegation is expected on April 8, 2005, while
an action for nullity of MKSs German patent remains pending.
On July 12, 2004, we filed a complaint in the United States District Court for the
District of Delaware against MKS alleging that MKSs Astron reactive gas source products infringe
our U.S. Patent No. 6,046,546. A stipulation of voluntary dismissal was filed by the parties on March 9, 2005, which leaves us free to refile our claims upon conclusion of
MKSs lawsuit against our Xstream products.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our
common stock trades on the Nasdaq National Market under the symbol
AEIS. At March 24,
2005, the number of common stockholders of record was 820, and the closing sale price on that day
was $9.35 per share.
The table below shows the range of high and low closing sale prices for the common stock as
quoted (without retail markup or markdown and without commissions) on the Nasdaq National Market;
quotations do not necessarily represent actual transactions:
21
We have not declared or paid any cash dividends on our capital stock since we terminated
our election to be treated as an S-corporation for tax purposes, effective January 1, 1994. We
currently intend to retain all future earnings to finance our business and do not anticipate paying
cash or other dividends on our common stock in the foreseeable future. Furthermore, our revolving
credit facility prohibits the declaration or payment of any cash dividends on our common stock.
ITEM 6. SELECTED FINANCIAL DATA
The information below is not necessarily indicative of results of future operations and should
be read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition
and Results of Operations of Part II of this Form 10-K in order to fully understand factors that
may affect the comparability of the information presented below.
The selected consolidated statement of operations data for the year ended December 31, 2004,
and the related consolidated balance sheet data as of December 31, 2004, was derived from the
consolidated financial statements audited by Grant Thornton LLP, Independent Registered Public
Accounting Firm. The selected consolidated statement of operations data for the years ended
December 31, 2003 and 2002, and the related consolidated balance sheet data as of December 31,
2003, were derived from consolidated financial statements audited by KPMG LLP, Independent
Registered Public Accounting Firm. The related audit reports are included in this Form 10-K,
within Part II, Item 8, Financial Statements and Supplementary Data. The selected consolidated
statement of operations data for the years ended December 31, 2001 and 2000, and the consolidated
balance sheet data as of December 31, 2002, 2001 and 2000, were derived from audited consolidated
financial statements not included in this Form 10-K.
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information, forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Statements that are other than
historical information are forward-looking statements. For example, statements relating to our
beliefs, expectations, plans and projections are forward-looking statements, as are statements that
certain actions, conditions or circumstances will continue or change. Forward-looking statements
involve risks and uncertainties. Consequently, 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:
For a discussion of these and other factors that may impact our realization of our
forward-looking statements, see Cautionary Statements Risk Factors within Item 1 of Part I of
this Form 10-K.
Executive Summary
We focused substantial attention in 2004 on reducing costs, by making significant progress in
our transition of high-volume manufacturing from our Fort Collins, Colorado facility to our
Shenzhen, China facility, methodically addressing our inventory and materials costs, and bringing
greater discipline to our product life-cycle program. By the end of 2004, we had transitioned to
our Shenzhen facility production of 19 of the 25 product lines we currently plan to transition. We
expect to transfer the remaining 6 product lines by the end of 2005. Also by
the end of 2004, we had selected Tier 1 Asian suppliers for a substantial portion of the parts and
components anticipated to be used in the production of these 25 product lines. During the
transition of the product lines to our Shenzhen facility, we have been incurring significant
23
operating and logistics costs as a result of duplicate manufacturing facilities in Shenzhen and
Fort Collins, which has placed significant downward pressure on our gross margin. As the
transition of production progresses, in addition to our realizing significantly lower labor and
other costs at the Shenzhen facility compared to our Fort Collins facility, the need for the
inefficient duplicate manufacturing and related costs should decline.
Our net loss for 2004 was $12.7 million, compared to a net loss of $44.2 million in 2003 and
$41.4 million in 2002. The improvement was principally due to the higher sales base. Our sales in
2004 were $395.3 million, a 51% increase over sales in 2003, and our sales in 2003 reflected an
increase of 10% over sales in 2002. Our increasing sales from 2003 to 2004 principally reflect
recovery from the 2002-2003 downturns in the semiconductor, semiconductor capital equipment, and
flat panel display industries. Our sales in the second half of 2004, however, were 15% lower than
our sales in the first half of 2004, due to decreasing sales to our semiconductor OEM customers,
offset by continued growth in the flat panel display and other advanced thin film markets such as
industrial coatings. We believe the decline in our sales to our semiconductor OEM customers
reflects an industry slowdown.
Our gross margin remained low in 2004. We expect gross margin to improve as the transition of
high-volume manufacturing to our Shenzhen facility and move to Tier 1 Asian suppliers progress.
We also expect the operational changes we have effected, particularly in our pricing, procurement
and product life-cycle management programs, to positively impact our gross margin beginning in
2005.
Results of Operations
The following table summarizes certain data as a percentage of sales extracted from our
consolidated statements of operations:
24
SALES
The following tables summarize annual net sales, and percentages of net sales, by customer
type for each of the three years in the period ended December 31, 2004:
The following tables summarize annual net sales, and percentages of net sales, by
geographic region for each of the three years in the period ended December 31, 2004. The following
amounts do not contemplate where our customers may subsequently transfer our products.
Total sales were $395.3 million in 2004, $262.4 million in 2003 and $238.9 million in
2002, representing an increase of 10% from 2002 to 2003 and 51% from 2003 to 2004. This growth is
due primarily to recovery from downturns in the semiconductor and semiconductor capital equipment
industries, and continued growth of the flat panel display industry. In 2004, the industry upturns
were most notable in the first half of the year. Sales in the second half of 2004 decreased 15%
from the first half, as the semiconductor capital equipment industry appears to be entering a
slowdown. Looking forward, we expect that this slowdown will continue in the near term.
Our sales to the semiconductor capital equipment industry declined by approximately 5% from
2002 to 2003 and increased by approximately 54% from 2003 to 2004, due primarily to the cyclicality
of this industry.
Our sales to the data storage, flat panel display and advanced product applications markets,
have been steadily increasing each year from 2001 through 2004. This growth is primarily
attributed to market share gains, order trends and the general expansion of end customer products
including large flat panel displays, liquid crystal displays, DVD applications and applications
25
dependent upon industrial coatings. Flat panel display sales have grown most notably, with an
increase of 46% from 2002 to 2003 and 94% from 2003 to 2004. The 94% increase from 2003 to 2004
was primarily driven by sales of our new Summit DC power system to OEM customers building PVD
tools for Generation 6 and Generation 7 panel sizes.
Certain of our major customers require shipping terms of FOB destination point. When the
majority of our shipments were made from Fort Collins the one-day shipping time in the United
States resulted in minimal delay of revenue recognition from time of
shipment. Given the volume of shipments coming from China to the United States,
beginning in 2005, we will be delaying the recognition of revenue for these shipments by five to
seven days on sales to these certain major customers.
The impact of the acquisitions of Aera Japan, Ltd. (Aera) and Dressler HF Technik GmbH
(Dressler) on the 2002 sales level was minimal and would not impact the sales growth percentage
from 2002 to 2003, as a vast majority of the 2002 sales of these entities were included in the
consolidated operating results.
GROSS MARGIN
Our gross margin was 30.3% in 2004, 33.5% in 2003 and 28.8% in 2002. Our gross margins during
these years have been adversely affected principally by the following factors:
The improvement in gross margin from 2002 to 2003 was primarily due to cost reduction
measures and improved
absorption of overhead due to the higher sales base.
The decline in gross margin from 2003 to 2004 was primarily due to: lower average selling
prices than anticipated; increasing manufacturing costs at the Shenzhen facility as production of
more product lines were transferred and customers began accepting products from such facility,
without equivalent decreases in manufacturing and facilities costs at our Fort Collins facility
(impact of approximately 200 300 basis points); high demand during 2004 for product lines with
relatively low margins; and excess and obsolete inventory charges during the fourth quarter of 2004
resulting from changes in our product life-cycle management program,
26
discontinuance of certain products in select markets, the product mix shift from 200mm wafers
to 300mm wafers and the expected continued slowdown in the semiconductor industry in the near term.
We have taken measures to bring greater discipline to our pricing, procurement and product
life-cycle management programs. We expect gross margin to improve as the transition of high-volume
manufacturing to our Shenzhen facility and move to Tier 1 Asian suppliers progress, resulting in
lower labor and materials costs.
However, factors that could cause our gross margins to be negatively impacted in 2005 and
beyond include, but are not limited to the following:
RESEARCH AND DEVELOPMENT
The market for our subsystems for vacuum process systems and related accessories is
characterized by ongoing technological changes. We believe that continued and timely development
of new highly differentiated products and enhancements to existing products 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 in order to remain responsive to their product requirements. We believe that the
continued investment in research and development 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. Since our inception, all of our research and development
costs have been expensed as incurred.
Our research and development expenses were $51.5 million in 2004, $51.6 million in 2003 and
$49.0 million in 2002. As a percentage of sales, research and development expenses decreased from
20.5% in 2002 to 19.7% in 2003 and to 13.0% in 2004, due primarily to the higher sales base. The
5.4% increase in research and development expenses from 2002 to 2003 was primarily due to increases
in payroll and depreciation of equipment used for new product development. We expect our 2005
research and development expenses to decrease from 2004 in dollar terms, primarily due to less
engineering support needed in connection with our transition of high-volume product manufacturing
to China and a refocusing of our efforts on the critical platforms
that we expect to need in the next few
years.
27
SELLING, GENERAL AND ADMINISTRATIVE
Our selling expenses support domestic and international sales and marketing activities that
include personnel, trade shows, advertising, and other selling and marketing activities. We
constantly monitor our sales and marketing levels to meet current industry conditions. Our general
and administrative expenses support our worldwide corporate, legal, patent, tax, financial,
corporate governance, administrative, information systems and human resource functions in addition
to our general management.
Selling, general and administrative (SG&A) expenses were $62.4 million in 2004, $54.0
million in 2003 and $66.6 million in 2002. As a percentage of sales, SG&A expenses decreased from
27.9% in 2002 to 20.6% in 2003 and to 15.8% in 2004 due to the increasing sales base and our cost
reduction measures, including the closures of certain locations in each year. Partially offsetting
the decrease as a percentage of sales from 2003 to 2004, is an increase in selling expense in 2004
of $3.8 million due to a change in accounting estimate related to our demonstration equipment.
During the fourth quarter, as a result of the continuing process of obtaining and analyzing
historical data and our plan for use of the current and future demonstration equipment, we made a
change in the estimated useful life of the demonstration equipment. As a result of this change in
estimate, the net book value of demonstration equipment was written-off to SG&A expense, and going
forward, rather than amortizing this equipment to SG&A expense over two years, the expense will be
recorded as the demonstration equipment is placed into service at our customers or potential
customers location. We do not expect this change to have a material impact on our operating
results going forward.
Patent litigation expenses from 2002 through 2004 have comprised a portion of our SG&A
expenses. In addition to litigation damages paid to MKS as described below, we have recorded legal
fees and expenses related to litigation with MKS and others of approximately 2% to 8% of our total
SG&A expenses for each of the three years in the period ended December 31, 2004.
LITIGATION DAMAGES
During 2002, we recorded a charge of $4.2 million pertaining to damages awarded by a jury in a
patent infringement case in which we were the defendant. The Applied Science and Technology, or
ASTeX, division of MKS Instruments, Inc. (MKS) was the plaintiff in the case, which was tried in
a Delaware court. Sales of the product in question have accounted for less than five percent of
our total sales each year since the products introduction. We entered into a settlement agreement
with MKS allowing us to sell the infringing product to one of our customers subsequent to the date
of the jury award. Under the settlement agreement, royalties payable to MKS from sales of the
infringing product were not material in 2004 and 2003.
RESTRUCTURING CHARGES
We recorded restructuring charges totaling $9.1 million in 2002, primarily associated with
changes in operations designed to reduce redundancies and better align our mass flow controller
business acquired in January 2002 within our operating framework. Our restructuring plans and
associated costs consisted of $6.0 million to close and consolidate certain manufacturing
facilities, and $3.1 million for related headcount reductions of approximately 223 employees.
28
At the end of 2002, we announced major changes in our operations to occur through 2003. These
included establishing the manufacturing location in China; consolidating worldwide sales forces; a
move to Tier 1 Asian suppliers; and the intention to close or sell certain facilities.
Associated with the above plan, we recognized restructuring charges of approximately $4.3
million during 2003. These charges consisted of the recognition of expense for involuntary
employee termination benefits for 109 employees in our United States operations; voluntary employee
termination benefits, primarily in our Japanese operations for 36 employees; and asset impairments
incurred as a result of closing our Longmont, CO manufacturing facilities.
During 2004, in conjunction with our continuing progress in transitioning our high-volume
manufacturing to Shenzhen, China, we recorded $3.9 million of restructuring charges, primarily
attributable to employee severance and termination costs for 262 employees in the Fort Collins
facility. These headcount reductions will be offset, in part, by new hires in the Shenzhen, China
facility. Additional restructuring charges approximating $2.0 million are expected in the first
half of 2005, related to employee severance and termination costs incurred for approximately 70
employees in the Hajiochi, Japan facility, as manufacturing from this facility is also being
transferred to Shenzhen, China.
GOODWILL AND OTHER INTANGIBLE ASSET IMPAIRMENTS
Whenever events or circumstances indicate that the carrying value of our goodwill or other
intangible assets may not be recoverable, we perform tests for impairment of these assets and
record impairment charges, as necessary. Such events or circumstances include downturns or
anticipated downturns in the industries in which we serve, changes in customer technology
requirements, and other changes in circumstances affecting the underlying value of the recorded
asset. We recorded impairment charges of our amortizable intangible assets of $3.3 million in
2004, $1.2 million in 2003 and $1.9 million in 2002.
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 $1.7 million in 2004 and 2003 and $3.3 million in 2002. The
decline in interest income from 2002 to 2003 was due to our lower level of investment in marketable
securities and the overall lower rate of interest paid on our investments which resulted from the
Federal Reserve lowering interest rates during the period. The average rate of return on our
marketable securities decreased from 2.0% in 2002 to 1.8% in 2003. During 2003, we sold
approximately $10.1 million of marketable securities to fund our
operations, capital expenditures and payments on our senior borrowings. From 2003 to 2004,
the decrease in our level of investment in marketable securities was offset by increased rates of
return. The rate of return on our marketable securities increased from an average of 1.8% in 2003
to 2.2% in 2004. During 2004, we sold approximately $25.0 million of marketable securities to fund
our operations, capital expenditures and payments on our senior
borrowings.
Interest expense consists principally of interest on our convertible subordinated notes,
amortization of our deferred offering costs on these notes, and bank loans and capital leases
assumed in the acquisition of Aera in January 2002. Interest expense was approximately $11.0
million in 2004, $11.3 million in 2003 and $12.5 million in 2002. Interest expense decreased from
2002 to 2003 due to the repurchase of approximately $15.4 million of our 5.25% convertible
subordinated notes and $3.5 million of our 5.00% convertible subordinated notes in the fourth
29
quarter of 2002 and due to the repayment of approximately $12.8 million of senior borrowings
and capital lease obligations during 2003. Interest expense decreased from 2003 to 2004 due to the
repayment of approximately $8.6 million of senior borrowings and capital leases during 2004, offset
in part by a new borrowing of approximately $1.6 million.
Our foreign subsidiaries sales are primarily denominated in currencies other than the U.S.
dollar. We recorded net foreign currency gains of $1.0 million in 2004, $869,000 in 2003 and $5.3
million in 2002.
Our foreign currency gain in 2002 was primarily related to an intercompany loan of Japanese
yen, which was settled in January 2003 that we made to our wholly owned subsidiary Advanced Energy
Japan K.K., which has a functional currency of yen, for the purpose of effecting the acquisition of
Aera. The loan was transacted in the first quarter of 2002, for approximately 5.7 billion yen,
approximately $44.0 million based upon an exchange rate of 130:1. During the first half of that
year, the U.S. dollar weakened significantly against the yen to approximately 119:1, resulting in a
gain of $4.9 million. In July and September 2002, we entered into various foreign currency forward
contracts with our primary banks to mitigate the effects of potential future currency fluctuations
between the U.S. dollar and the yen until the associated intercompany obligations were settled.
In the fourth quarter of 2002, we repurchased approximately $15.4 million of our 5.25%
convertible subordinated notes and $3.5 million of our 5.00% convertible subordinated notes in the
open market at an aggregate cost of approximately $14.5 million. These purchases resulted in a
gain of $4.2 million.
Net miscellaneous income of $1.0 million was recorded in 2004, primarily due to the gain on
sale of marketable equity securities of $703,000 and the sale of our Noah chiller business for a
gain of $404,000. Net miscellaneous expense items were $644,000 in 2003 and $2.1 million in 2002.
Net miscellaneous expense in 2003 and 2002 was primarily related to the impairment of a marketable
equity security. During the fourth quarter of 2002, the fair value of this security continued a
substantial decline, and we determined the decline was other than temporary as defined by the
Financial Accounting Standards Board. As a result we recorded an impairment charge of
approximately $1.5 million. In the first quarter of 2003, this security continued to decline in
value, and we recorded an additional impairment charge of $175,000. Since the first quarter of
2003, the value of this security has appreciated; however the increase in the fair value of this
security will not be reflected in income until the security is sold.
(PROVISION) BENEFIT FOR INCOME TAXES
We account for income taxes in accordance with Statement of Financial Accounting Standard
(SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires deferred tax assets and
liabilities to be recognized for temporary differences between the tax basis and financial
reporting basis of assets and liabilities, computed at current tax rates, as well as for the
expected tax benefit of net operating loss and tax credit carryforwards. During 2003, we recorded
valuation allowances against certain of our United States and foreign net deferred tax assets in
jurisdictions where we have incurred significant losses in 2001, 2002 and 2003. Given such
experience, management could not conclude that it was more likely than not that these net deferred
tax assets would be realized. Accordingly, our management, in accordance with SFAS No. 109, in
evaluating the recoverability of these net deferred tax assets, was required to place greater
weight on our historical results as compared to projections regarding future taxable income.
30
If we generate future taxable income, or should we be able to conclude that sufficient taxable
income is reasonably assured based on profitable operations, in the appropriate tax jurisdictions,
against which these tax attributes may be applied, some portion or all of the valuation allowance
will be reversed and a corresponding reduction in income tax expense will be reported in future
periods. A portion of the valuation allowance relates to the benefit from stock-based
compensation. Any reversal of valuation allowance from this item will be reflected as a component
of stockholders equity.
The income tax provision of $3.9 million for 2004 represented an effective tax rate of
negative 45% and the income tax provision of $11.8 million for 2003 represented an effective tax
rate of negative 36%, due to taxable income earned in certain foreign jurisdictions. The income
tax benefit of $22.3 million for 2002 represented an effective tax rate of 35%.
When recording acquisitions, we have recorded valuation allowances due to the uncertainty
related to the realization of certain deferred tax assets existing at the acquisition dates. The
amount of deferred tax assets considered realizable is subject to adjustment in future periods if
estimates of future taxable income are changed. Reversals of valuation allowances recorded in
purchase accounting will be reflected as a reduction of goodwill in the period of reversal. For
the year ended December 31, 2004, valuation allowances established in purchase accounting were
reversed with a corresponding reduction in goodwill of approximately $3.3 million.
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, 2004. We believe that all
necessary adjustments have been included in the amounts stated below to present fairly such
quarterly information. Due to the volatility of the industries in which our customers operate the
operating results for any quarter are not necessarily indicative of results for any subsequent
period.
We had a loss in the fourth quarter of 2004 of $23.0 million. Pretax charges in the
fourth quarter included $9.2 million to cost of sales for increased excess and obsolete inventory reserves,
$3.8 million to selling, general and administrative for the change in estimate of the useful life
of the demonstration equipment (see Note 1 within Part II, Item 8), $3.7 million to restructuring
for employee severance and termination costs primarily attributable to the Fort Collins facility
(see
31
Note 3 within Part II, Item 8), $3.3 million to impairment of intangible
assets related to certain amortizable intangible assets acquired in conjunction with our purchase
of Dressler and Aera (see Note 8 within Part II, Item 8). These items contributed significantly to
our fourth quarter 2004 results. We increased our reserve for excess and obsolete inventory in the
fourth quarter of 2004 as a result of the fourth quarter strategic management decision to
discontinue certain product offerings, the outlook for near term demand, and the declining trend in
our sales from the second quarter of 2004 to the fourth quarter of 2004.
We had a loss of $27.4 million in the third quarter of 2003. During this quarter we recorded
a valuation allowance against certain of our U.S. and foreign net deferred tax assets in
jurisdictions where we have recognized significant losses (see Note 12 within Part II, Item 8).
Due to the cyclical nature of the semiconductor capital equipment industry as well as the
other industries in which our customers operate, and the sudden changes resulting in severe
downturns and upturns, we have experienced and expect to continue to experience significant
fluctuations in our quarterly operating results. Our levels of operating expenditures are based,
in part, on expectations of future revenues that such expenses support. If revenue levels in a
particular quarter do not meet expectations, operating results may be adversely affected.
Liquidity and Capital Resources
At December 31, 2004, our principal sources of liquidity consisted of cash, cash equivalents
and marketable securities of $108.0 million, and a credit facility consisting of a $25.0 million
revolving line of credit, none of which was outstanding at December 31, 2004. Advances under the
revolving line of credit would bear interest at the prime rate minus
1% (4.75% at March 24, 2005).
Any advances under this revolving line of credit will be due and payable in May 2005. We are
subject to covenants on our line of credit that provide certain restrictions related to working
capital, net worth, acquisitions and payment and declaration of dividends. We were in compliance
with all such covenants at December 31, 2004.
During 2004, our cash, cash equivalents and marketable securities decreased $26.9 million from
$134.9 million at December 31, 2003 to $108.0 million at December 31, 2004, primarily due to use in
operations, capital expenditures and senior borrowing repayments. Due to the same uses, our cash,
cash equivalents and marketable securities decreased $37.4 million from $172.3 million at December
31, 2002 to $134.9 million at December 31, 2003. In 2006, when our convertible subordinated notes
become due, it is possible we may need substantial funds to repay such debt, which totaled $187.7
million at December 31, 2004. Our 5.00% convertible subordinated notes with a principal balance of
$121.5 million are due September 1, 2006, and our 5.25% convertible subordinated notes with a
principal balance of $66.2 million are due November 15, 2006. We will be required to repay the
notes at maturity, unless we can refinance the debt or the noteholders convert their notes into
common stock before the maturity dates. Noteholders will be unlikely to convert their notes unless
our stock price rises above the conversion levels of the notes. Our 5.00% convertible subordinated
notes are convertible into common stock at $29.83 per share, and our 5.25% convertible subordinated
notes are convertible into common stock at $49.53 per share. At March
24, 2005, the closing price
of our common stock on the Nasdaq National Market was $9.35 per share. We therefore do not expect
the noteholders to convert their notes prior to maturity. As a result, we are exploring ways to
refinance the notes, as well as potential sales of assets that are not critical to our core
operations.
32
To address our liquidity requirements, we have set a goal to reduce our quarterly operating
breakeven point to a level based upon $70 million to $75 million sales, after our transition to
China-based manufacturing and to Tier 1 Asian suppliers is complete, which we estimate to occur by
the end of 2005. Additionally, we may raise capital through the public or private markets during
2005 by issuing common stock or convertible debt securities, or a combination of the two. Such
proceeds will be used to realign our capital structure and provide liquidity for the next
semiconductor capital equipment up-cycle. However, we cannot provide assurance that such sources
of liquidity will be available to us on commercially reasonable terms, or at all.
We have historically financed our operations and capital requirements through a combination of
cash provided by operations, the issuance of long-term debt and common stock, bank loans, capital
lease obligations and operating leases. However, with the exception of the second quarter of 2004,
we have not generated positive cash flow from operations since 2001.
Operating activities used cash of $11.4 million in 2004, reflecting our net loss of $12.7
million partially offset by non-cash items of $39.1 million and increased by net working capital
changes of approximately $37.8 million. Non-cash items primarily consisted of depreciation and
amortization of $21.1 million and increased provision for excess and obsolete inventory of $11.3
million. Net working capital changes primarily consisted of a $19.8 million related to increased
inventory excluding inventory reserve increases, $8.9 million related to increased trade accounts
receivable and $5.8 million related to decreased trade accounts payable.
Investing activities provided cash of $12.3 million in 2004, which primarily consisted of
$25.0 million from proceeds on the sale of marketable securities, offset by $14.0 million for the
purchase of property and equipment. We expect to make between $10.0 million and $11.0 million of
capital expenditures in 2005, due in part to our continued investment in our manufacturing
operations as well as our information technology infrastructure. Our planned level of capital
expenditures is subject to frequent revisions as our business experiences sudden changes and as we
move into industry upturns and downturns and expected sales levels change. In addition, changes in
foreign currency exchange rates may significantly impact our capital expenditures in a particular
period.
Investing cash flows experience significant fluctuations from year to year as we buy and sell
marketable securities, which we convert to cash to fund strategic investments and our current
operations, and as we transfer cash into marketable securities when we attain levels of cash that
are greater than needed for current operations. However, we do not expect to generate significant
levels of cash that are greater than needed for our current operations in the near term.
Financing activities used cash of $5.2 million in 2004, which primarily consisted of payments
on our senior borrowings and capital lease obligations of $8.6 million, partially offset by $1.8
million from the exercise of employee stock options and sale of common stock through our employee
stock purchase plan and $1.6 million from the proceeds of a senior borrowing used to purchase a
building in South Korea.
We expect our financing activities to continue to fluctuate in the future. If market
conditions and our financial position are deemed appropriate, we may repurchase additional
convertible notes in the open market. Our payments under capital lease obligations and senior
borrowings may also increase in the future if we enter into additional capital lease obligations or
change the level of our bank financing. Our estimated payments under capital lease obligations and
senior borrowings during 2005 will be approximately $3.7 million. However, a significant portion
of these obligations are held in countries other than the United States; therefore, future foreign
33
currency fluctuations, especially between the U.S. dollar and the yen, could cause significant
fluctuations in our estimated 2005 payment obligations.
CONTRACTUAL OBLIGATIONS
The following table sets forth our future payments due under significant off-balance sheet
arrangements, long-term debt and capital lease obligations as of December 31, 2004.
Please refer to Note 10 Convertible Subordinated Notes Payable, Note 9 Senior Borrowings,
Note 14 Commitments And Contingencies and Note 16 Related Party Transactions included in Part II,
Item 8 of this Form 10-K for further discussion regarding our significant off-balance sheet
arrangements, long-term debt and capital lease obligations.
Our inventory purchase obligations consist of minimum purchase commitments we entered into to
ensure we have an adequate supply of critical components to meet the demand of our customers. We
believe that these inventory purchases will be consumed in our on-going operations during the
respective years of purchase commitment.
We have also committed to advance up to $850,000 to a privately held company in exchange for
an exclusive intellectual property license. The amount and timing of this advance is dependent
upon the privately held company achieving certain development milestones. As of December 31, 2004,
approximately $50,000 has been advanced under this agreement, which
was recorded within research and
development expense in the consolidated statement of operations.
Recent Acquisitions
On January 18, 2002, we acquired Aera Japan Limited, or Aera, a privately held Japanese
corporation. Aera supplies the semiconductor capital equipment industry with product lines that
include digital mass flow controllers, thermal-based mass flow controllers, pressure-based mass
flow controllers, liquid mass flow controllers and liquid vapor delivery systems. Aera provides us
with a key leadership position in the gas delivery market. In addition, Aeras products expand our
offering of critical subsystem solutions that enable the plasma-based manufacturing processes used
in the manufacture of semiconductors.
On
March 28, 2002, we acquired Dressler HF Technik GmbH, or Dressler, a privately owned
Stolberg, Germany-based provider of power supplies and matching networks. We acquired Dressler to
expand our product offerings to customers in the semiconductor, data storage and flat panel
equipment markets with Dresslers power product portfolio that includes a wide range of power
levels and radio frequencies. In addition, with inroads already made into the laser and medical
markets, Dressler enables us to explore new market opportunities. Dressler also strengthens our
presence in the European marketplace and has well-established relationships with many European
customers, who look to Dressler for innovative technical capability, high-quality products, and
highly responsive customer service.
34
The results of operations of these acquired companies are included in our consolidated
statements of operations as of and since the date of acquisition. The pro forma results for the
Company, Aera and Dressler for the year ended December 31, 2002, assuming the acquisitions of Aera
and Dressler occurred on January 1, 2002, are not presented as the difference between the pro forma
results and actual results are not material.
Critical Accounting Policies and Estimates
The above discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. In preparing our
consolidated financial statements, we must make estimates and judgments that affect the reported
amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities at the date of our financial statements. Actual results may differ from
these estimates under different assumptions or conditions. We have evaluated the accounting
policies used in the preparation of the consolidated financial statements and related notes under
Part II, Item 8 of this Form 10-K and believe that our accounting policies are reasonable and
appropriate. We believe that the following critical accounting policies, among others, are most
critical as they relate to our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
REVENUE RECOGNITION
The Companys standard shipping term is freight on board (FOB)
shipping point, for which revenue is recognized upon shipment of its products, at which time title
passes to the customer, the price is fixed and collectability is reasonably assured. For certain
customers, the Company has FOB destination terms, for which revenue is recognized upon receipt of
the products by the customer, at which time title passes to the customer, the price is fixed and
collectability is reasonably assured. Generally, the Company does not have obligations to its
customers after its products are shipped under FOB shipping point
terms or after its products are received by the customer under FOB
destination terms, other than pursuant to warranty obligations. In limited
instances the Company provides installation of its products. In accordance with Emerging Issues
Task Force Issue 00-21 Accounting for Revenue Arrangements With Multiple Deliverables, the
Company allocates revenue based on the fair value of the delivered item, generally the product, and
the undelivered item, installation, based on their respective fair values. Revenue related to the
undelivered item is deferred until the services have been completed. In certain limited instances,
some of the Companys customers have negotiated product acceptance provisions relative to specific
orders. Under these circumstances, the Company defers revenue recognition until the related
acceptance provisions have been satisfied. Revenue deferrals are reported as customer deposits and
deferred revenue in the consolidated balance sheet.
In certain instances, the Company requires its customers to pay for a portion or all of their
purchases prior to the Company building or shipping these products. Cash payments received prior
to shipment are recorded as customer deposits and deferred revenue in the consolidated balance
sheets, and then recognized as revenue upon shipment of the products. The Company does not offer
price protections to its customers or allow returns, unless covered by its normal policy for repair
of defective products.
WARRANTY POLICY
The Company offers warranty coverage for its products, typically ranging
from 12 to 24 months after shipment. The Company estimates the anticipated costs of repairing
products under warranty based on the historical cost of the repairs and expected failure rates.
The assumptions used to estimate warranty accruals are reevaluated periodically in light of
35
actual experience and, when appropriate, the accruals are adjusted. The Companys
determination of the appropriate level of warranty accrual is subjective and based on estimates.
The industries in which the Company operates are subject to rapid technological change and, as a
result, the Company periodically introduces newer, more complex products, which tend to result in
increased warranty costs. Estimated warranty costs are recorded at the time of sale of the related
product, and are recorded within cost of sales in the consolidated statement of operations.
EXCESS AND OBSOLETE INVENTORY
Inventory is written down or written off when it becomes
obsolete, generally due to engineering changes to a product or discontinuance of a product line, or
when it is deemed excess. Judgment by management is necessary in estimating the net realizable
value of inventory based primarily upon forecasts of product demand. Charges for excess and
obsolete inventory are recorded, as necessary, within cost of sales in the consolidated statement
of operations.
STOCK-BASED COMPENSATION
At December 31, 2004, the Company had three active stock-based
compensation plans, which are more fully described in Note 18 within Part II, Item 8. The Company
accounts for employee stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations. APB Opinion No. 25 requires the use of the intrinsic value method, which
measures compensation cost as the excess, if any, of the quoted market price of the stock at the
measurement date over the amount an employee must pay to acquire the stock. With the exception of
certain options granted in 1999 and 2000 by a shareholder of Sekidenko, Inc., prior to its
acquisition by the Company (which was accounted for as a pooling of interests), all options granted
under these plans have an exercise price equal to the market value of the underlying common stock
on the date of grant, therefore no stock-based compensation cost is reflected in the Companys net
loss. The Company makes disclosures of pro forma net loss and loss per share as if the
fair-value-based method of accounting had been applied as required by SFAS No. 123, Accounting for
Stock-Based Compensation and as amended by SFAS No. 148, Accounting for Stock-Based Compensation
Transition and Disclosure (see Note 18 within Part II, Item 8).
The
Company will adopt the provisions of SFAS No. 123(R), Share Based Compensation, as of
the Companys third quarter of fiscal year 2005, as further discussed under the heading New
Accounting Pronouncements under Note 1 within Part II, Item 8. The adoption of this statement
may have a significant impact on the Companys results of operations as the Company will be
required to record compensation expense in the consolidated statement of operations rather than
disclose the impact on the Companys results of operations within the notes to the consolidated
financial statements.
COMMITMENTS AND CONTINGENCIES
We are involved in disputes and legal actions arising in the
normal course of our business. While we currently believe that the amount of any ultimate
potential loss would not be material to our financial position, the outcome of these actions is
inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss
could have a material adverse effect on our financial position or reported results of operations in
a particular quarter. An unfavorable decision, particularly in patent litigation, could require
material changes in production processes and products or result in our inability to ship products
or components found to have violated third-party patent rights. We accrue loss contingencies in
connection with our commitments and contingencies, including
litigation, when it is probable that a loss has occurred and the amount of the
loss can be reasonably estimated.
36
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost over the
fair market value of net tangible and identifiable intangible assets of acquired businesses.
Goodwill and certain other intangible assets with indefinite lives are not amortized.
Instead, goodwill and other indefinite-lived intangible assets are subject to periodic (at least
annual) tests for impairment. For the periods presented, the Company does not have any
indefinite-lived intangible assets, other than goodwill. Impairment testing is performed in two
steps: (i) the Company assesses goodwill for potential impairment by comparing the fair value of
its reporting unit with its carrying value, and (ii) if potential impairment is indicated because
the reporting units fair value is less than its carrying amount, the Company measures the amount
of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that
goodwill.
Finite-lived intangible assets continue to be amortized using the straight-line method over
their estimated useful lives and are reviewed for impairment whenever events or circumstances
indicate that their carrying amount may not be recoverable.
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,
2004, our investments in marketable securities consisted primarily of commercial paper, municipal
bonds and notes and institutional money markets. These securities are highly liquid. Earnings on
our marketable securities are typically invested into similar securities. In 2004, the rates we
earned on our marketable securities averaged approximately 2.2% on a before tax equivalent basis.
The impact on interest income of a 10% decrease in the average interest rate would have decreased
interest income by approximately $174,000 in 2004, $170,000 in 2003 and $300,000 in 2002. Interest
rate risk on our investment portfolio has decreased since 2002 with the decrease in our marketable
securities balance, which is primarily attributable to the use of these funds in operations, for the
acquisitions of Aera in January 2002 and Dressler in March 2002, and for the repurchase of a
portion of our convertible subordinated notes in the fourth quarter of 2002.
The interest rates on our subordinated debt are fixed, specifically, at 5.25% for the $66.2
million of our debt that is due in November 2006, and at 5.00% for the $121.5 million of our debt that is due
in September 2006. Our offerings of subordinated debt in 1999 and 2001 increased our fixed interest
expense upon each issuance, though interest expense was partially reduced by the repurchases of
portions of these offerings. Because these rates are fixed, we believe there is no risk of
increased interest expense with regard to these instruments.
The interest rates on the borrowings of one of our foreign subsidiaries are variable and as of
December 31, 2004 ranged from 1.5% to 3.1%. We believe a 10% increase in the average interest rate
on these instruments would not have a material effect on our financial position or results of
operations.
37
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. In 2004 compared to 2003, the U.S. dollar
weakened on average approximately 7% against the Japanese yen and 9% against the euro. It is
highly uncertain how currency exchange rates will fluctuate in the future. We have entered into
various foreign currency forward exchange contracts to mitigate against currency fluctuations in
the Japanese yen, Taiwanese dollar, South Korean won and Chinese yuan. The notional amount of our
foreign currency contracts at December 31, 2004 was $13.9 million. The potential fair value loss
for a hypothetical 10% adverse change in foreign currency exchange rates at December 31, 2004,
would be approximately $1.5 million, which would be essentially offset by corresponding gains
related to the underlying assets. At December 31, 2004 we held foreign currency forward exchange
contracts, maturing through January 2005, primarily to purchase U.S. dollars and sell various
foreign currencies. The following table summarizes our outstanding contracts as of December 31,
2004:
We also have long-term non-U.S. dollar-denominated debt of $4.3 million and $5.9 million
as of December 31, 2004 and 2003, respectively. A weakening of the U.S. dollar by 10% against the
applicable Asian currencies would have resulted in unrealized translation losses of approximately
$473,000 and $646,000 as of December 31, 2004 and 2003, respectively. We will continue to evaluate
various methods to minimize the effects of currency fluctuations when we translate the financial
statements of our foreign subsidiaries into U.S. dollars.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
39
Report of Independent Registered Public Accounting Firm
Board of Directors and
We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc. and
subsidiaries (the Company) as of December 31, 2004, and the related consolidated statements of
operations, stockholders equity and comprehensive loss, and cash flows for the year then ended.
These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (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 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 financial position of Advanced Energy Industries, Inc. and subsidiaries as
of December 31, 2004, and the results of their operations and their cash flows for the year then
ended in conformity with accounting principles generally accepted in the United States of America.
Our audit was conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. Schedule II listed in the index of financial statements is presented for
purposes of additional analysis and is not a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit 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.
We were also engaged to audit, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Advanced Energy Industries, Inc.s internal
control over financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Management was unable to complete their assessment of internal control over
financial reporting as of December 31, 2004 in a timely manner, and due to that scope limitation
we were unable to perform the procedures required to enable us to express, and we did not express,
an opinion on managements assessment or on the effectiveness of the Companys internal control
over financial reporting in our report dated March 30, 2005.
/s/ GRANT THORNTON LLP
Denver,
Colorado
40
Report of Independent Registered Public Accounting Firm
Board of Directors and
We were engaged to audit managements assessment, included in the accompanying Managements Reports
on Internal Control Over Financial Reporting (included in Item 9A of this Form 10-K), that Advanced
Energy Industries, Inc. (the Company) maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in
Internal Control
Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting.
A material weakness is a significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The Companys management has identified two
material weaknesses, the first relates to the lack of segregation of duties within the Companys
enterprise resource planning (ERP) system, as certain employees have ERP system access to record
transactions outside of their assigned job responsibilities. The Companys ERP system is integrated
throughout the organization including material foreign locations, with the exception of the Japan
subsidiaries. The ERP system interacts with most of the Companys major processes including
manufacturing, payables, receivables and inventory controls. This material weakness could result in
a material misstatement of annual and interim financial statements that would not be prevented or
detected, in the normal course of operations. The second material weakness relates to two
significant deficiencies in the Companys Japan operations, that when considered in the aggregate,
represents a material weakness. The first significant deficiency relates to both of the Japan
facilities having their own unique information system, as well as a lack of segregation of duties,
with certain employees having access in these systems to record transactions outside of their
assigned job responsibilities. The second significant deficiency in Japan was caused in the fourth
quarter of 2004 by the departure of key management personnel in Japan, creating a lack of proper
segregation of duties and oversight at the local level. The Japan material weakness could result in
a material misstatement of the operating results of the Japanese subsidiaries which are included in
the annual and interim financial statements that would not be prevented or detected, in the normal
course of operations. These material weaknesses were considered in determining the nature, timing
and extent of audit tests applied in our audit of the 2004 consolidated financial statements. The
material weaknesses identified did not affect our opinion on the Companys consolidated financial
statements.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management
and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Since management was unable to complete its assessment timely and we were unable to apply other
procedures to satisfy ourselves as to the effectiveness of the Companys internal control over
financial reporting, the scope of our work was not sufficient to enable us to express, and we do
not express, an opinion either on managements assessment or on the effectiveness of the Companys
internal control over financial reporting.
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet of Advanced Energy Industries, Inc. as of December
31, 2004, and the related consolidated statements of operations, stockholders equity and
comprehensive loss, and cash flows for the year then ended and our report dated March 30, 2005
expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Denver, Colorado
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2003 and the related consolidated
statements of operations, stockholders equity and comprehensive loss, and cash flows for each of
the years in the two-year period then ended. In connection with our audits of these consolidated
financial statements, we also have audited the related financial statement schedules as listed in
the accompanying index. These consolidated financial statements and financial statement schedules
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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, 2003, and the results of their operations and their cash flows for each of the
years in the two-year period then ended, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
Advanced Energy
Industries, Inc. and subsidiaries adopted the provisions of Statements of Financial Accounting
Standards No. 141,
Business Combinations
, and No. 142,
Goodwill and Other Intangible Assets
,
effective January 1, 2002.
Advanced Energy Industries,
Inc. and subsidiaries adopted the provisions of Statement of Financial Accounting Standards No.
145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections
, effective January 1, 2003.
/s/
KPMG LLP
Denver, Colorado
42
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements
43
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements
44
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements
45
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE LOSS
The accompanying notes to consolidated financial statements
46
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements
47
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advanced Energy Industries, Inc., a Delaware corporation, is primarily engaged in the
development and production of components and subsystems critical to plasma-based manufacturing
processes, which are used by manufacturers of semiconductors and in industrial thin-film
manufacturing processes.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Advanced Energy Industries, Inc. and its wholly-owned subsidiaries (collectively, the Company)
since their dates of acquisition (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated financial statements are
stated in U.S. dollars and are prepared in accordance with accounting principles generally accepted
in the United States.
SEGMENT REPORTING
The Company operates in one segment for the manufacture, marketing and
servicing of key subsystems, primarily to the semiconductor capital equipment industry. In
accordance with Statement of Financial Accounting Standard (SFAS) No. 131, Disclosures About
Segments of an Enterprise and Related Information, the Companys chief operating decision maker
has been identified as the Chief Executive Officer, who reviews operating results to make
decisions about allocating resources and assessing performance for
the entire Company. SFAS No.
131, which is based on a management approach to segment reporting, establishes requirements to
report selected segment information quarterly and to report annually entity-wide disclosures about
products and services, major customers, and the countries in which the entity holds material assets
and reports revenue. All material operating units qualify for aggregation under SFAS No. 131 due
to their similar customer base and similarities in: economic characteristics; nature of products
and services; and procurement, manufacturing and distribution processes. To report revenues from
external customers for each product and service or group of similar products and services would not
be practicable. Since the Company operates in one segment, all financial information required by
SFAS No. 131 can be found in the consolidated financial statements and notes thereto.
ESTIMATES AND ASSUMPTIONS
The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally accepted in the United States requires the Companys management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the
reporting period. Significant estimates are used when establishing allowances for doubtful
accounts, determining useful lives for depreciation and amortization, assessing the need for
impairment charges, establishing warranty reserves, allocating purchase price among the fair values
of assets acquired and liabilities assumed, accounting for income taxes, and assessing excess and
obsolete inventory and various others items. The Company evaluates these estimates and judgments
on an ongoing basis and bases its estimates on historical experience, current conditions and
various other assumptions that are believed to be reasonable under the circumstances. The results
of these estimates form the basis for making judgments about the carrying values of assets and
liabilities as well as identifying and assessing the accounting treatment with respect to
commitments and contingencies. Actual results may differ from these estimates under different
assumptions or conditions.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
(FASB) reissued SFAS No. 123, Accounting for Stock-Based
Compensation as SFAS No. 123(R),
Share Based Compensation. This statement replaces SFAS No. 123, amends SFAS No. 95, Statement
of Cash Flows, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123(R) requires companies to apply a fair-value based
measurement method in accounting for share-based payment transactions with employees and to record
compensation expense for all stock awards granted, and to awards modified, repurchased or cancelled
after the required effective date. Compensation expense for outstanding awards for which the
48
requisite service had not been rendered as of the effective date will be recognized over the
remaining service period using the compensation cost calculated for pro forma disclosure purposes
under SFAS No. 123, adjusted for expected forfeitures.
Additionally, SFAS No. 123(R) will require
entities to record compensation expense for employee stock purchase plans that may not have
previously been considered compensatory under the existing rules.
SFAS No. 123(R) will be effective
for quarterly periods beginning after June 15, 2005, which is the Companys third quarter of 2005.
The Company will adopt the provisions of SFAS No. 123(R) using a modified prospective application.
This statement may have a significant impact on the Companys results of operations as the Company
will be required to record compensation expense in the consolidated statement of operations rather
than disclose the impact on the Companys results of operations within its notes to the
consolidated financial statements (see Note 18).
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of Accounting
Research Bulletin No. 43, Chapter 4, Inventory Pricing. SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should
be recognized as current-period charges. In addition, it requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005 and will be applied on a prospective basis by the Company for the
fiscal year beginning January 1, 2006. The Company is currently evaluating the impact that
adoption of SFAS No. 151 will have on its financial position and results of operations.
REVENUE RECOGNITION
The Companys standard shipping term is freight on board (FOB)
shipping point, for which revenue is recognized upon shipment of its products, at which time title
passes to the customer, the price is fixed and collectability is reasonably assured. For certain
customers, the Company has FOB destination terms, for which revenue is recognized upon receipt of
the products by the customer, at which time title passes to the customer, the price is fixed and
collectability is reasonably assured. Generally, the Company does not have obligations to its
customers after its products are shipped under FOB shipping point
terms or after its products are received by the customer under FOB
destination terms, other than pursuant to warranty obligations. In limited
instances, the Company provides installation of its products. In accordance with Emerging Issues
Task Force (EITF) Issue 00-21 Accounting for Revenue Arrangements With Multiple Deliverables,
the Company allocates revenue based on the fair value of the delivered item, generally the product,
and the undelivered item, installation, based on their respective fair values. Revenue related to
the undelivered item is deferred until the services have been completed. In certain limited
instances, some of the Companys customers have negotiated product acceptance provisions relative
to specific orders. Under these circumstances, the Company defers revenue recognition until the
related acceptance provisions have been satisfied. Revenue deferrals are reported as customer
deposits and deferred revenue in the consolidated balance sheets.
In certain instances, the Company requires its customers to pay for a portion or all of their
purchases prior to the Company building or shipping these products. Cash payments received prior
to shipment are recorded as customer deposits and deferred revenue in the consolidated balance
sheets, and then recognized as revenue upon shipment of the products. The Company does not offer
price protections to its customers or allow returns, unless covered by its normal policy for repair
of defective products.
SHIPPING AND HANDLING COSTS
Amounts billed to customers for shipping and handling are
recorded in sales in the consolidated statements of operations. Shipping and handling costs
incurred by the Company for the delivery of products to customers are included in cost of sales in
the consolidated statements of operations.
EXCESS AND OBSOLETE INVENTORY
Inventory is written down or written off when it becomes
obsolete, generally due to engineering changes to a product or discontinuance of a product line, or
when it is deemed excess. Judgment by management is necessary in estimating the net realizable
value of inventory based primarily upon forecasts of product demand. Charges for excess and
obsolete inventory are recorded, as necessary, within cost of sales
in the consolidated statements
of operations. For the years ended December 31, 2004, 2003 and 2002, the Company recorded charges
for excess and obsolete inventory of $11.3 million, $3.0 million and $5.8 million, respectively.
49
WARRANTY POLICY
The Company offers warranty coverage for its products for periods typically
ranging from 12 to 24 months after shipment. The Company estimates the anticipated costs of
repairing products under warranty based on the historical cost of the repairs and expected failure
rates. The assumptions used to estimate warranty accruals are reevaluated periodically in light of
actual experience and, when appropriate, the accruals are adjusted. The Companys determination of
the appropriate level of warranty accrual is subjective and based on estimates. The industries in
which the Company operates are subject to rapid technological change and, as a result, the Company
periodically introduces newer, more complex products, which tend to result in increased warranty
costs. Estimated warranty costs are recorded at the time of sale of the related product, and are
recorded within cost of sales in the consolidated statements of operations. The Company recorded
warranty charges of $10.5 million, $8.1 million and $13.2 million for the years ended December 31,
2004, 2003 and 2002, respectively. The following summarizes the activity in the Companys warranty
reserves during 2004 and 2003:
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses in
the accompanying consolidated statements of operations are expensed as incurred, including legal
and advertising costs.
STOCK-BASED COMPENSATION
At December 31, 2004, the Company had three active stock-based
compensation plans, which are more fully described in Note 18. The Company accounts for employee
stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations. APB Opinion No. 25
requires the use of the intrinsic value method, which measures compensation cost as the excess, if
any, of the quoted market price of the stock at the measurement date over the amount an employee
must pay to acquire the stock. With the exception of certain options granted in 1999 and 2000 by a
shareholder of Sekidenko, Inc., prior to its acquisition by the Company (which was accounted for as
a pooling of interests), all options
granted under these plans have an exercise price equal to the market value of the underlying common
stock on the date of grant, therefore no stock-based compensation cost is reflected in the
Companys net loss. Had compensation cost for the Companys plans been determined consistent with
the fair value-based method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
the Companys net loss would have increased to the following adjusted amounts:
50
For SFAS No. 123 purposes, the fair value of each option grant and purchase right granted
under the ESPP are estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:
Based on the Black-Scholes option pricing model, the weighted-average estimated fair
value of employee stock option grants was $8.49, $7.88 and $12.54 for the years ended December 31,
2004, 2003 and 2002, respectively. The weighted-average estimated fair value of purchase rights
granted under the ESPP was $3.45, $4.99 and $8.92 for the years ended December 31, 2004, 2003 and
2002, respectively.
The total fair value of options granted was computed to be approximately $10.9 million, $14.3
million and $24.4 million for the years ended December 31, 2004, 2003 and 2002, respectively.
These amounts are amortized ratably over the vesting period of the options for the purpose of
calculating the pro forma disclosure above.
The
Company will adopt the provisions of SFAS No. 123(R) as of the Companys third quarter of
fiscal year 2005, as further discussed the heading New Accounting Pronouncements above. The
adoption of this statement may have a significant impact on the Companys results of operations as
the Company will be required to record compensation expense in the consolidated statement of
operations rather than disclose the impact on the Companys results of operations within its notes
to the consolidated financial statements.
COMMITMENTS AND CONTINGENCIES
We are involved in disputes and legal actions arising in the
normal course of our business. While we currently believe that the amount of any ultimate
potential loss would not be material to our financial position, the outcome of these actions is
inherently difficult to predict. In the event of an adverse outcome, the ultimate potential loss
could have a material adverse effect on our financial position or reported results of operations in
a particular quarter. An unfavorable decision, particularly in patent litigation, could require
material changes in production processes and products or result in our inability to ship products
or components found to have violated third-party patent rights. We accrue loss contingencies in
connection with our commitments and contingencies, including
litigation, when it is probable that a loss has occurred and the amount of the
loss can be reasonably estimated.
CASH AND CASH EQUIVALENTS
The Company considers all amounts on deposit with financial
institutions and highly liquid investments (valued at cost, which approximates fair value) with an
original maturity of 90 days or less to be cash and cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company
to credit risk, include cash and cash equivalents, marketable securities and trade accounts
receivable. The Company maintains cash and cash equivalents, marketable securities and certain
other financial instruments with various major financial institutions. The Company performs
periodic evaluations of the relative credit standing of these financial institutions and limits the
amount of credit exposure with any one institution. The Companys customers generally are
concentrated in the semiconductor capital equipment industry. As a result the Company is generally
exposed to credit risk associated with this industry. Sales by the Companys foreign subsidiaries
are primarily denominated in currencies other than the U.S. dollar. The Company establishes an
allowance for doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information.
51
MARKETABLE SECURITIES
The Companys investment in marketable securities, includes
commercial paper, municipal bonds and notes and institutional money markets. These investments are
classified as available for sale securities, and are recorded at fair value with changes in fair
market value recorded as unrealized holding gains or losses in other comprehensive loss, net of
tax. Due to the short-term, highly liquid nature of the marketable securities held by the Company,
the cost, including accrued interest on such investments, approximates fair value.
The Company also has investments in marketable equity securities which have been included in
deposits and other in the accompanying consolidated balance sheets, due to the Companys expressed
intent and demonstrated ability to hold for greater than one year. These investments are
classified as available-for-sale securities and are reported at fair value with unrealized holding
gains and losses included in other comprehensive loss, net of tax.
INVENTORIES, NET
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 and are presented net of reserves for excess and obsolete inventory.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost or estimated fair value
upon acquisition. Depreciation is computed using the straight-line method over thirty-five to
forty years for buildings; three to ten years for machinery, equipment, furniture and fixtures and
vehicles; and three years for computers and communication equipment. Amortization of leasehold
improvements and leased equipment is calculated using the straight-line method over the lease term
or the estimated useful life of the assets, whichever period is shorter. Additions, improvements,
and major renewals are capitalized, while maintenance, repairs, and minor renewals are expensed as
incurred. When depreciable assets are retired, or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts and any related gains or losses are included
in the consolidated statement of operations. Property and other long-lived assets are reviewed for
impairment whenever events or circumstances indicate that their carrying amount may not be
recoverable.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost over the
fair market value of net tangible and identifiable intangible assets of acquired businesses.
Goodwill and certain other intangible assets with indefinite lives are not amortized.
Instead, goodwill and other indefinite-lived intangible assets are subject to periodic (at least
annual) tests for impairment. For the periods presented, the Company does not have any
indefinite-lived intangible assets, other than goodwill. Impairment testing is performed in two
steps: (i) the Company assesses goodwill for potential impairment by comparing the fair value of
its reporting unit with its carrying value, and (ii) if potential impairment is indicated because
the reporting units fair value is less than its carrying amount, the Company measures the amount
of impairment loss by comparing the implied fair value of goodwill with the carrying amount of that
goodwill.
Finite-lived intangible assets continue to be amortized using the straight-line method over
their estimated useful lives and are reviewed for impairment whenever events or circumstances
indicate that their carrying amount may not be recoverable.
DEMONSTRATION AND CUSTOMER SERVICE EQUIPMENT
Demonstration equipment is manufactured
product that is utilized for sales demonstration and evaluation purposes. Customer service
equipment is manufactured product that is utilized as replacement and loaner equipment to existing
customers.
Historically, the Company has amortized demonstration and customer service equipment over its
estimated useful life of two years. During the fourth quarter of 2004, as a result of the
continuing process of obtaining and analyzing historical data and the Companys plan for use of the
current and future demonstration equipment, the Company made a change in the estimated useful life
of the demonstration equipment from two years to zero years. As a result of this change in
estimate, the net book value of demonstration equipment of approximately $3.2 million, net of tax,
or $0.10 per share, was written off.
52
The Companys current policy is to record selling, general and administrative expense for the
demonstration equipment as it is placed into service at our customers or potential customers
location. Customer service equipment will continue to be amortized over its estimated useful life
of two years.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Companys foreign subsidiaries
is their local currency, with the exception of the Companys manufacturing facility in Shenzhen,
China where the U.S. dollar is the functional currency. Assets and liabilities of international
subsidiaries are translated to U.S. dollars at period-end exchange rates, and statement of
operations activity and cash flows are translated at average exchange rates during the period.
Resulting translation adjustments are recorded as a separate component of stockholders equity.
Transactions denominated in currencies other than the local currency are recorded based on
exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in
foreign currency transaction gains and losses which are reflected in income as unrealized (based on
period end translation) or realized (upon settlement of the transactions). Unrealized transaction
gains and losses applicable to permanent investments by the Company in its foreign subsidiaries are
included as cumulative translation adjustments, and unrealized translation gains or losses
applicable to non-permanent intercompany receivables from or payables to the Company and its
foreign subsidiaries are included in income.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
(2) ACQUISITIONS
LITMAS
During 1998, the Company acquired a 29% ownership interest in Litmas, a privately
held, North Carolina-based early-stage company that designed and manufactured plasma gas abatement
systems and high-density plasma sources. The purchase price consisted of $1.0 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 Companys 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 have been
consolidated in the Companys financial statements from the date the controlling interest of 56.5%
was acquired. In October 2000, the Company acquired an additional 3.0% interest in Litmas for an
additional $250,000, bringing the Companys ownership interest in Litmas to 59.5%. In April 2002,
the Company completed its acquisition of the 40.5% of Litmas that it did not previously own, by
issuing approximately 120,000 shares of the Companys common stock valued at approximately $4.2
million, and approximately $400,000 of cash. The acquisition of the remaining minority interest in
Litmas resulted in approximately $5.0 million of additional goodwill.
DRESSLER
On March 28, 2002, the Company acquired Dressler HF Technik GmbH (Dressler), a
privately owned Stolberg, Germany-based provider of power supplies and matching networks, for a
purchase price of approximately $15.0 million in cash and a $1.7 million escrow. The escrow fund
was retained by the Company until January 2003, at which time the related escrow liability was
settled. The purchase price was also subject to a $3.0 million earn-out provision if Dressler
achieved certain key business objectives by March 30, 2003. These business objectives were not met
prior to the expiration date.
The Company believes that Dressler expands the Companys product offerings to customers in the
semiconductor, data storage, and flat panel equipment markets due to its strong power product
portfolio that includes a wide range of power levels and radio frequencies. In addition, with
inroads already made into the laser and medical markets, Dressler is used to explore new market
opportunities for the Company. Dressler also strengthens the Companys presence in the European
marketplace. Dressler has well established relationships with many European customers, who look
to Dressler for innovative technical capability, quality products, and highly responsive customer
service.
53
The acquisition was accounted for using the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations (SFAS No. 141), and the operating results of Dressler are
reflected in the accompanying consolidated financial statements prospectively from the date of
acquisition. The tangible assets acquired and liabilities assumed were recorded at estimated fair
values as determined by the Companys management. Goodwill and other intangible assets were
recorded at estimated fair values based upon independent appraisals.
The purchase price was allocated to the net assets of Dressler as summarized below (in
thousands):
The excess purchase price over the estimated fair value of tangible net assets acquired
was allocated to goodwill and other intangible assets (see Notes 1 and 8). The Company recognized
approximately $2.3 million, $2.5 million and $769,000 of amortization expense related to these
amortizable intangibles acquired from Dressler for the years ended December 31, 2004, 2003 and
2002, respectively.
Prior to the combination, there were transactions between the Company and Dressler in the
first three months of 2002, during which time the Company purchased approximately $500,000 of
inventory from Dressler. These purchases were made in the normal course of the Companys business.
AERA
On January 18, 2002, the Company acquired Aera Japan Limited (Aera), a privately
held Japanese corporation. The Company effected the acquisition through its wholly owned
subsidiary, AE-Japan, which purchased all of the outstanding stock of Aera. The aggregate purchase
price paid by AE-Japan was 5.7 billion Japanese yen (approximately $44.0 million, based upon an
exchange rate of 130:1), which the Company funded from its available cash. In connection with the
acquisition, AE-Japan assumed approximately $34.0 million of Aeras debt. Aera supplies the
semiconductor capital equipment industry with product lines that include digital mass flow
controllers, pressure-based mass flow controllers, liquid mass flow controllers, ultrasonic liquid
flow meters and liquid vapor delivery systems.
The acquisition was accounted for using the purchase method of accounting in accordance with
SFAS No. 141 and the operating results of Aera are reflected in the accompanying consolidated
financial statements prospectively from the date of acquisition. The tangible assets acquired and
liabilities assumed were recorded at estimated fair values as determined by the Companys
management. Goodwill and other intangible assets were recorded at estimated fair values based upon
independent appraisals.
54
The purchase price was allocated to the net assets of Aera as summarized below (in thousands):
There were no transactions between the Company and Aera prior to the combination. The
excess purchase price over the estimated fair value of tangible net assets acquired was allocated
to goodwill and other intangible assets (see Notes 1 and 8). The Company recognized approximately
$1.5 million, $1.4 million and $3.0 million of amortization expense related to the amortizable
intangibles acquired from Aera for the years ended December 31, 2004, 2003 and 2002, respectively.
The pro forma results for the Company, Aera and Dressler for the year ended December 31, 2002,
assuming the acquisitions of Aera and Dressler occurred on January 1, 2002, are not presented as
the difference between the pro forma results and actual results are not material.
(3) RESTRUCTURING COSTS
Restructuring charges include the costs associated with actions taken by the Company primarily
in response to downturns in the semiconductor capital equipment industry. These charges consist of
costs that are incurred to exit an activity or cancel an existing contractual obligation, including
the closure of facilities and employee termination related charges.
Effective January 1, 2003, the Company adopted SFAS No. 146, Accounting for Exit or Disposal
Activities, which nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity. SFAS No. 146 requires costs associated
with exit or disposal activities to be recognized when they are incurred, whereas under EITF Issue
No. 94-3, a liability was recognized at the date of an entitys commitment to an exit plan. As
related to employee termination benefits, the provisions of SFAS No. 146 offer guidance on
one-time termination benefits, and exclude from the scope on-going benefit arrangements,
therefore, the Company follows the guidance within SFAS No. 146 for voluntary severances and other
one-time termination benefits.
The accounting for the standard severance benefits that the Company pays for involuntarily
severed employees, considered an on-going benefit arrangement, is excluded from the scope of SFAS
No. 146. For these benefits, the Company follows the guidance under SFAS No. 88, Employers
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits. Severance costs accounted for under SFAS No. 88 are accrued and recorded as
restructuring expense when such amount is probable that employees will be entitled to benefits and
the amount can be reasonably estimated.
55
The following table summarizes the components of the restructuring charges, the payments and
non-cash charges, and the remaining accrual as of December 31, 2004, 2003 and 2002:
The Company recorded restructuring charges totaling $9.1 million in 2002, primarily
associated with changes in operations designed to reduce redundancies and better align the
Companys Aera mass flow controller business within its operating framework. The Companys
restructuring plans and associated costs consisted of $6.0 million to close and consolidate certain
manufacturing facilities, and $3.1 million for related headcount reductions of approximately 223
manufacturing and administrative employees in the Companys U.S. operations.
Included in the 2002 expense are charges for the closure of a portion of the Companys
Voorhees, New Jersey manufacturing facilities, due to the transfer of the manufacturing of these
products to Fort Collins, Colorado; the closure of a manufacturing facility in Fort Collins; the
closure of a manufacturing facilities in Longmont, Colorado, due to the transfer of the
manufacturing of these products to Fort Collins, Colorado and
ultimately to Shenzhen, China; and the closure of
Litmas. During the fourth quarter of 2002, the Company closed its San Jose, California sales and
service location; and the Companys Austin, Texas manufacturing facility for the Aera-brand mass
flow controller products, due to the transfer of the manufacturing of these products to Hachioji,
Japan, to be co-located with Aera Japan Limited. These costs consisted primarily of payments
required under operating lease contracts and costs for writing down related leasehold improvements.
At the end of 2002, the Company announced major changes in its operations to occur through the
end of 2003. These included establishing a new manufacturing facility in China, consolidating
worldwide sales forces, a move to high-quality, low-cost suppliers local to our Shenzhen, China
facility (Tier 1 Asian suppliers), and the intention to close or sell certain facilities.
56
Associated with the above plan, the Company recognized charges during 2003 as follows:
In the first, second and third quarters of 2004, the Company recorded restructuring charges of
$220,000, $187,000 and $88,000, respectively, which primarily consisted of the recognition of
expense for involuntary employee termination benefits associated with headcount reductions of
approximately 34, 12 and 4 employees, respectively, in the
Companys U.S. operations. All affected
employees were terminated prior to the respective quarter ends. Additionally, in the third
quarter, the Company reversed $253,000 of previously recorded charges due to variances from the
original estimates used to establish the Companys reserve, consequently, the Companys
restructuring accrual balance for employee severance and termination costs was $0 at September 30,
2004.
In the fourth quarter of 2004, the Company recorded restructuring charges of $3.7 million.
The $3.7 million charge primarily consisted of employee termination and related costs associated
with the involuntary severance of 212 employees, including 60 agency employees, at the Companys
Fort Collins facility. All of such charges relate to separation costs anticipated to be paid to
the terminated employees, in cash, by the end of the second quarter of 2005. The need to reduce
headcount in Fort Collins resulted primarily from the transfer of a substantial portion of the
Companys manufacturing operations to Shenzhen, China.
(4) MARKETABLE SECURITIES
Marketable securities consisted of the following:
These marketable securities are considered available-for-sale and are stated at period
end market value. The commercial paper consists of high-credit quality, short-term money market
common and preferreds, with maturities or reset dates of 120 days or less.
At December 31, 2004 and 2003, the Company also had $3.6 million and $4.8 million,
respectively, of investments in marketable equity securities which are included in deposits and
other in the accompanying consolidated balance sheets, due to the Companys expressed intent and
demonstrated ability to hold for greater than one year. These investments are classified as
available-for-sale securities and are reported at fair value with unrealized holding gains and
losses included in other comprehensive loss, net of tax.
57
During the fourth quarter of 2002, the fair value of one of these securities continued a
substantial decline, and the Company determined the decline was other than temporary. As a result,
the Company recorded an impairment charge of approximately $1.5 million. In the first quarter of
2003, this security continued to decline in value, and the Company recorded an additional
impairment charge of $175,000. Since the first quarter of 2003, the value of this security has
appreciated which has been reflected as a component of other comprehensive loss, net of tax.
(5) ACCOUNTS RECEIVABLE TRADE
Trade accounts receivable consisted of the following:
(6) INVENTORIES, NET
Net inventories consisted of the following:
Inventories include costs of materials, direct labor and manufacturing overhead.
Inventories are valued at the lower of market or cost, computed on a first-in, first-out basis.
Inventory is expensed as cost of sales upon recognition of revenue.
(7) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Aggregate depreciation expense related to property and equipment for the years ended
December 31, 2004, 2003 and 2002, was $13.7 million, $12.7 million and $13.4 million, respectively.
In the fourth quarter of 2002, in conjunction with the restructuring of its operations, the
Company determined that certain facilities would be closed. The Company performed an analysis of
the fair value of certain long-lived assets, including land and buildings acquired in conjunction
with the Companys acquisition of Engineering Measurements Company in January 2001. As a result,
the Company recorded impairments of property and equipment of $1.6 million, which has been
reflected as restructuring charges in the consolidated statement of operations.
58
(8) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following as of December 31, 2004:
Goodwill and other intangible assets consisted of the following as of December 31, 2003:
The Companys goodwill and other intangible assets have primarily resulted from purchases
of Japanese and German companies, and accordingly, carrying amounts for these assets are impacted
by changes in foreign currency exchange rates.
Aggregate amortization expense related to amortizable intangibles for the years ended December
31, 2004, 2003 and 2002, was $3.9 million, $4.6 million and $5.5 million, respectively. Estimated
amortization expense related to the Companys acquired intangibles fluctuates with changes in
foreign currency exchange rates between the U.S. dollar and the Japanese yen and the euro.
Estimated amortization expense related to amortizable intangibles for each of the five years 2005
through 2009 is as follows (in thousands):
In the fourth quarter of 2004, the Company performed its annual goodwill impairment test,
and concluded that no impairment of goodwill existed at the measurement date, as the estimated fair
value of the Companys reporting unit exceeded its carrying
amount. For the year ended December 31, 2004, goodwill was reduced by
approximately $3.3 million due to reversals of deferred tax
asset valuation allowances established in purchase accounting (see
Note 12).
During the fourth quarter of 2004, in conjunction with the Companys financial forecasting for
future periods, it was evident that projected cash flows from certain customers of Dressler were
substantially below amounts projected at the time of acquisition, which were considered in
determining the fair value of certain contract-based and other amortizable intangible assets
recorded at acquisition. As a result, the Company performed assessments of the carrying values of
the related amortizable intangible assets. These assessments consisted of estimating the
intangible assets fair value and comparing the estimated fair value
59
to the carrying value of the asset. The Company estimated the intangible assets fair value
through the use of projected cash flows based upon projected revenue streams over the life of the
asset, discounted at rates consistent with the risk of the related cash flows. Based on this
analysis the Company determined that the fair values of certain intangible assets were below the
respective carrying values, and recorded impairment charges of approximately $2.9 million, which
has been reported as an impairment of intangible assets in the accompanying
consolidated statement of operations.
Also during the fourth quarter of 2004, in conjunction with the Companys restructuring plan,
employees who were the subject of certain contract-based amortizable intangibles were severed from
the Company or their responsibilities were altered. As a result, the Company performed assessments
of the carrying values of the related amortizable intangible assets. These assessments consisted
of estimating the intangible assets fair value and comparing the estimated fair value to the
carrying value of the asset. The Company estimated the intangible assets fair value through the
use of a lost profits method of determining the fair value, arriving at projected cash flows which
were then discounted at rates consistent with the risk of the related cash flows. Based on this
analysis the Company determined that the fair values of certain intangible assets were below the
respective carrying values, and recorded impairment charges of approximately $397,000, which has
been reported as an impairment of intangible assets in the accompanying
consolidated statement of operations.
During the third quarter of 2003, the Company determined that one of its mass flow controller
products would not conform to changing customer technology requirements, and as such would no
longer be accepted by the Companys customers. As a result, the Company performed an assessment of
the carrying value of the related intangible asset. This assessment consisted of estimating the
intangible assets fair value and comparing the estimated fair value to the carrying value of the
asset. The Company estimated the intangible assets fair value by applying a hypothetical royalty
rate to the projected revenue stream and using a cash flow model discounted at rates consistent
with the risk of the related cash flows. Based on this analysis the Company determined that the
fair value of the intangible asset was minimal and recorded an impairment charge of approximately
$1.2 million, which has also been reported as an impairment of intangible assets
in the accompanying consolidated statement of operations.
In the fourth quarter of 2002, the Companys sales to the semiconductor capital equipment
industry declined substantially from the third quarter of 2002. As a result the Company evaluated
the carrying amount of assets acquired from Symphony by comparing its estimated future cash flows
to its carrying value. This analysis indicated that the Companys investment was impaired by
approximately $1.9 million, which has been reflected as impairment of intangible
assets in the accompanying consolidated statement of operations.
(9) SENIOR BORROWINGS
Senior borrowings consisted of the following:
The Company is subject to covenants on its line of credit that provide certain
restrictions related to working capital, leverage, net worth, acquisitions, and payment and
declaration of dividends. The Company was in compliance with these covenants at December 31, 2004.
The senior borrowings assumed in the acquisition of Aera and the mortgage note payable are
collateralized by the Companys buildings in Japan and Korea, respectively.
60
Scheduled maturities of the Companys outstanding borrowings and convertible subordinated
notes payable (see Note 10) are as follows at December 31, 2004:
(10) CONVERTIBLE SUBORDINATED NOTES PAYABLE
In August 2001, the Company issued $125.0 million of 5.00% convertible subordinated notes.
These notes mature September 1, 2006, with interest payable on March 1
st
and September
1
st
of each year beginning March 1, 2002. Net proceeds to the Company were $121.25
million, after deducting $3.75 million of offering costs, which have been capitalized and are being
amortized as additional interest expense over a period of five years. Holders of the notes may
convert the notes at any time before maturity into shares of the Companys common stock at a
conversion rate of 33.5289 shares per each $1,000 principal amount of notes, equivalent to a
conversion price of $29.83 per share. The conversion rate is subject to adjustment in certain
circumstances. The Company may redeem the notes from September 4, 2004 through August 31, 2005 at
102% times the principal amount, from September 1, 2005 through August 31, 2006 at 101% times the
principal amount, and thereafter at 100% of the principal amount. Upon any provisional redemption,
the Company will make an additional payment in cash with respect to the notes called for redemption
in an amount equal to $150.56 per $1,000 principal amount of notes, less the amount of any interest
paid on the note. The Company may also make this additional payment in shares of its common stock,
and any such payment will be valued at 95% of the average of the closing prices of the Companys
common stock for the five consecutive trading days ending on the day prior to the redemption date.
The Company will be obligated to make an additional payment on all notes called for provisional
redemption. The notes are subordinated to the Companys present and potential future senior debt,
and are effectively subordinated in right of payment to all indebtedness and other liabilities of
the Companys subsidiaries. At December 31, 2004, approximately $2.0 million of interest expense
related to these notes was accrued as a current liability.
In November 1999, the Company issued $135.0 million of 5.25% convertible subordinated notes.
These notes mature November 15, 2006, with interest payable on May 15
th
and November
15
th
each year beginning May 15, 2000. Net proceeds to the Company were approximately
$130.5 million, after deducting $4.5 million of offering costs, which have been capitalized and are
being amortized as additional interest expense over a period of seven years. Holders of the notes
may convert the notes at any time into shares of the Companys common stock at a conversion rate of
20.1898 shares per each $1,000 principal amount of notes, equivalent to a conversion price of
$49.53 per share. The conversion rate is subject to adjustment in certain circumstances. The
Company may redeem the notes on or after November 19, 2002 at a redemption price of 103% of the
principal amount, and may redeem at successively lesser amounts thereafter until November 15, 2006,
at which time the Company may redeem at a redemption price equal to the principal amount. At
December 31, 2004, approximately $435,000 of interest expense related to these notes was accrued as
a current liability.
In October and November 2000, the Company repurchased an aggregate of approximately $53.4
million principal amount of its 5.25% convertible subordinated notes in the open market, for a cost
of approximately $40.8 million.
In October and November 2002, the Company repurchased approximately $15.4 million and $3.5
million principal amounts of its 5.25% and 5.00% convertible subordinated notes, respectively.
These purchases were made in the open market, for a cost of approximately $14.5 million, resulting
in a pre-tax gain of $4.2 million. At December 31, 2004 and 2003, approximately $66.2 million and
$121.5 million principal amounts of the 5.25% and 5.00% notes, respectively, remained outstanding.
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(11) EARNINGS PER SHARE
Basic earnings per share
(EPS) is computed by dividing income (loss) 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 exclude 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 if-converted and treasury stock methods), if securities containing potentially dilutive common
shares (convertible notes payable and stock options) had been converted to such common shares, and
if such assumed conversion is dilutive. For the years ended December 31, 2004, 2003 and 2002,
certain stock options outstanding and the conversion of the Companys convertible subordinated
notes payable were not included in this calculation because to do so would be anti-dilutive. Due
to the Companys net loss for years ended December 31, 2004, 2003 and 2002, basic and diluted EPS
are the same, as the assumed conversion of all potentially dilutive securities would be
anti-dilutive. Potential shares of common stock issuable under options for common stock at December
31, 2004, 2003 and 2002 were approximately 4.7 million, 4.0 million and 3.6 million, respectively.
Potential shares of common stock issuable upon conversion of the Companys convertible
subordinated notes payable were 5.4 million at December 31, 2004, 2003 and 2002.
(12) INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires deferred tax assets and liabilities to be recognized for temporary
differences between the tax basis and financial reporting basis of assets and liabilities, computed
at current tax rates, as well as for the expected tax benefit of net operating loss and tax credit
carryforwards. During 2004 and 2003, the Company recorded valuation allowances against certain of
its United States and foreign net deferred tax assets in jurisdictions where the Company has
incurred significant losses in recent years. Given such experience, the Companys management could
not conclude that it was more likely than not that these net deferred tax assets would be realized.
While there were indications that the markets in which the Company operates may have improved in
future periods, the Companys management, in accordance with SFAS No. 109, in evaluating the
recoverability of these net deferred tax assets, was required to place greater weight on the
Companys historical results as compared to projections regarding future taxable income. If the
Company generates future taxable income, or should the Company be able to conclude that sufficient
taxable income is reasonably assured based on profitable operations, in the appropriate tax
jurisdictions, against which these tax attributes may be applied, some portion or all of the
valuation allowance will be reversed and a corresponding reduction in income tax expense will be
reported in future periods. Approximately $2.3 million of the valuation allowance relates to the
benefit from stock-based compensation. Any reversal of valuation allowance from this item will be
reflected as a component of stockholders equity.
When recording acquisitions, the Company has recorded valuation allowances due to the
uncertainty related to the realization of certain deferred tax assets existing at the acquisition
dates. The amount of deferred tax assets considered realizable is subject to adjustment in future
periods if estimates of future taxable income are changed. Any reversals of valuation allowances
recorded in purchase accounting will be reflected as a reduction of goodwill in the period of
reversal. For the year ended December 31, 2004, valuation allowances established in
purchase accounting were reversed with a corresponding reduction in goodwill of approximately $3.3
million.
62
The income tax provision of $3.9 million in 2004 represents an effective tax rate of negative
45% and the income tax provision of $11.8 million in 2003 represents an effective tax rate of
negative 36%, due to taxable income earned in certain foreign jurisdictions. The income tax
benefit of $22.3 million for 2002 represents an effective tax rate of 35%. The provision (benefit)
for income taxes for the years ended December 31, 2004, 2003 and 2002 was, as follows:
The following reconciles the Companys effective tax rate to the federal statutory rate
for the years ended December 31, 2004, 2003 and 2002:
The sources of the Companys deferred income tax assets and liabilities are summarized as
follows:
The following reconciles the change in the net deferred income tax liability from
December 31, 2003 to December 31, 2004, to the deferred income tax provision:
63
As of December 31, 2004, the Company had a gross federal net operating loss, alternative
minimum tax credit and research and development credit carryforwards of approximately $85 million,
$2 million and $4 million, respectively, which may be available to offset future federal income tax
liabilities. The federal net operating loss and research and development credit carryforwards
expire at various dates through December 31, 2024, the alternative minimum tax credit carryforward
has no expiration date. In addition, as of December 31, 2004, the Company had a gross foreign net
operating loss carryforward of $4 million, which may be available to offset future foreign income
tax liabilities and expire at various dates through December 31, 2008.
The domestic versus foreign component of the Companys net loss before income taxes for the
years ended December 31, 2004, 2003 and 2002, was as follows:
(13) RETIREMENT PLANS
The Company has a 401(k) profit sharing plan which covers most full-time employees age
eighteen or older. Participants may defer up to the maximum amount allowed as determined by law.
Participants are immediately vested in their contributions.
The Company may make discretionary contributions based on corporate financial results. In
2002, the Companys contribution for participants in its 401(k) plan was 10% matching on
contributions by employees up to 6% of the employees compensation. In 2003, the Company increased
its matching contributions to 25% matching on contributions by employees up to 6% of the employees
compensation; such contribution level was maintained for 2004. The Companys total contributions
to the plan were approximately $698,000, $635,000 and $272,000 for the years ended December 31,
2004, 2003 and 2002, respectively. Vesting in the profit sharing contribution account is based on
years of service, with most participants fully vested after four years of credited service.
(14) COMMITMENTS AND CONTINGENCIES
The Company has committed to purchase approximately $5.0 million of parts, components and
subassemblies in 2005 and $2.5 million in 2006. This inventory purchase obligation represents a
minimum purchase commitment to ensure the Company has an adequate supply of critical components to
meet the demand of its customers. The Company believes these inventory purchases will be consumed
in its on-going operations during the respective years of purchase commitment.
The Company has also committed to advance up to $850,000 to a privately held company in
exchange for an exclusive intellectual property license. The amount and timing of this advance is
dependent upon the privately held company achieving certain development milestones. As of December
31, 2004, approximately $50,000 has been advanced under this
agreement, which was recorded within research and
development expense in the consolidated statement of operations.
DISPUTES AND LEGAL ACTIONS
The Company is involved in disputes and legal actions arising in the normal course of its
business. Currently and historically, the Companys most significant legal actions have involved
the application of patent law to complex technologies and intellectual property. The determination
of whether such technologies infringe upon the Companys or others patents is highly subjective.
This high level of subjectivity introduces substantial additional risk with regard to the outcome
of the Companys disputes and legal actions related to intellectual property. While the Company
currently believes that the amount of any ultimate potential loss for currently-known matters would
not be material to the Companys financial
64
position, the outcome of these actions is inherently difficult to predict. In the event of an
adverse outcome, the ultimate potential loss could have a material adverse effect on the Companys
financial position or reported results of operations in a particular period. An unfavorable
decision, particularly in patent litigation, could require material changes in production processes
and products or result in the Companys inability to ship products or components found to have
violated third-party patent rights. The Company accrues loss contingencies in connection with its
litigation when it is probable that a loss will occur and the amount of the loss can be reasonably
estimated.
In April 2003, the Company filed a claim in the United States District Court for the District
of Colorado seeking a declaratory ruling that its new plasma source products Xstream With Active
Matching Network (Xstream products) are not in violation of U.S. Patents held by MKS
Instruments, Inc. (MKS). This case was transferred by the Colorado court to the United States
District Court for the District of Delaware for consolidation with a patent infringement suit filed
in that court by MKS in May 2003, alleging that the Companys Xstream products infringe five
patents held by MKS. On July 23, 2004, a jury returned a verdict of infringement of three MKS
patents, which did not stipulate damages. The court has not enjoined the Company from selling the
Xstream products. The Company has filed four separate motions to have the verdict set aside based
upon defects in the trial. The court has not scheduled any further activity in the case, including
trial of the Companys patent invalidity and inequitable conduct defenses, while the post-trial
motions are being reviewed. Potential liability, if any, resulting from the jury verdict is
indeterminable at this time, and therefore no amount has been accrued by the Company in the
accompanying consolidated financial statements.
On June 2, 2004, MKS filed a petition in the District Court in Munich, Germany, alleging
infringement by the Companys Xstream products of a counterpart German patent owned by MKS. On
August 4, 2004, this court dismissed MKSs petition and assessed costs of the proceeding against
MKS. MKS refiled an infringement petition in the District Court of Mannheim. At a hearing held on
February 18, 2005, the Mannheim court indicated that a decision on the infringement allegation
would be rendered on April 8, 2005. A petition for invalidity of MKSs patent brought by the
Company is still pending before the German Federal Patent Court.
On July 12, 2004, the Company filed a complaint in the United States District Court for the
District of Delaware against MKS alleging that MKSs Astron reactive gas source products infringe
Advanced Energys U.S. Patent No. 6,046,546. A stipulation of voluntary dismissal of the
action was filed by the parties on March 9, 2005, which leaves the Company free to refile its claims upon conclusion of
MKSs lawsuit against the Companys Xstream products.
On September 17, 2001, Sierra Applied Sciences, Inc. (Sierra) filed for declaratory judgment
asking the U.S. District Court for the District of Colorado to rule that its products did not
infringe the Companys U.S. patent no. 5,718,813 and that the patent was invalid. On March 24,
2003, the Court granted the Companys motion to dismiss the case for lack of subject matter
jurisdiction. The Court of Appeals for the Federal Circuit affirmed the dismissal on April 13, 2004
as to all of Sierras current activities, but remanded for findings related to past sales of older
products. The case was settled and dismissed on September 2, 2004 under terms of a settlement
agreement that provided for no monetary consideration to be paid by either party.
In May 2002, the Company recognized approximately $4.2 million of litigation damages
pertaining to a judgment entered by a jury against the Company and in favor of MKS in a
patent-infringement suit in which the Company was the defendant. The Company has entered into a
settlement agreement with MKS allowing it to sell the infringing product subsequent to the date of
the jury award. The settlement agreement is in effect until all patents subject to the litigation
expire. Under the settlement agreement, royalties payable to MKS from sales of the related product
were not material in any of the periods presented.
65
CAPITAL LEASES
The Company finances a portion of its property and equipment under capital lease obligations
at interest rates averaging approximately 3%. The future minimum lease payments under capital
lease obligations as of December 31, 2004 are as follows:
OPERATING LEASES
The Company has various operating leases for automobiles, equipment, and office and production
facilities (see Note 16). Lease expense under operating leases was approximately $6.2 million,
$6.3 million, and $6.5 million for the years ended December 31, 2004, 2003 and 2002, respectively.
The future minimum rental payments required under non-cancelable operating leases as of
December 31, 2004 are as follows:
(15) FOREIGN OPERATIONS AND MAJOR CUSTOMERS
The Company has operations in the United States, Europe and Asia. The following is a summary
of the Companys operations by region:
66
Intercompany sales among the Companys geographic areas are recorded on the basis of
intercompany prices established by the Company.
The Company has a major customer (sales in excess of 10% of total sales) that is a
manufacturer of semiconductor capital equipment. Sales to this customer accounted for the
following percentages of sales for the years ended December 31, 2004, 2003 and 2002:
There were no other customers that represented greater than 10% of the Companys total
sales for the years ended December 31, 2004, 2003 and 2002.
Trade accounts receivable from Applied Materials, Inc. were approximately $7.8 million as of
December 31, 2004, which represented approximately 12% of the Companys total trade accounts
receivable. At December 31, 2004, trade accounts receivable from ULVAC, Inc. were approximately
$17.4 million, representing approximately 26% of the Companys total trade accounts receivable. No
other customers had a trade accounts receivable balance in excess of 10% of the total trade
accounts receivable at December 31, 2004.
(16) RELATED PARTY TRANSACTIONS
The Company leases its executive offices and manufacturing facilities in Fort Collins,
Colorado from two limited liability partnerships, in which the Companys Chief Executive Officer
holds an interest. The leases relating to these spaces expire in 2009, 2011 and 2016, and contain
monthly payments of approximately $87,000, $69,000 and $85,000, respectively.
For each of the years ended December 31, 2004 and 2003 approximately $2.8 million was paid
attributable to these leases. For the year ended December 31, 2002, approximately $2.7 million was
paid attributable to these leases. Rent and related amounts are expensed as incurred.
The Company also has an agreement whereby monthly payments of approximately $12,000 are made
to one of the above mentioned limited liability partnerships, which secures future leasing rights
on a parcel of land in Colorado. Such amounts are expensed as incurred. Approximately $132,000
was paid attributable to this agreement for the year ended December 31, 2004, and $156,000 for each
of the years ended December 31, 2003 and 2002.
The Company leased, for business purposes, a condominium owned by a partnership of certain
stockholders, including the Companys Chief Executive Officer. The Company paid the partnership
$10,000, $60,000 and $67,000 in 2004, 2003 and 2002, respectively. In February 2004, this lease
agreement was terminated.
The Company charters aircraft from time to time from a company owned by the Companys Chief
Executive Officer. Aggregate payments for the use of such aircraft were $16,000, $6,000 and
$103,000 in 2004, 2003 and 2002, respectively.
(17) CONCENTRATIONS OF CREDIT RISK
FORWARD CONTRACTS
The Company, including its subsidiaries, enters into foreign currency
forward contracts with counterparties to mitigate foreign currency exposure from foreign currency
denominated trade purchases and intercompany receivables and payables. These derivative
instruments are not held for trading or speculative purposes.
To the extent that changes occur in currency exchange rates, the Company is exposed to market
risk on its open derivative instruments. This market risk exposure is generally offset by the gain
or loss recognized
67
upon the translation of its trade purchases and intercompany receivables and payables.
Foreign currency forward contracts are entered into with major commercial United States, Japanese
and German banks that have high credit ratings, and the Company does not expect the counterparties
to fail to meet their obligations under outstanding contracts. Foreign currency gains and losses
under these 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, 2004 maturing through January 2005. The Company did not seek specific hedge
accounting treatment for its foreign currency forward contracts.
At December 31, 2004, the Company held the following foreign currency forward contracts to buy
U.S. dollars and sell various foreign currencies:
OTHER CONCENTRATIONS OF CREDIT RISK
The Company uses financial instruments that
potentially subject it to concentrations of credit risk. Such instruments include cash
equivalents, short-term investments, accounts receivable, and foreign currency forward contracts.
The Company invests its cash in cash deposits, money market funds, commercial paper, and municipal
bonds and notes. The Company places its investments with high-credit quality financial
institutions and limits the credit exposure from any one financial institution or instrument. To
date, the Company has not experienced significant losses on these investments. The Company
performs ongoing credit evaluations of its customers financial condition and generally requires no
collateral. Because the Companys receivables are primarily related to companies in the
semiconductor capital equipment industry, the Company is exposed to credit risk generally related
to this cyclical industry.
(18) STOCK PLANS
As of December 31, 2004, the Company had three active stock-based compensation plans; the 2003
Stock Option Plan (the 2003 Plan), the 2003 Non-Employee Directors Stock Option Plan (the 2003
Directors Plan) and the Employee Stock Purchase Plan (ESPP).
2003 STOCK OPTION PLAN
The 2003 Plan is a broad-based plan for employees, executive
officers, and consultants in which directors of the Company are not allowed to participate. The
Board of Directors currently administers this plan, and makes all decisions concerning which
employees, executive officers and consultants are granted options, how many to grant to each
optionee, when options are granted, how the plan should be properly interpreted, whether to amend
or terminate the plan, and whether to delegate administration of the plan to a committee. The 2003
Plan, adopted in 2003, provides for the issuance of up to 3,250,000 shares of common stock. Shares
may be issued under the 2003 Plan on exercise of incentive stock options or non-qualified stock
options granted under the 2003 Plan or as restricted stock awards. Stock appreciation rights may
also be granted under the 2003 Plan, and the shares represented by the stock appreciation rights
will be deducted from shares issuable under the 2003 Plan. The exercise price of incentive stock
options and non-qualified stock options may not be less than the market value of the Companys
common stock on the date of grant. The Company has the discretion to determine the vesting period
of options granted under the 2003 Plan, however option grants will generally vest over four years,
contingent upon the optionee continuing to be an employee, executive officer or consultant of the
Company. The options are exercisable for ten years from the date of grant. The 2003 Plan will
expire in February 2013, unless the administrator of the plan terminates it earlier. As of
December 31, 2004, approximately 1.3 million shares of common stock were available for grant under
this plan.
68
On January 31, 2005, the Company amended the 2003 Plan to provide additional terms for the
restricted stock units. The restricted stock units generally vest as to 10% on the first
anniversary of the grant date, an additional 20% on the second anniversary of the grant date, an
additional 30% on the third anniversary of the grant date and the remaining 40% on the fourth
anniversary of the grant date. Additional terms are set forth in the individual grant agreements
between the Company and the award recipient.
2003 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
The 2003 Directors Plan, adopted in 2003,
provides for the issuance of up to 150,000 shares of common stock upon the exercise of
non-qualified stock options granted under the 2003 Directors Plan. The exercise price of options
granted under the 2003 Directors Plan may not be less than the market value of the Companys
common stock on the date of grant. Non-employee directors are automatically granted an option to
purchase 15,000 shares on the first date elected or appointed as a member of the Companys board,
and 5,000 shares on any date re-elected as a member of the board. Options granted on the date
first elected or appointed as a member of the Companys board immediately vest as to one-third of
the shares subject to the grant, then another one-third on each of the first two anniversaries of
the date granted, provided the optionee continues to be a director. Options granted upon
re-election are immediately exercisable. As of December 31, 2004, 40,000 shares of common stock
were available for grant under this plan.
EMPLOYEE STOCK PURCHASE PLAN
In September 1995, stockholders approved an ESPP covering an
aggregate of 200,000 shares of common stock. On May 7, 2003, the Companys stockholders approved
an amendment to increase the number of common shares reserved for issuance under the plan from
200,000 shares to 400,000 shares. Employees are eligible to participate in the ESPP if employed by
the Company for at least 20 hours per week during at least five months per calendar year.
Participating employees may have the lessor of 5% their earnings or $1,250 per six-month period
withheld pursuant to the ESPP. The purchase price of common stock purchased under the ESPP is
equal to 85% of the lower of the fair value on the commencement date of each offering period or the
relevant purchase date. During 2004, 2003 and 2002, employees purchased an aggregate of
approximately 65,000, 73,000 and 54,000 shares of common stock under the ESPP, respectively. At
December 31, 2004, approximately 90,000 shares remained available for future issuance.
On April 14, 2004, by resolution of the Companys Board of Directors, the Company terminated
its 2002 and 2001 Employee Stock Option Plans. Existing stock options outstanding under the 2002
and 2001 Employee Stock Option Plans remain outstanding according to their original terms. At
December 31, 2004, options to purchase approximately 406,000 and 423,000 shares of common stock
remained outstanding under the 2002 and 2001 Employee Stock Option Plans, respectively.
On May 7, 2003, the Company terminated the 1995 Employee Stock Option Plan and the
Non-Employee Directors Stock Option Plan upon stockholder approval of the 2003 Plan and the 2003
Directors Plan; however, existing stock options outstanding under these terminated plans remain
outstanding according to their original terms. At December 31, 2004, options to purchase
approximately 1.8 million and 67,000 shares of common stock remained outstanding under the 1995
Employee Stock Option Plan and the Non-Employee Directors Stock Option Plan, respectively.
69
The following summarizes the activity relating to stock options for the years ended December
31, 2004, 2003 and 2002:
The following table summarizes information about the stock options outstanding at
December 31, 2004:
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companys financial instruments include cash, trade receivables, trade payables,
marketable securities, short-term and long-term debt, and foreign currency forward exchange
contracts (see Note 17). The fair values of cash, trade receivables, trade payables and short-term
debt approximate the carrying values due to the short-term nature of these instruments. Marketable
securities are stated at fair value (see Notes 1 and 4). At December 31, 2004 and 2003, the
carrying value of long-term debt was $195.4 million and $201.7 million, respectively. The carrying
value of senior borrowings approximates their fair value
70
due to the variable interest rates associated with the borrowings. At December 31, 2004, the
estimated fair value of the Companys 5.25% convertible subordinated notes that are due November
15, 2006 was approximately $64.6 million, compared to a book value of $66.2 million. At December
31, 2004, the estimated fair value of the Companys 5.00% convertible subordinated notes that are
due September 1, 2006 was approximately $115.1 million, compared to a book value of $121.5 million.
(20) SUPPLEMENTAL CASH FLOW DISCLOSURES
In the first quarter of 2004, the Company made a strategic decision to further focus its
marketing and product support resources on its core competencies and reorient its operating
infrastructure towards sustained profitability. As a result, the Company sold its Noah chiller
business to an unrelated third party for $797,000 in cash and a $1.9 million note receivable due
March 31, 2009. The note bears interest at 5.0%, payable annually on March 31. The sale included
property and equipment with a book value of approximately $300,000, inventory of approximately $1.0
million, goodwill and intangible assets net of accumulated amortization of approximately $900,000,
demonstration and customer service equipment of approximately $140,000, and estimated warranty
obligations of approximately $140,000. The Company recognized a gain on the sale of $404,000,
which has been recorded as other income and expense in the accompanying consolidated statement of
operations. In the third quarter of 2004, the Company purchased equipment of approximately $71,000
from the buyers of the Noah chiller assets in exchange for an equivalent reduction of the note
receivable due March 31, 2009.
In the second quarter of 2003, as part of the Companys ongoing cost reduction measures, the
Company committed to a plan to sell certain inventory and property and equipment assets to an
unrelated third party at their respective net book values. These assets were primarily used in the
manufacture of a component for the Companys direct current and radio frequency products and were
sold on June 30, 2003. In conjunction with the sale, the Company received approximately $1.6
million in cash and a short-term note receivable for approximately $1.5 million in exchange for
inventory with a carrying value of approximately $2.1 million and property and equipment with a
carrying value of approximately $1.0 million.
(21) QUARTERLY FINANCIAL DATA UNAUDITED
The following table presents unaudited quarterly financial data for each of the eight quarters
in the period ended December 31, 2004. 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.
The Company had a loss in the fourth quarter of 2004 of $23.0 million. Pretax charges in
the fourth quarter included $9.2 million to cost of sales for increased excess and obsolete
inventory reserves, $3.8 million to selling, general and administrative for the change in estimate
of the useful life of the demonstration equipment (see Note 1), $3.7 million to restructuring for
employee severance and termination costs primarily attributable to the Fort Collins facility (see
Note 3), $3.3 million to impairment of intangible assets related to certain
amortizable intangible assets acquired in conjunction with the Companys purchase of Dressler and
Aera (see Note 8). These items contributed significantly to the Companys fourth quarter 2004
results. The Company increased its reserve for excess and obsolete inventory in the fourth quarter
of 2004, as a result of the fourth quarter strategic management decision to discontinue certain
product offerings, the outlook for future periods demand and the declining trend in the Companys
sales from the second quarter of 2004 to the fourth quarter of 2004.
The Company had a loss of $27.4 million in the third quarter of 2003. During this quarter the
Company recorded a valuation allowance against certain of its U.S. and foreign net deferred tax
assets in jurisdictions where significant losses had been recognized (see Note 12).
71
ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 16, 2004, the Audit and Finance Committee of the Board of Directors dismissed KPMG
LLP as our independent accountants, and on the subsequent day, August 17, appointed Grant Thornton
LLP as the independent accountants to audit our financial statements for our fiscal year ended
December 31, 2004. We filed a Current Report on Form 8-K on August 20 and an amendment to such on
August 23, disclosing this change in our independent accountants.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the Companys reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation,
with the participation of management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the disclosure controls and procedures pursuant to the Exchange
Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not effective as of December 31,
2004, because of the material weaknesses disclosed below in Managements Report on Internal
Control over Financial Reporting.
In light of these material weaknesses, the Company performs additional analyses and other pre
and post-closing procedures to ensure that our consolidated financial statements are presented
fairly in all material respects in accordance with generally accepted accounting principles in the
United States. These procedures include monthly business reviews led by our Chief Executive Officer
and monthly operating and financial statement reviews by various levels of our management team,
including our executive officers. Accordingly, management believes that the consolidated financial
statements and schedules included in this Form 10-K fairly present in all material respects our
financial position, results of operations and cash flows for the
periods presented.
Managements Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Exchange Act Rule 13a-15(f). The Companys internal controls over
financial reporting are designed to provide reasonable assurance concerning the reliability of
financial data used in the preparation of our financial statements. All internal control systems,
no matter how well designed, have inherent limitations and may not prevent or detect misstatements.
Controls considered to be operating effectively in one period may become inadequate in future
periods because of changes in conditions or a deterioration in the degree of compliance with
policies or procedures.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004 using the criteria described
in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. As a result of our assessment, Management has identified two material
weaknesses, as described below, and therefore has concluded that our internal controls over
financial reporting were not effective as of December 31, 2004.
A material weakness is defined within the Public Company Accounting Oversight Boards Auditing
Standard No. 2 as a control deficiency or combination of control deficiencies that results in a
more than remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected.
72
In our filing on Form 10-Q
for the quarter ended September 30, 2004, the Company disclosed a
material weakness related to the lack of segregation of duties defined within the Companys
enterprise resource planning (ERP) system, as certain employees have access in our ERP system to
record transactions outside of their assigned job responsibilities.
The Companys ERP system is integrated throughout the
organization including material foreign locations with the exception
of the Japan subsidiaries. The ERP system interacts with most of the
Companys major processes including manufacturing, payables,
receivables and inventory controls. During the fourth quarter, the
Company began the process of appropriately assigning access within the ERP system on a user-by-user
basis and has restricted access to certain users to begin to remedy the segregation of duties
concerns; however, this process, as well as the testing of the implementation, was not completed by
December 31, 2004. During the fourth quarter of 2004, we experienced set backs in the remediation
of this weakness due to turnover in our internal audit and information technology departments and a
lack of other available resources within the Company to perform the planned implementation and
testing on a timely basis before December 31, 2004. As our remediation was not completed, and
although the Company believes that sufficient measures were taken at year end to identify any
material error that could have resulted from the lack of segregation of duties defined within our
ERP system, management continues to conclude that due to the pervasive nature of this issue it is a
material weakness. A discussion of managements remediation plan for this material weakness follows
under the heading Remediation Plan for Material Weaknesses.
Management has also identified
two significant deficiencies in its Japan operations, that when
considered in the aggregate represent a material weakness. The first significant deficiency relates
to the fact that both of our Japan facilities have their own unique information system, neither of
which is the corporate ERP system discussed above and both of which have similar segregation of
duties issues. The Company anticipates implementing the corporate ERP system in Japan with stronger
controls in place; however, the implementation has been postponed until we complete the
manufacturing transition of certain product lines from Japan to China. Individually, the Company
has viewed this situation as a significant deficiency and had established detective controls to
compensate for this lack of system integration and uniformity. The second significant deficiency in
Japan was caused in the fourth quarter of 2004 by the departure of key management personnel in
Japan, creating a lack of sufficient human resources for proper segregation of duties and oversight
at the local level. On an interim basis, additional oversight is being provided by management in
the United States. Considering these two significant deficiencies in the aggregate, management has
concluded that the above constitutes a material weakness. A
discussion of managements remediation plan for this material weakness follows under the heading Remediation Plan for
Material Weaknesses.
Due to staff turnover, principally
in our internal audit group, we were not able to complete
our documentation and testing of our internal controls over financial reporting in a timely manner
to allow our independent registered public accounting firm, Grant
Thornton LLP (Grant Thornton), sufficient time to
perform their audit of managements assessment and their audit of the effectiveness of the
Companys internal control over financial reporting. Accordingly, Grant Thornton has issued a
disclaimer of opinion on both managements assessment and the effectiveness of our internal
controls over financial reporting.
Notwithstanding the fact that management has concluded that our internal controls over
financial reporting were not effective as of December 31, 2004 and Grant Thornton has disclaimed an
opinion on our assessment, Grant Thornton has issued an unqualified opinion on our financial
statements for 2004, which is included in Part II, Item 8 of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
There was no change in the Companys internal control over financial reporting that
occurred during the Companys most recent quarter that has materially affected, or is reasonably
likely to materially affect, the internal control over financial reporting.
Remediation Plan for Material Weaknesses
To remediate the material weaknesses described in Managements Report on Internal
Control over Financial Reporting management has taken the following steps during the fourth
quarter of 2004:
These efforts have
been continued in the first quarter of 2005 and are being directly
supervised by our Chief Financial Officer to ensure prompt and effective remediation of the
material weaknesses identified. Management expects that the lack of segregation of duties defined
within our ERP system will be remediated by the end of the second quarter of 2005. Management
expects the material weakness in Japan to be remediated upon the consolidation of our two main
Japanese locations allowing local management to focus on the single location. The significant
deficiency related to the lack of system integration and uniformity in Japan will be addressed by
the implementation of the corporate ERP in Japan that will commence upon completion of our
manufacturing transition.
73
ITEM 9B. OTHER INFORMATION
On
March 29, 2005, we entered into an Executive Change in Control
Agreement
(CIC
Agreement)
with each of our Executive Vice Presidents: Michael El-Hillow, Linda Capuano, and C. Stephen
Rhoades. The CIC Agreement provides each of these executives with severance payments and certain
benefits in the event of his or her termination without Cause or other Involuntary Termination (as
such capitalized terms are defined in the CIC Agreement).
In the event of an executives termination without Cause, provided that a Change in Control
(as defined in the CIC Agreement) has not occurred and there is no Pending Change in Control (as
defined in the CIC Agreement), the executive will be entitled to receive: (a) all then accrued
compensation
and a pro-rata
portion of executives target bonus for the year in which the
termination is effected, (b) a lump sum payment equal to the executives then current annual base
salary plus his or her target bonus for the year in which the termination is effected, (c)
continuation of insurance and other benefits for 12 months following the date of termination, (d)
an amount equal to the contributions that would have been made to the companys retirement plans on
behalf of executive, if the executive had continued to be employed for 12 months following the date
of termination, and (e) reimbursement, up to $15,000, for outplacement services.
An Involuntary Termination will be deemed to have occurred if the executives employment is
terminated (i) without Cause following a Change in Control or during a Pending Change in Control,
(ii) by the executive for Good Reason following a Change in Control, or (iii) by the executive, for
any reason or no reason, during the 30-day period commencing on the date that is six months after a
Change in Control. In the event of an Involuntary Termination following a Change in Control, the
executive will be entitled to receive: (a) all then accrued compensation and
a pro-rata
portion of
executives target bonus for the year in which the termination is effected, (b) a lump sum payment
equal to 1.75 times (i) the executives then current annual base salary plus (ii) his or her target
bonus for the year in which the termination is effected, (c) continuation of insurance and other
benefits for 21 months following the date of termination, (d) an amount equal to the contributions
that would have been made to the companys retirement plans on behalf of executive, if the
executive had continued to be employed for 21 months following the date of termination, and (e)
reimbursement, up to $15,000, for outplacement services. In addition, if an Involuntary Termination
occurs following a Change in Control and during the term of the CIC Agreement, all stock options
and other equity awards then held by the executive whose employment was terminated will become
fully vested and exercisable.
The foregoing is a summary of the material terms of the CIC Agreement. The form of the CIC
Agreement is attached as an exhibit to this Annual Report on Form 10-K, and the terms of such form
of agreement are incorporated herein by this reference.
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 Advanced Energys definitive proxy statement relating to
its 2005 Annual Meeting of Stockholders (the 2005 Proxy Statement), as set forth below. The 2005
Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the
close of the Companys fiscal year end.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the 2005 Proxy Statement under the headings Proposal No. 1/
Election of DirectorsNominees and Section 16(a) Beneficial Ownership Reporting Compliance is
incorporated herein by reference. The information under the heading Executive Officers of the
Registrant in Part I of this Form 10-K is also incorporated herein by reference.
We have adopted a Code of Ethical Conduct that applies to our directors. In addition, we have
adopted a Code of Ethical Conduct for our executives, managers and finance employees which impose
additional standards. These Codes of Ethical Conduct are available through our website at
www.advanced-energy.com. Information contained on the website is not part of this report. If we
grant any waiver of either code with respect to the conduct of executive officers or directors, we
will publicly disclose such waivers as required by applicable law.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 2005 Proxy Statement under the headings Executive
Compensation and Stock Performance Graph is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information set forth in the 2005 Proxy Statement under the headings Common Stock
Ownership by Management and Other Stockholders and Equity Compensation Plan Information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the 2005 Proxy Statement under the caption Certain Transactions
with Management is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in the 2005 Proxy Statement under the caption Fees Billed by
Independent Public Accountants is incorporated herein by reference.
75
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
76
77
78
79
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.
Each person whose signature appears below hereby appoints Douglas S. Schatz and Michael
El-Hillow, 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.
80
INDEX TO EXHIBITS
81
82
83
Semiconductor devices for electronics applications;
Flat panel displays for hand-held devices, computer and television screens;
Compact discs, DVDs and other digital storage media;
Optical coatings for architectural glass, eyeglasses and solar panels; and
Industrial laser and medical applications.
Table of Contents
Table of Contents
Product
Major Process
Products
Description
Applications
Direct Current
DC Pulsing Product Suite, E-Chuck System,
EWave, MDX Series, MDX II Series, Pinnacle
® 3000, Pinnacle® Diamond, Pinnacle® Plus
Series, Pinnacle® Series, Summit Series
Power conversion and
control systems
CVD
PECVD
HDPCVD
PVD
Reactive sputtering
Vacuum sputtering
Etch
High Power
Astral® Series, Crystal®
Low and Mid Frequency
LFGC Series, LFGS Series, PDX® Series, PE and
PE II Series, RAS Split Inductor
RF and High Frequency
Apex® Series, CESAR Series, HPG Series, HFV
Variable Frequency Generators, RFG Series,
Ovation Series
Oxide
Poly
Conductor
Ion implantation
Plasma vacuum process systems
Electroplating
Wafer handling
Bias
CO
2
laser excitation
Flat panel display
Data storage
Architectural glass
Match Networks
VarioMatch Series, Navigator Match Network
Series
RF Instrumentation
ZScan® Sensors
CONTROL
Mass Flow Controllers
Aera® FC-780CHT Series, Aera® FC-790 Series,
Aera® FC-900 Series, Aera® FC-1000 Series, Aera
® FC-7700 Series, Aera® FC-7800 Series, Aera®
FC-D980 Series, Aera® FC-P2000 Series, Aera®
FC-PA780 Series Digital, Aera® LX-1200/1200C
Series, Aera® PrimAera® Series Digital
Digital and analog MFCs,
large capacity thermal
vaporizer and delivery
system, compact thermal
vaporizer and delivery
system, thermal refill
and
vaporizer recharge
system,
ultrasonic flow
controller
Semiconductor processes
Fiber optics
Safe delivery systems
Vaporized liquids
Silica industries
CVD diffusion
Thermal Vaporizer Systems
Aera® ADS-L200, Aera® AS Series, Aera® GS-
440A
Mass Flow Meters
Aera® USF100 A-G Ultra-Sonic, Aera® Mass
Flow Meter Series , EMCO® Industrial Flow
Meters
INSTRUMENTATION
Thermal Sensing Systems
Sekidenko OR1000F Optical Fiber Thermometer,
Sekidenko OR2000F Optical Fiber Thermometer
Non-contact temperature
sensing systems
RTP
PVD
CVD
CMP
Track
Lithography
TECHNOLOGY
Ion Beam Sources
LIS Series
Plasma Source
Xstream with Active Matching Network,
Litmas
Direct deposition of thin
films, ion-assisted
deposition
CVD chamber clean
Deposition
Thin films
Etch
Optical coating
Industrial coating
PRODUCTS
DC-to-DC Converters
HDS High-Density 1.25 V 11 A, HDS High-Density
1.5 V 36 A, HDS High-Density 2.5 V 43 A, HDS
High-
Density 3.3 V 34 A, HDS High-Density 48 to 12 V,
HDS High-Density 5 V 18 A, VRMs, MVRs
Low voltage/high current
power conversion
DC-to-DC conversion
Table of Contents
Chemical vapor deposition
Physical vapor deposition
Oxide etch
Poly etch
Conductor etch
Wafer handling
Chemical mechanical polishing
Table of Contents
Semiconductor
Data Storage
Flat Panel Display
Advanced Product Applications
Etch
CD-ROMs
CDs
Active matrix LCDs
Digital micro-mirror
Advanced computer technology workstations
and servers
DVDs
Field emission displays
Automobile coatings
Hard disc carbon wear coatings
Large flat panel displays
Chemical, physical and materials research
Hard disc magnetic media
LCD projection
Circuit board etch-back and de-smear
Magneto-optic CDs
Liquid crystal displays
Consumer product coatings
Recordable CDs
Medical applications
Diamond-like coatings
Thin-film heads
Plasma displays
Food package coatings
Glass coatings
Optical coatings
Photovoltaics
Superconductors
polishing (CMP)
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Our ability to refinance our convertible subordinated notes due in 2006;
Our future revenues;
Our future gross profit;
Transitioning our high-volume manufacturing to Shenzhen, China;
Transitioning to high-quality, low-cost suppliers local to our Shenzhen, China
facility (Tier 1 Asian suppliers);
Market acceptance of our products;
Reducing our operating breakeven point;
Customer inventory levels, requirements and order levels;
Research and development expenses;
Selling, general and administrative expenses;
Sufficiency and availability of capital resources;
Capital expenditures;
Restructuring activities and expenses; and
General global economic conditions.
Table of Contents
Changes in economic conditions in the semiconductor, semiconductor capital
equipment and flat panel display industries and other industries in which our
customers operate;
The timing and nature of orders placed by our customers;
The seasonal variations in capital spending by our customers;
Changes in customers inventory management practices;
Customer cancellations of previously placed orders and shipment delays;
Pricing competition from our competitors;
Customer demands to reduce prices, enhance features, improve reliability, shorten
delivery times and extend payment terms;
Component shortages or allocations or other factors that change our levels of
inventory or substantially increase our spending on inventory or result in
manufacturing delays;
The introduction of new products by us or our competitors;
Declines in macroeconomic conditions;
Potential litigation especially regarding intellectual property; and
Our exposure to currency exchange rate fluctuations between the several functional
currencies in foreign locations in which we have operations.
Table of Contents
Table of Contents
The potential inability to obtain an adequate supply of required parts, components
or subassemblies;
The potential for a sole source provider to cease operations;
Our potential need to fund the operating losses of a sole source provider;
Reduced control over pricing and timing of delivery of parts,
components or
subassemblies; and
The potential inability of our suppliers to develop technologically advanced
products to support our growth and development of new products.
Table of Contents
Cause us to incur substantial costs in the form of legal fees, fines and royalty payments;
Result in restrictions on our ability to sell certain products;
Result in an inability to prevent others from using technology we have developed; and
Require us to redesign products or seek alternative technologies.
Table of Contents
Our ability to develop relationships with suppliers and other local businesses;
Compliance with product safety requirements and standards that are different from
those of the United States;
Variations in enforcement of intellectual property and contract rights in different
jurisdictions;
Table of Contents
Trade restrictions, political instability, disruptions in financial markets and
deterioration of economic conditions;
The ability to provide sufficient levels of technical support in different locations;
Collecting past due accounts receivable from foreign customers; and
Changes in tariffs, taxes and foreign currency exchange rates.
Table of Contents
We could be subject to fines;
Our production could be suspended; or
We could be prohibited from offering particular products in specified markets.
Table of Contents
Name
Age
Position
59
Chairman of the Board, President and Chief
Executive Officer
53
Executive Vice President of Finance and
Administration and Chief Financial Officer
53
Executive Vice President and Chief Technology
Officer
44
Executive Vice President, Products and
Operations
50
Senior Vice President of Sales
Table of Contents
Location
Type
Principal Use
Sq. Footage
Ownership
Office
Distribution
20,000
Leased
Office, plant
Headquarters,
248,000
Leased
Research and development,
Manufacturing, Distribution
Office
Distribution
8,000
Leased
Office
Distribution
2,000
Leased
Office, plant
Research and development,
20,000
Leased
Manufacturing, Distribution
Office
Distribution
8,000
Leased
Office, plant
Manufacturing, Distribution
100,000
Leased
Office
Distribution
1,000
Leased
Office
Distribution
2,000
Leased
Office
Distribution
9,000
Leased
Office, plant
Research and development,
17,000
Leased
Manufacturing, Distribution
Office, plant
Research and development,
46,000
Owned (1)
Manufacturing, Distribution
Office
Distribution
4,000
Leased
Office
Distribution
14,000
Owned (2)
Office
Distribution
9,000
Leased
Office
Distribution
13,000
Leased
(1)
The Company owns this facility which serves as collateral for senior borrowings of approximately $6.0
million as of December 31, 2004, maturing serially through April 2010.
(2)
The Company owns this facility and has a mortgage note payable of approximately $1.7 million outstanding
as of December 31, 2004, due in 2007, which is collateralized by the building.
Location
Type
Principal Use
Sq. Footage
Ownership
Office
Research and development
14,000
Leased
Office
Distribution
4,000
Leased
Office, plant
Research and development,
78,000
Leased
Manufacturing, Distribution
Office
Distribution
3,000
Leased
Office
Distribution
4,000
Leased
Table of Contents
2004
2003
High
Low
High
Low
$
28.19
$
19.13
$
17.43
$
7.91
$
23.07
$
12.83
$
16.83
$
7.37
$
15.32
$
8.78
$
24.65
$
13.56
$
10.97
$
7.92
$
29.99
$
18.66
Table of Contents
(In thousands, except per share data)
Years Ended December 31,
2004
2003
2002
2001
2000
$
395,305
$
262,402
$
238,898
$
193,600
$
359,782
119,679
87,947
68,760
57,432
176,453
121,223
111,079
130,745
104,319
91,253
(1,544
)
(23,132
)
(61,985
)
(46,887
)
85,200
$
(12,747
)
$
(44,241
)
$
(41,399
)
$
(31,379
)
$
68,034
$
(0.39
)
$
(1.37
)
$
(1.29
)
$
(0.99
)
$
2.10
32,649
32,271
32,026
31,712
32,425
December 31,
2004
2003
2002
2001
2000
Balance Sheet Data:
$
107,982
$
134,892
$
172,347
$
271,978
$
189,527
206,915
205,835
247,942
349,608
277,154
395,975
414,731
455,733
450,195
365,835
195,408
201,651
212,220
207,724
83,927
144,978
151,834
183,339
214,345
238,798
Table of Contents
Ability to refinance our convertible subordinated notes payable due in 2006;
Changes or slowdowns in general economic conditions or conditions in the
semiconductor, semiconductor capital equipment and flat panel display industries and
other industries in which our customers operate;
Acceptance by our customers of products manufactured or planned to be manufactured
at our China-based manufacturing facility;
Ability to transition a substantial portion of our materials purchases to
high-quality, low-cost suppliers local to our Shenzhen, China facility (Tier 1 Asian
suppliers);
Timing and nature of orders placed by our customers, including their product
acceptance criteria;
Future warranty costs in excess of anticipated levels;
Periodic charges for excess and obsolete inventory;
Pricing competition from our competitors;
Lower average selling prices than anticipated;
Costs incurred and judgments resulting from patent or other litigation;
Component shortages or allocations or other factors that change our levels of
inventory or substantially increase our spending on inventory;
The introduction of new products by us or our competitors;
Changes in our customers inventory management practices; and
Customer cancellations of previously placed orders and shipment delays.
Table of Contents
Years Ended December 31,
2004
2003
2002
100.0
%
100.0
%
100.0
%
69.7
66.5
71.2
30.3
33.5
28.8
13.0
19.7
20.5
15.8
20.6
27.9
1.7
1.0
1.6
3.8
0.9
0.4
0.8
30.7
42.3
54.7
(0.4
)
(8.8
)
(25.9
)
(1.8
)
(3.6
)
(0.7
)
(2.2
)
(12.4
)
(26.6
)
(1.0
)
(4.5
)
9.3
(3.2
)%
(16.9
)%
(17.3
)%
Table of Contents
Years Ended December 31,
2004
2003
2002
(In thousands)
$
238,728
$
155,153
$
163,108
29,229
26,397
13,570
56,304
28,953
19,826
71,044
51,899
42,394
$
395,305
$
262,402
$
238,898
Years Ended December 31,
2004
2003
2002
60
%
59
%
68
%
8
10
6
14
11
8
18
20
18
100
%
100
%
100
%
Years Ended December 31,
2004
2003
2002
(In thousands)
$
208,002
$
124,185
$
143,698
59,552
48,185
32,791
126,862
88,919
61,327
889
1,113
1,082
$
395,305
$
262,402
$
238,898
Years Ended December 31,
2004
2003
2002
53
%
47
%
60
%
15
19
14
32
34
26
100
%
100
%
100
%
Table of Contents
The lower sales base caused in large part by the severe downturn in the semiconductor
equipment industry during 2002 and most of 2003, resulted in lower absorption of our fixed
costs;
Lower average selling prices than anticipated;
During our transition of high-volume manufacturing to Shenzhen, China beginning in
2003, we have been required to operate manufacturing facilities in both Shenzhen and Fort
Collins to produce the same products, which has required duplicate management, procurement
and engineering teams, as well as facilities costs, and the transition has taken longer
than initially anticipated;
Increased shipping and related costs in 2003 and 2004 for products manufactured in our
Shenzhen facility;
High demand for two product groups with margins lower than our corporate average;
Charges for excess and obsolete inventory were approximately $11.3 million in 2004,
$3.0 million in 2003 and $5.8 million in 2002; and
Warranty costs, particularly with respect to the introduction of new products, were
approximately $10.5 million in 2004, $8.1 million in 2003, and $13.2 million in 2002.
Table of Contents
Decrease in average selling prices;
Costs associated with the continued transition of our high-volume manufacturing to
our new China facility, including costs incurred to operate duplicate manufacturing
facilities and increased shipping and related costs;
Unanticipated costs to comply with our customers strict and extensive
requirements, especially related to our China transition and move to Tier 1 Asian
suppliers;
Cost reduction programs initiated by semiconductor manufacturers and semiconductor
capital equipment manufacturers that negatively impact our average selling price;
Warranty costs in excess of historical rates and our expectations;
Increased levels of excess and obsolete inventory, either due to market conditions,
the introduction of new products by our competitors, or our decision to discontinue
certain product lines; and
Changes in foreign currency exchange rates that might affect our costs.
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Table of Contents
Quarters Ended
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
2003
2003
2003
2003
2004
2004
2004
2004
(In thousands, except per share data)
$
56,158
$
62,946
$
68,567
$
74,731
$
104,487
$
108,869
$
93,550
$
88,399
17,950
20,273
23,093
26,631
38,414
36,962
29,740
14,563
(10,885
)
(6,825
)
(5,741
)
319
9,810
8,754
1,855
(21,963
)
(2,750
)
(2,340
)
(2,261
)
(1,957
)
(1,155
)
(2,417
)
(1,994
)
(1,690
)
$
(8,590
)
$
(5,774
)
$
(27,438
)
$
(2,439
)
$
6,924
$
4,470
$
(1,136
)
$
(23,005
)
$
(0.27
)
$
(0.18
)
$
(0.85
)
$
(0.08
)
$
0.21
$
0.13
$
(0.03
)
$
(0.70
)
Quarters Ended
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
2003
2003
2003
2003
2004
2004
2004
2004
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
100.0
%
32.0
32.2
33.7
35.6
36.8
34.0
31.8
16.5
(19.4
)
(10.8
)
(8.4
)
0.4
9.4
8.0
2.0
(24.8
)
(4.9
)
(3.7
)
(3.3
)
(2.6
)
(1.1
)
(2.2
)
(2.1
)
(1.9
)
(15.3
)%
(9.2
)%
(40.0
)%
(3.3
)%
6.6
%
4.1
%
(1.2
)%
(26.0
)%
Table of Contents
Table of Contents
Table of Contents
Payments Due by Period (In thousands)
Contractual Obligations
2005
2006
2007
2008
2009
Thereafter
Total
$
$
187,718
$
$
$
$
$
187,718
3,432
2,185
2,073
7,690
303
225
112
57
40
737
6,062
5,492
4,443
3,761
2,957
9,432
32,147
5,000
2,500
7,500
$
14,797
$
198,120
$
6,628
$
3,818
$
2,997
$
9,432
$
235,792
(1)
Cash requirements for interest on these notes approximate $9.6 million annually.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
Market
Notional
Settlement
Unrealized
(In thousands)
Amounts
Amounts
(Loss)/Gain
$
8,200
$
8,263
$
63
4,000
4,031
31
1,300
1,315
15
400
398
(2
)
$
13,900
$
14,007
$
107
Table of Contents
Page
40
42
43
45
46
47
48
72
Table of Contents
March 30, 2005
Table of Contents
March 30, 2005
Table of Contents
Advanced Energy Industries, Inc.:
February 20, 2004
Table of Contents
(In thousands)
December 31,
2004
2003
$
38,404
$
41,522
69,578
93,370
66,610
57,156
5,443
4,771
404
151
73,224
65,703
5,736
5,486
259,399
268,159
44,746
44,725
6,468
5,951
68,276
69,510
12,032
19,433
2,968
3,934
2,086
3,019
$
395,975
$
414,731
are an integral part of these consolidated balance sheets.
Table of Contents
(In thousands, except per share data)
December 31,
2004
2003
$
17,683
$
23,066
2,974
445
7,788
7,953
6,791
6,612
4,414
3,175
5,986
7,079
662
2,952
294
554
3,432
8,028
2,460
2,460
52,484
62,324
421
263
4,258
5,905
3,709
4,672
187,718
187,718
2,407
2,015
198,513
200,573
250,997
262,897
33
33
144,500
142,667
(12,795
)
(48
)
(60
)
1,051
1,491
12,189
7,751
144,978
151,834
$
395,975
$
414,731
are an integral part of these consolidated balance sheets.
Table of Contents
(In thousands, except per share amounts)
Years Ended December 31,
2004
2003
2002
$
395,305
$
262,402
$
238,898
275,626
174,455
170,138
119,679
87,947
68,760
51,541
51,647
48,995
62,444
53,951
66,586
4,200
3,912
4,306
9,060
3,326
1,175
1,904
121,223
111,079
130,745
(1,544
)
(23,132
)
(61,985
)
1,737
1,721
3,314
(11,049
)
(11,254
)
(12,460
)
1,023
869
5,280
4,223
1,033
(644
)
(2,064
)
(7,256
)
(9,308
)
(1,707
)
(8,800
)
(32,440
)
(63,692
)
(3,947
)
(11,801
)
22,293
$
(12,747
)
$
(44,241
)
$
(41,399
)
$
(0.39
)
$
(1.37
)
$
(1.29
)
32,649
32,271
32,026
are an integral part of these consolidated statements.
Table of Contents
(In thousands)
Accumulated
Additional
Retained
Other
Total
Common Stock
Paid-in
Earnings
Deferred
Comprehensive
Stockholders
Shares
Amount
Capital
(Accumulated Deficit)
Compensation
(Loss) Income
Equity
31,848
$
32
$
131,698
$
85,592
$
(1,094
)
$
(1,883
)
$
214,345
118
1,389
1,389
120
4,219
4,219
54
689
689
468
468
518
518
(34
)
34
4,400
(2,641
)
1,351
(41,399
)
(38,289
)
32,140
$
32
$
138,429
$
44,193
$
(542
)
$
1,227
$
183,339
360
1
3,499
3,500
73
739
739
482
482
6,491
1,524
(44,241
)
(36,226
)
32,573
$
33
$
142,667
$
(48
)
$
(60
)
$
9,242
$
151,834
122
1,224
1,224
65
609
609
60
60
4,438
(146
)
(294
)
(12,747
)
(8,749
)
32,760
$
33
$
144,500
$
(12,795
)
$
$
13,240
$
144,978
are an integral part of these consolidated statements.
Table of Contents
(In thousands)
Years Ended December 31,
2004
2003
2002
$
(12,747
)
$
(44,241
)
$
(41,399
)
21,119
21,829
23,289
3,752
444
6,429
(6,888
)
11,262
3,016
5,803
3,326
1,350
5,066
198
(429
)
1,870
(107
)
160
388
(4,223
)
(864
)
2,846
359
(4,879
)
(8,925
)
(14,556
)
(5,067
)
(19,783
)
(11,339
)
3,021
(675
)
(62
)
(846
)
(5,849
)
5,873
2,366
(2,329
)
(2,379
)
8,293
2,507
16,530
608
(3,099
)
666
(3,760
)
392
1,321
694
(11,378
)
(12,986
)
(15,305
)
(1,208
)
(1,308
)
(2,499
)
25,000
10,106
90,439
2,556
5,196
350
(14,019
)
(20,509
)
(10,714
)
(400
)
(2,781
)
(35,689
)
(1,675
)
(14,395
)
(400
)
12,329
(8,590
)
24,311
1,585
(8,609
)
(12,847
)
(10,190
)
(14,522
)
609
739
689
1,224
3,500
1,389
(5,191
)
(8,608
)
(22,634
)
1,122
1,518
1,861
(3,118
)
(28,666
)
(11,767
)
41,522
70,188
81,955
$
38,404
$
41,522
$
70,188
$
$
$
468
$
9,949
$
10,521
$
11,517
$
1,227
$
(9,642
)
$
(16,086
)
$
1,842
$
1,538
$
are an integral part of these consolidated statements.
Table of Contents
Table of Contents
Table of Contents
2004
2003
(In thousands)
$
6,612
$
9,402
10,466
8,105
(10,287
)
(10,895
)
$
6,791
$
6,612
(in thousands, except per share data)
2004
2003
2002
$
(12,747
)
$
(44,241
)
$
(41,399
)
(12,133
)
(12,410
)
(9,794
)
60
482
324
$
(24,820
)
$
(56,169
)
$
(50,869
)
$
(0.39
)
$
(1.37
)
$
(1.29
)
$
(0.76
)
$
(1.74
)
$
(1.59
)
(a)
Compensation expense in 2004 and 2003 is presented prior to income tax effects due to the
Company recording valuation allowances against certain deferred tax assets in 2003 (see
Note 12).
(b)
Cumulative compensation cost recognized with respect to options that are forfeited prior to
vesting is reflected as a reduction of compensation expense in the period of forfeiture.
Compensation expense related to awards granted under the Companys employee stock purchase plan
is estimated until the period in which settlement occurs, as the number of shares of common
stock awarded and the purchase price are not known until settlement.
(c)
Prior to its acquisition by the Company, a shareholder of Sekidenko, Inc. granted employees
options under a preexisting arrangement to purchase shares of his common stock already
outstanding at exercise prices below fair value. Under this agreement, 29,700 and 34,250 of
such options were granted in 1999 and 2000, respectively. These options result in the Company
recognizing approximately $2.1 million as compensation expense over the four-year vesting
period of the options. The options fully vested during the first quarter of 2004.
Table of Contents
2004
2003
2002
3.05
%
2.96
%
3.89
%
0.0
%
0.0
%
0.0
%
3.0 years
2.9 years
2.9 years
75.23
%
85.64
%
88.05
%
1.70
%
1.34
%
1.91
%
0.0
%
0.0
%
0.0
%
0.5 years
0.5 years
0.5 years
65.31
%
83.82
%
76.62
%
Table of Contents
Table of Contents
Table of Contents
$
680
1,939
1,111
83
260
9,405
7,750
19
(314
)
(39
)
(474
)
(2,945
)
(725
)
$
16,750
Table of Contents
$
8,276
115
8,405
19,243
530
13,388
24,869
12,500
427
(2,329
)
(2,924
)
(2,164
)
(4,765
)
(12,008
)
(19,598
)
$
43,965
Table of Contents
Employee
Severance and
Facility
Total
Termination
Closure
Restructuring
Costs
Costs
Charges
(In thousands)
$
965
$
462
$
1,427
1,033
2,187
3,220
2,021
3,819
5,840
3,054
6,006
9,060
(2,412
)
(2,086
)
(4,498
)
1,607
4,382
5,989
1,509
1,509
670
98
768
704
307
1,011
994
24
1,018
3,877
429
4,306
(4,924
)
(2,196
)
(7,120
)
560
2,615
3,175
220
220
187
187
57
31
88
(127
)
(126
)
(253
)
3,639
31
3,670
3,976
(64
)
3,912
(1,243
)
(1,430
)
(2,673
)
$
3,293
$
1,121
$
4,414
Table of Contents
In the first quarter of 2003, the Company recorded charges totaling approximately
$1.5 million primarily associated with manufacturing and administrative personnel
headcount reductions in the Companys Japanese operations. In accordance with
Japanese labor regulations the Company offered voluntary termination benefits to all
of its Japanese employees. The voluntary termination benefits were accepted by 36
employees, with termination dates in the second quarter of 2003.
In the second quarter of 2003, the Company recognized charges
totaling $768,000 that consisted primarily of the involuntary termination of 55 manufacturing and
administrative personnel in the Companys U.S. operations.
In the third quarter of 2003, the Company recognized charges of approximately $1.0
million that consisted of $704,000 of expense for involuntary employee termination
benefits for 20 employees and $307,000 related to asset
impairments incurred as a result of exiting its Longmont, Colorado manufacturing
facilities.
In the fourth quarter of 2003, the Company recognized approximately $1.0 million
that consisted primarily of the recognition of expense for involuntary employee
termination benefits associated with the involuntary employee termination benefits of
34 manufacturing and administrative personnel in the Companys U.S. operations.
December 31,
2004
2003
(In thousands)
$
43,459
$
40,792
20,332
46,762
5,787
5,816
$
69,578
$
93,370
Table of Contents
December 31,
2004
2003
(In thousands)
$
16,612
$
17,100
51,047
41,359
(1,049
)
(1,303
)
$
66,610
$
57,156
December 31,
2004
2003
(In thousands)
$
54,069
$
47,120
4,491
4,385
14,664
14,198
$
73,224
$
65,703
December 31,
2004
2003
(In thousands)
$
5,127
$
5,663
5,738
4,293
40,196
36,039
28,954
24,324
6,221
6,268
290
1,368
17,684
17,618
104,210
95,573
(59,464
)
(50,848
)
$
44,746
$
44,725
Table of Contents
Effect of
Weighted-
Gross
Changes in
Average
Carrying
Exchange
Accumulated
Net Carrying
Useful Life
Amount
Rates
Amortization
Amount
in Years
(In thousands, except weighted-average useful life)
$
7,304
$
1,741
$
(5,290
)
$
3,755
6
1,200
222
(1,386
)
36
4
8,500
2,689
(2,948
)
8,241
17
17,004
4,652
(9,624
)
12,032
11
55,104
13,172
68,276
$
72,108
$
17,824
$
(9,624
)
$
80,308
Effect of
Weighted-
Gross
Changes in
Average
Carrying
Exchange
Accumulated
Net Carrying
Useful Life
Amount
Rates
Amortization
Amount
in Years
(In thousands, except weighted-average useful life)
$
7,304
$
1,544
$
(3,906
)
$
4,942
6
9,210
1,709
(5,882
)
5,037
4
8,500
2,363
(1,409
)
9,454
17
25,014
5,616
(11,197
)
19,433
11
58,629
10,881
69,510
$
83,643
$
16,497
$
(11,197
)
$
88,943
Estimated
Amortization
Expense
(in thousands)
$
2,173
2,016
1,009
876
474
Table of Contents
December 31,
2004
2003
(In thousands)
$
$
5,953
13,933
1,737
(3,432
)
(8,028
)
$
4,258
$
5,905
Table of Contents
Convertible
Bank Loans
Subordinated Notes
Total
(In thousands)
$
3,432
$
$
3,432
2,185
187,718
189,903
2,073
2,073
$
7,690
$
187,718
$
195,408
Table of Contents
Table of Contents
December 31,
2004
2003
2002
(In thousands)
$
$
8,437
$
(18,575
)
784
(2,178
)
3,947
2,580
(1,540
)
$
3,947
$
11,801
$
(22,293
)
$
3,503
$
5,372
$
(15,405
)
444
6,429
(6,888
)
$
3,947
$
11,801
$
(22,293
)
December 31,
2004
2003
2002
(In thousands)
$
(3,080
)
$
(11,354
)
$
(22,293
)
(810
)
(1,328
)
(1,414
)
(350
)
(350
)
(262
)
98
98
183
(514
)
(456
)
760
(415
)
(333
)
(272
)
7,884
29,130
1,255
1,134
(3,606
)
(250
)
$
3,947
$
11,801
$
(22,293
)
December 31,
2004
2003
(In thousands)
$
31
$
314
2,493
2,463
201
533
833
806
1,545
1,222
3,156
4,093
2,604
988
(10,863
)
(10,419
)
42,284
38,246
(7,099
)
(5,464
)
(2,454
)
(7,898
)
2,963
3,340
(39,403
)
(32,896
)
$
(3,709
)
$
(4,672
)
2004
(In thousands)
$
(963
)
(246
)
3,288
(1,635
)
$
444
Table of Contents
December 31,
2004
2003
2002
(In thousands)
$
(20,725
)
$
(35,137
)
$
(60,070
)
11,925
2,697
(3,622
)
$
(8,800
)
$
(32,440
)
$
(63,692
)
Table of Contents
Table of Contents
(In thousands)
$
303
225
112
57
40
737
(22
)
(294
)
$
421
(In thousands)
$
6,062
5,492
4,443
3,761
2,957
9,432
$
32,147
Years Ended December 31,
2004
2003
2002
(In thousands)
$
207,279
$
124,128
$
141,637
42,407
35,509
24,607
115
57
2,108
36,151
24,492
18,672
608
108,745
78,216
51,874
$
395,305
$
262,402
$
238,898
$
(13,603
)
$
(27,639
)
$
(57,305
)
(1,540
)
559
(725
)
13,508
4,811
1,865
91
(863
)
(5,820
)
$
(1,544
)
$
(23,132
)
$
(61,985
)
$
411,324
$
424,661
43,011
48,150
280,351
210,585
(338,711
)
(268,665
)
$
395,975
$
414,731
(1)
These sales amounts do not contemplate where our customers may subsequently transfer
our products.
Table of Contents
December 31,
2004
2003
2002
27
%
20
%
27
%
Table of Contents
Market
Notional
Settlement
Unrealized
Amounts
Amounts
(Loss)/Gain
(In thousands)
$
8,200
$
8,263
$
63
4,000
4,031
31
1,300
1,315
15
400
398
(2
)
$
13,900
$
14,007
$
107
Table of Contents
Table of Contents
2004
2003
2002
(In thousands, except share prices)
Weighted-
Weighted-
Weighted-
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
3,920
$
19.95
3,475
$
23.18
2,108
$
25.07
1,196
16.99
1,790
14.66
1,920
21.73
(117)
9.52
(352)
9.89
(118)
11.70
(472)
19.09
(993)
25.28
(435)
29.02
4,527
19.53
3,920
19.95
3,475
23.18
1,943
22.70
1,230
25.50
1,239
23.25
$8.40
$7.88
$12.55
$3.11 - $60.75
$0.67 - $60.75
$0.67 - $60.75
$0.83 - $60.75
$0.83 - $60.75
$0.83 - $60.75
104
$
19.00
112
$
22.64
90
$
26.92
85
13.62
25
10.67
22
15.58
(5)
10.67
(8)
6.75
(12)
51.10
(25)
30.90
172
15.81
104
19.00
112
22.64
122
16.94
80
21.91
62
22.24
$9.67
$7.84
$11.33
$6.13 - $46.13
$6.13 - $60.75
$6.13 - $64.94
$6.15 - $64.94
$6.13 - $64.94
$
(In thousands, except share prices and
lives)
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
609
7.7 years
$
7.46
267
$
7.24
682
8.0 years
9.58
197
8.96
495
7.7 years
13.21
206
13.43
876
7.9 years
18.56
414
18.34
634
9.1 years
21.88
13
21.95
574
8.1 years
23.50
252
24.09
669
6.3 years
33.17
556
32.48
117
5.0 years
43.79
117
43.79
43
5.6 years
59.68
43
59.68
4,699
7.7 years
19.39
2,065
22.36
Table of Contents
Quarters Ended
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
Mar. 31,
June 30,
Sept. 30,
Dec. 31,
2003
2003
2003
2003
2004
2004
2004
2004
(In thousands, except per share data)
$
56,158
$
62,946
$
68,567
$
74,731
$
104,487
$
108,869
$
93,550
$
88,399
17,950
20,273
23,093
26,631
38,414
36,962
29,740
14,563
(10,885
)
(6,825
)
(5,741
)
319
9,810
8,754
1,855
(21,963
)
$
(8,590
)
$
(5,774
)
$
(27,438
)
$
(2,439
)
$
6,924
$
4,470
$
(1,136
)
$
(23,005
)
$
(0.27
)
$
(0.18
)
$
(0.85
)
$
(0.08
)
$
0.21
$
0.13
$
(0.03
)
$
(0.70
)
Table of Contents
Additions
Balance at
Additions
Charged
Balance at
Beginning of
Due to
to Expense
End of
Period
Acquisitions
(Recoveries)
Deductions
Period
(In thousands)
$
5,631
$
13,704
$
5,803
$
4,719
$
20,419
1,049
416
1,870
279
3,056
$
6,680
$
14,120
$
7,673
$
4,998
$
23,475
$
20,419
$
$
3,016
$
13,944
$
9,491
3,056
(429
)
1,324
1,303
$
23,475
$
$
2,587
$
15,268
$
10,794
$
9,491
$
$
11,262
$
6,102
$
14,651
1,303
198
452
1,049
$
10,794
$
$
11,460
$
6,554
$
15,700
Table of Contents
Recruited and hired an internal audit manager to fill the vacancy
left by the departure of our previous internal audit manager during the third quarter of 2004;
Reallocated additional human resources within the Company to the
internal audit department until an adequate staff level has been recruited
and hired directly for the internal audit department. The increased staffing
of this department is focused on the completion of the implementation and
testing of appropriate segregation of duties defined within our corporate ERP system;
Increased executive management involvement in the details of
the remediation project to ensure that appropriate segregation of
duties are defined within our corporate ERP system;
Assignment on a temporary basis of a financial manager from our
corporate headquarters to Japan. This manager will be physically present in Japan beginning in the second quarter of 2005; and
Further development of a plan to implement the corporate ERP system
in Japan upon completion of the manufacturing transition.
Table of Contents
Table of Contents
Table of Contents
Table of Contents
10.1
Loan and Security Agreement dated May 8, 2004, by and among Silicon Valley Bank, as a bank, and
Advanced Energy Industries, Inc., as borrower.(15)
10.2
Lease, dated June 12, 1984, amended June 11, 1992, by and between Prospect Park East
Partnership and Advanced Energy Industries, Inc., for property located in Fort Collins,
Colorado.(4)
10.3
Lease, dated March 14, 1994, as amended, by and between Sharp Point Properties, L.L.C., and
Advanced Energy Industries, Inc., for property located in Fort Collins, Colorado.(4)
10.4
Lease, dated May 19, 1995, by and between Sharp Point Properties, L.L.C. and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado.(4)
10.5
Form of Indemnification Agreement.(4)
10.6
1995 Stock Option Plan, as amended and restated through February 7, 2001.(7)*
10.7
1995 Non-Employee Directors Stock Option Plan, as amended and restated through February 7,
2001.(7)*
10.8
2003 Stock Option Plan.(13)*
10.9
Amendment No. 1 to 2003 Stock Option Plan, dated January 31, 2005.(16)*
10.10
Restricted Stock Unit Agreement pursuant to the 2003 Stock Option Plan.(16)*
10.11
Stock Option Agreement pursuant to the 2003 Stock Option Plan.(16)*
10.12
2003 Non-Employee Directors Stock Option Plan.(13)*
10.13
2001 Employee Stock Option Plan.(13)*
10.14
2002 Employee Stock Option Plan.(13)*
10.15
Lease dated March 20, 2000, by and between Sharp Point Properties, L.L.C. and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado.(8)
10.16
Agreement and Plan of Reorganization, dated April 5, 2000, by and among Advanced Energy
Industries, Inc., Noah Holdings, Inc. and AE Cal Merger Sub, Inc.(9)
10.17
Escrow and Indemnity Agreement, dated April 5, 2000, by and among Advanced Energy Industries,
Inc., the former stockholders of Noah Holdings, Inc. and Commercial Escrow Services, Inc.(9)
10.18
Agreement and Plan of Reorganization, dated July 21, 2000, by and among Advanced Energy
Industries, Inc., Mercury Merger Corporation, Sekidenko, Inc. and Dr. Ray R. Dils.(10)
10.19
Agreement and Plan of Reorganization, dated July 6, 2000, amended and restated as of October
20, 2000, by and among Advanced Energy Industries, Inc., Flow Acquisition Corporation, and
Engineering Measurements Company.(11)
10.20
License Agreement, dated January 3, 2003, by and among Advanced Energy Industries, Inc., and
APJeT, Inc.(12)
10.21
Lease dated January 16, 2003, by and between China Great Wall Computer Shenzhen Co., Ltd.,
Great Wall Limited and Advanced Energy Industries (Shenzhen) Co., Ltd., for a building located
in Shenzhen, China.(14)
10.22
Non-employee Director Compensation summary *
10.23
Executive Change in Control Severance Agreement
21.1
Subsidiaries of Advanced Energy Industries, Inc.
23.1
Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm
23.2
Consent of KPMG LLP, Independent Registered Public Accounting Firm
24.1
Power of Attorney (included on the signature pages to this Annual Report on Form 10-K)
Table of Contents
31.1
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)
Incorporated by reference to the Registrants 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 Registrants Registration Statement on
Form S-3 (File No. 333-72748), filed February 8, 2002, as amended.
(3)
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-26966),
filed February 1, 2002.
(4)
Incorporated by reference to the Registrants Registration Statement on
Form S-1 (File No. 33-97188), filed September 20, 1995, as amended.
(5)
Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 000-26966), filed March 20, 2000.
(6)
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-26966),
filed September 10, 2001.
(7)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2001 (File No. 000-26966), filed May 9, 2001.
(8)
Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 000-26966), filed March 27, 2001.
(9)
Incorporated by reference to the Registrants Registration Statement on Form S-3 (File No.
333-37378), filed May 19, 2000.
(10)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000 (File No. 000-26966), filed August 4, 2000.
(11)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000 (File No. 000-26966), filed October 30, 2000.
(12)
Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 000-26966), filed March 27, 2003.
(13)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003 (File No. 000-26966), filed November 4, 2003.
(14)
Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended
December 31, 2003 (File No. 000-26966), filed February 24, 2004.
(15)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (File No. 000-26966), filed
August 9, 2004.
Table of Contents
(16)
Incorporated by reference to the Registrants Current Report on Form 8-K (File No. 000-26966),
filed February 3, 2005.
*
Compensation Plan
+
Confidential treatment has been granted for portions of this agreement.
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
(Registrant)
/s/ Douglas S. Schatz
Douglas S. Schatz
Chief Executive Officer, President and Chairman of the Board
Signatures
Title
Date
Chief Executive Officer, President
March 30, 2005
Douglas S. Schatz
and Chairman of the Board
(Principal Executive Officer)
Michael El-Hillow
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer and Principal
Accounting
Officer)
March 30, 2005
Director
March 30, 2005
Director
March 30, 2005
Director
March 30, 2005
Director
March 30, 2005
Director
March 30, 2005
Arthur A. Noeth
Director
March 30, 2005
Director
March 30, 2005
Director
March 30, 2005
Table of Contents
Agreement and Plan of Reorganization, dated as of June 1, 1998, by and among Advanced Energy
Industries, Inc., Warpspeed, Inc. and RF Power Products, Inc.(1)
Stock Purchase Agreement dated November 16, 2001, by and among Advanced Energy Industries,
Inc., Advanced Energy Japan K.K., Aera Japan Limited and Certain Stockholders of Aera Japan
Limited.(2)
Amendment No. 1 to Stock Purchase Agreement, dated December 25, 2001, by and among Advanced
Energy Industries, Inc., Advanced Energy Japan K.K., Aera Japan Limited and Certain
Stockholders of Aera Japan Limited.(3)
Forms of Minority Stock Purchase Agreement.(3)
Restated Certificate of Incorporation, as amended.(13)
By-laws.(4)
Form of Specimen Certificate for Common Stock.(4)
Indenture dated November 1, 1999, by and between State Street Bank and Trust Company of
California, N.A., as trustee, and Advanced Energy Industries, Inc. (including form of 5
1
/
4
%
Convertible Subordinated Note due 2006).(5)
Indenture dated August 27, 2001, by and between State Street Bank and Trust Company of
California, N.A., as trustee, and Advanced Energy Industries, Inc. (including form of 5.00%
Convertible Subordinated Note due September 1, 2006).(6)
Registration Rights Agreement, dated as of August 22, 2001, by and between Advanced Energy
Industries, Inc., and Goldman, Sachs and Co.(6)
The Registrant 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 Advanced Energy Industries, Inc. None
of such instruments not included as exhibits herein represents long-term debt in excess of 10%
of the consolidated total assets of Advanced Energy Industries, Inc.
Loan and Security Agreement dated May 8, 2004, by and among Silicon Valley Bank, as a bank, and
Advanced Energy Industries, Inc., as borrower.(15)
Lease, dated June 12, 1984, amended June 11, 1992, by and between Prospect Park East
Partnership and Advanced Energy Industries, Inc., for property located in Fort Collins,
Colorado.(4)
Lease, dated March 14, 1994, as amended, by and between Sharp Point Properties, L.L.C., and
Advanced Energy Industries, Inc., for property located in Fort Collins, Colorado.(4)
Lease, dated May 19, 1995, by and between Sharp Point Properties, L.L.C. and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado.(4)
Form of Indemnification Agreement.(4)
1995 Stock Option Plan, as amended and restated through February 7, 2001.(7)*
1995 Non-Employee Directors Stock Option Plan, as amended and restated through February 7,
2001.(7)*
2003 Stock Option Plan.(13)*
Amendment No. 1 to 2003 Stock Option Plan, dated January 31, 2005.(16)*
Restricted Stock Unit Agreement pursuant to the 2003 Stock Option Plan.(16)*
Stock Option Agreement pursuant to the 2003 Stock Option Plan.(16)*
Table of Contents
2003 Non-Employee Directors Stock Option Plan.(13)*
2001 Employee Stock Option Plan.(13)*
2002 Employee Stock Option Plan.(13)*
Lease dated March 20, 2000, by and between Sharp Point Properties, L.L.C. and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado.(8)
Agreement and Plan of Reorganization, dated April 5, 2000, by and among Advanced Energy
Industries, Inc., Noah Holdings, Inc. and AE Cal Merger Sub, Inc.(9)
Escrow and Indemnity Agreement, dated April 5, 2000, by and among Advanced Energy Industries,
Inc., the former stockholders of Noah Holdings, Inc. and Commercial Escrow Services, Inc.(9)
Agreement and Plan of Reorganization, dated July 21, 2000, by and among Advanced Energy
Industries, Inc., Mercury Merger Corporation, Sekidenko, Inc. and Dr. Ray R. Dils.(10)
Agreement and Plan of Reorganization, dated July 6, 2000, amended and restated as of October
20, 2000, by and among Advanced Energy Industries, Inc., Flow Acquisition Corporation, and
Engineering Measurements Company.(11)
License Agreement, dated January 3, 2003, by and among Advanced Energy Industries, Inc., and
APJeT, Inc.(12)
Lease dated January 16, 2003, by and between China Great Wall Computer Shenzhen Co., Ltd.,
Great Wall Limited and Advanced Energy Industries (Shenzhen) Co., Ltd., for a building located
in Shenzhen, China.(14)
Non-employee Director Compensation summary *
Executive change in Control Severance Agreement
Subsidiaries of Advanced Energy Industries, Inc.
Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Power of Attorney (included on the signature pages to this Annual Report on Form 10-K)
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1)
Incorporated by reference to the Registrants 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 Registrants Registration Statement on Form S-3 (File No.
333-72748), filed February 8, 2002, as amended.
(3)
Incorporated by reference to the Registrants Current Report on Form 8-K
(File No. 000-26966), filed February 1, 2002.
(4)
Incorporated by reference to the Registrants Registration Statement on Form S-1 (File No.
33-97188), filed September 20, 1995, as amended.
Table of Contents
(5)
Incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 1999 (File No. 000-26966), filed March 20, 2000.
(6)
Incorporated by reference to the Registrants Current Report on Form 8-K
(File No. 000-26966), filed September 10, 2001.
(7)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 (File No. 000-26966), filed May 9, 2001.
(8)
Incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2000 (File No. 000-26966), filed March 27, 2001.
(9)
Incorporated by reference to the Registrants Registration Statement on Form
S-3 (File No. 333-37378), filed May 19, 2000.
(10)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 (File No. 000-26966), filed August 4, 2000.
(11)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 (File No. 000-26966), filed October 30, 2000.
(12)
Incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2002 (File No. 000-26966), filed March 27, 2003.
(13)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003 (File No. 000-26966), filed November 4, 2003.
(14)
Incorporated by reference to the Registrants Annual Report on Form 10-K for
the year ended December 31, 2003 (File No. 000-26966), filed February 24, 2004.
(15)
Incorporated by reference to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 (File No.
000-26966), filed August 9, 2004.
(16)
Incorporated by reference to the Registrants Current Report on Form 8-K
(File No. 000-26966), filed February 3, 2005.
*
Compensation Plan
+
Confidential treatment has been granted for portions of this agreement.
EXHIBIT 10.22
The following summarizes Advanced Energy Industries, Inc.s non-employee director compensation structure.
Compensation for each non-employee director is as follows:
EXHIBIT 10.23
EXECUTIVE CHANGE IN CONTROL SEVERANCE AGREEMENT
This Executive Change in Control Severance Agreement (this Agreement ), is made as of the ___ day of March, 2005 (the Effective Date ), by and between Advanced Energy Industries, Inc., a Delaware corporation (the Company ), and ___(the Executive ).
Recitals
A. The Executive currently serves as an Executive Vice President of the Company in the Office of the President.
B. The Board of Directors of the Company (the Board ) acknowledges that consolidation within the industries in which the Company operates is likely to continue and the potential for a change in control of the Company, whether friendly or hostile, currently exists and from time to time in the future will exist, which potential can give rise to uncertainty among the senior executives of the Company. The Board considers it essential to the best interests of the Company to reduce the risk of the Executives departure and/or the inevitable distraction of the Executives attention from his duties to the Company, which are normally attendant to such uncertainties.
C. The Executive confirms that the terms of this Agreement reduce the risks of his departure and distraction of his attention from his duties to the Company and, accordingly, desires to enter into this Agreement.
Agreement
In consideration of the foregoing and the mutual covenants contained herein, the Company and the Executive agree as follows:
1. Definitions . Capitalized terms used herein shall have the meanings given to them in Annex A attached hereto, except where the context requires otherwise.
2. Term of Agreement .
(a) This Agreement shall be effective as of the Effective Date and shall continue in effect until the second anniversary of the Effective Date, provided , however , that the term of this Agreement automatically shall be extended for one additional year effective as of each anniversary of the Effective Date beginning with the second anniversary, unless either the Company or the Executive provides written notice to the other that the term of this Agreement shall terminate on the upcoming anniversary of the Effective Date, provided such notice is received by the receiving party not less than ninety (90) days prior to the intended date of termination and provided further that the Company shall not be entitled to deliver to the Executive such notice in the event of a Change in Control or a Pending Change in Control. Notwithstanding the foregoing, this Agreement shall terminate immediately upon (a) the Executives Voluntary Resignation, (b) the termination of the Executives employment for Cause, or (c) the termination of the CIC Period.
(b) Voluntary Resignation means the termination of the Executives employment upon his voluntary resignation, which includes retirement.
(c) CIC Period means the 30-day period commencing on the date that is six months following the effective date of a Change in Control and ending on the date that is thirty (30) days thereafter.
3. At Will Employment; Reasons for Termination .
(a) The Executives employment shall continue to be at-will, as defined under applicable law. If the Executives employment terminates for any reason or no reason, the Executive shall not be entitled to any compensation, benefits, damages, awards or other payments in respect of such termination, except as provided in this Agreement or pursuant to the terms of any Applicable Benefit Plan. Applicable Benefit Plan means any written employee benefit plan in effect and in which the Executive participates as of the time of the termination of his employment.
(b) The Executives employment shall be terminated upon the first to occur of the following:
(i) the Executives Voluntary Resignation;
(ii) termination by the Company for Cause;
(iii) the Executives death or Long-Term Disability;
(iv) termination by the Company without Cause;
(v) termination by the Executive for Good Reason following a Change in Control; and
(vi) termination by the Executive during the CIC Period.
(c) The Executives termination shall be deemed to be an Involuntary Termination , if such termination is effected (i) by the Company without Cause following a Change in Control or during a Pending Change in Control, (ii) by the Executive for Good Reason following a Change in Control, or (iii) by the Executive during the CIC Period.
(d) Cause means any of the following:
(i) the Executives (A) conviction of a felony; (B) commission of any other material act or omission involving dishonesty or fraud with respect to the Company or any of its Affiliates or any of the customers, vendors or suppliers of the Company or its Affiliates; (C) misappropriation of material funds or assets of the Company for personal use; or (D) engagement in unlawful harassment or unlawful discrimination with respect to any employee of the Company or any of its subsidiaries;
(ii) the Executives continued substantial and repeated neglect of his duties, after written notice thereof from the Board, and such neglect has not been cured within 30 days after the Executive receives notice thereof from the Board;
(iii) the Executives gross negligence or willful misconduct in the performance of his duties hereunder that is materially and demonstrably injurious to the Company; or
(iv) the Executives engaging in conduct constituting a breach of his written obligations to the Company in respect of confidentiality and/or the use or ownership of proprietary information.
(e) Good Reason means any of the following:
(i) a material reduction in the Executives duties, level of responsibility or authority, other than (A) reductions solely attributable to the Company ceasing to be a publicly held company or becoming a subsidiary or division of another company, or (B) isolated incidents that are promptly remedied by the Company; or
(ii) a reduction in the Executives Base Salary, without (A) the Executives express written consent or (B) an increase in the Executives benefits, perquisites and/or guaranteed bonus, which increase(s) have a value reasonably equivalent to the reduction in Base Salary; or
(iii) a reduction in the Executives Target Bonus, without (A) the Executives express written consent or (B) a corresponding increase in the Executives Base Salary; or
(iv) a material reduction in the Benefits, taken as a whole, without the Executives express written consent; or
(v) the relocation of the Executives principal place of business to a location more than thirty-five (35) miles from the Executives principal place of business immediately prior to the Change in Control, without the Executives express written consent; or
(vi) the Companys (or its successors) material breach of this Agreement.
4. Severance Benefits .
(a) Compensation and Benefits Required by Law or Applicable Benefit Plan . Notwithstanding anything to the contrary herein, the Executive or his estate shall be entitled to any and all compensation, benefits, awards and other payments required by any Applicable Benefit Plan, the COBRA Act or other applicable law, after taking into account the agreements set forth herein.
(b) No Payments Without Release . The Executive shall not be entitled to any of the compensation, benefits or other payments provided herein in respect of the termination of his employment, unless and until he has provided to the Company a full release of
claims, substantially in the form of Appendix I attached hereto, which release shall be dated not earlier than the date of the termination of his employment and shall release the Company of any claims that the Executive may have in respect of his employment with the Company or the termination thereof.
(c) Voluntary Resignation or Termination for Cause .
(i) In the event of the Executives Voluntary Resignation or termination of his employment by the Company for Cause, the Executive shall not be entitled to any compensation, benefits, awards or other payments in connection with such termination of his employment, except as provided in paragraph (a) of this Section 4.
(ii) The Executive shall not be deemed to have been terminated for Cause under this Agreement, unless the following procedures have been observed: To terminate the Executive for Cause, the Board must deliver to the Executive notice of such termination in writing, which notice must specify the facts purportedly constituting Cause in reasonable detail. The Executive will have the right, within 10 calendar days of receipt of such notice, to submit a written request for review by the Board. If such request is timely made, within a reasonable time thereafter, the Board (with all directors attending in person or by telephone) shall give the Executive the opportunity to be heard (personally or by counsel). Following such hearing, unless a majority of the directors then in office confirm that the Executives termination was for Cause, the Executives termination shall be deemed to have been made by the Company without Cause for purposes of this Agreement.
(d) Death or Long-Term Disability . In the event of the Executives death or Long-Term Disability, the Executive (or his estate or personal representative) shall be entitled to receive (i) the proceeds of any life insurance policy carried by the Company with respect to the Executive, (ii) payments pursuant to any long-term disability insurance policy carried by the Company with respect to the Executive, and (iii) within sixty (60) days following the Executives death or Long-Term Disability, a lump-sum payment equal to six months salary, reduced by any proceeds or payments remitted or to be remitted pursuant to clause (i) or (ii) above.
(e) Termination by the Company without Cause and without a Change in Control . In the event of the Executives termination without Cause, provided that a Change in Control has not occurred and there is no Pending Change in Control, the Executive shall be entitled to receive:
(i) within fifteen (15) calendar days after the Date of Termination, the Executives Accrued Compensation and Pro-Rata Bonus through the date of termination; and
(ii) within fifteen (15) calendar days after the Date of Termination, the amount in cash equal to sum of the Executives annual Base Salary and the Executives Target Bonus in effect as of the Date of Termination; and
(iii) for twelve (12) months after the Date of Termination, or such longer period as may be provided by the terms of any Applicable Benefit Plan, continuation of the benefits for the Executive and/or the Executives family that are being provided to the
Executive and/or the Executives family immediately prior to the Date of Termination, including the welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) (collectively, the Benefits ), as if the Executives employment had not been terminated; provided, however , that if the Executive commences employment with another employer during such twelve (12) month period and is eligible to receive medical or other welfare benefits under the new employers plan(s), the Benefits shall terminate as of the date the Executive becomes eligible to receive such benefits; and
(iv) an amount equal to the contributions to the Companys retirement plans on behalf of the Executive that would have been made for the benefit of the Executive if the Executives employment had continued for twelve (12) months after the Date of Termination, assuming for this purpose that all benefits under any such retirement plans were fully vested and that the Executives compensation during such twelve (12) months were the same as it had been immediately prior to the Date of Termination; and
(v) reimbursement, up to $15,000, for outplacement services reasonably selected by the Executive.
(f) Involuntary Termination . In the event Executives employment is terminated under circumstances constituting an Involuntary Termination, the Executive shall be entitled to receive:
(i) within 15 calendar days after the Date of Termination, the Executives Accrued Compensation and Pro-Rata Bonus through the Date of Termination; and
(ii) within fifteen (15) calendar days after the Date of Termination, the amount in cash equal to the product of (A) 1.75 and (B) the sum of the Executives annual Base Salary and the Executives Target Bonus in effect as of the Date of Termination; and
(iii) for twenty-one (21) months after the Date of Termination, or such longer period as may be provided by the terms of any Applicable Benefit Plan, continuation of the Benefits, as if the Executives employment had not been terminated; provided, however , that if the Executive commences employment with another employer during such twenty-one (21) month period and is eligible to receive medical or other welfare benefits under the new employers plan(s), the Benefits shall terminate as of the date the Executive becomes eligible to receive such benefits;
(iv) an amount equal to the contributions to the Companys retirement plans on behalf of the Executive that would have been made for the benefit of the Executive if the Executives employment had continued for twenty-one (21) months after the Date of Termination, assuming for this purpose that all benefits under any such retirement plans were fully vested and that the Executives compensation during such twenty-one (21) months were the same as it had been immediately prior to the Date of Termination; and
(v) reimbursement, up to $15,000, for outplacement services reasonably selected by the Executive; provided that the Executive may not terminate his
employment for Good Reason, unless he has delivered prior written notice of his belief that Good Reason exists and the Company has not fully remedied the situation (such that Good Reason no longer exists) within ten (10) business days after receipt of such notice.
5. Effect on Option, Restricted Stock and Restricted Unit Agreements .
(a) In the event Options held by the Executive are assumed by the surviving entity in connection with a Change in Control, if an Involuntary Termination of Executives employment occurs following the Change of Control before the end of the CIC Period, vesting of any and all assumed Options held by the Executive shall be accelerated so that all unexpired Options then held by the Executive shall be fully vested and exercisable immediately upon the Involuntary Termination.
(b) In the event Restricted Stock and RSUs held by the Executive are assumed by the surviving entity in connection with a Change in Control, if an Involuntary Termination of Executives employment occurs following the Change of Control before the end of the CIC Period, vesting of any and all assumed Restricted Stock and RSUs held by the Executive shall be accelerated so that all Restricted Stock and RSUs then held by the Executive shall be fully vested and exercisable immediately upon the Involuntary Termination.
(c) The termination of the Executives employment by the Company without Cause during a Pending Change in Control shall have no effect on the vesting of the Options, Restricted Stock or RSUs then held by the Executive, and no shares of Common Stock shall be delivered to the Executive in connection with the RSUs held by the Executive at the time of the termination of his employment unless the Change in Control is effected within three (3) months following the Date of Termination. If the Change in Control is effected, then the Options, Restricted Stock and RSUs held by the Executive as of the Date of Termination shall be treated as if the Executives employment had not been terminated and the Executive shall have rights as set forth under Section 5(a) above. If the Change in Control is not effected within three (3) months following the Date of Termination, then the Options, Restricted Stock and RSUs held by the Executive as of the Date of Termination shall be treated as if the Executives employment had been terminated as of such three-month anniversary of the Date of Termination.
(d) In the event the Executives employment is terminated by the Company under any circumstances other than those described in paragraphs (a) through (c) of this Section 5, the effect of such termination of employment on the Options, Restricted Stock and/or RSUs then held by the Executive shall be as set forth in the agreements representing such Options, Restricted Stock and/or RSUs.
6. Certain Additional Payments by the Company .
(a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any Payment would be subject to the Excise Tax, then the Executive shall be entitled to receive an additional payment (the Gross-Up Payment ) in an amount such that, after payment by the Executive of all taxes (and any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax
imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 6(c) , all determinations required to be made under this Section 6 , including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP, or such other nationally recognized certified public accounting firm as may be designated by the Executive (the Accounting Firm ). The Accounting Firm shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive may appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6 , shall be paid by the Company to the Executive within 5 days of the receipt of the Accounting Firms determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments that will not have been made by the Company should have been made (the Underpayment ), consistent with the calculations required to be made hereunder. In the event the Company exhausts its remedies pursuant to Section 6(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be paid by the Company to or for the benefit of the Executive within ten (10) business days after the Accounting Firm has given the Company notice of the amount it has determined to be the Underpayment.
(c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable, but no later than 10 business days after the Executive is informed in writing of such claim. The Executive shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that the Company desires to contest such claim and the Company has a good faith basis to contest the claim, the Executive shall:
(i) give the Company any information reasonably requested by the Company relating to such claim,
(ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to contest such claim, and
(iv) permit the Company to participate in any proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest, and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 6(c) , the Company shall control all proceedings taken in connection with such contest, and, at its sole discretion, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the applicable taxing authority in respect of such claim and may, at its sole discretion, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees that he will, to the extent reasonably requested by the Company, prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall reasonably determine; provided, however, that, if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties) imposed with respect to such advance or with respect to any imputed income in connection with such advance; and provided, further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Companys control of the contest shall be limited to issues with respect to which the Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.
(d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(c) , the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Companys complying with the requirements of Section 6(c) ) pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto), within ten (10) business days after the Executives receipt thereof (which receipt shall include without limitation the recordation by the applicable taxing authority of any credit against the Executives taxes). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 6(c) , a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.
(e) Notwithstanding any other provision of this Section 6 , the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for the benefit of the Executive, all or any portion of the Gross-Up Payment, and the Executive hereby consents to such withholding.
7. Mitigation . In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and except as set forth in Section 4 , such amounts shall not be reduced whether or not the Executive obtains other employment.
8. Successors .
(a) This Agreement is personal to the Executive, and, without the prior written consent of the Company, shall not be assignable by the Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executives legal representatives.
(b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.
9. Miscellaneous .
(a) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement constitutes the entire agreement and understanding of the parties in respect of the subject matter hereof and supersedes all prior understanding, agreements, or representations by or among the parties, written or oral, to the extent they relate in any away to the subject matter hereof; provided, however , this Agreement shall have no effect on any confidentiality agreements or assignment of inventions agreements between the parties. This Agreement may not be amended or modified other than by a written agreement executed by the parties hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:
if to the Executive:
if to the Company:
Advanced Energy Industries, Inc.
1625 Sharp Point Drive
Fort Collins, CO 80525
Attention: Chief Executive Officer
or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this Agreement such United States federal, state or local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.
(e) The Executives or the Companys failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.
(f) All claims by the Executive for payments or benefits under this Agreement shall be promptly forwarded to and addressed by the Compensation Committee and shall be in writing. Any denial by the Compensation Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Compensation Committee shall afford the Executive a reasonable opportunity for a review of the decision denying a claim and shall further allow the Executive make a written demand upon the Company to submit the disputed matter to arbitration in accordance with the provisions of paragraph (g) below. The Company shall pay all expenses of the Executive, including reasonable attorneys and expert fees, in connection with any such arbitration. If for any reason the arbitrator has not made his award within one hundred eighty (180) days from the date of Executives demand for arbitration, such arbitration proceedings shall be immediately suspended and the Company shall be deemed to have agreed to Executives position. Thereafter, the Company shall, as soon as practicable and in any event within 10 business days after the expiration of such 180-day period, pay Executive his reasonable expenses and all amounts reasonably claimed by him that were the subject of such dispute and arbitration proceedings.
(g) Subject to the terms of paragraph (f) above, any dispute arising from, or relating to, this Agreement shall be resolved at the request of either party through binding arbitration in accordance with this paragraph (g) . Within 10 business days after demand for arbitration has been made by either party, the parties, and/or their counsel, shall meet to discuss the issues involved, to discuss a suitable arbitrator and arbitration procedure, and to agree on arbitration rules particularly tailored to the matter in dispute, with a view to the disputes prompt, efficient, and just resolution. Upon the failure of the parties to agree upon arbitration rules and procedures within a reasonable time (not longer than 15 business days from the demand), the Commercial Arbitration Rules of the American Arbitration Association shall be applicable. Likewise, upon the failure of the parties to agree upon an arbitrator within a reasonable time (not longer than 15 business days from demand), there shall be a panel comprised of three arbitrators, one to be appointed by each party and the third one to be selected by the two arbitrators jointly, or by the American Arbitration Association, if the two arbitrators cannot decide on a third arbitrator. At least 30 days before the arbitration hearing (which shall
be set for a date no later than 60 days from the demand), the parties shall allow each other reasonable written discovery including the inspection and copying of documents and other tangible items relevant to the issues that are to be presented at the arbitration hearing. The arbitrator(s) shall be empowered to decide any disputes regarding the scope of discovery. The award rendered by the arbitrator(s) shall be final and binding upon both parties. The arbitration shall be conducted in Larimer County in the State of Colorado. The Colorado District Court located in Larimer County shall have exclusive jurisdiction over disputes between the parties in connection with such arbitration and the enforcement thereof, and the parties consent to the jurisdiction and venue of such court for such purpose.
(h) This Agreement shall be governed by the laws of the State of Colorado, without giving effect to any choice of law provision or rule (whether of the State of Colorado or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Colorado.
(i) If the Company determines that any payment obligation pursuant to this Agreement will trigger tax obligations under Section 409A of the Code, then the parties shall use their commercially reasonable efforts to structure an alternative payment mechanism consistent with the parties objectives, to the extent reasonably practicable, that will not trigger such tax obligations under Section 409A of the Code.
[Signature Page Follows]
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date set forth in the Preamble hereto.
[ Name of Executive ] | ||||
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Advanced Energy Industries, Inc. | ||||
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By: | |||
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Douglas S. Schatz
Chief Executive Officer and Chairman |
ANNEX A
DEFINITIONS
(a) Accounting Firm means Deloitte & Touche, LLP, or such other nationally recognized certified public accounting firm as may be designated by the Executive as set forth in Section 6 hereof.
(b) Accrued Compensation means an amount including all amounts earned or accrued through the Date of Termination but not paid as of the Date of Termination including (i) Base Salary, (ii) reimbursement for reasonable and necessary expenses incurred by the Executive on behalf of the Company during the period ending on the Date of Termination, (iii) vacation and sick leave pay (to the extent provided by Company policy or applicable law), and (iv) incentive compensation (if any) earned in respect of any period ended prior to the Date of Termination. It is expressly understood that incentive compensation shall have been earned as of the time that the conditions to such incentive compensation have been met, even if not calculated or payable at such time.
(c) Agreement means this Executive Change in Control Severance Agreement, as set forth in the Preamble hereto.
(d) Applicable Benefit Plan means any written employee benefit plan in effect and in which the Executive participates as of the time of the termination of his employment.
(e) Base Salary means the Executives annual base salary at the rate in effect during the last regularly scheduled payroll period immediately preceding the occurrence of the Change in Control or termination of employment and does not include, for example, bonuses, overtime compensation, incentive pay, fringe benefits, sales commissions or expense allowances.
(f) Benefits means the benefits for the Executive and/or the Executives family that are being provided to the Executive and/or the Executives family immediately prior to the Date of Termination, including the welfare benefit plans, practices, policies and programs provided by the Company (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) and, if applicable, car allowance, as set forth in Section 4 hereof.
(g) Board means the Board of Directors of the Company, as set forth in the Recitals hereto.
(h) Cause means any of the following:
(i) the Executives (A) conviction of a felony; (B) commission of any other material act or omission involving dishonesty or fraud with respect to the Company or any of its Affiliates or any of the customers, vendors or suppliers of the Company or its Affiliates; (C) misappropriation of material funds or assets of the Company for personal use; or (D) engagement in unlawful harassment or unlawful discrimination with respect to any employee of the Company or any of its subsidiaries;
(ii) the Executives continued substantial and repeated neglect of his duties, after written notice thereof from the Board, and such neglect has not been cured within 30 days after the Executive receives notice thereof from the Board;
(iii) the Executives gross negligence or willful misconduct in the performance of his duties hereunder that is materially and demonstrably injurious to the Company; or
(iv) the Executives engaging in conduct constituting a breach of his written obligations to the Company in respect of confidentiality and/or the use or ownership of proprietary information.
(i) Change in Control shall be deemed to occur upon the consummation of any of the following transactions:
(i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state of the Companys incorporation or a transaction in which 50% or more of the surviving entitys outstanding voting stock following the transaction is held by holders who held 50% or more of the Companys outstanding voting stock prior to such transaction; or
(ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company; or
(iii) any reverse merger in which the Company is the surviving entity, but in which 50% or more of the Companys outstanding voting stock is transferred to holders different from those who held the stock immediately prior to such merger; or
(iv) the acquisition by any person (or entity), other than Douglas Schatz and/or any of his affiliates or members of his immediate family, directly or indirectly of 50% or more of the combined voting power of the outstanding shares of Common Stock.
(j) CIC Period means the 30-day period commencing on the date that is six months following the effective date of a Change in Control and ending on the date that is thirty (30) days thereafter.
(k) Code means the Internal Revenue Code of 1986, as amended.
(l) Common Stock means common stock, par value $0.001, of the Company.
(m) Company means Advanced Energy Industries, Inc., a Delaware corporation, as set forth in the Preamble hereto.
(n) Date of Termination means (i) if the Executives employment is terminated for Cause, the date of receipt by the Executive of written notice from the Board or the Chief Executive Officer that the Executive has been terminated, or any later date specified therein, as the case may be, (ii) if the Executives employment is terminated by the Company
A-ii
other than for Cause, death or Long-Term Disability, the date specified in the Companys written notice to the Executive of such termination, (iii) if the Executives employment is terminated by reason of the Executives death or Long-Term Disability, the date of such death or the effective date of such Long-Term Disability, (iv) if the Executives employment is terminated by Executives resignation that constitutes Involuntary Termination under this Agreement, the date of the Companys receipt of the Executives notice of termination or any later date specified therein.
(o) Effective Date means the date set forth in the Preamble hereto.
(p) Executive means the individual identified in the Preamble hereto.
(q) Excise Tax means the excise tax imposed by Section 4999 of the Code, together with any interest or penalties imposed with respect to such excise tax.
(r) Good Reason means any of the following:
(i) a material reduction in the Executives duties, level of responsibility or authority, other than (A) reductions solely attributable to the Company ceasing to be a publicly held company or becoming a subsidiary or division of another company, or (B) isolated incidents that are promptly remedied by the Company; or
(ii) a reduction in the Executives Base Salary, without (A) the Executives express written consent or (B) an increase in the Executives benefits, perquisites and/or guaranteed bonus, which increase(s) have a value reasonably equivalent to the reduction in Base Salary; or
(iii) a reduction in the Executives Target Bonus, without (A) the Executives express written consent or (B) an corresponding increase in the Executives Base Salary; or
(iv) a material reduction in the Benefits, taken as a whole, without the Executives express written consent; or
(v) the relocation of the Executives principal place of business to a location more than thirty-five (35) miles from the Executives principal place of business immediately prior to the Change in Control, without the Executives express written consent; or
(vi) the Companys (or its successors) material breach of this Agreement.
(s) Gross-Up Payment means an additional payment that the Executive is entitled to receive for any Payment subject to the Excise Tax, as set forth in Section 6 hereof.
(t) Involuntary Termination means the termination of Executives employment with the Company:
A-iii
(i) by the Company without Cause,
(ii) by the Executive for Good Reason following a Change in Control, or
(iii) by the Executive during the CIC Period;
as set forth in Section 3 hereof.
(u) Long-Term Disability is defined according to the Companys insurance policy regarding long-term disability for its employees.
(v) Parachute Value of a Payment means the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a parachute payment under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.
(w) A Payment means any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for the benefit of the Executive, whether paid or payable pursuant to this Agreement or otherwise.
(x) Pending Change in Control means that one or more of the following events has occurred and a Change in Control pursuant thereto is reasonably expected to be effected within 90 days of the date as of the determination as to whether there is a Pending Change in Control: (i) the Company executes a letter of intent, term sheet or similar instrument with respect to a transaction or series of transactions, the consummation of which transaction(s) would result in a Change in Control; (ii) the Board approves a transaction or series of transactions, the consummation of which transaction(s) would result in a Change in Control; or (iii) a person makes a public announcement of tender offer for the Common Stock, the completion of which would result in a Change in Control. A Pending Change in Control shall cease to exist upon a Change in Control.
(y) Pro Rata Bonus means an amount equal to 100% of the Target Bonus that the Executive would have been eligible to receive for the Companys fiscal year in which the Executives employment terminates following a Change in Control, multiplied by a fraction, the numerator of which is the number of days in such fiscal year through the Termination Date and the denominator of which is 365.
(z) Restricted Stock means Common Stock issued by the Company with vesting restrictions and subject to an award agreement pursuant to a stock plan of the Company.
(aa) RSUs mean restricted stock units granted by the Company pursuant to which the Company has agreed to issue Common Stock upon the satisfaction of vesting and other conditions, which RSUs are subject to an award agreement pursuant to a stock plan of the Company.
A-iv
(bb) Target Bonus means the bonus which would have been paid to the Executive for full achievement of the Companys base business plan or budget and/or for the attainment of specific performance objectives pertaining to the business of the Company or any of its specific business units or divisions, or to individual performance criteria applicable to the Executive or his position, which objectives have been established by the Board of Directors (or the Compensation Committee thereof) for the Executive relating to such plan or budget for the year in question. Target Bonus shall not mean the maximum bonus which the Executive might have been paid for overachievement of such plan.
(cc) Underpayment means Gross-Up Payments that have not been made by the Company and should have been made, as set forth in Section 6 hereof.
(dd) Value of a Payment means the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as determined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code.
(ee) Voluntary Resignation means the termination of the Executives employment upon his voluntary resignation, which includes retirement, as set forth in Section 3 hereof.
A-v
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of Incorporation
Name
or Organization
Germany
China
South Korea
China
China
United Kingdom
Japan
Japan
Taiwan
Netherlands
Delaware
Texas
United Kingdom
Germany
Washington
China
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We
have issued our reports dated March 30, 2005, accompanying the
consolidated financial statements and managements assessment
of the effectiveness of internal control over financial reporting included in the Annual Report of Advanced Energy Industries, Inc. on Form 10-K for the year ended
December 31, 2004. We hereby consent to the incorporation by reference of said reports in the
Registration Statements of Advanced Energy Industries, Inc. on Form S-8 (No. 333-01616), Form S-8
(No. 333-04073), Form S-8 (No. 333-46705), Form S-8 (No. 333-57233), Form S-8 (No. 333-65413), Form
S-8 (No. 333-79425), Form S-8 (No. 333-79429), Form S-8 (No. 333-62760), Form S-8 (No. 333-69148),
Form S-8 (No. 333-69150), Form S-8 (No. 333-87718), Form S-8 (No. 333-105365), Form S-8 (No.
333-105366), Form S-8 (No. 333-105367), Form S-3 (No. 333-37378), Form S-3 (No. 333-47114), Form
S-3 (No. 333-72748), Form S-3 (No. 333-87720), and Form S-3 (No. 333-110534).
/s/ GRANT THORNTON LLP
Denver, Colorado
March 30, 2005
EXHIBIT 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
/s/ KPMG LLP
Denver, Colorado
Advanced Energy Industries, Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-37378,
333-47114, 333-72748, 333-87720, and 333-110534) on Form S-3 and the registration statements (Nos.
333-01616, 333-04073, 333-46705, 333-57233, 333-65413, 333-79425, 333-79429, 333-62760, 333-69148,
333-69150, 333-87718, 333-105365, 333-105366, and 333-105367) on Form S-8 of Advanced Energy
Industries, Inc. of our report dated February 20, 2004, with respect to the consolidated balance
sheet of Advanced Energy Industries, Inc. as of December 31, 2003, and the related consolidated
statements of operations, stockholders equity and comprehensive loss, and cash flows, and the
related financial statement schedules, for each of the years in the two-year period then ended,
which report appears in the December 31, 2004 annual report on Form 10-K of Advanced Energy
Industries, Inc.
Our report dated February 20, 2004 contains an explanatory paragraph relating to the fact that
effective January 1, 2002 the Company adopted Statements of Financial Accounting Standards No. 141,
Business Combinations
, and No. 142,
Goodwill and Other Intangible Assets
.
Our report dated February 20, 2004 contains an explanatory paragraph relating to the fact that
effective January 1, 2003, Advanced Energy Industries, Inc. and subsidiaries adopted the provisions
of Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections
.
March 30, 2005
EXHIBIT 31.1
I, Douglas S. Schatz, certify that: | ||||
1. | I have reviewed this annual report on Form 10-K of Advanced Energy Industries, Inc.; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |||
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 30, 2005
|
/s/ Douglas S. Schatz | |
|
Douglas S. Schatz | |
|
Chief Executive Officer, President | |
|
and Chairman of the Board |
EXHIBIT 31.2
I, Michael El-Hillow, certify that: | ||||
1. | I have reviewed this annual report on Form 10-K of Advanced Energy Industries, Inc.; | |||
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |||
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |||
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||
c. | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||
d. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | |||
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: March 30, 2005
|
/s/ Michael El-Hillow | |
|
Michael El-Hillow | |
|
Executive Vice President, Chief Financial | |
|
Officer (Principal Financial Officer) |
EXHIBIT 32.1
Certification of the Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
In connection with the accompanying annual report on Form 10-K of Advanced Energy Industries, Inc. (the Company) for the year ended December 31, 2004 (the Report), I, Douglas S. Schatz, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 30, 2005
|
/s/ Douglas S. Schatz | |
|
Douglas S. Schatz | |
|
Chief Executive Officer and President |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
Certification of the Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
In connection with the accompanying annual report on Form 10-K of Advanced Energy Industries, Inc. (the Company) for the year ended December 31, 2004 (the Report), I, Michael El-Hillow, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 30, 2005
|
/s/ Michael El-Hillow | |
|
Michael El-Hillow | |
|
Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.