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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
[ ] 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 0-23621
MKS INSTRUMENTS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-2277512
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Six Shattuck Road, Andover, Massachusetts 01810
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (978) 975-2350
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of January 31, 2002: $764,300,367; Number of
shares outstanding of the issuer's Common Stock, no par value, as of January 31,
2002: 50,056,447
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for MKS' Annual Meeting of
Stockholders to be held on May 16, 2002 are incorporated by reference into Part
III of this Form 10-K.
PART I
ITEM 1. BUSINESS
MKS Instruments, Inc. is a leading worldwide developer, manufacturer
and supplier of instruments, components and integrated subsystems used to
measure, control and analyze gases in semiconductor manufacturing and similar
industrial manufacturing processes.
MKS Instruments, Inc. completed two acquisitions in fiscal 2001 that
further expanded its extensive technology portfolio and product suite. On
January 26, 2001, MKS acquired Applied Science and Technology, Inc., ("ASTeX"),
a Wilmington, Massachusetts based company with products and technology in
reactive gas generation and power delivery. Each outstanding share of ASTeX
common stock was exchanged for 0.7669 newly issued shares of common stock of MKS
Instruments, Inc., resulting in the issuance of approximately 11.2 million
shares of common stock of MKS Instruments, Inc. The acquisition was accounted
for under the pooling of interests method of accounting, and accordingly, the
consolidated financial statements included in this Form 10-K reflect the
combined financial position and results of operations and cash flows of MKS
Instruments, Inc. and all of its subsidiaries and ASTeX and all of its
subsidiaries (together, the "Company" or "MKS"), for all periods presented. This
presentation combines the historical financial statements of MKS Instruments,
Inc. for the years ended December 31, 2000 and 1999 with the historical
financial statements of ASTeX for the fiscal years ended July 1, 2000 and June
26, 1999, respectively. On April 27, 2001, MKS acquired On-Line Technologies,
Inc. ("On-Line"), a privately held company that designs and manufactures
products used for gas analysis, wafer metrology and complementary analysis and
control software. The purchase price was approximately $23,829,000 and consisted
of approximately 660,000 shares of MKS common stock valued at approximately
$12,110,000, cash payments of $6,295,000, and the assumption of approximately
$4,728,000 of debt. The On-Line acquisition was accounted for under the purchase
method of accounting and its results of operations are included in the Company's
consolidated statement of income since the date of purchase.
On January 31, 2002, MKS acquired the ENI division of Emerson Electric
Co. ENI is a leading supplier of solid-state radio frequency (RF) and direct
current (DC) plasma power supplies, matching networks and instrumentation to the
semiconductor and thin-film processing industries. ENI's technology complements
that of ASTeX by adding critical solid-state power conversion technology to
ASTeX's core capability in plasma management. MKS issued 12 million shares of
MKS common stock to Emerson in exchange for the businesses and assets of ENI.
The purchase price is approximately $265,000,000. The ENI acquisition will be
accounted for under the purchase method of accounting and its results of
operations will be included in the Company's consolidated statement of income
from the date of purchase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Recent Developments" on this
Form 10-K. The following discussion of MKS' business, unless otherwise noted, is
as of December 31, 2001 and prior to the closing of the acquisition of ENI.
PRODUCTS
MKS offers a comprehensive line of products that are used to manufacture,
among other things:
- - semiconductors - solar panels
- - optical filters and fiber optic cables for data and - gas lasers
telecommunications - eyeglasses
- - flat panel displays - architectural glass
- - magnetic and optical storage devices and media, - cutting tools
including: - freeze-dried pharmaceuticals
- compact disks - magnetic resonance imaging (MRI) equipment
- hard disk storage devices
- magnetic devices for reading disk data
- digital video disks
- optical storage disks or laser readable disks
MKS supplies products in four principal product areas. We also combine
products and technologies to provide value-added integrated subsystems. Our
product areas include:
- Pressure Measurement and Control Products
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- Materials Delivery and Analysis Products
- Vacuum Products
- Reactive Gas Generation and Power Delivery Products
PRESSURE MEASUREMENT AND CONTROL PRODUCTS. MKS designs and manufactures a
wide range of gas pressure measurement and control instrumentation. Each product
line consists of products that are designed for a variety of pressure ranges and
accuracies.
Baratron Pressure Measurement Products. Baratron products are
high-precision pressure measurement instruments. MKS has five Baratron product
families that range from high accuracy digital output instruments to simple
electronic switches. These products are typically used to measure the pressure
of the gases being distributed upstream of the process chambers, to measure
process chamber pressures and to measure pressures between process chambers,
vacuum pumps and exhaust lines. Baratron instruments measure pressures at ranges
from two hundred times atmospheric pressure to one billionth of atmospheric
pressure. MKS believes it offers the widest range of gas pressure measurement
instruments in the semiconductor and advanced thin-film materials processing
industries.
A key feature of Baratron instruments is the ability to measure pressure
independent of gas composition, which is critical for precise pressure control
of semiconductor processes that involve gas mixtures. In these processes, there
is a need to control both pressure and gas mixture, but the pressure measurement
instrument must measure only the pressure of the sum of the gases in the
chamber, independent of gas composition. The Baratron instruments enable users
to achieve a highly precise, accurate and repeatable measurement of gas
pressure. Pressure measurement, independent of gas composition, is also useful
during process steps used to remove atmospheric gases as well as those used to
introduce specific amounts of various types of gases. Such processes are used to
manufacture fluorescent bulbs and to fabricate gas lasers.
Automatic Pressure and Vacuum Control Products. Automatic pressure control
products consist of analog and digital automatic pressure and vacuum control
electronic instruments and valves. These products enable precise control of
process pressure by electronically actuating valves which control the flow of
gases in and out of the process chamber to minimize the difference between
desired and actual pressure in the chamber. The electronic controllers vary from
simple analog units with precise manual tuning capability to state-of-the-art
self-tuning, digital signal processing controllers. The valve products vary from
small gas inlet valves to large exhaust valves.
In most cases, Baratron pressure measurement instruments provide the
pressure input to the automatic pressure control device. Together, these
components create an integrated automatic pressure control system. MKS' pressure
control products can also accept inputs from other measurement instruments,
enabling the automatic control of gas input or exhaust based on parameters other
than pressure.
MKS has a line of integrated pressure controllers to address the need for
smaller components that save valuable clean room space. This product line
combines the functions of its Baratron pressure measurement instrument, flow
measurement instrument, control electronics and valve into a four-inch long
instrument. This instrument can be placed directly on a gas line to control
pressure downstream of the instrument while indicating the gas flow rate.
MATERIALS DELIVERY AND ANALYSIS PRODUCTS. MKS designs and manufactures a
wide range of flow and composition analysis measurement and control
instrumentation. Each product line consists of products that are designed for a
variety of flow and composition ranges and accuracies.
Flow Measurement and Control Products. Flow measurement products include
gas, vapor and liquid flow measurement products based upon thermal conductivity,
pressure and direct liquid injection technologies. The flow control products
combine the flow measurement device with valve control elements based upon
solenoid, piezo-electric and piston pump technologies. The products measure and
automatically control the mass flow rate of gases and vapors into the process
chamber. MKS' broad product lines include products that allow the precise,
automatic flow control of inert or corrosive gases, the automatic control of low
vapor pressure gases and heated liquid source materials, and the automatic
control of delicate, advanced technology liquid sources and vaporized solid
sources for next generation devices.
MKS' line of thermal-based mass flow controllers, which control gas flow
based on the molecular weight of gases, includes all-metal-sealed designs and
ultra-clean designs for semiconductor applications, as well as general-purpose
controllers for applications where all-metal-sealed construction is not
required. MKS has also developed pressure-based mass flow controllers, based on
Baratron pressure instrument measurement and control technology, which use flow
restrictors in the gas line to transform pressure control into mass flow
control.
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Certain new materials required for the next generation of semiconductor
devices are difficult to control using traditional thermal mass flow technology.
To control these new materials, MKS has designed a direct liquid injection
subsystem which pumps a precise volume of liquid into a vaporizer, which in turn
supplies a controlled flow of vapor into the process chamber. The direct liquid
injection subsystem pump and vaporizer are presently used principally for
research and development applications for next generation semiconductor device
conductors, diffusion barriers and insulators, such as copper, titanium nitride
and dielectric materials.
MKS' flow measurement products also include a calibration system which
independently measures mass flow and compares this measurement to that of the
process chamber mass flow controller. The demand for the MKS calibration system
is driven by the increasingly stringent process control needs of the
semiconductor industry and the need to reduce costly downtime resulting from
stopping operations to address mass flow controller problems.
Gas Composition Analysis Instruments. Gas analysis instruments are sold
primarily to the semiconductor industry. The product lines for residual gas
analysis include a quadrapole mass spectrometer sensor, which is a device that
separates gases based on molecular weight. MKS' quadrapole mass spectrometer
sensors include built-in electronics to analyze the composition of background
and process gases in the process chamber. MKS' Spectra International, LLC
("Spectra") process monitoring system is a sophisticated quadrapole mass
spectrometer process analyzer for statistical process monitoring of
manufacturing processes operating from very low pressures to atmospheric
pressure. These instruments are provided both as portable laboratory systems and
as process gas monitoring systems used in the diagnosis of semiconductor
manufacturing process systems. The gas monitoring systems can indicate
out-of-bounds conditions, such as the presence of undesirable atmospheric gases,
water vapor or out-of-tolerance amounts of specific gases in the process
chamber, enabling operators to diagnose and repair faulty equipment. MKS' gas
sampling systems provide a turnkey solution to withdraw gases from chambers at
relatively high pressures for introduction into the low-pressure gas analyzers.
Next generation semiconductor manufacturing processes, with smaller circuit
patterns and larger wafer sizes, are expected to require sophisticated gas
analysis instruments and/or monitoring equipment to ensure tighter process
control and earlier diagnosis of equipment malfunction. MKS' acquisition of
Compact Instrument Technology, LLC in March 2000 enhances its core capabilities
in gas composition analysis and provides additional capabilities to reduce the
size and costs of monitors for advanced processes. The first product emerging
from the Compact Instrument acquisition is the PICO helium leak detector, which
MKS believes is the smallest mass spectrometer-based leak detector currently
available. The PICO is applicable in a diverse array of markets from
semiconductors to air conditioning, where it is critical to ensure that
equipment or products are leak tight.
Optical Monitoring Instruments. MKS' acquisition of Spectra in June 2000,
in addition to augmenting the residual gas analysis products mentioned above,
added a range of optical monitoring instruments. These are sold primarily to the
thin film coating industry in applications such as the manufacture of optical
filters. The optical monitors measure the thickness and optical properties of a
film being deposited, allowing the user to better control the process.
Gas Analysis, Wafer Metrology and Process Control Products. MKS'
acquisition of On-Line in April 2001, added an advanced range of gas analysis
and wafer metrology products based on a proprietary FTIR spectrometer, as well
as complementary analysis in control software. These products are applicable in
three main areas: (1) the measurement of the composition or purity of gases used
for processing; (2) the analysis of gases produced by a process, and (3) the
analysis of thickness and composition of thin film deposited during
semiconductor and optoelectronic fabrication.
VACUUM PRODUCTS. MKS designs and manufactures a wide variety of vacuum
technology products, including vacuum gauges, valves and components.
Vacuum Gauging Products. MKS offers a wide range of vacuum instruments
consisting of vacuum measurement sensors and associated power supply and readout
units. These vacuum gauges measure phenomena that are related to the level of
pressure in the process chamber and downstream of the process chamber between
the chamber and the pump. Unlike Baratron pressure measurement instruments,
vacuum gauges do not measure pressure directly. These gauges are used to measure
vacuum at pressures lower than those measurable with a Baratron pressure
measurement instrument or to measure vacuum in the Baratron pressure measurement
instrument range where less accuracy is required. MKS' indirect pressure gauges
use thermal conductivity and ionization gauge technologies to measure pressure
from atmospheric pressure to one trillionth of atmospheric pressure. MKS'
Baratron pressure measurement instruments, together with its vacuum gauges, are
capable of measuring the full range of pressures used in semiconductor and other
thin-film manufacturing processes from two hundred times atmospheric pressure to
one trillionth of atmospheric pressure.
MKS also manufactures a wide range of vacuum gauge instruments in which
the associated electronics are packaged with the vacuum sensor, reducing panel
space and installation cost. MKS offers both analog and digital versions of
these vacuum gauge transducers.
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Vacuum Valves and Components. MKS' vacuum valves are used on the gas lines
between the process chamber and the pump downstream of the process chamber. MKS'
vacuum components consist of flanges, fittings, traps and heated lines that are
used downstream from the process chamber to provide leak free connections and to
prevent condensable materials from depositing particles near or back into the
chamber. The manufacture of small circuit patterns cannot tolerate contamination
from atmospheric leaks or particles. MKS' vacuum components are designed to
minimize such contamination and thus increase yields and uptimes.
REACTIVE GAS GENERATION AND POWER DELIVERY PRODUCTS. MKS designs and
manufactures a wide variety of reactive gas generation modules and power
supplies used in semiconductor device manufacturing and medical equipment
markets.
Reactive gases are used in many of the process steps in chip fabrication.
Reactive gases are used to etch, strip and deposit films on wafers, to clean
wafers during processing, and to clean process chambers to reduce particle
contamination. A reactive gas is created when energy is added to a stable gas to
break apart its molecules. The resulting dissociated gas produces rapid chemical
reactions when it comes into contact with other matter. Reactive gas processes
have important advantages relative to other types of chemical processes. These
advantages include: greater precision in etch, strip and deposition process
steps; lower temperatures that protect materials involved in the process from
heat damage; greater efficiency and shorter reaction times to improve
manufacturing yields; and lower cost.
MKS' proprietary reactive gas generation modules, delivered to
semiconductor equipment manufacturers, create reactive gases used to deposit and
etch thin films applied during various steps in the manufacture of semiconductor
devices. These modules help manufacturers improve yields, reduce overall
production costs and improve time to market. MKS' power delivery products are
used in the semiconductor and medical markets. In the semiconductor market, MKS
microwave and RF (Radio Frequency) power supplies are used to provide energy to
various etching, stripping and deposition processes. In the medical market, MKS'
power delivery products are used to provide power for plasma sterilization and
for MRI (magnetic resonance imaging) applications.
MARKETS AND APPLICATIONS
MKS estimates that approximately 64% and 76% of its total sales in 2001
and 2000, respectively, were made to the semiconductor industry. MKS' products
are also used in other markets and applications including the manufacture of,
among other things:
- optical filters and fiber optic cables for data and
telecommunications
- flat panel displays
- magnetic and optical storage, devices and media
- solar panels
- gas lasers
- eyeglasses
- architectural glass
- cutting tools
- magnetic resonance imaging (MRI) medical equipment
- freeze-dried pharmaceuticals
As of December 31, 2001, MKS' products were sold primarily through its
direct sales force in 40 offices in France, Germany, Japan, Korea, The
Netherlands, Singapore, Taiwan, the United Kingdom and the United States. MKS'
direct sales force is supplemented by sales representatives and agents in
countries including Canada, China, India, Israel and Italy and in selected U.S.
cities. The major markets for MKS' products include:
Semiconductor Manufacturing
MKS' products are sold to semiconductor capital equipment manufacturers
and semiconductor device manufacturers. MKS' products are used in the major
semiconductor processing steps such as:
4
- depositing materials onto substrates
- etching circuit patterns
- implanting positively charged atoms into a substrate to alter
electrical characteristics
MKS' products are also used for process facility applications such as gas
distribution, pressure control and vacuum distribution in clean rooms where
semiconductor manufacturing takes place. MKS anticipates that the semiconductor
manufacturing market will continue to account for a substantial portion of its
sales. While the semiconductor device manufacturing market is global, the major
semiconductor capital equipment manufacturers are concentrated in the United
States, Japan and Europe.
Optical Filters, Optical Fibers and Other Coating
MKS' products are used in optical filter, optical fiber and other optical
thin-film coating processes. MKS' products are sold both to coating equipment
manufacturers and to manufacturers of products made using optical thin-film
coating processes. Optical filters and fibers used for data transmission are
manufactured using processes to deposit chemical vapors which are similar to
those used in semiconductor manufacturing. The requirement for greater data
transmission is driving the need for tighter control of optical filters and
fiber coating processes. Optical thin films for eyeglasses, solar panels and
architectural glass are deposited using processes to deposit chemical vapors and
gaseous metals similar to those used in semiconductor manufacturing. Optical
filter, optical fiber and other optical thin-film processing are concentrated in
the United States, Japan and Europe.
Flat Panel Display Manufacturing
MKS' products are used in the manufacture of flat panel displays, which
require the same or similar fabrication processes as semiconductor
manufacturing. MKS sells its products both to flat panel original equipment
manufacturers and to end-users in the flat panel display market. The transition
to larger panel size and higher definition is driving the need for tighter
process controls to reduce defects. The major manufacturers for flat panel
displays and flat panel display equipment are concentrated in Japan, Korea,
Taiwan and the United States.
Magnetic and Optical Storage Media
MKS' products are used in the manufacture of:
- magnetic storage media which store and read data magnetically
- optical storage media which store and read data using laser technology
- compact disks
- hard disks
- data storage devices
- digital video or versatile disks
The transition to higher density storage capacity requires manufacturing
processes incorporating tighter process controls. While storage media
manufacturing is global, the major manufacturers are concentrated in Japan and
the Asia Pacific region and storage media capital equipment manufacturers are
concentrated in the United States, Japan and Europe.
Other Coating Markets
MKS' products are also used in processes for the application of thin films
to harden tool bit surfaces, for the application of diamond thin films to
enhance surface hardness and durability and for coatings used for food container
packaging, jewelry and ornaments. The major equipment and process providers are
concentrated in the United States, Japan and Europe.
Other Markets
MKS' products are used in plasma processes used to sterilize medical
instruments, in vacuum freeze drying of pharmaceuticals, foods and beverages,
and in vacuum processes involved in light bulb and gas laser manufacturing. MKS'
5
products are also incorporated into some end-market products such as magnetic
resonance imaging (MRI) medical equipment, industrial vehicles, and analytical
instruments. MKS' products are also sold to government, university and
industrial laboratories for vacuum applications involving research and
development in materials science, physical chemistry and electronics materials.
The major equipment and process providers and research laboratories are
concentrated in the United States, Japan and Europe.
CUSTOMERS
MKS' largest customers are leading semiconductor capital equipment
manufacturers such as Applied Materials, Lam Research, Novellus and Tokyo
Electron, semiconductor device manufacturers such as Intel, a major manufacturer
of magnetic resonance imaging (MRI) equipment, and a major manufacturer of
medical sterilization equipment. Sales to MKS' top ten customers accounted for
approximately 39%, 52% and 46% of net sales in 2001, 2000 and 1999,
respectively. International sales, which include sales by MKS' foreign
subsidiaries, but exclude direct export sales (which were less than 10% of MKS'
total net sales) accounted for 31%, 23% and 25% of net sales for 2001, 2000 and
1999, respectively. Sales by MKS' Japan subsidiary comprised 12%, 11% and 12% of
net sales in 2001, 2000 and 1999, respectively. During 2001 and 2000, Applied
Materials accounted for approximately 18% and 30% of MKS' net sales,
respectively. None of MKS' significant customers has entered into an agreement
requiring it to purchase any minimum quantity of MKS' products.
SALES, MARKETING AND SUPPORT
MKS' worldwide sales, marketing and support organization is critical to
its strategy of maintaining close relationships with semiconductor capital
equipment manufacturers and semiconductor device manufacturers. MKS sells its
products primarily through its direct sales force. As of December 31, 2001, MKS
had 169 sales employees in 40 offices in France, Germany, Japan, Korea, The
Netherlands, Singapore, Taiwan, the United Kingdom and the United States. This
direct sales force is supplemented by sales representatives and agents in
countries including Canada, China, India, Israel and Italy and in selected U.S.
cities. MKS maintains a marketing staff to identify customer requirements,
assist in product planning and specifications and to focus on future trends in
the semiconductor and other markets.
As semiconductor device manufacturers have become increasingly sensitive
to the significant costs of system downtime, they have required that suppliers
offer comprehensive local repair service and close customer support.
Manufacturers require close support to enable them to repair, modify, upgrade
and retrofit their equipment to improve yields and adapt new materials or
processes. To meet these market requirements, MKS maintains a worldwide sales
and support organization with offices in 40 locations as of December 31, 2001.
Technical support is provided by applications engineers located at offices in
Arizona, California, Colorado, Massachusetts, Oregon and Texas, as well as
Canada, France, Germany, India, Israel, Italy, Japan, Korea, The Netherlands,
Singapore, Taiwan and the United Kingdom. Repair and calibration services are
provided at 17 service depots located worldwide as of December 31, 2001. MKS
provides warranties from one to three years, depending upon the type of product.
In addition, MKS offers training programs for its customers in a wide range of
vacuum and gas processing technologies.
RESEARCH AND DEVELOPMENT
MKS' research and development efforts are directed toward developing and
improving MKS process control instruments and components for semiconductor and
advanced thin-film processing applications and identifying and developing
products for new applications for which gas management plays a critical role.
MKS has undertaken an initiative to involve its marketing, engineering,
manufacturing and sales personnel in the concurrent development of new products
in order to reduce the time to market for new products. MKS employees also work
closely with its customers' development personnel. These relationships help MKS
identify and define future technical needs on which to focus its research and
development efforts. In addition, MKS participates in SEMI (Semiconductor
Equipment and Materials International), a trade group representing semiconductor
equipment suppliers, to assist in product development and standardization of
product technology, and it supports research at academic institutions targeted
at advances in materials science and semiconductor process development. Research
and development expense was $37,964,000, $37,323,000 and $22,975,000 in 2001,
2000 and 1999, respectively. MKS' research and development efforts include
numerous projects which generally have a duration of 18 to 30 months.
COMPETITION
The market for MKS' products is highly competitive. Principal competitive
factors include:
- historical customer relationships
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- product quality, performance and price
- breadth of product line
- manufacturing capabilities
- customer service and support
Although MKS believes that it competes favorably with respect to these
factors, there can be no assurance that it will continue to do so.
MKS encounters substantial competition in each of its product lines from a
number of competitors, although no one competitor competes with MKS across all
product lines. Certain of MKS' competitors have greater financial and other
resources than MKS. In some cases, the competitors are smaller than MKS, but
well established in specific product niches. Mykrolis offers products that
compete with MKS' pressure and flow products. Advanced Energy, STEC, and Unit
Instruments, each offer products that compete with MKS' mass flow control
products. Nor-Cal Products and MDC Vacuum Products each offer products that
compete with MKS' vacuum components. Inficon offers products that compete with
MKS' vacuum measuring and gas analysis products. Helix Technology offers
products that compete with MKS' vacuum gauging products. Advanced Energy offers
products that compete with MKS' power supply and reactive gas generator
products.
In some cases, particularly with respect to mass flow controllers,
semiconductor device manufacturers may direct semiconductor capital equipment
manufacturers to use a specified supplier's product in their equipment.
Accordingly, MKS' success depends in part on its ability to have semiconductor
device manufacturers specify that its products be used at their fabrication
facilities and MKS may encounter difficulties in changing established
relationships of competitors with a large installed base of products at such
customers' fabrication facilities. In addition, MKS' competitors can be expected
to continue to improve the design and performance of their products. There can
be no assurance that competitors will not develop products that offer price or
performance features superior to those of MKS' products.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
MKS relies on a combination of patent, copyright, trademark and trade
secret laws and license agreements to establish and protect its proprietary
rights. As of December 31, 2001, MKS owned 124 U.S. patents and 79 foreign
patents and had 58 pending U.S. patent applications and 128 pending foreign
patent applications. Although MKS believes that certain patents may be important
for certain aspects of its business, MKS believes that its success depends more
upon close customer contact, innovation, technological expertise, responsiveness
and worldwide distribution.
MKS requires each of its employees, including its executive officers, to
enter into standard agreements pursuant to which the employee agrees to keep
confidential all of MKS' proprietary information and to assign to MKS all
inventions while they are employed by MKS.
On November 3, 1999, On-Line Technologies, Inc., which was acquired by MKS
in April 2001, brought suit in federal district court in Connecticut against
Perkin-Elmer, Inc. and certain other defendants for infringement of On-Line's
patent related to its FTIR spectrometer product. On November 30, 2000, MKS'
ASTeX subsidiary brought suit in federal district court in Delaware against
Advanced Energy Industries, Inc. for infringement of ASTeX's patent related to
its Astron product. MKS cannot predict the likely outcomes of these suits at
this time.
MKS is not involved in any further material disputes with other parties
with respect to the ownership or use of its proprietary technology. However,
there can be no assurance that other parties will not assert technology
infringement claims or other claims against MKS in the future. The litigation of
such a claim may involve significant expense and management time. In addition,
if any such claim were successful, MKS could be required to pay monetary damages
and may also be required to either refrain from distributing the infringing
product or obtain a license from the party asserting the claim (which license
may not be available on commercially reasonable terms).
EMPLOYEES
As of December 31, 2001, MKS employed 1,493 persons. Management
believes that MKS' ongoing success depends upon its continued ability to attract
and retain highly skilled employees. None of MKS' employees is represented by a
labor union or is party to a collective bargaining agreement. MKS believes that
its employee relations are good.
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FACTORS AFFECTING FUTURE OPERATING RESULTS
MKS believes that this document contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties and are based on the
beliefs and assumptions of management of MKS, based on information currently
available to MKS' management. Use of words such as "believes," "expects,"
"anticipates," "intends," "plans," "estimates," "should," "likely" or similar
expressions, indicate a forward-looking statement. Forward-looking statements
involve risks, uncertainties and assumptions. Certain of the information
contained in this Annual Report on Form 10-K consists of forward-looking
statements. Important factors that could cause actual results to differ
materially from the forward-looking statements include the following:
MKS' BUSINESS DEPENDS SUBSTANTIALLY ON CAPITAL SPENDING IN THE SEMICONDUCTOR
INDUSTRY WHICH IS CHARACTERIZED BY PERIODIC FLUCTUATIONS THAT MAY CAUSE A
REDUCTION IN DEMAND FOR MKS' PRODUCTS.
MKS estimates that approximately 64% of its sales during 2001 and 76% of its
sales in 2000 were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers, and it expects that sales to such customers
will continue to account for a substantial majority of its sales. MKS' business
depends upon the capital expenditures of semiconductor device manufacturers,
which in turn depend upon the demand for semiconductors. Periodic reductions in
demand for the products manufactured by semiconductor capital equipment
manufacturers and semiconductor device manufacturers may adversely affect MKS'
business, financial condition and results of operations. Historically, the
semiconductor market has been highly cyclical and has experienced periods of
overcapacity, resulting in significantly reduced demand for capital equipment.
For example, in 1996 and 1998, the semiconductor capital equipment industry
experienced significant declines, which caused a number of MKS' customers to
reduce their orders. More recently, in 2001, MKS has experienced a significant
reduction in demand from OEM customers, lower gross margins due to reduced
absorption of manufacturing overhead at the lower revenue levels, and special
charges for excess and obsolete inventory of $14.0 million in the fourth quarter
of 2001 and $2.6 million in the second quarter of 2001. The charges were
significantly higher than normal and were primarily caused by a significant
reduction in demand including reduced demand for older technology products. In
addition, many semiconductor manufacturers have operations and customers in
Asia, a region which in recent years has experienced serious economic problems
including currency devaluations, debt defaults, lack of liquidity and
recessions. MKS cannot be certain that semiconductor downturns will not recur. A
decline in the level of orders as a result of any future downturn or slowdown in
the semiconductor capital equipment industry could have a material adverse
effect on MKS' business, financial condition and results of operations.
MKS' QUARTERLY OPERATING RESULTS HAVE VARIED, AND ARE LIKELY TO CONTINUE TO VARY
SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR MKS'
SHARES.
A substantial portion of MKS' shipments occur shortly after an order is
received and therefore MKS operates with a low level of backlog. As a result, a
decrease in demand for MKS' products from one or more customers could occur with
limited advance notice and could have a material adverse effect on MKS' results
of operations in any particular period. A significant percentage of MKS'
expenses are relatively fixed and based in part on expectations of future net
sales. The inability to adjust spending quickly enough to compensate for any
shortfall would magnify the adverse impact of a shortfall in net sales on MKS'
results of operations. Factors that could cause fluctuations in MKS' net sales
include:
- the timing of the receipt of orders from major customers;
- shipment delays;
- disruption in sources of supply;
- seasonal variations of capital spending by customers;
- production capacity constraints; and
- specific features requested by customers.
For example, MKS was in the process of increasing its production capacity when
the semiconductor capital equipment market began to experience a significant
downturn in 1996. This downturn had a material adverse effect on MKS' operating
results in the second half of 1996 and the first half of 1997. After an increase
in business in the latter half of 1997, the market experienced another downturn
in 1998, which had a material adverse effect on MKS' 1998 and first quarter 1999
operating results. More recently, the semiconductor capital equipment market has
experienced a significant down turn during 2001. As a result, MKS has
experienced a reduction in demand from OEM customers in 2001, which has had a
material adverse effect on MKS' operating results. During 2001 gross margins
were negatively affected by special charges for excess and obsolete
8
inventory of $14.0 million in the fourth quarter of 2001 and $2.6 million in
the second quarter of 2001. The charges were significantly higher than normal
and were primarily caused by a significant reduction in demand including reduced
demand for older technology products. As a result of the factors discussed
above, it is likely that MKS will in the future experience quarterly or annual
fluctuations and that, in one or more future quarters, its operating results
will fall below the expectations of public market analysts or investors. In any
such event, the price of MKS' common stock could decline significantly.
THE LOSS OF NET SALES TO ANY ONE OF MKS' MAJOR CUSTOMERS WOULD LIKELY HAVE A
MATERIAL ADVERSE EFFECT ON MKS.
MKS' ten largest customers accounted for approximately 39% of its net sales
in 2001, 52% of its net sales in 2000 and 46% of its net sales in 1999. The loss
of a major customer or any reduction in orders by these customers, including
reductions due to market or competitive conditions, would likely have a material
adverse effect on MKS' business, financial condition and results of operations.
During 2001 and 2000, one customer, Applied Materials, accounted for
approximately 18% and 30%, respectively, of MKS' net sales. None of MKS'
significant customers has entered into an agreement requiring it to purchase any
minimum quantity of MKS' products. The demand for MKS' products from its
semiconductor capital equipment customers depends in part on orders received by
them from their semiconductor device manufacturer customers.
Attempts to lessen the adverse effect of any loss or reduction through
the rapid addition of new customers could be difficult because prospective
customers typically require lengthy qualification periods prior to placing
volume orders with a new supplier. MKS' future success will continue to depend
upon:
- its ability to maintain relationships with existing key customers;
- its ability to attract new customers; and
- the success of its customers in creating demand for their capital
equipment products which incorporate MKS' products.
AS PART OF MKS' BUSINESS STRATEGY, MKS HAS ENTERED INTO AND MAY ENTER INTO OR
SEEK TO ENTER INTO BUSINESS COMBINATIONS AND ACQUISITIONS THAT MAY BE DIFFICULT
TO INTEGRATE, DISRUPT ITS BUSINESS, DILUTE STOCKHOLDER VALUE OR DIVERT
MANAGEMENT ATTENTION.
MKS acquired Compact Instrument in March 2000, Telvac Engineering
Limited in May 2000, Spectra in July 2000, D.I.P, Inc. in September 2000, ASTeX
in January 2001, On-Line in April 2001, and ENI in January 2002. As a part of
its business strategy, MKS may enter into additional business combinations and
acquisitions. Acquisitions are typically accompanied by a number of risks,
including the difficulty of integrating the operations and personnel of the
acquired companies, the potential disruption of MKS' ongoing business and
distraction of management, expenses related to the acquisition and potential
unknown liabilities associated with acquired businesses.
If MKS is not successful in completing acquisitions that it may pursue
in the future, it may be required to reevaluate its growth strategy and MKS may
have incurred substantial expenses and devoted significant management time and
resources in seeking to complete proposed acquisitions that will not generate
benefits for it.
In addition, with future acquisitions, MKS could use substantial
portions of its available cash as all or a portion of the purchase price. MKS
could also issue additional securities as consideration for these acquisitions,
which could cause significant stockholder dilution. MKS' acquisitions of Compact
Instrument, Telvac, Spectra, D.I.P., ASTeX, On-Line, and ENI and any future
acquisitions may not ultimately help MKS achieve its strategic goals and may
pose other risks to MKS.
AN INABILITY TO CONVINCE SEMICONDUCTOR DEVICE MANUFACTURERS TO SPECIFY THE USE
OF MKS' PRODUCTS TO MKS' CUSTOMERS, WHO ARE SEMICONDUCTOR CAPITAL EQUIPMENT
MANUFACTURERS, WOULD WEAKEN MKS' COMPETITIVE POSITION.
The markets for MKS' products are highly competitive. MKS' competitive
success often depends upon factors outside of its control. For example, in some
cases, particularly with respect to mass flow controllers, semiconductor device
manufacturers may direct semiconductor capital equipment manufacturers to use a
specified supplier's product in their equipment. Accordingly, for such products,
MKS' success will depend in part on its ability to have semiconductor device
manufacturers specify that MKS' products be used at their semiconductor
fabrication facilities. In addition, MKS may encounter difficulties in changing
established relationships of competitors that already have a large installed
base of products within such semiconductor fabrication facilities.
9
IF MKS' PRODUCTS ARE NOT DESIGNED INTO SUCCESSIVE NEW GENERATIONS OF ITS
CUSTOMERS' PRODUCTS, MKS WILL LOSE SIGNIFICANT NET SALES DURING THE LIFESPAN OF
THOSE PRODUCTS.
New products designed by semiconductor capital equipment manufacturers
typically have a lifespan of five to ten years. MKS' success depends on its
products being designed into new generations of equipment for the semiconductor
industry. MKS must develop products that are technologically current so that
they are positioned to be chosen for use in each successive new generation of
semiconductor capital equipment. If MKS' products are not chosen by its
customers, MKS' net sales may be reduced during the lifespan of its customers'
products. In addition, MKS must make a significant capital investment to develop
products for its customers well before its products are introduced and before it
can be sure that it will recover its capital investment through sales to the
customers in significant volume. MKS is thus also at risk during the development
phase that its product may fail to meet its customers' technical or cost
requirements and may be replaced by a competitive product or alternative
technology solution. If that happens, MKS may be unable to recover MKS'
development costs.
THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO RAPID DEMAND SHIFTS WHICH ARE DIFFICULT
TO PREDICT. AS A RESULT, MKS' INABILITY TO EXPAND ITS MANUFACTURING CAPACITY IN
RESPONSE TO THESE RAPID SHIFTS MAY CAUSE A REDUCTION IN ITS MARKET SHARE.
MKS' ability to increase sales of certain products depends in part upon
its ability to expand its manufacturing capacity for such products in a timely
manner. If MKS is unable to expand its manufacturing capacity on a timely basis
or to manage such expansion effectively, its customers could implement its
competitors' products and, as a result, its market share could be reduced.
Because the semiconductor industry is subject to rapid demand shifts which are
difficult to foresee, MKS may not be able to increase capacity quickly enough to
respond to a rapid increase in demand in the semiconductor industry.
Additionally, capacity expansion could increase MKS' fixed operating expenses
and if sales levels do not increase to offset the additional expense levels
associated with any such expansion, its business, financial condition and
results of operations could be materially adversely affected.
SALES TO FOREIGN MARKETS CONSTITUTE A SUBSTANTIAL PORTION OF MKS' NET SALES;
THEREFORE, MKS' NET SALES AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED
BY DOWNTURNS IN ECONOMIC CONDITIONS IN COUNTRIES OUTSIDE OF THE UNITED STATES.
International sales, which include sales by MKS' foreign subsidiaries,
located in Japan, Korea, Europe, Singapore and Taiwan, but exclude direct export
sales (which were less than 10% of MKS' total net sales), accounted for
approximately 31% of net sales in 2001, 23% of net sales in 2000, and 25% of net
sales in 1999. Sales by MKS' Japan subsidiary comprised 12%, 11% and 12% of net
sales in 2001, 2000 and 1999, respectively. MKS anticipates that international
sales will continue to account for a significant portion of MKS' net sales. In
addition, certain of MKS' key domestic customers derive a significant portion of
their revenues from sales in international markets. Therefore, MKS' sales and
results of operations could be adversely affected by economic slowdowns and
other risks associated with international sales.
UNFAVORABLE CURRENCY EXCHANGE RATE FLUCTUATIONS MAY LEAD TO LOWER GROSS MARGINS,
OR MAY CAUSE MKS TO RAISE PRICES WHICH COULD RESULT IN REDUCED SALES.
Currency exchange rate fluctuations could have an adverse effect on
MKS' net sales and results of operations and MKS could experience losses with
respect to its hedging activities. Unfavorable currency fluctuations could
require MKS to increase prices to foreign customers which could result in lower
net sales by MKS to such customers. Alternatively, if MKS does not adjust the
prices for its products in response to unfavorable currency fluctuations, its
results of operations could be adversely affected. In addition, sales made by
MKS' foreign subsidiaries are denominated in the currency of the country in
which these products are sold and the currency it receives in payment for such
sales could be less valuable at the time of receipt as a result of exchange rate
fluctuations. MKS enters into forward exchange contracts and local currency
purchased options to reduce currency exposure arising from intercompany sales of
inventory. However, MKS cannot be certain that its efforts will be adequate to
protect it against significant currency fluctuations or that such efforts will
not expose it to additional exchange rate risks.
KEY PERSONNEL MAY BE DIFFICULT TO ATTRACT AND RETAIN.
MKS' success depends to a large extent upon the efforts and abilities
of a number of key employees and officers, particularly those with expertise in
the semiconductor manufacturing and similar industrial manufacturing industries.
The loss of key employees or officers could have a material adverse effect on
MKS' business, financial condition and results of
10
operations. MKS believes that its future success will depend in part on its
ability to attract and retain highly skilled technical, financial, managerial
and marketing personnel. MKS cannot be certain that it will be successful in
attracting and retaining such personnel.
MKS' PROPRIETARY TECHNOLOGY IS IMPORTANT TO THE CONTINUED SUCCESS OF ITS
BUSINESS. MKS' FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY
IMPAIR MKS' COMPETITIVE POSITION.
As of December 31, 2001, MKS owned 124 U.S. patents and 79 foreign
patents and had 58 pending U.S. patent applications and 128 pending foreign
patent applications. Although MKS seeks to protect its intellectual property
rights through patents, copyrights, trade secrets and other measures, it cannot
be certain that:
- MKS will be able to protect its technology adequately;
- competitors will not be able to develop similar technology
independently;
- any of MKS' pending patent applications will be issued;
- intellectual property laws will protect MKS' intellectual
property rights; or
- third parties will not assert that MKS' products infringe patent,
copyright or trade secrets of such parties.
PROTECTION OF MKS' INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
Litigation may be necessary in order to enforce MKS' patents,
copyrights or other intellectual property rights, to protect its trade secrets,
to determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement. For example, on November 30, 2000, MKS'
ASTeX subsidiary brought suit in federal district court in Delaware against
Advanced Energy Industries, Inc. for infringement of ASTeX's patent related to
its Astron product. Such litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on MKS'
business, financial condition and results of operations.
THE MARKET PRICE OF MKS' COMMON STOCK HAS FLUCTUATED AND MAY CONTINUE TO
FLUCTUATE FOR REASONS OVER WHICH MKS HAS NO CONTROL.
The stock market has from time to time experienced, and is likely to
continue to experience, extreme price and volume fluctuations. Recently, prices
of securities of technology companies have been especially volatile and have
often fluctuated for reasons that are unrelated to the operating performance of
the companies. The market price of shares of MKS' common stock has fluctuated
greatly since its initial public offering and could continue to fluctuate due to
a variety of factors. In the past, companies that have experienced volatility in
the market price of their stock have been the objects of securities class action
litigation. If MKS were the object of securities class action litigation, it
could result in substantial costs and a diversion of MKS' management's attention
and resources.
MKS' DEPENDENCE ON SOLE AND LIMITED SOURCE SUPPLIERS COULD AFFECT ITS ABILITY TO
MANUFACTURE PRODUCTS AND SYSTEMS.
MKS relies on sole and limited source suppliers for a few of its
components and subassemblies that are critical to the manufacturing of MKS'
products. This reliance involves several risks, including the following:
- the potential inability to obtain an adequate supply of required
components;
- reduced control over pricing and timing of delivery of components;
and
- the potential inability of its suppliers to develop technologically
advanced products to support MKS' growth and development of new
systems.
MKS believes that in time MKS could obtain and qualify alternative
sources for most sole and limited source parts. Seeking alternative sources of
the parts could require MKS to redesign its systems, resulting in increased
costs and likely shipping delays. MKS may be unable to redesign its systems,
which could result in further development costs and shipping delays. These
increased costs would decrease MKS' profit margins if it could not pass the
costs to its customers. Further, shipping delays could damage MKS' relationships
with current and potential customers and have a material adverse effect on MKS'
business and results of operations.
11
MKS IS SUBJECT TO GOVERNMENTAL REGULATIONS.
MKS is subject to federal, state, local and foreign regulations,
including environmental regulations and regulations relating to the design and
operation of MKS' power supply products. MKS must ensure that these systems meet
certain safety standards, many of which vary across the countries in which MKS'
systems are used. For example, the European Union has published directives
specifically relating to power supplies. MKS must comply with these directives
in order to ship MKS' systems into countries that are members of the European
Union. MKS believes it is in compliance with current applicable regulations,
directives and standards and has obtained all necessary permits, approvals, and
authorizations to conduct MKS' business. However, compliance with future
regulations, directives and standards could require it to modify or redesign
certain systems, make capital expenditures or incur substantial costs. If MKS
does not comply with current or future regulations, directives and standards:
- MKS could be subject to fines;
- MKS' production could be suspended; or
- MKS could be prohibited from offering particular systems in
specified markets.
CERTAIN STOCKHOLDERS HAVE A SUBSTANTIAL INTEREST IN MKS AND MAY BE ABLE TO EXERT
SUBSTANTIAL INFLUENCE OVER MKS' ACTIONS.
As of January 31, 2002, John R. Bertucci, president, chairman and chief
executive officer of MKS, and members of his family, in the aggregate,
beneficially owned approximately 29.8% of MKS' outstanding common stock. As a
result, these stockholders, acting together, are able to exert substantial
influence over the actions of MKS. Pursuant to the acquisition of the ENI
Business of Emerson Electric Co. ("Emerson"), MKS issued approximately 24% of
its then outstanding shares of common stock to Emerson. Accordingly, these
stockholders are able to exert substantial influence over MKS' actions.
SOME PROVISIONS OF MKS' RESTATED ARTICLES OF ORGANIZATION, MKS' AMENDED AND
RESTATED BY-LAWS AND MASSACHUSETTS LAW COULD DISCOURAGE POTENTIAL ACQUISITION
PROPOSALS AND COULD DELAY OR PREVENT A CHANGE IN CONTROL OF MKS.
Anti-takeover provisions could diminish the opportunities for
stockholders to participate in tender offers, including tender offers at a price
above the then current market value of the common stock. Such provisions may
also inhibit increases in the market price of the common stock that could result
from takeover attempts. For example, while MKS has no present plans to issue any
preferred stock, MKS' board of directors, without further stockholder approval,
may issue preferred stock that could have the effect of delaying, deterring or
preventing a change in control of MKS. The issuance of preferred stock could
adversely affect the voting power of the holders of MKS' common stock, including
the loss of voting control to others. In addition, MKS' By-Laws provide for a
classified board of directors consisting of three classes. The classified board
could also have the effect of delaying, deterring or preventing a change in
control of MKS.
ITEM 2. PROPERTIES
As of December 31, 2001, the following table provides information
concerning MKS' principal and certain other owned and leased facilities:
PRODUCTS LEASE
LOCATION SQ. FT. ACTIVITY MANUFACTURED EXPIRES
-------- ------- -------- ------------ -------
Andover, Massachusetts 82,000 Headquarters, Manufacturing, Customer Pressure Measurement (1)
Support and Research & Development and Control Products
Austin, Texas 8,000 Sales, Customer Support and Service Not applicable April 30, 2003
Boulder, Colorado 119,000 Manufacturing, Customer Support, Vacuum Products (2)
Service and Research & Development
Cheshire, U.K. 13,000 Manufacturing, Sales, Customer Support Materials Delivery and (3)
and Service Analysis Products
12
PRODUCTS LEASE
LOCATION SQ. FT. ACTIVITY MANUFACTURED EXPIRES
-------- ------- -------- ------------ -------
Colorado Springs, Colorado 40,500 Manufacturing, Customer Support, Reactive Gas (6)
Service and Research & Development Generation and Power
Delivery Products
East Hartford, Connecticut 11,000 Manufacturing, Customer Support, Reactive Gas December 31, 2002
Service and Research & Development Generation and Power
Delivery Products
Lawrence, Massachusetts 40,000 Manufacturing Pressure Measurement (1)
and Control Products
Le Bourget, France 14,000 Sales, Customer Support and Service Not applicable (1)
Methuen, Massachusetts 85,000 Manufacturing, Customer Support, Pressure Measurement (1)
Service and Research & Development and Control Products;
Materials Delivery and
Analysis Products
Morgan Hill, California 17,000 Manufacturing, Customer Support, Materials Delivery and June 30, 2007
Service and Research & Development Analysis Products
Munich, Germany 14,000 Manufacturing, Sales, Customer Pressure Measurement (1)
Support, Service and Research & and Control Products;
Development Materials Delivery and
Analysis Products
Newton, Massachusetts 3,500 Manufacturing Reactive Gas October 31, 2003
Generation and Power
Delivery Products
Richardson, Texas 15,000 Manufacturing, Sales, Customer Support Pressure Measurement August 31, 2004
and Service and Control Products;
Materials Delivery and
Analysis Products
Riverside, California 9,800 Manufacturing, Service Pressure Measurement April 30, 2003
and Control Products
Santa Clara, California 12,800 Sales, Customer Support and Service Not applicable (4)
Santa Clara, California 12,500 Sales, Customer Support and Service Not Applicable August 12, 2002
Seoul, Korea 7,000 Sales, Customer Support and Service Materials Delivery and May 31, 2003
Analysis Products
Shropshire, U.K. 25,000 Manufacturing Vacuum Products October 19, 2002
Singapore 4,000 Sales, Customer Support and Service Not applicable February 1, 2003
Taiwan 10,600 Sales, Customer Support and Service Not applicable December 31, 2003
Tokyo, Japan 13,000 Manufacturing, Sales, Customer Materials Delivery and (5)
Support, Service and Research & Analysis Products
Development
Wilmington, Massachusetts 118,000 Manufacturing, Customer Support, Reactive Gas (1)
Service and Research & Development Generation and Power
Delivery Products
13
(1) This facility is owned by MKS.
(2) MKS leases two facilities, one has 39,000 square feet of space
and a lease term which expires October 31, 2004 and the other
has 33,000 square feet with a lease term which expires August
15, 2005. MKS also owns a third and fourth facility with
28,000 and 19,000 square feet of space, respectively.
(3) MKS leases two facilities, one has 2,000 square feet of space
and a lease term which expires October 5, 2009 and the second
has 11,000 square feet of space and a lease term which expires
November 30, 2009.
(4) MKS leases two facilities, one has 4,000 square feet of space
and a lease term which expires February 28, 2003 and the
second has 3,800 square feet and a lease term which expires
April 30, 2002. MKS owns another facility with 5,000 square
feet of space.
(5) MKS leases one facility with 4,000 square feet of space on a
month-to-month basis, a second facility of 4,000 square feet
with a lease term which expires on January 30, 2003. MKS owns
a third facility of 5,000 square feet.
(6) MKS leases one facility with 16,500 square feet. The lease expires
on February 28, 2005. MKS owns another facility with 24,000 square feet.
In addition to manufacturing and other operations conducted at the
foregoing leased or owned facilities, MKS provides worldwide sales, customer
support and services from various other leased facilities throughout the world
not listed in the table above. See "Business -- Sales, Marketing and Support."
ITEM 3. LEGAL PROCEEDINGS
On November 3, 1999, On-Line Technologies Inc., which was acquired by
MKS in April 2001, brought suit in federal district court in Connecticut against
Perkin-Elmer, Inc. and certain other defendants for infringement of On-Line's
patent related to its FTIR spectrometer product. The suit seeks injunctive
relief and damages for infringement. Perkin-Elmer, Inc. has filed a counterclaim
seeking invalidity of the patent, costs, and attorneys' fees. MKS believes that
the counterclaim is without merit.
On November 30, 2000, ASTeX, which was acquired by MKS in January 2001,
brought suit in federal district court in Delaware against Advanced Energy
Industries, Inc. for infringement of ASTeX's patent related to its Astron
product. MKS is seeking injunctive relief and damages for infringement. Advanced
Energy Industries, Inc. has filed a counterclaim seeking invalidity of the
patent, costs, and attorneys' fees. MKS believes that the counterclaim is
without merit.
MKS cannot be certain of the outcome of the foregoing litigation, but
does plan to assert its claims against other parties and oppose the
counterclaims against it vigorously.
MKS is subject to other legal proceedings and claims, which have
arisen in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on MKS' results of operations, financial
condition or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Special Meeting of stockholders held on January 7,
2002, the stockholders voted on the proposal to approve the issuance of
12,000,000 shares of common stock of the Company to Emerson Electric Co.
("Emerson") pursuant to the terms of the Agreement and Plan of Merger, with
respect to the acquisition of the ENI Business, dated October 30, 2001, between
the Company and Emerson as further specified below:
FOR AGAINST ABSTAIN/BROKER NON VOTES
31,649,316 35,393 49,420
14
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of MKS is traded on the Nasdaq National Market under
the symbol MKSI. On February 28, 2002, the closing price of the Company's Common
Stock, as reported on the Nasdaq National Market, was $26.86 per share. The
following table sets forth for the periods indicated the high and low sales
prices per share of the Common Stock as reported by the Nasdaq National Market.
2001 2000
-------------------------------------------
Price Range of Common Stock High Low High Low
- --------------------------------------------------------------------------
First Quarter $24.63 $15.41 $62.25 $30.50
Second Quarter 31.97 17.13 57.00 31.88
Third Quarter 29.94 15.17 40.75 16.81
Fourth Quarter 27.67 16.16 25.81 14.25
On February 28, 2002, MKS had approximately 245 stockholders of record.
DIVIDEND POLICY
On September 19, 2000, MKS made a cash payment in the aggregate amount
of $1,594,143, pursuant to its obligations under the Tax Indemnification and S
Corporation Distribution Agreement, entered into by and among MKS and the
stockholders of MKS prior to MKS' initial public offering. MKS currently intends
to retain earnings, if any, to support its growth strategy and does not
anticipate paying cash dividends in the foreseeable future. Payment of future
dividends, if any, will be at the discretion of the MKS board of directors after
taking into account various factors, including MKS' financial condition,
operating results, current and anticipated cash needs and plans for expansion.
15
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Year Ended December 31
-------------------------------------------------------------------
2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME (LOSS) DATA
Net sales $286,808 $466,852 $265,292 $223,199 $236,047
Gross profit (1) 85,583 205,396 102,509 84,428 97,884
Income (loss) from operations (47,360) 91,535 25,037 15,044 25,622
Net income (loss) $(31,043) $ 60,260 $ 22,786 $ 11,207 $ 21,228
Historical net income (loss) per share
Basic $ (0.83) $ 1.74 $ 0.76 $ 0.46 $ 0.92
Diluted $ (0.83) $ 1.67 $ 0.72 $ 0.44 $ 0.90
PRO FORMA STATEMENT OF INCOME (LOSS) DATA (2)
Pro forma net income $ 17,161 $ 9,065 $ 14,744
Pro forma net income per share:
Basic $ 0.57 $ 0.37 $ 0.64
Diluted $ 0.55 $ 0.36 $ 0.63
BALANCE SHEET DATA
Cash and cash equivalents $120,869 $123,082 $ 67,489 $ 18,875 $ 5,757
Working capital 216,855 237,321 137,999 59,511 46,674
Total assets 411,189 454,403 253,772 146,972 145,260
Short-term obligations 14,815 19,134 20,828 12,819 15,676
Long-term obligations, less current portion 11,257 12,386 5,662 13,786 21,993
Stockholders' equity 352,871 357,522 185,685 98,074 75,734
(1) Gross profit for the year ended December 31, 2001 includes special charges
for excess and obsolete inventory of $14.0 million in the fourth quarter
of 2001 and $2.6 million in the second quarter of 2001. These charges were
significantly higher than normal and were primarily caused by a
significant reduction in demand, including reduced demand for older
technology products.
(2) Data is computed on the same basis as Note 2 of Notes to MKS' consolidated
financial statements for the year ended December 31, 2001, which are
included in this Annual Report on Form 10-K . The historical net income
per share data does not include provisions for federal income taxes prior
to its initial public offering in 1999, because MKS was treated as an S
corporation for federal income tax purposes. The pro forma statement of
income data presents net income and net income per share data as if MKS
had been subject to federal income taxes as a C corporation during the
periods presented. No pro forma presentation is necessary for the fiscal
years ended December 31, 2001 and 2000 because MKS was subject to income
taxes as a C corporation for these periods.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MKS believes that this Annual Report on Form 10-K contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. When used herein, including this Management's
Discussion and Analysis, the words "believes," "anticipates," "plans," "expects"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements reflect management's current opinions and are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those stated or implied. MKS Instruments, Inc. assumes no
obligation to update this information. Risks and uncertainties include, but are
not limited to, those discussed in the section entitled "Factors Affecting
Future Operating Results."
OVERVIEW
MKS Instruments, Inc. was founded in 1961. MKS Instruments, Inc. develops,
manufactures and supplies instruments, components and integrated subsystems used
to measure, control and analyze gases in semiconductor manufacturing and similar
industrial manufacturing processes. On January 26, 2001, MKS Instruments, Inc.
completed its acquisition of Applied Science and Technology, Inc. ("ASTeX") in a
transaction accounted for under the pooling of interets method of accounting
and, accordingly, the consolidated financial statements reflect the combined
financial position and results of operations and cash flows of MKS Instruments,
Inc. and ASTeX (together, the "Company" or "MKS"), for all periods presented.
This presentation combines the historical financial statements of MKS
Instruments, Inc. for the years ended December 31, 2000 and 1999 with the
historical financial statements of ASTeX for the fiscal years ended July 1, 2000
and June 26, 1999, respectively.
The Company's customers include semiconductor capital equipment
manufacturers, semiconductor device manufacturers, industrial manufacturing
companies and university, government and industrial research laboratories.
During 2001 and 2000, MKS estimates that approximately 64% and 76% of its net
sales, respectively, were to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. MKS expects that sales to such customers
will continue to account for a substantial majority of its sales. In 2001, 2000
and 1999, sales to MKS' top ten customers accounted for approximately 39%, 52%
and 46%, respectively, of MKS' net sales. During 2001 and 2000, Applied
Materials, Inc. accounted for approximately 18% and 30% of MKS' net sales,
respectively.
A significant portion of MKS' sales are to operations in international
markets. International sales, which include sales by MKS' foreign subsidiaries,
but exclude direct export sales (which were less than 10% of MKS' total net
sales), accounted for approximately 31% of net sales in 2001, 23% of net sales
in 2000, and 25% of net sales in 1999. Sales by MKS' Japan subsidiary comprised
12%, 11% and 12% of net sales in 2001, 2000 and 1999, respectively.
On April 27, 2001, MKS completed its acquisition of On-Line Technologies,
Inc. ("On-Line"), a supplier of measurement and control products used for gas
analysis, wafer metrology and process control. The acquisition has been
accounted for under the purchase method of accounting. The purchase price was
approximately $23,829,000 and consisted of approximately 660,000 shares of MKS
common stock valued at approximately $12,110,000, cash payments of $6,295,000,
assumption of On-Line debt of approximately $4,728,000 and transaction expenses
of approximately $696,000. The results of operations are included in the
Company's consolidated statement of income since the date of the purchase.
MKS completed several acquisitions in fiscal 2000, all of which have been
accounted for under the purchase method of accounting. Accordingly, the results
of operations for each acquired company have been included in the MKS
consolidated results of operations from the date of purchase. On March 10, 2000,
MKS acquired Compact Instrument Technology, LLC ("Compact Instrument"), a
start-up company with proprietary technology in process monitoring for
semiconductor manufacturing and other manufacturing processes. The purchase
price was $8,700,000 and consisted of $8,400,000 in MKS common stock and
$300,000 in assumed net liabilities. On May 5, 2000, MKS acquired Telvac
Engineering, Ltd., or Telvac, a UK-based, privately held manufacturer of vacuum
subsystems. The purchase price was $1,600,000 and consisted of $750,000 in cash;
$750,000 in debt; and $100,000 in acquisition expenses. On July 21, 2000, MKS
acquired Spectra International, LLC, or Spectra, a privately held company with
products and technology in process monitoring. The purchase price was
$19,000,000 and consisted of $9,700,000 in cash; 183,293 shares of MKS common
stock valued at $6,500,000; fully vested options to purchase 83,675 shares of
MKS common stock valued at $2,400,000; and $400,000 in acquisition costs. On
September 6, 2000, MKS acquired D.I.P., Inc., or D.I.P., a privately held
company with products and technology in digital process control. The purchase
price was $14,000,000 and consisted of $6,900,000 in cash; 231,392 shares of MKS
common stock valued at $6,800,000; and $300,000 in acquisition costs.
17
MKS was treated as an S corporation for federal income tax purposes prior
to its initial public offering in 1999. MKS' S corporation status terminated
upon the closing of the offering, at which time MKS became subject to federal,
and certain state, income taxation as a C corporation. The pro forma net income
reflects a pro forma effective tax rate of 37.3% in 1999 to reflect federal and
state income taxes which would have been payable had MKS been taxed as a C
corporation in 1999.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses MKS' consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments, including those related to revenue recognition, in-process
research and development, merger expenses, intangible assets and goodwill,
inventories and investments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
REVENUE RECOGNITION The Company recognizes revenue from product sales
generally upon shipment provided that persuasive evidence of an arrangement
exists, the sales price is fixed or determinable, collectibility is reasonably
assured and title and risk of loss have passed to the customer. The Company has
no obligations to customers after the date products are shipped other than
pursuant to warranty obligations. The Company provides for the estimated costs
to fulfill customer warranty obligations upon the recognition of the related
revenue. Shipping and handling fees, if any, billed to customers are recognized
as revenue. The related shipping and handling costs are recognized in cost of
sales. The Company monitors and tracks the amount of product returns and reduces
revenue at the time of shipment for the estimated amount of such future returns,
based on historical experience. While product returns and warranty costs have
historically been within our expectations and the provisions established, there
is no assurance that we will continue to experience the same return rates and
warranty repair costs that we have in the past. Any significant increase in
product return rates or a significant increase in the cost to repair our
products could have a material adverse impact on our operating results for the
period or periods in which such returns or increased costs materialize. The
Company makes estimates evaluating its allowance for doubtful accounts. The
Company continuously monitors collections and payments from its customers and
maintains a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the
provisions established, there is no assurance that we will continue to
experience the same credit loss rates that we have in the past. A significant
change in the liquidity or financial position of our customers could have a
material adverse impact on the collectability of our accounts receivable and our
future operating results.
IN-PROCESS RESEARCH AND DEVELOPMENT The Company values tangible and
intangible assets acquired through our business acquisitions at fair value
including in-process research and development ("IPR&D"). The Company determines
IPR&D through established valuation techniques for various projects for the
development of new products and technologies and expenses IPR&D when technical
feasibility is not reached. During 2001, the Company expensed approximately $2.3
million in IPR&D charges in connection with the On-Line acquisition because the
technological feasibility of certain products under development had not been
established and no future alternative uses existed. If the Company acquires
other companies with IPR&D in the future, we will value the IPR&D through
established valuation techniques and incur future IPR&D charges if those
products under development have not reached technical feasibility.
MERGER EXPENSES The Company expenses fees and costs related to mergers
accounted for under the pooling of interests method. In connection with the
acquisition of ASTeX in January 2001, the Company expensed approximately $7.7
million of merger related expenses, consisting of $6.9 million of investment
banking, legal, accounting, printing and other professional fees, and $0.8
million of regulatory and other costs in the first quarter of 2001. In July
2001, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling of interests method.
Merger expenses associated with any future purchase business combination will be
accounted for under the purchase method of accounting and included as part of
the purchase price.
18
VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL The Company
assesses the impairment of identifiable intangibles, long-lived assets and
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important which could trigger
an impairment review include the following:
- - significant under-performance relative to expected historical or projected
future operating results;
- - significant changes in the manner of the Company's use of the acquired
assets or the strategy for the Company's overall business; and
- - significant negative industry or economic trends.
When the Company determines that the carrying value of intangibles,
long-lived assets and related goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by the Company's management to be commensurate with the risk
inherent in the Company's business model. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our evaluations.
Effective with the January 1, 2002 adoption of Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets," the Company will cease to amortize approximately $40,271,000 of
goodwill. In lieu of amortization, the Company is required to perform an initial
impairment review of our goodwill in 2002 and an annual impairment review
thereafter. The Company is currently assessing the impact of SFAS 142 on our
financial position, cash flows and results of operations and expects to complete
this review by the second quarter of 2002.
INVENTORY The Company values its inventory at the lower of cost (first-in,
first-out method) or market. The Company regularly reviews inventory quantities
on hand and records a provision to write down excess and obsolete inventory to
its estimated net realizable value, if less than cost, based primarily on its
estimated forecast of product demand for the next 18 to 24 months. As
demonstrated during 2001, demand for the Company's products can fluctuate
significantly. The Company recorded special charges for excess and obsolete
inventory of $14.0 million in the fourth quarter of 2001 and $2.6 million in the
second quarter of 2001. The charges were significantly higher than normal and
were primarily caused by a significant reduction in demand including reduced
demand for older technology products. A significant increase in the demand for
the Company's product could result in a short-term increase or decrease in the
cost of inventory purchases while a significant decrease in demand could result
in an increase in the charges for excess inventory quantities on hand. In
addition, the Company's industry is subject to technological change, new product
development, and product technological obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Therefore, any
significant unanticipated changes in demand or technological developments could
have a significant impact on the value of the Company's inventory and its
reported operating results.
INVESTMENTS The Company holds investments in companies having operations or
technology in areas within or adjacent to its strategic focus, which are in
non-publicly traded companies whose value is difficult to determine. These
investments are accounted for under the cost and equity method of accounting.
Under the equity method of accounting, which generally applies to investments
that represent a 20 to 50 percent ownership of the equity securities of the
investee, the Company's proportionate share of the earnings or losses of the
investee is included in other income and expense. The Company records an
investment impairment charge when it believes an investment has experienced a
decline in value. Future adverse changes in market conditions or poor operating
results of underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be reflected in an
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
19
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total net sales of certain line items included in MKS' consolidated statement of
income data:
Year Ended December 31
------------------------------
2001 2000 1999
------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 70.2 56.0 61.4
-----------------------------
Gross profit 29.8 44.0 38.6
Research and development 13.2 8.0 8.7
Selling, general and administrative 24.5 15.2 19.4
Amortization of goodwill and acquired
intangible assets 3.8 1.1 0.3
Goodwill impairment 1.3 -- --
Restructuring charge -- -- 0.8
Merger expenses 2.7 -- --
Purchase of in-process technology 0.8 0.1 --
-----------------------------
Income (loss) from operations (16.5) 19.6 9.4
Interest income (expense), net 1.3 1.0 0.5
Other income (expense), net (0.9) -- 0.4
-----------------------------
Income (loss) before income taxes (16.1) 20.6 10.3
Provision (benefit) for income taxes (5.3) 7.7 1.7
-----------------------------
Net income (loss) (10.8)% 12.9% 8.6%
-----------------------------
PRO FORMA DATA:
Historical income before income taxes 10.3%
Pro forma provision for income taxes 3.8
-----
Pro forma net income 6.5%
-----
YEAR ENDED 2001 COMPARED TO 2000
NET SALES Net sales decreased 38.6% to $286.8 million for the year
ended December 31, 2001 from $466.9 million for the year ended December 31,
2000. International net sales were approximately $90.0 million for the year
ended December 31, 2001 or 31.4% of net sales and $108.1 million for the year
ended December 31, 2000 or 23.1% of net sales. The decrease in net sales is due
to a worldwide slowdown in demand for semiconductors during 2001 which resulted
in a decline in demand for the Company's products from the Company's
semiconductor capital equipment manufacturers and semiconductor device
manufacturer customers, offset by an increase in net sales of approximately
$15.4 million from the companies acquired in 2001 and 2000.
GROSS PROFIT Gross profit as a percentage of net sales decreased to
29.8% for the year ended December 31, 2001 from 44.0% for the year ended
December 31, 2000. Gross margin was negatively effected by special charges for
excess and obsolete inventory of $14.0 million in the fourth quarter of 2001 and
$2.6 million in the second quarter of 2001. These charges were significantly
higher than normal and were primarily caused by a significant reduction in
demand, including reduced demand for older technology products. Additionally,
gross margin was negatively effected due to lower absorption of manufacturing
overhead costs.
RESEARCH AND DEVELOPMENT MKS' research and development efforts are
directed toward developing and improving MKS process control instruments and
components for semiconductor and advanced thin-film processing applications and
identifying and developing products for new applications for which gas
management plays a critical role. Research and development expense increased
1.7% to $38.0 million or 13.2% of net sales for the year ended December 31, 2001
from $37.3 million or 8.0% of net sales for the year ended December 31, 2000.
The increase was primarily due to increased compensation expense resulting from
the companies acquired in 2001 and 2000. The Company's research and development
efforts include numerous projects which generally have a duration of 18 to 30
months.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and
administrative expenses decreased 1.4% to $70.2 million or 24.5% of net sales
for the year ended December 31, 2001 from $71.2 million or 15.2% of net sales
for the year ended December 31, 2000. The decrease was primarily due to
decreased salaries and wages and incentive compensation expense of $5.7 million,
offset by increased professional fees of $4.3 million primarily related to costs
associated with defending certain of the Company's patents.
20
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS Amortization
of goodwill and acquired intangible assets of $11.0 million for the year ended
December 31, 2001, represents the amortization of goodwill and other intangibles
resulting from the acquisitions completed by the Company, of which $5.2 million
relates to acquired intangibles and $5.8 million relates to goodwill. Effective
with the January 1, 2002 adoption of SFAS 142, the Company will cease to
amortize approximately $40,271,000 of goodwill.
GOODWILL IMPAIRMENT CHARGE When the Company acquired the Shamrock
product line, it was expected that sales of the existing system design and
development of new system designs would generate future revenues. Since the
acquisition, the Company has provided potential customers with purchase
quotations for Shamrock systems, including a significant quotation to a
potential customer in January 2001 for the sale of several systems. The customer
did not purchase the systems, and the quotation expired in March 2001. The
Company has been unsuccessful in selling any systems of the product line since
the acquisition and, with the expiration of the significant quote in March 2001,
the Company evaluated the recoverability of the long-lived assets, primarily
goodwill. As a result, based on a discounted cash flow analysis, the Company
recorded an impairment charge for the carrying value of the related goodwill of
approximately $3,720,000 in the quarter ended March 31, 2001.
MERGER COSTS On January 26, 2001 MKS completed its acquisition of
ASTeX in a transaction accounted for under the pooling of interests method of
accounting. Under the pooling of interests method of accounting, fees and
expenses related to the merger are expensed in the period of the merger. During
the year ended December 31, 2001, MKS expensed approximately $7.7 million of
merger related expenses, consisting of $6.9 million of investment banking,
legal, accounting, printing and other professional fees, and $0.8 million of
regulatory and other costs.
PURCHASE OF IN-PROCESS TECHNOLOGY In April 2001, the Company acquired
On-Line in a transaction accounted for as a purchase. The purchase price was
allocated to the assets acquired, including intangible assets, based on their
estimated fair values. The intangible assets include approximately $2.3 million
for acquired in-process technology for various projects, generally expected to
have durations of 24 to 48 months, that did not have future alternative uses.
The value of the purchased in-process technology was determined using the income
approach, which discounts expected future cash flows from projects under
development to their net present value. Each project was analyzed to determine
the technological innovations included; the utilization of core technology; the
complexity, cost and time to complete development; any alternative future use or
current technological feasibility; and the stage of completion. The cash flows
derived from the in-process technology projects were discounted at a rate of
25%. The Company believes this rate was appropriate given the risks associated
with the technologies for which commercial feasibility had not been established.
The percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility. At
the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the technology in progress had no
alternative future uses. Accordingly, these costs were expensed in the second
quarter of 2001.
INTEREST INCOME (EXPENSE), NET During the years ended December 31,
2001 and 2000, the Company generated net interest income of $3.7 million and
$4.8 million, respectively, primarily from the invested net proceeds of its
common stock offerings, offset by interest expense on outstanding debt. Interest
income decreased by $1.0 million for the year ended December 31, 2001 from $6.2
million for the year ended December 31, 2000. The decrease was due to lower
interest rate yields on investments during 2001.
OTHER INCOME (EXPENSE), NET Other expense of $2.4 million for the year
ended December 31, 2001 represents a loss on sale of assets of $1.2 million and
a loss on the sale of an investment in a company of $1.1 million. Other expense
of $0.2 million in the year ended December 31, 2000 represents expenses related
to the preparation of the registration statement for the Company's follow-on
public stock offering. The Company decided not to proceed with the follow-on
offering, and converted the registration statement to a shelf registration
statement.
PROVISION FOR INCOME TAXES The effective tax rates for the years ended
December 31, 2001 and 2000 were 32.6% and 37.3%, respectively, resulting in an
income tax benefit of $15.0 million and provision for income taxes of $35.9
million, respectively. The reduction in the effective tax rate and the resulting
income tax benefit for the year ended December 31, 2001 as compared to the
effective tax rate for the year ended December 31, 2000 was primarily due to
non-deductible charges associated with acquisitions made in 2001.
21
YEAR ENDED 2000 COMPARED TO 1999
NET SALES Net sales increased 76.0% to $466.9 million for the year
ended December 31, 2000 from $265.3 million in the same period of 1999.
International net sales were approximately $108.1 million for the year ended
December 31, 2000 or 23.1% of net sales and $65.1 million for the year ended
December 31, 1999 or 24.5% of net sales. The increase in net sales was due to
increased worldwide sales volume of the Company's existing products which
resulted primarily from increased sales to the Company's semiconductor capital
equipment manufacturer and semiconductor device manufacturer customers, and an
increase of approximately $11.3 million from the companies acquired in 2000.
GROSS PROFIT Gross profit as a percentage of sales increased to 44.0%
for the year ended December 31, 2000 from 38.6% for the same period of 1999. The
increase was primarily due to fuller utilization of existing manufacturing
capacity as a result of increased sales, other manufacturing efficiencies, and a
lower fixed cost structure from restructurings in 1999. Gross margins in fiscal
1999 were adversely impacted by a $1.1 million inventory writedown.
RESEARCH AND DEVELOPMENT Research and development expense increased
62.5% to $37.3 million or 8.0% of net sales for the year ended December 31, 2000
from $23.0 million or 8.7% of net sales for the same period of 1999. The
increase was due to increased compensation of $4.2 million, increased spending
for development materials related to projects in process of $3.7 million,
development of new products and increased spending on other costs related to
development work.
SELLING, GENERAL AND ADMINISTRATIVE Selling, general and
administrative expenses increased 38.3% to $71.2 million or 15.2% of net sales
for the year ended December 31, 2000 from $51.5 million or 19.4% of net sales
for the same period of 1999. The increase was due primarily to increased
compensation expense of $9.1 million, earnout payments of $1.2 million related
to the acquisition of Spectra International, LLC, increased professional fees
and other selling, general and administrative expenses.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLE ASSETS Amortization
of goodwill and acquired intangible assets increased $4.2 million to $5.0
million for the year ended December 31, 2000 from $0.8 million for the same
period of 1999. The increase is due to the amortization of goodwill and other
intangibles resulting from the acquisitions completed by the Company during
2000.
PURCHASE OF IN-PROCESS TECHNOLOGY In July 2000, the Company acquired
Spectra International, LLC in a transaction accounted for as a purchase. The
purchase price was allocated to the assets acquired, including intangible
assets, based on their estimated fair values. The intangible assets include
approximately $0.3 million for acquired in-process technology for projects that
did not have future alternative uses. This allocation represents the estimated
fair value based on risk-adjusted cash flows related to the in-process
technology projects. At the date of the acquisition, the development of these
projects had not yet reached technological feasibility, and the technology in
progress had no alternative future uses. Accordingly, these costs were expensed
in the three months ended September 30, 2000.
INTEREST INCOME (EXPENSE), NET During the years ended December 31,
2000 and 1999, the Company generated net interest income of $4.8 million and
$1.4 million, respectively, primarily from the invested net proceeds of its
common stock offerings, offset by interest expense on outstanding debt.
PROVISION FOR INCOME TAXES Prior to the closing of its initial public
offering in April 1999, MKS was treated as an S corporation for tax purposes. As
an S corporation, MKS was not subject to federal and certain state income taxes.
Upon the closing of its initial public offering on April 5, 1999, MKS' status as
an S Corporation was terminated and it became subject to taxes as a C
corporation. The Company's pro forma provision for income taxes in 1999 reflects
the estimated tax expense the Company would have incurred had it been subject to
federal and state income taxes as a C corporation. The pro forma provision
differs from the federal statutory rate due primarily to the effects of state
and foreign taxes and certain tax credits. The 2000 provision for income taxes
of 37.3% is approximately the same as the pro forma provision in 1999.
LIQUIDITY AND CAPITAL RESOURCES
MKS has financed its operations and capital requirements through a
combination of cash provided by operations, long-term real estate financing,
capital lease financing and short-term lines of credit.
On April 5, 1999, the Company completed the initial public offering of
its Common Stock. In connection with this offering and the exercise of an
over-allotment option by the underwriters, the Company sold 6,375,000 shares of
Common Stock at a price of $14.00 per share. The net proceeds to the Company
were approximately $82.0 million and were received in the second quarter of
1999. Underwriting discounts and commissions were approximately $6.2 million,
and other offering
22
costs were approximately $1.0 million. On April 5, 1999 MKS distributed $40.0
million, which was the estimated amount of its undistributed S Corporation
earnings as of the day prior to the closing of the offering.
On March 30, 2000, ASTeX completed the registration and sale of
1,917,250 shares of common stock at $40.42 per share. The net proceeds from the
offering were approximately $73.2 million.
On March 5, 1999, ASTeX completed the registration and sale of
1,533,800 shares of common stock at $14.34 per share. On April 6, 1999, the
underwriters exercised their over-allotment option to purchase an additional
230,070 shares of common stock. The net proceeds from the offering were
approximately $23.8 million.
Operations provided cash of $20.1 million for 2001 and $40.0 million
for 2000. The cash flow from operations in 2001 was impacted by the net loss of
$31.0 million, decreases in accounts payable and accrued expenses of $14.3
million and of $12.2 million, respectively, and offset by depreciation of $26.7
million and decreases in accounts receivable and inventory of $58.9 million and
$16.2 million, respectively. The cash flow from operations in 2000 was impacted
by the net income of $60.3 million, depreciation of $14.9 million, increases in
accounts payable and accrued expenses of $7.5 million and $10.3 million,
respectively, and offset by increases in accounts receivable and inventory of
$37.6 million and $24.9 million, respectively. Investing activities utilized
cash of $18.1 million for 2001 and $64.8 million for 2000. Cash utilized in
investing activities decreased by $46.7 million in 2001 compared with 2000
primarily from fewer purchases of property, plant and equipment and fewer
acquisitions made in 2001. Financing activities utilized cash of $1.1 million in
2001 and provided cash of $81.0 million in 2000. Net cash provided from
financing activities in 2000 was primarily from the sale of 1,917,250 shares of
common stock for $73.2 million.
Working capital was $216.9 million as of December 31, 2001, a decrease of $20.5
million from December 31, 2000. MKS has a combined $40.0 million line of credit
with two banks, expiring July 31, 2002. The line of credit is collateralized by
the Company's domestic accounts receivable and domestic inventory for borrowings
exceeding $5,000,000. There were no borrowings under this line of credit as of
December 31, 2001. The terms of the line of credit and certain term loan
agreements, as amended, contain, among other provisions, requirements for
maintaining certain levels of tangible net worth and other financial ratios. The
agreements also contain restrictions with respect to acquisitions. Under the
most restrictive covenant, the Company's consolidated cash, short term
investments, accounts receivable and long term fixed income investments to
consolidated current liabilities shall not be less than 2.25 to 1.0 at anytime.
In the event of default of these covenants or restrictions, any obligation then
outstanding under the loan agreement shall become payable upon demand by the
bank. The Company was in compliance with all debt covenants as of December 31,
2001.
Future payments due under debt and lease obligations as of December 31,
2001 (in thousands) are as follows:
Payment Due by Period
-----------------------------------------------------------
Less than
Total 1 Year 1-3 Years 4-5 Years After 5 Years
-----------------------------------------------------------
Debt $25,228 $14,312 $6,721 $3,550 $645
Capital Leases 919 523 396 -- --
Operating Leases 11,558 3,803 4,812 1,965 978
-----------------------------------------------------------
$37,705 $18,638 $11,929 $5,515 $1,623
-----------------------------------------------------------
MKS believes that its working capital, together with the cash
anticipated to be generated from operations and funds available from existing
credit facilities, will be sufficient to satisfy its estimated working capital
and planned capital expenditure requirements through at least the next 12
months.
Prior to its initial public offering, the Company entered into a Tax
Indemnification and S Corporation Distribution Agreement with its then existing
stockholders (the "Pre-IPO stockholders"). The agreement includes provisions for
the payment, with interest, by the Pre-IPO stockholders or MKS, as the case may
be, for the difference between the $40.0 million distributed as an estimate of
the amount of the accumulated adjustments account as of April 4, 1999, which is
the date the Company's S Corporation status was terminated, and the actual
amount of the accumulated adjustments account on that day. The actual amount of
the accumulated adjustments account was $41.4 million. Accordingly, the Company
made an additional distribution of $1.4 million, plus interest of $0.2 million,
to the Pre-IPO stockholders during the three months ended September 30, 2000.
The amount of the additional distribution payable had been estimated to be $3.3
million. This estimated amount was charged directly to retained earnings during
1999 and had no impact on net income or earnings per share. The difference of
$1.9 million between the actual additional distribution and the estimated
additional distribution was credited directly to retained earnings during the
three months ended September 30, 2000 and had no impact on net income or
earnings per share. The amount of the accumulated adjustments account can be
affected by future income tax audits of MKS.
23
If any audit increases or decreases the accumulated adjustments account, MKS or
the Pre-IPO stockholders, as the case may be, will also be required to make a
payment, with interest, of such difference to the other party. No shareholders,
other than the Pre-IPO stockholders, are parties to the Tax Indemnification and
S Corporation Distribution Agreement.
DERIVATIVES
The Company conducts its operations globally. Consequently the results
of our operations are exposed to movements in foreign currency exchange rates.
The Company hedges a portion of its forecasted foreign currency denominated
intercompany sales of inventory, over a maximum period of fifteen months, using
forward exchange contracts and currency options primarily related to Japanese
and European currencies. These derivatives are designated as cash-flow hedges,
and changes in their fair value are carried in accumulated other comprehensive
income until the hedged transaction affects earnings. When the hedged
transaction affects earnings, the appropriate gain or loss from the derivative
designated as a hedge of the transaction is reclassified from accumulated other
comprehensive income to cost of sales. As of December 31, 2001 the amount that
will be reclassified from accumulated other comprehensive income to earnings
over the next twelve months is an unrealized gain of $787,000, net of taxes. The
ineffective portion of the derivatives is primarily related to option premiums,
is recorded in cost of sales, and was immaterial in 2001.
Realized and unrealized gains and losses on forward exchange contracts
and local currency purchased option contracts that do not qualify for hedge
accounting are recognized immediately in earnings. The cash flows resulting from
forward exchange contracts and local currency purchased options that qualify for
hedge accounting are classified in the statement of cash flows as part of cash
flows from operating activities. Cash flows resulting from forward exchange
contracts and local currency purchased options that do not qualify for hedge
accounting are classified in the statement of cash flows as investing
activities. The Company does not hold or issue derivative financial instruments
for trading purposes.
There were no forward exchange contracts outstanding at December 31,
2001. Forward exchange contracts with notional amounts totaling $1,500,000 and
$4,000,000 to exchange foreign currencies for U.S. dollars were outstanding at
December 31, 2000 and 1999, respectively. Of such forward exchange contracts
$1,500,000 and $4,000,000 to exchange Japanese yen for U.S. dollars were
outstanding at December 31, 2000 and 1999, respectively. Local currency
purchased options with notional amounts totaling $11,349,000, $25,390,000 and
$11,800,000 to exchange foreign currencies for U.S. dollars were outstanding at
December 31, 2001, 2000 and 1999, respectively.
There were no foreign exchange gains or losses on forward exchange
contracts which did not qualify for hedge accounting in 2001. Foreign exchange
gains of $37,000 and $415,000 on forward exchange contracts which did not
qualify for hedge accounting were recognized in earnings during 2000 and 1999,
respectively, and are classified in other income, net. Gains and losses on
forward exchange contracts and local currency purchased options that qualify for
hedge accounting are classified in cost of goods sold and totaled a gain of
$175,000 and $6,000 and a loss of $104,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
The fair values of forward exchange contracts at December 31, 2000,
determined by applying period end currency exchange rates to the notional
contract amounts, amounted to an unrealized gain of $164,000. The fair values of
local currency purchased options at December 31, 2001 and 2000, which were
obtained through dealer quotes were immaterial.
The Company hedges certain intercompany payables with currency options.
Since these derivatives hedge existing amounts that are denominated in foreign
currencies, the options do not qualify for hedge accounting. The foreign
exchange gain on these currency options was not material in 2001, 2000 and 1999.
INTEREST RATE RISK MANAGEMENT
The Company utilizes an interest rate swap to fix the interest rate on
certain variable rate term loans in order to minimize the effect of changes in
interest rates on earnings. In 1998, the Company entered into a four-year
interest rate swap agreement, with a major bank, on a declining notional amount
basis which matches with the scheduled variable term loan principal payments. At
December 31, 2001, the remaining notional amount of the interest rate swap, and
the remaining principal amount of the bank term loan was $917,000. Under the
agreement, the Company pays a fixed rate of 5.85% on the notional amount and
receives LIBOR. The interest differential payable or accruable on the swap
agreement is recognized on an accrual basis as an adjustment to interest
expense. The criteria used to apply hedge accounting for this interest rate swap
is based upon management designating the swap as a hedge against the variable
rate debt combined with the terms of the swap matching the underlying debt
including the notional amount, the timing of the interest reset dates, the
indices used and the paydates. At December 31, 2001, the fair value of this
interest rate swap, which represents the amount the Company would
24
receive or pay to terminate the agreement, was not material, based on dealer
quotes. The variable rate received on the swap at December 31, 2001 was 2.14%.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling of
interests method.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is
effective for fiscal years beginning after December 15, 2001. SFAS 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard includes provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the testing for impairment
of existing goodwill and other intangibles. Upon adoption of SFAS 142 the
Company will cease to amortize approximately $40,271,000 of goodwill. The
impairment review will involve a two-step process as follows:
Step 1 -- The Company will compare the fair value of our reporting units
to the carrying value, including goodwill of each of those units. For
each reporting unit where the carrying value, including goodwill,
exceeds the unit's fair value, the Company will move on to step 2. If a
unit's fair value exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
Step 2 -- The Company will perform an allocation of the fair value of
the reporting unit to its identifiable tangible and non-goodwill
intangible assets and liabilities. This will derive an implied fair
value for the reporting unit's goodwill. The Company will then compare
the implied fair value of the reporting unit's goodwill with the
carrying amount of the reporting unit's goodwill. If the carrying amount
of the reporting unit's goodwill is greater than the implied fair value
of its goodwill, an impairment loss must be recognized for the excess.
The Company is currently assessing the impact of SFAS 142 on our
financial position, cash flows and results of operations and expects to complete
this review by the second quarter of 2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" ("SFAS 143"). The objective of SFAS 143 is to provide
accounting guidance for legal obligations associated with the retirement of
long-lived assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of either the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company is currently evaluating the expected impact of the
adoption of SFAS 143 on the Company's financial condition, cash flows and
results of operations. The Company will adopt the standard in the first quarter
of fiscal 2003.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses significant issues relating to the
implementation of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and develops a single
accounting method under which long-lived assets that are to be disposed of by
sale are measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. SFAS 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and its
provisions are to be applied prospectively. The Company does not expect that the
implementation of SFAS 144 will have a significant impact on its financial
statements.
RECENT DEVELOPMENTS
On January 31, 2002, the Company completed its acquisition of the ENI
Business of Emerson Electric Co. ("Emerson"), pursuant to an Agreement and Plan
of Merger with respect to the acquisition of the ENI Business dated October 30,
2001 between the Company and Emerson. The Company issued an aggregate of 12.0
million shares of its common stock to Emerson, in exchange for the businesses
and assets of ENI. The acquisition will be accounted for under the purchase
method of accounting.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND SENSITIVITY ANALYSIS
FOREIGN EXCHANGE RATE RISK
MKS enters into local currency purchased options and forward exchange
contracts to reduce currency exposure arising from intercompany sales of
inventory. The potential fair value loss for a hypothetical 10% adverse change
in currency exchange rates on MKS' local currency purchased options at December
31, 2001 would be approximately $628,000. The value of the local currency
purchased options at December 31, 2000 was immaterial. The potential loss in
2001 was estimated by calculating the fair value of the local currency purchased
options at December 31, 2001 and comparing that with those calculated using the
hypothetical currency exchange rates.
There were no forward exchange contracts outstanding at December 31,
2001. The potential fair value loss for a hypothetical 10% adverse change in the
forward currency exchange rate on MKS' forward exchange contracts at December
31, 2000 would be $146,000. The potential loss in 2000 was estimated by
calculating the fair value of the forward exchange contracts at December 31,
2000 and comparing that with those calculated using the hypothetical forward
currency exchange rates.
At December 31, 2001, MKS had $9,238,000 related to short-term
borrowings denominated in Japanese yen. The carrying value of these short-term
borrowings approximates fair value due to their short period to maturity.
Assuming a hypothetical 10% adverse change in the Japanese yen to U.S. dollar
year end exchange rate, the fair value of these short-term borrowings would
increase by $1,026,000. The potential increase in fair value was estimated by
calculating the fair value of the short-term borrowings at December 31, 2001 and
comparing that with the fair value using the hypothetical year end exchange
rate.
At December 31, 2000, MKS had $15,719,000 related to short-term
borrowings denominated in Japanese yen. The carrying value of these short-term
borrowings approximated fair value due to their short period to maturity.
Assuming a hypothetical 10% adverse change in the Japanese yen to U.S. dollar
year end exchange rate, the fair value of these short-term borrowings would have
increased by $1,746,000. The potential increase in fair value was estimated by
calculating the fair value of the short-term borrowings at December 31, 2000 and
comparing that with the fair value using the hypothetical year end exchange
rate.
INTEREST RATE RISK
MKS is exposed to fluctuations in interest rates in connection with its
variable rate term loans. In order to minimize the effect of changes in interest
rates on earnings, MKS entered into an interest rate swap that fixed the
interest rate on its variable rate term loans. Under the swap agreement, MKS
pays a fixed rate of 5.85% on the notional amount and receives LIBOR. At
December 31, 2001 and 2000, the notional amount of the interest rate swap was
equal to the principal amount of the variable rate term loans. The potential
increase in the fair value of term loans resulting from a hypothetical 10%
decrease in interest rates, after adjusting for the interest rate swap, was not
material.
Due to its short-term duration, the fair value of the Company's cash
and investment portfolio at December 31, 2001 and 2000 approximated its carrying
value. Interest rate risk was estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in interest rates for securities
contained in the investment portfolio. The resulting hypothetical fair value was
not materially different from the year-end carrying values.
26
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of MKS Instruments, Inc.:
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)(1) present fairly, in all material respects, the financial position of MKS
Instruments, Inc. and its subsidiaries at December 31, 2001 and 2000 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
based on our audits and the report of other auditors, the financial statement
schedule listed in the index appearing under Item 14(a)(2) presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. The
consolidated financial statements give retroactive effect to the merger of
Applied Science and Technology, Inc. on January 26, 2001 in a transaction
accounted for as a pooling of interests, as described in Note 2 to the
consolidated financial statements. We did not audit the financial statements and
financial statement schedule of Applied Science and Technology, Inc., which
statements reflect total assets of 41 percent of the related consolidated totals
as of December 31, 2000 and total revenues of 30 percent and 29 percent of the
related consolidated totals for the year ended December 31, 2000 and 1999,
respectively. Those statements and schedule were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Applied Science and
Technology, Inc., is based solely on the report of the other auditors. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
January 31, 2002
27
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Applied Science and Technology, Inc.:
We have audited the consolidated balance sheet of Applied Science and
Technology, Inc. and subsidiaries as of July 1, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the two-year period ended July 1, 2000. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 Applied Science and
Technology, Inc. and subsidiaries as of July 1, 2000, and the results of their
operations and their cash flows for each of the years in the two-year period
ended July 1, 2000, in conformity with accounting principles generally accepted
in the United States of America.
/s/ KPMG LLP
Boston, Massachusetts
July 31, 2000
28
CONSOLIDATED BALANCE SHEETS
December 31
---------------------
(in thousands, except share data) 2001 2000
---------------------
ASSETS
Current assets:
Cash and cash equivalents $120,869 $123,082
Short-term investments 16,625 17,904
Trade accounts receivable, net of allowance
for doubtful accounts of $3,282 and $1,954 at
December 31, 2001 and 2000, respectively 35,778 95,076
Inventories 56,954 69,165
Deferred tax asset 16,426 9,976
Other current assets 16,353 4,433
---------------------
Total current assets 263,005 319,636
Property, plant and equipment, net 69,634 64,133
Long-term investments 11,029 17,100
Goodwill and acquired intangible assets 52,285 45,325
Other assets 15,236 8,209
---------------------
Total assets $411,189 $454,403
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 9,238 $ 15,741
Current portion of long-term debt 5,074 2,783
Current portion of capital lease obligations 503 610
Accounts payable 9,668 23,653
Accrued compensation 6,116 17,003
Other accrued expenses 15,551 14,588
Income taxes payable -- 7,937
---------------------
Total current liabilities 46,150 82,315
Long-term debt 10,916 11,439
Long-term portion of capital lease obligations 341 947
Deferred tax liability -- 1,663
Other liabilities 911 517
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding -- --
Common Stock, no par value, 75,000,000 shares
authorized; 37,998,699 and 36,645,665
shares issued and outstanding at December 31,
2001 and 2000 113 113
Additional paid-in capital 285,252 263,723
Retained earnings 68,160 93,235
Accumulated other comprehensive income (loss) (654) 451
---------------------
Total stockholders' equity 352,871 357,522
---------------------
Total liabilities and stockholders' equity $411,189 $454,403
---------------------
The accompanying notes are an integral part of the consolidated financial
statements.
29
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
---------------------------------------
(in thousands, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net sales $286,808 $466,852 $265,292
Cost of sales 201,225 261,456 162,783
---------------------------------------
Gross profit 85,583 205,396 102,509
Research and development 37,964 37,323 22,975
Selling, general and administrative 70,185 71,205 51,474
Amortization of goodwill and acquired intangible assets 11,026 5,023 763
Goodwill impairment charge 3,720 -- --
Restructuring charge -- -- 2,260
Merger expenses 7,708 -- --
Purchase of in-process technology 2,340 310 --
---------------------------------------
Income (loss) from operations (47,360) 91,535 25,037
Interest expense 1,513 1,390 1,378
Interest income 5,196 6,208 2,803
Other income (expense), net (2,379) (243) 905
---------------------------------------
Income (loss) before income taxes (46,056) 96,110 27,367
Provision (benefit) for income taxes (Note 9) (15,013) 35,850 4,581
---------------------------------------
Net income (loss) $(31,043) $ 60,260 $ 22,786
---------------------------------------
Historical net income (loss) per share:
Basic $ (0.83) $ 1.74 $ 0.76
---------------------------------------
Diluted $ (0.83) $ 1.67 $ 0.72
---------------------------------------
Historical weighted average common shares outstanding:
Basic 37,493 34,596 29,991
---------------------------------------
Diluted 37,493 36,170 31,439
---------------------------------------
Pro forma data (unaudited):
Historical income before income taxes $ 27,367
Pro forma provision for income taxes assuming C corporation tax 10,206
--------
Pro forma net income $ 17,161
--------
Pro forma net income per share:
Basic $ 0.57
--------
Diluted $ 0.55
--------
Pro forma weighted average common shares outstanding:
Basic 29,991
--------
Diluted 31,271
--------
The accompanying notes are an integral part of the consolidated financial
statements.
30
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2000 and 1999
(in thousands, except share data)
Accum-
mulated
Common Stock Other
---------------------------------- Compre- Compre- Total
Class A Class B Common Stock Additonal Share- hensive hensive Stock-
---------------------------------------------------- Paid-In Retained holder Income Income holders'
Shares Amount Shares Amount Shares Amount Capital Earnings Receivable (loss) (loss) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 7,766,910 $ 40 10,286,257 $ 73 6,600,296 -- $ 44,085 $52,232 $(148) $1,792 $ 98,074
Distributions to
stockholders (40,000) (40,000)
Distributions payable
to stockholders (3,350) (3,350)
Conversion to
Common Stock (7,766,910) (40) (10,286,257) (73) 18,053,167 113
Issuance of common
stock from Initial
Public Offering 6,375,000 82,062 82,062
Common stock issued
in ASTeX stock
offering, net of
issuance costs 1,763,870 23,805 23,805
Issuance of common
stock from exercise
of stock options and
warrants and Employee
Stock Purchase Plan 374,961 2,219 2,219
Tax benefit from exercise
of stock options 1,556 1,556
Retirement of common stock (16,825) (195) (195)
Stock option compensation 261 261
Stock issued in pooling of
interest acquisition 238,202 837 (626) 211
Shareholder receivable (856) (856)
Comprehensive income:
Net income 22,786 22,786 22,786
Other comprehensive
income, net of taxes:
Non-recurring deferred
tax charge to
comprehensive income
(Note 9) (497) (497) (497)
Impact of adopting
SFAS No. 133 (16) (16) (16)
Changes in value of
financialinstruments
designated as cash
flow hedges and
unrealized gain (loss)
on investment (212) (212) (212)
Foreign currency
translation adjustment (163) (163) (163)
-------
Comprehensive income $21,898
--------------------------------------------------------------------------------------------------
Balance at December
31, 1999 -- -- -- 33,388,671 113 154,630 31,042 (1,004) 904 185,685
Adjustment to Distributions
payable to stockholders 1,933 1,933
Issuance of common stock 1,917,250 73,207 73,207
Issuance of common stock
from exercise of stock
options and Employee Stock
Purchase Plan 787,929 6,477 6,477
Tax benefit from exercise
of stock options 5,273 5,273
Stock and stock options
issued in acquisition
of Businesses 551,815 24,136 24,136
Shareholder receivable 1,004 1,004
Comprehensive income:
Net income 60,260 60,260 60,260
Other comprehensive
income, net of taxes:
Changes in value of
financial instruments
designated as cash
flow hedges and
unrealized gain (loss)
on investment 603 603 603
Foreign currency
translation adjustment (1,056) (1,056) (1,056)
--------
Comprehensive income $ 59,807
--------------------------------------------------------------------------------------------------
Balance at December
31, 2000 -- -- -- -- 36,645,665 113 263,723 93,235 -- 451 357,522
Issuance of common
stock from exercise
of stock options and
Employee Stock
Purchase Plan 693,089 6,391 6,391
Tax benefit from exercise
of stock options 2,342 2,342
Issuance of common stock
for acquisition of
business 659,945 12,110 12,110
Stock option compensation
and other 686 686
Comprehensive loss:
Net loss (31,043) (31,043)(31,043)
Other comprehensive
income, net of taxes:
Changes in value of
financial instruments
designated as cash
flow hedges and
unrealized gain
(loss) on investment 104 104 104
Foreign currency
translation adjustment (1,209) (1,209) (1,209)
--------
Comprehensive loss $(32,148)
Adjustment to conform
ASTeX's year end 5,968 5,968
---------------------------------------------------------------------------------------------------
Balance at December
31, 2001 -- $-- -- $-- 37,998,699 $113 $285,252 $68,160 $-- $(654) $352,871
---------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------------------------
(in thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (31,043) $ 60,260 $ 22,786
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 26,705 14,875 9,490
Deferred taxes (11,452) (2,828) (1,260)
Other 4,836 844 (2,592)
Changes in operating assets and liabilities, net of effects of
businesses acquired:
Trade accounts receivable 58,911 (37,593) (20,250)
Inventories 16,218 (24,932) (1,272)
Other current assets (9,637) 450 (1,569)
Accrued expenses (12,170) 10,323 7,783
Accounts payable (14,293) 7,503 5,970
Income taxes payable (7,967) 11,106 1,307
---------------------------------------------
Net cash provided by operating activities 20,108 40,008 20,393
---------------------------------------------
Cash flows from investing activities:
Purchases of short-term and long-term investments (22,545) (46,598) (45,999)
Maturities and sales of short-term and long-term investments 21,066 39,044 18,654
Purchases of property, plant and equipment (14,638) (32,168) (7,344)
Proceeds from sale of assets and investment 4,726 -- --
Business combinations, net of cash acquired (7,121) (23,921) (23)
Increase in other assets 383 (1,171) (1,598)
---------------------------------------------
Net cash used in investing activities (18,129) (64,814) (36,310)
---------------------------------------------
Cash flows from financing activities:
Proceeds from short-term borrowings 32,117 42,272 11,250
Payments on short-term borrowings (36,944) (37,226) (9,825)
Proceeds from long-term borrowings 833 9,639 --
Payments on long-term debt (2,810) (10,800) (3,110)
Proceeds from issuance of common stock, net of issuance costs -- 73,207 105,542
Proceeds from exercise of stock options and Employee Stock Purchase Plan 6,391 6,477 2,219
Cash distributions to stockholders -- (1,417) (40,000)
Principal payments under capital lease obligations (706) (1,064) (1,050)
---------------------------------------------
Net cash provided by (used in) financing activities (1,119) 81,088 65,026
---------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 69 (689) (495)
---------------------------------------------
Increase in cash and cash equivalents 929 55,593 48,614
Cash and cash equivalents at beginning of period 123,082 67,489 18,875
Effect of excluded results of ASTeX (Note 2) (3,142) -- --
---------------------------------------------
Cash and cash equivalents at end of period $ 120,869 $ 123,082 $ 67,489
---------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,074 $ 1,416 $ 1,409
Income taxes $ 16,032 $ 24,995 $ 10,294
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations incurred for the purchase of new equipment $ -- $ -- $ 762
Note receivable from sale of assets $ 3,928 $ -- $ --
---------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)
1) DESCRIPTION OF BUSINESS
MKS Instruments, Inc. was founded in 1961. MKS Instruments, Inc. develops,
manufactures and supplies instruments, components and integrated subsystems used
to measure, control and analyze gases in semiconductor manufacturing and similar
industrial manufacturing processes.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
All significant intercompany accounts and transactions have been eliminated in
consolidation. On January 26, 2001, MKS Instruments, Inc. completed its
acquisition of Applied Science and Technology, Inc. ("ASTeX") in a transaction
accounted for under the pooling of interests method of accounting and,
accordingly, the consolidated financial statements reflect the combined
financial position, results of operations and cash flows of MKS Instruments,
Inc., ASTeX and their subsidiaries (together, the "Company" or "MKS"), for all
periods presented. These consolidated financial statements combine the
historical consolidated financial statements of the Company for all periods
presented and the ASTeX share information has been converted to the MKS share
equivalent.
Since the fiscal years of MKS and ASTeX differed, the historical periods
combined giving effect to the merger are as follows:
MKS ASTEX
--- ------
Fiscal year ended December 31, 1999 Fiscal year ended June 26, 1999
Fiscal year ended December 31, 2000 Fiscal year ended July 1, 2000
As a result of conforming dissimilar fiscal year-ends, the ASTeX results of
operations for the six month period ended December 31, 2000 are excluded from
these consolidated financial statements. The following is information related to
the ASTeX financial results for the six-month period ended December 31, 2000:
Net sales $89,193
Net income 5,968
Decrease in cash and cash equivalents (3,142)
The excluded net income and excluded decrease in cash and cash equivalents of
$5,968,000 and $3,142,000 have been recorded as adjustments to retained earnings
and statement of cash flows for the year ended December 31, 2001, respectively.
The following table shows the separate historical results of MKS and ASTeX for
the periods prior to the consummation of the merger of the two entities.
Fiscal Year Ended
-------------------------------------
2000 1999
- --------------------------------------------------------------------------------
Net sales:
MKS $326,955 $187,083
ASTeX 139,897 78,209
-------------------------------------
$466,852 $265,292
-------------------------------------
Net income (loss):
MKS $ 46,234 $ 24,037
ASTeX 14,026 (1,251)
-------------------------------------
$ 60,260 $ 22,786
-------------------------------------
All fees and expenses related to the merger and the integration of the combined
companies are expenses as required under the pooling of interests accounting
method. For the year ended December 31, 2001, the Company expensed approximately
$7.7 million of merger related expenses, consisting of $6.9 million of
investment banking, legal, accounting, printing and other professional fees, and
$0.8 million of regulatory and other costs.
HISTORICAL AND PRO FORMA (UNAUDITED) NET INCOME PER SHARE
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings per
Share." SFAS 128 requires both basic earnings per share, which is based on
33
the weighted average number of common shares outstanding, and diluted earnings
per share, which is based on the weighted average number of common shares
outstanding and all dilutive potential common equivalent shares outstanding. The
dilutive effect of options is determined under the treasury stock method using
the average market price for the period. Common equivalent shares are included
in the per share calculations when the effect of their inclusion would be
dilutive.
Historical net income per share in 1999 is not meaningful because of the
Company's conversion from an S corporation to a C corporation upon the closing
of its initial public offering in 1999. Historical net income has been adjusted
for the pro forma provision for income taxes calculated assuming the Company was
subject to income taxation as a C corporation, at a pro forma tax rate of 37.3%
in 1999.
The following is a reconciliation of basic to diluted pro forma and historical
net income per share:
For the Year Ended December 31,
--------------------------------------------------
2001 2000 1999
------------------------ ------------------------
Historical Historical Pro forma Historical
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(31,043) $60,260 $ 17,161 $ 22,786
Shares used in net income (loss) per common shares - basic 37,493 34,596 29,991 29,991
Effect of dilutive securities:
Employee and director stock options --- 1,574 1,280 1,448
-------------------------------------------------
Shares used in net income (loss) per common share - diluted 37,493 36,170 31,271 31,439
-------------------------------------------------
Net income (loss) per common share - basic $ (0.83) $ 1.74 $ 0.57 $ 0.76
-------------------------------------------------
Net income (loss) per common share - diluted $ (0.83) $ 1.67 $ 0.55 $ 0.72
-------------------------------------------------
For purposes of computing diluted earnings per share, weighted average common
share equivalents do not include stock options with an exercise price greater
than the average market price of the common shares during the period. Options to
purchase 474,000 and 374,000 shares of common stock were outstanding during 2000
and 1999, respectively, but were not included in the calculation of diluted net
income per common share because the option price was greater than the average
market price of the common shares during the period. All options outstanding
during the year ended December 31, 2001 are excluded from the calculation of
diluted net loss per common share because their inclusion would be
anti-dilutive. There were options to purchase 5,958,735 of the Company's common
stock outstanding at December 31, 2001.
FOREIGN EXCHANGE
The functional currency of the Company's foreign subsidiaries is the applicable
local currency. For those subsidiaries, assets and liabilities are translated to
U.S. dollars at year-end exchange rates. Income and expense accounts are
translated at the average exchange rates prevailing for the year. The resulting
translation adjustments are included in accumulated other comprehensive income
in consolidated stockholders' equity. Foreign exchange transaction gains and
losses were not material in 2001, 2000 and 1999.
REVENUE RECOGNITION
Revenue from product sales is generally recognized upon shipment provided that
persuasive evidence of an arrangement exists, the sales price is fixed or
determinable, collectibility is reasonably assured and title and risk of loss
have passed to the customer. The Company has no obligations to customers after
the date products are shipped other than pursuant to warranty obligations. The
Company provides for the estimated costs to fulfill customer warranty
obligations upon the recognition of the related revenue. Shipping and handling
fees, if any, billed to customers are recognized as revenue. The related
shipping and handling costs are recognized in cost of sales. The Company
monitors and tracks the amount of product returns and reduces revenue at the
time of shipment for the estimated amount of such future returns, based on
historical experience. The Company makes estimates evaluating its allowance for
doubtful accounts. The Company continuously monitors collections and payments
from its customers and maintains a provision for estimated credit losses based
upon its historical experience and any specific customer collection issues that
it has identified.
CASH AND CASH EQUIVALENTS AND INVESTMENTS
All highly liquid investments with an original maturity of three months or less
at the date of purchase are considered to be cash equivalents.
34
Cash equivalents consist of the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and Money Market Instruments $ 101,045 $36,687
Commercial Paper 8,094 74,895
Federal Government and Government Agency Obligations 11,730 1,000
State and Municipal Government Obligations -- 2,000
Corporate Obligations -- 8,500
-------------------------------
$ 120,869 $123,082
-------------------------------
Short-term available-for-sale investments maturing within one year consist of
the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Government and Government Agency Obligations $ 5,442 $10,101
State and Municipal Government Obligations 3,100 --
Corporate Obligations -- 1,000
Commercial Paper 8,083 6,803
-------------------------------
$ 16,625 $17,904
-------------------------------
Long-term available-for-sale investments with maturities of 1 to 5 years consist
of the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Federal Government and Government Agency Obligations $ 1,008 $ 4,000
State and Municipal Government Obligations 7,021 13,100
Corporate Obligations 3,000 ---
-------------------------------
$ 11,029 $ 17,100
-------------------------------
The appropriate classification of investments in securities is determined at the
time of purchase. Debt securities that the Company does not have the intent and
ability to hold to maturity are classified as "available-for-sale" and are
carried at fair value. Unrealized gains and losses on securities classified as
available-for-sale are included in accumulated other comprehensive income in
consolidated stockholders' equity. The cost of securities sold is based on the
specific identification method.
The Company holds investments in companies having operations or technology in
areas within or adjacent to its strategic focus, which are in non-publicly
traded companies whose value is difficult to determine. These investments are
accounted for under the cost and equity method of accounting. Under the equity
method of accounting, which generally applies to investments that represent a 20
to 50 percent ownership of the equity securities of the investee, the Company's
proportionate share of the earnings or losses of the investee is included in
other income and expense. The Company records an investment impairment charge
when it believes an investment has experienced a decline in value.
INVENTORIES
The Company values its inventory at the lower of cost (first-in, first-out
method) or market. The Company regularly reviews inventory quantities on hand
and records a provision to write down excess and obsolete inventory to its
estimated net realizable value, if less than cost, based primarily on its
estimated forecast of product demand for the next 18 to 24 months.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Equipment acquired under
capital leases is recorded at the present value of the minimum lease payments
required during the lease period. Expenditures for major renewals and
betterments that extend the useful lives of property, plant and equipment are
capitalized. Expenditures for maintenance and repairs are charged to expense as
incurred. When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are eliminated from the accounts and any resulting gain
or loss is recognized in earnings.
Depreciation is provided on the straight-line method over the estimated useful
lives of twenty to thirty-one and one-half years for buildings and three to
seven years for machinery and equipment. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the leased
asset.
35
INTANGIBLE ASSETS
Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are estimated by management based on the
fair value of assets received. These include acquired customer lists, workforce,
technology, patents, trade name, covenants not to compete and goodwill.
Intangible assets are amortized from three to ten years on a straight-line basis
which represents the estimated periods of benefit.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company's research
and development efforts include numerous projects which generally have a
duration of 18 to 30 months.
IN-PROCESS RESEARCH AND DEVELOPMENT
The Company values tangible and intangible assets acquired through its business
acquisitions at fair value including in-process research and development
("IPR&D"). The Company determines IPR&D through established valuation techniques
for various projects for the development of new products and technologies and
expenses IPR&D when technical feasibility is not reached.
PATENTS
Patent costs are amortized over their estimated useful life of five years.
MERGER EXPENSES
The Company expenses fees and costs related to mergers accounted for under the
pooling of interests method. In July 2001, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling of interests method.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling of interests method.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective for
fiscal years beginning after December 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. Upon adoption of SFAS 142 the Company will cease to
amortize approximately $40,271,000 of goodwill. The impairment review will
involve a two-step process as follows:
Step 1 -- The Company will compare the fair value of our reporting units
to the carrying value, including goodwill of each of those units. For
each reporting unit where the carrying value, including goodwill,
exceeds the unit's fair value, the Company will move on to step 2. If a
unit's fair value exceeds the carrying value, no further work is
performed and no impairment charge is necessary.
Step 2 -- The Company will perform an allocation of the fair value of
the reporting unit to its identifiable tangible and non-goodwill
intangible assets and liabilities. This will derive an implied fair
value for the reporting unit's goodwill. The Company will then compare
the implied fair value of the reporting unit's goodwill with the
carrying amount of the reporting unit's goodwill. If the carrying amount
of the reporting unit's goodwill is greater than the implied fair value
of its goodwill, an impairment loss must be recognized for the excess.
The Company is currently assessing the impact of SFAS 142 on its financial
position, cash flows and results of operations and expects to complete this
review by the second quarter of 2002.
36
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Obligations Associated with the Retirement of Long-Lived
Assets" ("SFAS 143"). The objective of SFAS 143 is to provide accounting
guidance for legal obligations associated with the retirement of long-lived
assets. The retirement obligations included within the scope of this
pronouncement are those that an entity cannot avoid as a result of either the
acquisition, construction or normal operation of a long-lived asset. Components
of larger systems also fall under this pronouncement, as well as tangible
long-lived assets with indeterminable lives. The provisions of SFAS 143 are
effective for financial statements issued for fiscal years beginning after June
15, 2002. The Company is currently evaluating the expected impact of the
adoption of SFAS 143 on the Company's financial condition, cash flows and
results of operations. The Company will adopt the standard in the first quarter
of fiscal 2003.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"). SFAS 144 addresses significant issues relating to the implementation of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and develops a single accounting method
under which long-lived assets that are to be disposed of by sale are measured at
the lower of book value or fair value less cost to sell. Additionally, SFAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and its provisions are to be
applied prospectively. The Company does not expect that the implementation of
SFAS 144 will have a significant impact on its financial statements.
USE OF ESTIMATES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, in-process research and development,
merger expenses, intangible assets and goodwill, inventories and investments.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
3) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
FOREIGN EXCHANGE RISK MANAGEMENT
The Company adopted the provisions of SFAS No. 133 effective April 1, 1999. The
impact of adopting SFAS No. 133 was the recording of an unrealized loss of
$16,000, net of taxes, in other comprehensive income. The Company hedges a
portion of its forecasted foreign currency denominated intercompany sales of
inventory, over a maximum period of fifteen months, using forward exchange
contracts and currency options primarily related to Japanese and European
currencies. These derivatives are designated as cash-flow hedges, and changes in
their fair value are carried in accumulated other comprehensive income until the
hedged transaction affects earnings. When the hedged transaction affects
earnings, the appropriate gain or loss from the derivative designated as a hedge
of the transaction is reclassified from accumulated other comprehensive income
to cost of sales. As of December 31, 2001 the amount that will be reclassified
from accumulated other comprehensive income to earnings over the next twelve
months is an unrealized gain of $787,000, net of taxes. The ineffective portion
of the derivatives is primarily related to option premiums, is recorded in cost
of sales, and was immaterial in 2001.
Realized and unrealized gains and losses on forward exchange contracts and local
currency purchased option contracts that do not qualify for hedge accounting are
recognized immediately in earnings. The cash flows resulting from forward
exchange contracts and local currency purchased options that qualify for hedge
accounting are classified in the statement of cash flows as part of cash flows
from operating activities. Cash flows resulting from forward exchange contracts
and local currency purchased options that do not qualify for hedge accounting
are classified in the statement of cash flows as investing activities. The
Company does not hold or issue derivative financial instruments for trading
purposes.
There were no forward exchange contracts outstanding at December 31, 2001.
Forward exchange contracts with notional amounts totaling $1,500,000 and
$4,000,000 to exchange foreign currencies for U.S. dollars were outstanding at
December 31, 2000 and 1999, respectively. Of such forward exchange contracts,
$1,500,000 and $4,000,000 to exchange Japanese yen for U.S. dollars, were
outstanding at December 31, 2000 and 1999, respectively. Local currency
purchased options with notional amounts totaling $11,349,000, $25,390,000 and
$11,800,000 to exchange foreign currencies for U.S. dollars were outstanding at
December 31, 2001, 2000 and 1999, respectively.
37
There were no foreign exchange gains or losses on forward exchange contracts
which did not qualify for hedge accounting in 2001. Foreign exchange gains of
$37,000 and $415,000 on forward exchange contracts which did not qualify for
hedge accounting were recognized in earnings during 2000 and 1999, respectively,
and are classified in Other income, net. Gains and losses on forward exchange
contracts and local currency purchased options that qualify for hedge accounting
are classified in cost of goods sold and totaled a gain of $175,000 and $6,000
and a loss of $104,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
The fair values of forward exchange contracts at December 31, 2000, determined
by applying period end currency exchange rates to the notional contract amounts,
amounted to an unrealized gain of $164,000. The fair values of local currency
purchased options at December 31, 2001 and 2000, which were obtained through
dealer quotes were immaterial.
The Company hedges certain intercompany payables with currency options. Since
these derivatives hedge existing amounts that are denominated in foreign
currencies, the options do not qualify for hedge accounting under SFAS No. 133.
The foreign exchange gain on these currency options was not material in 2001,
2000 and 1999.
INTEREST RATE RISK MANAGEMENT
The Company utilizes an interest rate swap to fix the interest rate on certain
variable rate term loans in order to minimize the effect of changes in interest
rates on earnings. In 1998, the Company entered into a four-year interest rate
swap agreement on a declining notional amount basis which matches with the
scheduled principal payments with a major bank. At December 31, 2001, the
remaining notional amount of the interest rate swap, and the remaining principal
amount of the bank term loan, was $917,000. Under the agreement, the Company
pays a fixed rate of 5.85% on the notional amount and receives LIBOR. The
interest differential payable or accruable on the swap agreement is recognized
on an accrual basis as an adjustment to interest expense. The criteria used to
apply hedge accounting for this interest rate swap is based upon management
designating the swap as a hedge against the variable rate debt combined with the
terms of the swap matching the underlying debt including the notional amount,
the timing of the interest reset dates, the indices used and the paydates. At
December 31, 2001, the fair value of this interest rate swap, which represents
the amount the Company would receive or pay to terminate the agreement, was not
material, based on dealer quotes. The variable rate received on the swap at
December 31, 2001 was 2.14%.
The market risk exposure from the interest rate swap is assessed in light of the
underlying interest rate exposures. Credit risk exposure from the swap is
minimized as the agreement is with a major financial institution. The Company
monitors the credit worthiness of this financial institution and full
performance is anticipated.
CONCENTRATIONS OF CREDIT RISK
The Company's significant concentrations of credit risk consist principally of
cash and cash equivalents, investments, forward exchange contracts, and trade
accounts receivable. The Company maintains cash and cash equivalents with
financial institutions including the bank it has borrowings with. The Company
maintains investments primarily in U.S. Treasury and government agency
securities and corporate debt securities, rated AA or higher. The Company places
forward currency contracts with high credit-quality financial institutions in
order to minimize credit risk exposure. Concentrations of credit risk with
respect to accounts receivable are limited due to the large number of diverse
and geographically dispersed customers. Credit is extended for all customers
based on financial condition and collateral is not required.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the term loans, including the current portion, approximates
its carrying value given its variable rate interest provisions. The fair value
of marketable securities is based on quoted market prices. The fair value of
mortgage notes is based on borrowing rates for similar instruments and
approximates its carrying value. For all other balance sheet financial
instruments, the carrying amount approximates fair value because of the short
period to maturity of these instruments.
4) INVENTORIES
Inventories consist of the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Raw material $21,019 $23,765
Work in process 15,362 20,856
Finished goods 20,573 24,544
-------------------------------
$56,954 $69,165
-------------------------------
38
5) GOODWILL IMPAIRMENT CHARGE
When the Company acquired the Shamrock product line, it was expected that sales
of the existing system design and development of new system designs would
generate future revenues. Since the acquisition, the Company has provided
potential customers with purchase quotations for Shamrock systems, including a
significant quotation to a potential customer in January 2001 for the sale of
several systems. The customer did not purchase the systems, and the quotation
expired in March 2001. The Company has been unsuccessful in selling any systems
of the product line since the acquisition and, with the expiration of the
significant quote in March 2001, the Company evaluated the recoverability of the
long-lived assets, primarily goodwill. As a result, based on discounted cash
flow analysis, the Company recorded an impairment charge for the carrying value
of the related goodwill of approximately $3,720,000 in the quarter ended March
31, 2001.
6) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Land $ 10,499 $10,936
Buildings 46,107 35,892
Machinery and equipment 53,216 46,402
Furniture and fixtures 18,984 16,789
Leasehold improvements 3,170 3,775
Construction in progress 4,626 5,956
-------------------------------
136,602 119,750
Less: accumulated depreciation and amortization 66,968 55,617
-------------------------------
$69,634 $64,133
-------------------------------
Depreciation and amortization of property, plant and equipment totaled
$11,905,000, $9,785,000 and $8,727,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
7) DEBT
CREDIT AGREEMENTS AND SHORT-TERM BORROWINGS
Effective January 1, 2000, the Company entered into a loan agreement with two
banks, which provides access to a revolving credit facility. The revolving
credit facility provides for borrowings up to $40,000,000, and expires July 31,
2002. The credit facility is collateralized by the Company's domestic accounts
receivable and domestic inventory for borrowings exceeding $5,000,000. Interest
on borrowings is payable quarterly at either the banks' base rate, or the LIBOR
Rate, as defined in the agreement. At December 31, 2001 there were no borrowings
outstanding under this agreement. The credit facility was amended in January
2002 to reduce the minimum tangible net worth requirement.
Additionally, certain of the Company's foreign subsidiaries have lines of credit
and short-term borrowing arrangements with various financial institutions which
provide for aggregate borrowings as of December 31, 2001 of up to $18,388,000,
which generally expire and are renewed at six month intervals. At December 31,
2001 and 2000, total borrowings outstanding under these arrangements were
$9,238,000 and $15,719,000, respectively, at interest rates ranging from 0.84%
to 1.88% and 1.35% to 1.88%, respectively.
LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Term loans $ 7,042 $ 2,620
Mortgage notes 8,948 11,602
-------------------------------
Total long-term debt 15,990 14,222
Less: current portion 5,074 2,783
-------------------------------
Long-term debt less current portion $10,916 $11,439
-------------------------------
On November 1, 1993, the Company entered into a term loan agreement with a bank,
which provided for borrowings of $10,000,000. The loan was collateralized by
certain land, buildings, and equipment. Interest was payable monthly at either
the bank's base rate, at a rate based on the long-term funds rate, or at the
LIBOR Rate, as defined in the agreement, at the Company's option. The final
principal amount on this term loan was paid in November 2000.
39
On October 31, 1995, the Company also entered into a term loan agreement with
the same bank, which provided additional uncollateralized borrowings of
$7,000,000. Principal payments are payable in equal monthly installments of
$83,000 through June 1, 2002, with the remaining principal payment due on June
30, 2002. Interest is payable monthly at either the bank's base rate or at the
LIBOR Rate, as defined in the agreement, at the Company's option. The remaining
principal as of December 31, 2001 was $917,000. The term loan agreement was
amended in January 2002 to reduce the minimum tangible net worth requirement.
In connection with the purchase of On-Line Technologies, Inc., the Company
assumed term loans of $4,728,000. The principal and interest accrued are due in
two equal installments, the first installment on April 27, 2002, and the second
installment on April 27, 2003.
In connection with the purchase of Telvac Engineering, Ltd., the Company issued
term loans of $752,000. Principal payments of $51,000 are due on an annual basis
through December 1, 2004 with the remaining principal due on May 1, 2005.
Interest is payable semi-annually at the UK base rate. Remaining principal as of
December 31, 2001 was $634,000.
The Company also has an outstanding term loan from a foreign bank, with
principal due on April 2, 2004. The interest rate in effect for this term loan
at December 31, 2001 was 1.19%. The remaining principal balance at December 31,
2001 was $763,000.
At December 31, 2001 and 2000, the interest rates in effect for the outstanding
term loan borrowings ranged from 1.19% to 6.0% and from 6.0% to 9.59%,
respectively.
On March 6, 2000, the Company entered into a mortgage note payable with a bank
to borrow $10,000,000 to finance the purchase of land and a building. Principal
and interest of $119,000 is being paid in monthly installments with final
payments due in March 2007. The remaining principal as of December 31, 2001 was
$7,500,000.
The terms of the revolving credit facility and certain term loan agreements, as
amended, contain, among other provisions, requirements for maintaining certain
levels of tangible net worth and other financial ratios. The agreements also
contain restrictions with respect to acquisitions. Under the most restrictive
covenant, the Company's consolidated cash, short term investments, accounts
receivable and long term fixed income investments to consolidated current
liabilities shall not be less than 2.25 to 1.0 at anytime. In the event of
default of these covenants or restrictions, any obligation then outstanding
under the loan agreement shall become payable upon demand by the bank. The
Company was in compliance with all debt covenants as of December 31, 2001.
The Company has loans outstanding from various foreign banks in the form of
mortgage notes at interest rates ranging from 1.88% to 6.10%. Principal and
interest are payable in monthly installments through 2010. The loans are
collateralized by mortgages on certain of the Company's foreign properties. The
remaining principal as of December 31, 2001 was $1,448,000.
Aggregate maturities of long-term debt over the next five years are as follows:
Year ending December 31, Aggregate Maturities
- ----------------------------------------------------------------------------------------
2002 $ 5,074
2003 4,159
2004 2,562
2005 2,061
2006 1,489
Thereafter 645
-------------------------
$15,990
-------------------------
8) COMMITMENTS AND CONTINGENCIES
On November 3, 1999, On-Line Technologies Inc., which was acquired by the
Company in April 2001, brought suit in federal district court in Connecticut
against Perkin-Elmer, Inc. and certain other defendants for infringement of
On-Line's patent related to its FTIR spectrometer product. The suit seeks
injunctive relief and damages for infringement. Perkin-Elmer, Inc. has filed a
counterclaim seeking invalidity of the patent, costs, and attorneys' fees. The
Company believes that the counterclaim is without merit.
On November 30, 2000, ASTeX, which was acquired by the Company in January 2001,
brought suit in federal district court in Delaware against Advanced Energy
Industries, Inc. for infringement of ASTeX's patent related to its Astron
product. The
40
Company is seeking injunctive relief and damages for infringement. Advanced
Energy Industries, Inc. has filed a counterclaim seeking invalidity of the
patent, costs, and attorneys' fees. The Company believes that the counterclaim
is without merit.
The Company cannot be certain of the outcome of the foregoing litigation, but
does plan to assert its claims against other parties and oppose the
counterclaims against it vigorously.
The Company is subject to other legal proceedings and claims, which have arisen
in the ordinary course of business.
In the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's results of operations, financial
condition or cash flows.
The Company leases certain of its facilities and machinery and equipment under
capital and operating leases expiring in various years through 2002 and
thereafter. Generally, the facility leases require the Company to pay
maintenance, insurance and real estate taxes. Rental expense under operating
leases totaled $5,122,000, $4,623,000, and $4,289,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Minimum lease payments under operating and capital leases are as follows:
Year ending December 31, Operating Leases Capital Leases
- -----------------------------------------------------------------------------------------------------------------------
2002 $3,803 $ 523
2003 2,697 290
2004 2,115 106
2005 1,273 ---
2006 692 ---
Thereafter 978 ---
--------------------------------
Total minimum lease payments $11,558 $919
--------------------------------
Less: amounts representing interest 75
----------------
Present value of minimum lease payments 844
Less: current portion 503
----------------
Long-term portion $ 341
----------------
Prior to its initial public offering, the Company entered into a Tax
Indemnification and S Corporation Distribution Agreement with its then existing
stockholders (the "Pre-IPO stockholders"). The agreement includes provisions for
the payment, with interest, by the Pre-IPO stockholders or MKS, as the case may
be, for the difference between the $40,000,000 distributed as an estimate of the
amount of the accumulated adjustments account as of April 4, 1999, which is the
date the Company's S Corporation status was terminated, and the actual amount of
the accumulated adjustments account on that day. The actual amount of the
accumulated adjustments account was $41,416,619. Accordingly, the Company made
an additional distribution of $1,416,619, plus interest of $177,524, to the
Pre-IPO stockholders during the three months ended September 30, 2000. The
amount of the additional distribution payable had been estimated to be
$3,350,000. This estimated amount was charged directly to retained earnings
during 1999 and had no impact on net income or earnings per share. The
difference of $1,933,000 between the actual additional distribution and the
estimated additional distribution was credited directly to retained earnings
during the three months ended September 30, 2000 and had no impact on net income
or earnings per share. The amount of the accumulated adjustments account can be
affected by future income tax audits of MKS. If any audit increases or decreases
the accumulated adjustments account, MKS or the Pre-IPO stockholders, as the
case may be, will also be required to make a payment, with interest, of such
difference to the other party. No shareholders, other than the Pre-IPO
stockholders, are parties to the Tax Indemnification and S Corporation
Distribution Agreement.
9) STOCKHOLDERS' EQUITY
COMMON STOCK
In May 2001, the Company amended its Restated Articles of Organization to
increase the authorized number of shares of Common Stock to 75,000,000 shares
from 50,000,000 shares.
On March 30, 2000, ASTeX completed the registration and sale of 1,917,250 shares
of common stock at $40.42 per share. The net proceeds from the offering were
approximately $73,200,000.
On April 5, 1999, the Company closed the initial public offering of its Common
Stock. In connection with this offering and the exercise of an over-allotment
option by the underwriters, the Company sold 6,375,000 shares of Common Stock at
a price
41
of $14.00 per share. The net proceeds to the Company were approximately
$82,000,000. Underwriting discounts and commissions were approximately
$6,200,000 and other offering costs were approximately $1,000,000.
On April 5, 1999 the Company distributed $40,000,000, which was the estimated
amount of the Company's undistributed S corporation earnings as of the day prior
to the closing of the offering.
On March 5, 1999, ASTeX completed the registration and sale of 1,533,800 shares
of common stock at $14.34 per share. On April 6, 1999, the underwriters
exercised their over-allotment option to purchase an additional 230,070 shares
of common stock. The net proceeds from the offering were approximately $23.8
million.
STOCK PURCHASE PLANS
The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") authorizes
the issuance of up to an aggregate of 450,000 shares of Common Stock to
participating employees. Offerings under the Purchase Plan commence on June 1
and December 1 and terminate, respectively, on November 30 and May 31. Under the
Purchase Plan, eligible employees may purchase shares of Common Stock through
payroll deductions of up to 10% of their compensation. The price at which an
employee's option is exercised is the lower of (1) 85% of the closing price of
the Common Stock on the NASDAQ National Market on the day that each offering
commences or (2) 85% of the closing price on the day that each offering
terminates. During 2001 and 2000 the Company issued 111,835 and 83,118 shares,
respectively, of Common Stock to employees who participated in the Purchase Plan
at exercise prices of $13.12 and $19.06 in 2001 and $21.04 and $12.86 in 2000.
As of December 31, 2001 there were 218,527 shares reserved for issuance.
The Company's International Employee Stock Purchase Plan (the "Foreign Purchase
Plan") authorizes the issuance of up to an aggregate of 50,000 shares of Common
Stock to participating employees. The initial offering under the Foreign
Purchase Plan commenced on March 1, 2000 and terminated May 31, 2000. Additional
offerings under the Foreign Purchase Plan commence on June 1 and December 1 and
terminate, respectively, on November 30 and May 31. Under the Foreign Purchase
Plan, eligible employees may purchase shares of Common Stock through payroll
deductions of up to 10% of their compensation. The price at which an employee's
option is exercised is the lower of (1) 85% of the closing price of the Common
Stock on the NASDAQ National Market on the day that each offering commences or
(2) 85% of the closing price on the day that each offering terminates. During
2001 and 2000, the Company issued 13,333 and 7,248 shares of Common Stock to
employees who participated in the Foreign Purchase Plan at exercise prices of
$13.12 and $19.06 and $33.47 and $12.86 per share, respectively. As of December
31, 2001 and 2000, there were 29,419 and 42,752 shares reserved for issuance,
respectively.
STOCK OPTION PLANS
In April 2001, the Company's Board of Directors approved an annual increase in
the number of shares that may be granted under the 1995 Stock Incentive Plan of
5% of the total shares of the Company's stock on July 1 of each year. In May
2000, the stockholders of the Company approved an annual increase in the number
of shares that may be granted under the 1995 Stock Incentive Plan of 4% of the
total shares of the Company's stock on July 1 of each year. The annual increase
will occur until such time as the aggregate number of shares which may be issued
under the Plan is 9,750,000 shares, subject to adjustment for certain changes in
MKS' capitalization.
The Company has granted options to employees under the 1995 Stock Incentive Plan
and the 1993 Stock Option Plan (the "Plans"). The Plans are administered by the
Company's board of directors. The Company grants options to directors under the
1996 Director Stock Option Plan and the 1997 Director Stock Option Plan (the
"Director Plans").
At December 31, 2001, 916,563 options to purchase shares of the Company's common
stock were reserved for issuance under the Plans. At December 31, 2001, under
the Director Plans, options to purchase 163,500 shares of common stock were
reserved for issuance. Stock options are granted at 100% of the fair value of
the Company's common stock. Generally, stock options granted under the Plans
prior to 2000 vest 20% after one year and 5% per quarter thereafter, and expire
10 years after the grant date. Generally, stock options granted under the Plans
in 2001 and 2000 vest 25% after one year and 6.25% per quarter thereafter, or
vest immediately, and expire 10 years after the grant date. Under the Director
Plans, certain options granted in 1999 vest immediately. Generally, options
granted under the Director Plans vest at the earlier of (1) the next annual
meeting, (2) 13 months from date of grant, or (3) the effective date of an
acquisition as defined in the Director Plans.
42
The following table presents the activity for options under the Plans:
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding -- beginning of period 3,924,098 $14.54 3,603,131 $ 8.56 3,011,329 $ 7.11
Granted 3,064,619 $20.99 1,134,384 29.66 1,358,977 12.49
Exercised (567,921) $8.86 (672,472) 7.93 (338,441) 6.70
Forfeited or Expired (607,837) $18.87 (140,945) 14.86 (428,734) 12.30
------------------------------------------------------------------------
Outstanding -- end of period 5,812,959 $18.04 3,924,098 $14.54 3,603,131 $ 8.56
Exercisable at end of period 3,295,692 $16.83 1,852,368 $ 8.56 1,509,406 $ 6.40
The following table summarizes information with respect to options outstanding
and exercisable under the Plans at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted .
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number Exercise
Shares Price Life (In Years) of Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
$4.43-$10.44 1,573,692 $ 5.80 5.33 1,309,100 $ 5.62
$11.98-19.00 1,752,576 $16.64 7.87 429,408 $15.37
$19.24-$29.50 1,949,994 $24.56 8.81 1,279,664 $24.77
$30.34-$61.50 536,697 $34.79 7.00 277,520 $35.33
----------------------------------------------------------------------
5,812,959 $18.04 7.42 3,295,692 $16.83
The following table presents activity for options under the Director Plans:
Year Ended December 31,
------------------------------------------------------------------------
2001 2000 1999
------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding -- beginning of period 99,276 $ 19.15 100,368 $10.95 34,368 $4.81
Granted 46,500 $ 24.71 24,000 44.88 66,000 14.15
Exercised -- -- (25,092) 10.95 -- --
------------------------------------------------------------------------
Outstanding -- end of period 145,776 $ 20.92 99,276 $19.15 100,368 $10.95
Exercisable at end of period 104,900 $ 19.20 75,276 $10.95 76,368 $9.86
The following table summarizes information with respect to options outstanding
and exercisable under the Director Plans at December 31, 2001:
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted .
Weighted Average Weighted
Number of Average Remaining Average
Shares Exercise Contractual Number of Exercise
Price Life (In Years) Shares Price
- ------------------------------------------------------------------------------------------------------------------------------------
$4.43-$8.00 25,776 $ 4.81 4.85 25,776 $4.81
$14.00-$14.40 49,500 $14.15 7.20 49,500 $14.15
$20.13-$29.00 46,500 $24.71 9.23 5,624 $20.13
$44.88 24,000 $44.88 8.38 24,000 $44.88
----------------------------------------------------------------------
145,776 $20.92 7.63 104,900 $19.20
43
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). The Company has chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. The Company is required to disclose pro forma net
income and net income per common share amounts had compensation cost for the
Company's stock based compensation plans been determined based on the fair value
at the grant date for awards under the plans. Had compensation expense for the
stock based compensation plans been consistent with the method of SFAS 123, the
amounts reported for 2001, 2000 and 1999 would have been:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income (loss) reported $(31,043) $60,260 $22,786
Pro form net income (loss) for SFAS No. 123 $(51,395) $53,320 $19,920
Pro forma net income (loss) per share for SFAS No. 123:
Basic $ (1.37) $ 1.54 $ 0.66
Diluted $ (1.37) $ 1.47 $ 0.63
The weighted average fair value of options at the date of grant was estimated
using the Black-Scholes model and was $14.65 with the following assumptions in
2001: expected life of 5 years, weighted average interest rate of 4.27%,
expected volatility of 83%, and no dividend yield. In 2000, the weighted average
fair value of MKS options at the date of grant was $22.74, with the following
assumptions: expected life of 5 years, weighted average interest rate of 6.37%,
expected volatility of 88%, and no dividend yield. In 1999, the weighted average
fair value of options at the date of grant was $9.54, with the following
assumptions: expected life of 5 years, weighted average interest rate of 5.49%,
expected volatility of 64%, and no dividend yield.
The fair value of purchase rights granted in 2001, 2000 and 1999 under the
Purchase Plan was $7.19, $7.64 and $5.11, respectively. The fair value of the
employees' purchase rights was estimated using the Black-Scholes model with the
following assumptions in 2001: expected life of 6 months, interest rate of
5.03%, expected volatility of 83%, and no dividend yield. In 2000, the following
assumptions were made: expected life of 6 months, interest rate of 5.57%,
expected volatility of 88%, and no dividend yield. In 1999, the following
assumptions were made: expected life of 6 months, interest rate of 4.87%,
expected volatility of 64%, and no dividend yield.
The weighted average fair value of ASTeX options granted during fiscal 2000 and
1999 was $18.53 and $4.08, respectively.
The fair value of each ASTeX option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants issued in fiscal 2000 and 1999: no dividend yield
for all years; expected volatility of 72% and 82% for 2000 and 1999,
respectively; risk-free interest rates of 5.92% for 2000 grants and 4.72% for
1999 grants; and expected lives of 4 years for all grants.
ACCUMULATED OTHER COMPREHENSIVE INCOME
The balance of accumulated other comprehensive income (loss) was comprised of
the following:
Financial
Instruments
Designated as Cash
Flow Hedges and Accumulated
Cumulative Unrealized Gain Other
Translation (loss) on Comprehensive
Adjustments Investment Income (loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 1,132 $(228) $ 904
Foreign currency translation adjustment, net of taxes of $628 (1,056) --- (1,056)
Changes in value of financial instruments designated as cash flow hedges,
net of taxes of $(359) --- 603 603
-------------------------------------------------------
Balance at December 31, 2000 $ 76 $ 375 $ 451
Foreign currency translation adjustment, net of taxes of $854 (1,209) (1,209)
Changes in value of financial instruments designated as cash flow hedges
and unrealized gain (loss) on investments, net of taxes of $38 104 104
-------------------------------------------------------
Balance at December 31, 2001 $(1,133) $ 479 $ (654)
-------------------------------------------------------
44
10) INCOME TAXES
Prior to its initial public offering, MKS was treated as an S corporation for
federal income tax purposes. As an S corporation, the Company was not subject to
federal, and certain state, income taxes. MKS terminated its S corporation
status upon the closing of its initial public offering in 1999 and became
subject to taxes at C corporation tax rates. This change in tax status and tax
rates resulted in a non-recurring, non-cash deferred tax credit to net income of
$3,770,000 and a deferred tax charge to other comprehensive income of $497,000
in 1999.
The Pre-IPO stockholders are liable for individual Federal, and certain state,
income taxes on their allocated portions of the MKS taxable income as an S
corporation. For the tax year ending December 31, 1999, the Pre-IPO stockholders
were allocated a portion of the MKS 1999 taxable income. A reconciliation of the
Company's 2001, 2000 and 1999 effective tax rate to the U.S. federal statutory
rate follows:
2001 2000 1999
----------------------------------------------
U.S. Federal income tax statutory rate (35.0)% 35.0% 35.0%
Non-recurring deferred tax credit --- --- (13.7)
Pre-IPO stockholder 1999 allocated taxable income --- --- (7.3)
Nondeductible goodwill and merger expenses 7.6 0.7 ---
State income taxes, net of federal benefit (3.2) 3.3 2.4
Effect of foreign operations taxed at various rates (0.6) 0.7 2.3
Foreign sales corporation tax benefit (1.1) (1.2) (1.7)
Other (0.3) (1.2) (0.3)
----------------------------------------------
(32.6)% 37.3% 16.7%
----------------------------------------------
The components of income before income taxes and the historical related
provision for income taxes consist of the following:
Year Ended December 31,
------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes:
United States $(52,571) $87,654 $23,689
Foreign 6,515 8,456 3,678
------------------------------------------------
(46,056) 96,110 27,367
------------------------------------------------
Current taxes:
United States Federal (5,892) 29,778 6,514
State 337 5,203 1,291
Foreign 1,994 3,697 1,806
------------------------------------------------
(3,561) 38,678 9,611
------------------------------------------------
Deferred taxes:
United States Federal (8,842) (2,593) (4,804)
State and Foreign (2,610) (235) (226)
------------------------------------------------
(11,452) (2,828) (5,030)
------------------------------------------------
Provision for income taxes $(15,013) $ 35,850 $ 4,581
------------------------------------------------
At December 31, 2001 and 2000 the components of the deferred tax asset and
deferred tax liability were as follows:
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred tax assets (liabilities):
Inventories $10,054 $4,086
Intercompany profits 3,094 2,572
Net operating loss carryforwards 4,046 45
Depreciable assets 1,395 1,457
Compensation and accrued liabilities 1,779 1,236
Investment booked under the equity method (885) (753)
Other 1,387 328
-------------------------------
Total $20,870 $8,971
-------------------------------
At December 31, 2001, MKS had approximately $6,857,000 of net operating loss
carryforwards which arose as part of the Company's acquisition of On-Line. The
future utilization of these net operating losses, which begin to expire in 2009,
may
45
be limited by the change of ownership rules under Section 382 of the Internal
Revenue Code. In addition, at December 31, 2001, MKS also has approximately
$21,946,000 of state net operating loss carryforwards which begin to expire in
2006. The Company believes that it is more likely than not that the net deferred
tax assets will be realized.
11) EMPLOYEE BENEFIT PLANS
The Company has a 401(k) profit-sharing plan for U.S. employees meeting certain
requirements in which eligible employees may contribute from 1% up to 12% of
their compensation. The Company, at its discretion, may provide a matching
contribution which will generally match up to the first 2% of each participant's
compensation, plus 25% of the next 4% of compensation. At the discretion of the
Board of Directors, the Company may also make additional contributions for the
benefit of all eligible employees. The Company's contributions are generally
paid annually, and were $2,960,000 and $2,371,000 for the years ended December
31, 2000 and 1999. Approximately $2,184,000 has been expensed as the estimated
Company contribution for the year ended December 31, 2001.
The Company maintains a bonus plan which provides cash awards to key employees,
at the discretion of the Compensation Committee of the Board of Directors, based
upon operating results and employee performance. Bonus expense to key employees
was $0, $7,579,000, and $3,900,000 for the years ended December 31, 2001, 2000
and 1999, respectively.
12) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER
See Note 1 for a brief description of the Company's business. The Company is
organized around four principal operating segments domestically and by
geographic locations internationally. The Company's current domestic operating
segments qualify for aggregation under SFAS 131, "Disclosure About Segments of
an Enterprise and Related Information," as the products are manufactured and
distributed in a similar manner, have similar long-term margins and are sold to
a similar customer base. The Company has three reportable segments: North
America, Far East, and Europe. Net sales to unaffiliated customers are based on
the location in which the sale originated. Transfers between geographic areas
are at negotiated transfer prices and have been eliminated from consolidated net
sales. Income from operations consists of total net sales less operating
expenses and does not include either interest income, interest expense or income
taxes. The Company had one customer comprising 18%, 30% and 29% of net sales for
the years ended December 31, 2001, 2000 and 1999, respectively.
Year Ended December 31, 2001
-----------------------------------------------------------------
United States Far East Europe Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $196,768 $49,964 $40,076 $286,808
Intersegment net sales 46,907 1,012 984 48,903
Depreciation and amortization 25,718 406 581 26,705
Income (loss) from operations (55,414) 2,878 5,176 (47,360)
Segment assets 358,786 29,063 23,340 411,189
Long-lived assets 122,445 5,543 5,284 133,272
Capital expenditures 13,491 616 531 14,638
Year Ended December 31, 2000
-----------------------------------------------------------------
United States Far East Europe Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $358,777 $67,015 $41,060 $466,852
Intersegment net sales 68,753 1,411 1,307 71,471
Depreciation and amortization 14,072 227 576 14,875
Income from operations 80,144 4,753 6,638 91,535
Segment assets 390,688 39,436 24,279 454,403
Long-lived assets 106,738 5,703 4,494 116,935
Capital expenditures 31,019 154 995 32,168
Year Ended December 31, 1999
-----------------------------------------------------------------
United States Far East Europe Total
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales to unaffiliated customers $200,223 $38,734 $26,335 $265,292
Intersegment net sales 40,117 706 986 41,809
Depreciation and amortization 8,691 252 547 9,490
Income from operations 20,870 1,413 2,754 25,037
Segment assets 208,137 31,272 14,363 253,772
Long-lived assets 41,800 6,524 2,874 51,198
Capital expenditures 6,746 241 357 7,344
46
Included in the Far East are Japan, Korea, Singapore and Taiwan. Included in
Europe are Germany, France and the United Kingdom. Net sales to unaffiliated
customers from Japan were $34,816,000, $50,187,000 and $30,696,000 for the years
ended December 31, 2001, 2000 and 1999, respectively. Long-lived assets within
Japan amounted to $4,618,000, $5,460,000 and $6,266,000 at December 31, 2001,
2000 and 1999, respectively.
13) ACQUISITIONS
During the three years ended December 31, 2001, the Company completed a number
of purchase acquisitions. The Consolidated Financial Statements include the
operating results of each business from the date of the acquisition. A summary
of purchase transactions is outlined as follows:
Consideration
Including Purchased
Assumed Intangible
Acquired Company Liabilities IPR&D Assets Goodwill
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
On-Line Technologies, Inc. $23,829 $ 2,340 $ 6,410 $ 16,050
-----------------------------------------------------------------
Fiscal 2000
Compact Instrument Technology, LLC $ 8,700 $ -- $ 1,600 $ 7,600
Telvac Engineering, Ltd. 1,600 -- -- 800
Spectra International, LLC 19,000 310 11,600 6,100
D.I.P., Inc. 14,000 -- 8,900 4,300
Shamrock Product Line from Sputtered Films, Inc. 6,382 -- -- 4,463
-----------------------------------------------------------------
Total $49,682 $ 310 $22,100 $ 23,263
-----------------------------------------------------------------
Fiscal 1999
PlasmaQuest, Inc. $ 147 $ -- $ -- $ 393
-----------------------------------------------------------------
The $23.8 million in consideration paid for the acquisition of On-Line
Technologies, Inc. included 660,000 shares of MKS common stock valued at
approximately $12.1 million. The consideration paid for the acquisitions of
Compact Instrument Technology, LLC, Spectra International, LLC, and D.I.P., Inc.
included 137,131 shares of MKS common stock valued at $8.4 million; 183,293
shares of MKS common stock valued at $6.5 million and fully vested options to
purchase 83,675 shares of common stock valued at $2.4 million; and 231,392
shares of MKS common stock valued at $6.8 million, respectively. The Spectra
International, LLC acquisition includes contingent earnout payments of up to an
aggregate of $12,000,000 over 5 years, which will be treated as compensation
expense as it is earned.
The amounts allocated to in-process research and development ("IPR&D") were
determined through established valuation techniques and were expensed upon
acquisition because technical feasibility had not been established and no future
alternative uses existed. In connection with the acquisition of On-Line, the
Company obtained an appraisal from an independent appraiser of the fair value of
its intangible assets. This appraisal valued purchased IPR&D of various projects
for the development of new products and technologies at approximately
$2,340,000. The projects were generally expected to have durations of 24 to 48
months. Because the technological feasibility of products under development had
not been established and no future alternative uses existed, the purchased IPR&D
was written off during the quarter ended June 30, 2001. The value of the
purchased IPR&D was determined using the income approach, which discounts
expected future cash flows from projects under development to their net present
value. Each project was analyzed to determine the technological innovations
included; the utilization of core technology; the complexity, cost and time to
complete development; any alternative future use or current technological
feasibility; and the stage of completion. The cash flows derived from the
in-process technology projects were discounted at a rate of 25%. The Company
believes this rate was appropriate given the risks associated with the
technologies for which commercial feasibility had not been established. The
percentage of completion for each in-process project was determined by
identifying the elapsed time invested in the project as a ratio of the total
time required to bring the project to technical and commercial feasibility. The
percentage of completion for in-process projects acquired ranged from 55% to
65%, based on management's estimates of tasks completed and the tasks to be
completed to bring the projects to technological and commercial feasibility.
Development of in-process technology remains a substantial risk to the Company
due to a variety of factors including the remaining effort to achieve technical
feasibility, rapidly changing customer requirements and competitive threats from
other companies and technologies.
Amounts allocated to purchased intangible assets are amortized on a
straight-line basis over periods not exceeding seven years.
47
The following unaudited pro forma results of operations of the Company give
effect to the acquisitions made in 2001 and 2000 as if the acquisitions had
occurred at the beginning of 2000.
Year Ended
December 31,
---------------------------------
2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 288,028 $485,842
Net income (loss) $(32,994) $ 57,267
Net income (loss) per share:
Basic $ (0.88) $ 1.61
---------------------------------
Diluted $ (0.88) $ 1.54
---------------------------------
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
actually would have resulted had the acquisitions occurred at the beginning of
the period, or which may result in the future.
POOLING OF INTEREST COMBINATIONS
On January 26, 2001, MKS acquired ASTeX. Each outstanding share of ASTeX common
stock was exchanged for 0.7669 newly issued shares of common stock of MKS,
resulting in the issuance of approximately 11.2 million shares of common stock
of MKS. The acquisition was accounted for under the pooling of interests method
of accounting, and accordingly, the consolidated financial statements reflect
the combined financial position and results of operations and cash flows of MKS
Instruments, Inc. and ASTeX, for all periods presented.
14) SALE OF ASSETS AND RESTRUCTURING CHARGES
In August 2001, the Company sold assets for proceeds of approximately $9.0
million. The proceeds consist primarily of approximately $4.7 million in cash
and $3.9 million in a note receivable. The note receivable matures August 7,
2004, bears an annual interest rate of 9.0% and is included in other assets. The
loss on the transaction was $1,246,000 before taxes.
In December 2001, the Company sold an investment in a company for approximately
$367,000. The loss on the transactions was $1,133,000 before taxes.
During 1999, the Company consolidated its Modesto, California operations into
it's Woburn, Massachusetts and Colorado Springs, Colorado sites. The Company
also consolidated its Beverly, Massachusetts operation into it's Woburn site.
These consolidations resulted in a restructuring charge of $1,497,000. The
restructuring charge consisted of severance relating to the termination of 70
employees, abandonment of leasehold improvements and fixed assets, and facility
costs (primarily future lease payments relating to abandoned facilities).
Also during 1999, the Company announced the consolidation of its recently
acquired PlasmaQuest operations based in Dallas, Texas into its newly leased
space in Wilmington, Massachusetts. This consolidation has resulted in a
restructuring charge of approximately $763,000, primarily consisting of
severance relating to the termination of 16 employees, abandonment of leasehold
improvements and fixed assets, and facility costs (primarily future lease
payments relating to the abandoned facility).
48
The following table summarizes the recorded accruals and uses of the 1999
restructuring and impairment actions:
Asset Severance Exit
impairments benefits costs Total
- ------------------------------------------------------------------------------------------------------------------------------------
First Quarter Restructuring
Total charge $ 606 $ 579 $ 312 $ 1,497
Cash payments (8) (546) (140) (694)
Noncash items (598) -- -- (598)
-----------------------------------------------------------
Adjustments of accrual -- (33) 2 (31)
Accrual balance as of December 31, 1999 $ -- $ -- $ 174 $ 174
-----------------------------------------------------------
Cash payments -- -- (172) (172)
Adjustment of accrual -- -- (2) (2)
-----------------------------------------------------------
Accrual balance as of December 31, 2000 $ -- $ -- $ -- $ --
--------------- --------------- ---------------------------
Fourth Quarter Restructuring
Total charges $ 183 $ 196 $ 384 $ 763
Noncash items (183) -- -- (183)
-----------------------------------------------------------
Accrual balance as of December 31, 1999 -- 196 384 580
-----------------------------------------------------------
Cash payments -- (196) (340) (536)
Adjustment of accrual -- -- (44) (44)
-----------------------------------------------------------
Accrual balance as of December 31, 2000 $ -- $ -- $ -- $ --
-----------------------------------------------------------
15) INTANGIBLE ASSETS
Intangible assets include the following at December 31:
(in thousands) 2001 2000 Useful Lives
- ------------------------------------------------------------------------------------------------------------------------------------
Patents, completed technology and other acquired intangibles $28,736 $22,965 3 - 7 years
Goodwill 40,271 28,508 5 - 7 years
--------------------------------------
$69,007 $51,473
Less: accumulated amortization (16,722) (6,148)
--------------------------------------
$52,285 $45,325
----------------------------------------------------------
16) SUBSEQUENT EVENT
On January 31, 2002, the Company completed its acquisition of the ENI Business
of Emerson Electric Co. ("Emerson"), pursuant to an Agreement and Plan of Merger
with respect to the acquisition of the ENI Business dated October 30, 2001 (the
"Acquisition Agreement") between the Company and Emerson. The Company issued an
aggregate of 12.0 million shares of its common stock to Emerson, in exchange for
the businesses and assets of ENI. The acquisition has been accounted for under
the purchase method.
The reasons for the acquisition of ENI was based upon the ability to offer
higher value and more highly integrated application solutions by combining ENI's
solid-state power conversion technology with the Company's core competency in
plasma and reactive gas solutions.
The value of the MKS common stock was approximately $21.77 per share based on
the average closing price of MKS' common stock for the five-day period including
the date of the announcement of the signing of the acquisition agreement and the
two days preceding and succeeding such date.
The purchase consideration is as follows:
Common stock $261,264
Estimated transaction expenses 4,150
---------------
$265,414
---------------
49
The preliminary allocation of the purchase price is summarized below:
Accounts receivable $ 4,801
Inventories 21,440
Property and equipment 19,282
Developed technology 30,500
Patents 4,100
In-process research and development 7,300
Goodwill 196,759
Other net liabilities (5,199)
Deferred tax liability (13,569)
--------------
$265,414
--------------
The actual purchase price allocation is dependent upon the finalization of the
preliminary valuation report.
The $7,300,000 allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no future
alternative use. The projects were generally expected to have durations of up to
12 months. Based on preliminary assessments, the value of these projects was
determined by estimating the resulting net cash flows from the sale of the
products resulting from the completion of the projects, reduced by the portion
of the revenue attributable to developed technology and the percentage of
completion of the project. The resulting cash flows were then discounted back to
their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.
The amounts allocated to in-process research and development will be charged to
the statements of operations in the first quarter of fiscal 2002.
Goodwill represents the excess of purchase price over the fair value of the
underlying net identifiable assets. The deferred tax liability relates to
differences between book and tax bases of acquired assets and liabilities
assumed.
50
MKS INSTRUMENTS, INC.
SUPPLEMENTAL FINANCIAL DATA
(UNAUDITED)
Quarter Ended
----------------------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31
- ------------------------------------------------------------------------------------------------------------------------------------
2001
STATEMENT OF INCOME (LOSS) DATA
Net sales $110,888 $ 72,656 $ 53,201 $ 50,063
Gross profit (1) 43,195 25,818 16,096 474
Income (loss) from operations (681) (6,296) (13,701) (26,682)
Net income (loss) (2,105) (4,182) (9,071) (15,685)
Net income (loss) per share
Basic $ (0.06) $ (0.11) $ (0.24) $ (0.41)
Diluted $ (0.06) $ (0.11) $ (0.24) $ (0.41)
2000
STATEMENT OF INCOME DATA
Net sales $ 96,158 $108,767 $121,769 $140,158
Gross profit 41,225 48,981 54,419 60,771
Income from operations 18,504 22,277 24,417 26,337
Net income 11,959 14,449 15,955 17,897
Net income per share
Basic $ 0.36 $ 0.43 $ 0.47 $ 0.49
Diluted $ 0.34 $ 0.41 $ 0.44 $ 0.47
(1) Gross profit for the year ended December 31, 2001 includes special charges
for excess and obsolete inventory of $14.0 million in the fourth quarter of 2001
and $2.6 million in the second quarter of 2001. These charges were significantly
higher than normal and were primarily caused by a significant reduction in
demand, including reduced demand for older technology products.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions
"Election of Directors" and "Executive Officers" in our Proxy Statement for the
2002 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" in our Proxy Statement for the 2002 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement for the 2002 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Certain Relationships and Related Transactions" in our Proxy Statement for the
2002 Annual Meeting of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements. See below for index to Consolidated Financial
Statements under Item 8.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
FINANCIAL STATEMENTS:
Report of Independent Accountants 27-28
Consolidated Balance Sheets at December 31, 2001 and 2000 29
Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999 30
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 31
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 32
Notes to Consolidated Financial Statements 33
FINANCIAL STATEMENT SCHEDULE:
Schedule II -Valuation and Qualifying Accounts 53
52
MKS INSTRUMENTS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
Column A Column B Column C Column D Column E
Balance at Charged to
Beginning of Costs and Charged to Balance at
Description Year Expenses Other Accounts Deductions End of Year
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts... $1,033,439 $ 659,979 $98,625 $122,972 $ 1,669,071
YEAR ENDED DECEMBER 31, 2000:
Allowance for doubtful accounts... $1,669,071 $ 978,893 $ -- $694,178 $ 1,953,786
YEAR ENDED DECEMBER 31, 2001:
Allowance for doubtful accounts... $1,953,786 $1,711,395 $ --- $382,927 $ 3,282,254
(2) Exhibits.
(a) The Exhibits listed in Exhibit Index immediately preceding such
Exhibits are filed as part of this Annual Report on Form 10-K.
EXHIBIT NO. TITLE
- ----------- -----
+3.2(1) Restated Articles of Organization
+3.3(2) Articles of Amendment
+3.4(3) Amended and Restated By-Laws
+4.1(3) Specimen certificate representing the common stock
10.1 Amended and Restated 1995 Stock Incentive Plan and
Amendments thereto
+10.2(4) Applied Science and Technology, Inc. 1993 Stock Option Plan,
as amended
+10.3(4) Applied Science and Technology, Inc. 1994 Formula Stock
Option Plan, as amended
+10.4(3) 1996 Amended and Restated Director Stock Option Plan
+10.5(3) 1997 Director Stock Option Plan
10.6 Amended and Restated 1999 Employee Stock Purchase Plan
+10.7(5) MKS Instruments, Inc. International Employee Stock Purchase
Plan
10.8 MKS Instruments, Inc. International Employee Stock Purchase
Plan 2001 Amendment
+10.9(3) Amended and Restated Employment Agreement dated as of
December 15, 1995 between Leo Berlinghieri and the
Registrant
+10.10(3) Amended and Restated Employment Agreement dated as of
December 15, 1995 between Ronald C. Weigner and the
Registrant
+10.11(3) Amended and Restated Employment Agreement dated as of
December 15, 1995 between William D. Stewart and the
Registrant
+10.12(6) Employment Agreement dated as of December 6, 1999 between
Robert Klimm and the Registrant
+10.13(7) Employment Agreement dated as of March 10, 2000 between the
Registrant and Donald Smith
+10.14(1) Employment Agreement dated as of October 18, 2000 between
the Registrant and F. Thomas McNabb
+10.15(3) Lease Agreement dated as of October 12, 1989, as extended
November 1, 1998, by and between Aspen Industrial Park
Partnership and the Registrant
+10.16(3) Lease dated as of September 21, 1995 by and between General
American Life Insurance Company and the Registrant
+10.17(3) Lease dated as of January 1, 1996 between MiFuji Kanzai Co.
Ltd. and the Registrant (covering Floor 5)
+10.18(3) Lease dated as of April 21, 1997 between MiFuji Kanzai Co.
Ltd. and the Registrant (covering Floors 1 and 2)
+10.19(1) Lease dated as of August 9, 2000 between Aspen Industrial
Partnership, LLP and the Registrant
+10.20(3) Loan Agreement dated as of November 1, 1993, as last amended
January 1, 2001, between Fleet National Bank (f/k/a The
First National Bank of Boston) and the Registrant
+10.21(6) First Amended and Restated Loan Agreement dated as of
January 1, 2000 between Fleet National Bank (f/k/a
BankBoston, N.A.), The Chase Manhattan Bank, and the
Registrant
+10.22(8) Second Amendment dated as of January 1, 2001 to First
Amended and Restated Loan Agreement dated as of January 1,
2000 among Fleet National Bank (f/k/a BankBoston, N.A.), The
Chase Manhattan Bank and the Registrant
10.23(9) Credit Agreement dated July 31, 2001 between Fleet National
Bank as Agent and Lender, The Chase Manhattan Bank as
Lender, and Registrant as Borrower
53
+10.24(9) Ninth Amendment dated July 31, 2001 to the Loan Agreement
dated October 31, 1995 between Fleet National Bank as Lender
and the Registrant as Borrower
10.25 Consent, Waiver and First Amendment to Credit Agreement
dated as of January 28, 2002 by and between MKS and Fleet
National Bank and JP Morgan Chase Bank
10.26 Consent, Waiver and Tenth Amendment to Loan Agreement dated
as of January 28, 2002 between MKS and Fleet National Bank
+10.27(10) Loan Agreement between ASTeX Realty Corp. and Citizens Bank
of Massachusetts, dated March 6, 2000 (the "Loan Agreement")
+10.28(10) Exhibit A to the Loan Agreement
+10.29(3) Split-Dollar Agreement dated as of September 12, 1991
between the Registrant, John R. Bertucci and Claire R.
Bertucci and Richard S. Chute, Trustees of the John R.
Bertucci Insurance Trust of January 10, 1986
+10.30(3) Split-Dollar Agreement dated as of September 12, 1991
between the Registrant, John R. Bertucci and John R.
Bertucci and Thomas H. Belknap, Trustees of the Claire R.
Bertucci Insurance Trust of January 10, 1986
+10.31(3) Form of Tax Indemnification and S Corporation Distribution
Agreement
+10.32(11) Agreement and Plan of Merger with respect to the
Acquisition of the ENI Business dated October 30, 2001
between the Registrant and Emerson Electric Co.
+10.33(12) Shareholder Agreement dated as of January 31, 2002 among
the Registrant and Emerson Electric Co.
21.1 Subsidiaries of the Registrant
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of KPMG LLP
- ---------------
+ Previously filed
(1) Incorporated by reference to the Registration Statement on Form S-4 (File
No. 333-49738) filed with the Securities and Exchange Commission on
November 13, 2000, as amended.
(2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the three and six months ended June 30, 2001.
(3) Incorporated by reference to the Registration Statement on Form S-1 (file
No. 333-71363) filed with the Securities and Exchange Commission on January
28, 1999, as amended.
(4) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-54490) filed with the Securities and Exchange Commission on January
29, 2001, as amended.
(5) Incorporated by reference to the Registration Statement on Form S-8 (File
No. 333-31224) filed with the Securities and Exchange Commission on
February 28, 2000.
(6) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.
(7) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.
(8) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.
(9) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001.
(10) Incorporated by reference to Applied Science and Technology, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended March 25, 2000.
(11) Incorporated by reference to the Registrant's Definitive Proxy Statement
on Schedule 14A (Commission File No. 000-23621) filed with the Securities
and Exchange Commission on December 4, 2001.
(12) Incorporated by reference to the Registrant's report on Form 8-K filed
with the Securities and Exchange Commission on February 12, 2002.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K with the
Securities and Exchange Commission on November 27, 2001 pertaining to
the retroactive effect of the January 26, 2001 business combination of
MKS Instruments, Inc. (the "Company") and Applied Science and
Technology, Inc. ("ASTeX"), which was accounted for under the pooling
of interest method of accounting.
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on November 7, 2001 announcing the execution of
the Agreement and Plan of Merger, dated October 30, 2001, with respect
to the acquisition of the ENI business between the Company and Emerson
Electric Co.
(c) Exhibits.
The Company hereby files as exhibits to our Annual Report on Form
10-K those exhibits listed in Item 14(a)(2) above.
(d) Financial Statement Schedules.
Not applicable.
54
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.
MKS INSTRUMENTS, INC.
By: /s/ John R. Bertucci
----------------------------------------------------
John R. Bertucci
President, Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
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 date indicated.
SIGNATURES TITLE DATE
President, Chairman of the Board of Directors and
/s/ John R. Bertucci Chief Executive Officer (Principal Executive Officer) March 29, 2002
- -------------------------------------
John R. Bertucci
Vice President and Chief Financial Officer (Principal
/s/ Ronald C. Weigner Financial and Accounting Officer) March 29, 2002
- -------------------------------------
Ronald C. Weigner
/s/ Robert R. Anderson Director March 29, 2002
- -------------------------------------
Robert R. Anderson
/s/ James G. Berges Director March 29, 2002
- -------------------------------------
James G. Berges
/s/ Richard S. Chute Director March 29, 2002
- -------------------------------------
Richard S. Chute
/s/ Hans-Jochen Kahl Director March 29, 2002
- -------------------------------------
Hans-Jochen Kahl
/s/ Owen W. Robbins Director March 29, 2002
- -------------------------------------
Owen W. Robbins
/s/ Louis P. Valente Director March 29, 2002
- -------------------------------------
Louis P. Valente
55