================================================================================ 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 1
- 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. 2
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. 3
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 6
- 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. 7
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
Exhibit 10.1 FIRST AMENDMENT TO AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN OF MKS INSTRUMENTS, INC. The Amended and Restated 1995 Stock Incentive Plan (the "Plan") be and hereby is amended by deleting the last sentence of Section 3(b) thereof in its entirety and inserting in lieu thereof the following: "The Chief Executive Officer of the Company may grant Awards to non-executive officer employees of the Company in amounts not to exceed 500,000 shares in the aggregate or 35,000 shares to any one employee." Adopted by the Compensation Committee of the Board of Directors on October 18, 1999. SECOND AMENDMENT TO AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN OF MKS INSTRUMENTS, INC. The Amended and Restated 1995 Stock Incentive Plan (the "Plan") be and hereby is amended by deleting the first sentence of Section 4(a) thereof in its entirety and inserting in lieu thereof the following: "Beginning July 1, 2000 and subject to adjustment under Section 4(c), the number of shares of Common Stock (as defined below in Section 4(d)) available for Awards under the Plan shall annually increase by 4% of the total shares of the Company's outstanding Common Stock on July 1 of each year. Such annual increase shall occur until such time as an aggregate number of shares of Common Stock which may be issued under the Plan is 9,750,000 shares."
Adopted by the Board of Directors on January 31, 2000. Approved by the Stockholders on May 17, 2000. THIRD AMENDMENT TO AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN OF MKS INSTRUMENTS, INC. The Amended and Restated 1995 Stock Incentive Plan (the "Plan") be and hereby is amended as follows: (1) by deleting the first sentence of Section 4(a) thereof in its entirety and inserting in lieu thereof the following: "Beginning July 1, 2001 and subject to adjustment under Section 4(c), the number of shares of Common Stock (as defined below in Section 4(d)) available for Awards under the Plan shall annually increase by 5% of the total shares of the Company's outstanding Common Stock on July 1 of each year. Such annual increase shall occur until such time as an aggregate number of shares of Common Stock which may be issued under the Plan is 9,750,000 shares." (2) by deleting the last sentence of Section 3(b) thereof in its entirety and inserting in lieu thereof the following: "The Chief Executive Officer of the Company may grant Awards to non-executive officer employees of the Company in amounts not to exceed 35,000 shares to any one employee." Adopted by the Board of Directors on April 19, 2001. MKS INSTRUMENTS, INC. AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN 1. PURPOSE The purpose of this Amended and Restated 1995 Stock Incentive Plan (the "Plan") of MKS Instruments, Inc., a Massachusetts corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate
persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of MKS Instruments, Inc. as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. ELIGIBILITY All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock, or other stock-based awards (each, an "Award") under the Plan. Any person who has been granted an Award under the Plan shall be deemed a "Participant." 3. ADMINISTRATION, DELEGATION a. ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered by the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. b. DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. The Chief Executive Officer of the Company may grant Awards to non-executive officer employees of the Company in amounts not to exceed 300,000 shares in the aggregate or 20,000 shares to any one employee. c. APPOINTMENT OF COMMITTEES. To the extent permitted by applicable law, the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). If and when the Common Stock (as defined below in Section 4(d)) is registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-3 promulgated under the Exchange Act." All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer.
4. STOCK AVAILABLE FOR AWARDS a. NUMBER OF SHARES. Subject to adjustment under Section 4(c), Awards may be made under the Plan for up to 2,500,000 shares of Common Stock (as defined below in Section 4 (d)). If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock (as defined below in Section 4(d)) covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. All share amounts set forth in this plan reflect the 2,110-for-1 stock split approved by the Board of Directors of the Company on December 31, 1997 (the "1997 Stock Split"). b. PER-PARTICIPANT LIMIT. Subject to adjustment under Section 4(c), for Awards granted after the Common Stock (as defined below in Section 4(d)) is registered under the Exchange Act, the maximum number of shares with respect to which an Award may be granted to any Participant under the Plan shall be 900,000 per calendar year. The per-participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. c. ADJUSTMENT TO COMMON STOCK. In the event, at any time after the 1997 Stock Split, of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock (as defined below in Section 4(d)) other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to each outstanding Restricted Stock Award and (iv) the terms of each other outstanding stock-based Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 4(c) applies and Section 8(e) (1) also applies to any event, Section 8(e)(1) shall be applicable to such event and this Section 4(c) shall not be applicable. d. DEFINITION OF COMMON STOCK. "Common Stock" means (i) prior to the closing of the Company's initial public offering of common stock pursuant to an effective registration statement under the Securities Act of 1933 ("IPO"), the Class B Common Stock, no par value per share, of the Company, and (ii) from and after the closing of the IPO, the Common Stock, no par value per share, of the Company. 5. STOCK OPTIONS a. GENERAL. The Board may grant options to purchase Common Stock (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of
each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option." b. INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. c. EXERCISE PRICE. The Board shall establish the exercise price at the time each Option is granted and specify it in the applicable option agreement. d. DURATION OF OPTIONS. Each Option shall be exercisable at such times and subject to such terms and conditions as the Board may specify in the applicable option agreement. No Option will be granted for a term in excess of 10 years. e. EXERCISE OF OPTION. Options may be exercised only by delivery to the Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. f. PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for as follows: i. in cash or by check, payable to the order of the Company; ii. except as the Board may otherwise provide in an Option Agreement, delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price, or by delivery of shares of Common Stock owned by the Participant valued at the fair market value as determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery; iii. to the extent permitted by the Board and explicitly provided in an Option Agreement (i) by delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) by payment of such other lawful consideration as the Board may determine; or iv. any combination of the above permitted forms of payment. 6. RESTRICTED STOCK a. GRANTS. The Board may grant Awards entitling recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at
their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, "Restricted Stock Award"). b. TERMS AND CONDITIONS. The Board shall determine the terms and conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. OTHER STOCK-BASED AWARDS The Board shall have the right to grant other Awards based upon the Common Stock, having such terms and conditions as the Board may determine including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 8. GENERAL PROVISIONS APPLICABLE TO AWARDS a. TRANSFERABILITY OF AWARDS. Except as the Board may otherwise determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. b. DOCUMENTATION. Each Award under the Plan shall be evidenced by a written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. c. BOARD DISCRETION. Except as otherwise provided by the Plan, each type of Award may be made alone or in addition or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. d. TERMINATION OF STATUS. The Board shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award.
e. ACQUISITION EVENTS (1) CONSEQUENCES OF ACQUISITION EVENTS. Upon the occurrence of an Acquisition Event (as defined below), or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall take any one or more of the following actions with respect to then outstanding Awards: (i) provide that outstanding Options shall be assumed, or equivalent Options shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any such Options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code; (ii) if the acquisition or succeeding corporation refuses or is unable to assume outstanding Options or grant Options in substitution therefor pursuant to clause (i), upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time (the "Acceleration Time") prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event, except to the extent exercised by the Participants between the Acceleration Time and the consummation of such Acquisition Event; (iii) in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options; (iv) provide that all Restricted Stock Awards then outstanding shall become free of all restrictions prior to the consummation of the Acquisition Event; and (v) provide that any other stock-based Awards outstanding (A) shall become exercisable, realizable or vested in full, or shall be free of all conditions or restrictions, as applicable to each such Award, prior to the consummation of the Acquisition Event, or (B), if applicable, shall be assumed, or equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof). An "Acquisition Event" shall mean: (a) any merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto representing immediately thereafter (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity outstanding immediately after such merger or consolidation; (b) any sale of all or substantially all of the assets of the Company; or (c) the complete liquidation of the Company. (2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may grant Awards under the Plan in substitution for stock and stock-based awards held by employees of another corporation who become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances.
f. WITHHOLDING. Each Participant shall pay to the Company, or make provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. g. AMENDMENT OF AWARD. The Board may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. h. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. i. ACCELERATION. The Board may at any time provide that any Options shall become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of all restrictions or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 9. MISCELLANEOUS a. NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. b. NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the applicable Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares.
c. EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on the date on which it is adopted by the Board, but no Award granted to a Participant designated as subject to Section 162(m) by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. d. AMENDMENT OF PLAN. The Board may amend, suspend or terminate the Plan or any portion thereof at any time, provided that no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders. e. STOCKHOLDER APPROVAL. For purposes of this Plan, stockholder approval shall mean approval by a vote of the stockholders in accordance with the requirements of Section 162(m) of the Code. f. GOVERNING LAW. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of The Commonwealth of Massachusetts, without regard to any applicable conflicts of law rules or provisions. Adopted by the Board of Directors on November 30, 1995 Adopted by the Stockholders on May 17, 1996 Approved as Amended and Restated by the Board of Directors on December 31, 1997 Approved as Amended and Restated by the Stockholders on January 9, 1998
Exhibit 10.6 FIRST AMENDMENT TO AMENDED AND RESTATED 1999 EMPLOYEE STOCK PURCHASE PLAN OF MKS INSTRUMENTS, INC. Whereas, the above titled plan (the "Plan") was adopted by the Board of Directors (the "Board") of MKS Instruments, Inc. (the "Company") and Whereas, Section 17 of the Plan provides that the Board may at any time, and from time to time, amend this Plan in any respect, Now therefore, the Plan is hereby amended, effective for the Plan Period beginning June 1, 2001, as follows: Section 2(b) is amended by deleting the requirement that a person be employed by the Company or a Designated Subsidiary for "at least six (6) months prior to enrolling in the Plan" and substituting a requirement that a person be employed for "at least three (3) months prior to enrolling in the Plan". Now therefore, the Plan is hereby further amended, effective for the Plan Period beginning June 1, 2001, as follows: The first paragraph of Section 9 is hereby deleted in its entirety and the following paragraph is inserted in lieu thereof: "9. PURCHASE OF SHARES. On the Offering Commencement Date of each Plan Period, the Company will grant to each eligible employee who is then a participant in the Plan an option ("Option") to purchase on the last business day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter provided for, the largest number of shares (fractional or whole) of Common Stock of the Company as does not exceed the number of shares determined by multiplying $2,083 by the number of full months in the Offering Period and dividing the results by the closing price (as defined below) on the Offering Commencement Date of such Plan Period." Adopted by the Board of Directors on April 19, 2001.
MKS INSTRUMENTS, INC. AMENDED AND RESTATED 1999 EMPLOYEE STOCK PURCHASE PLAN The purpose of this Plan is to provide eligible employees of MKS Instruments, Inc. (the "Company") and certain of its subsidiaries with opportunities to purchase shares of the Company's Common Stock, no par value per share (the "Common Stock"), commencing on June 1, 1999; provided, that at such time the Company's Common Stock shall be listed for trading on the Nasdaq National Market or a national securities exchange. Four hundred fifty thousand (450,000) shares of Common Stock in the aggregate have been approved for this purpose. This Plan is intended to qualify as an "employee stock purchase plan" as defined in Section 423 of the Internal Revenue Code of 1986, as amended (the "Code") and the regulations promulgated thereunder, and shall be interpreted consistent therewith. All share amounts set forth in this Plan reflect the 3-for-2 stock split approved by the Board of Directors of the Company on February 10, 1999 (the "1999 Stock Split"). 1. ADMINISTRATION. The Plan will be administered by the Company's Board of Directors (the "Board") or by a Committee appointed by the Board (the "Committee"). The Board or the Committee has authority to make rules and regulations for the administration of the Plan and its interpretation and decisions with regard thereto shall be final and conclusive. 2. ELIGIBILITY. All employees of the Company, including Directors who are employees, and all employees of any subsidiary of the Company (as defined in Section 424(f) of the Code) designated by the Board or the Committee from time to time (a "Designated Subsidiary"), including employees of the Company or any designated Subsidiary who are "highly compensated" within the meaning of Section 414(q) of the Code, are eligible to participate in any one or more of the Offerings (as defined in Section 9) to purchase Common Stock under the Plan provided that: (a) they are customarily employed by the Company or a Designated Subsidiary for more than 20 hours a week and for more than five months in a calendar year; and (b) they have been employed by the Company or a Designated Subsidiary for at least six months prior to enrolling in the Plan; and (c) they are employees of the Company or a Designated Subsidiary on the first day of the applicable Plan Period (as defined below). No employee may be granted an option hereunder if such employee, immediately after the option is granted, owns 5% or more of the total combined voting power or value of the stock of the Company or any subsidiary. For purposes of the preceding sentence, the attribution rules of 2
Section 424(d) of the Code shall apply in determining the stock ownership of an employee, and all stock which the employee has a contractual right to purchase shall be treated as stock owned by the employee. 3. OFFERINGS. The Company will make one or more offerings ("Offerings") to employees to purchase stock under this Plan. Offerings will begin each June 1 and December 1, or the first business day thereafter (the "Offering Commencement Dates"). Each Offering Commencement Date will begin a six (6) month period (a "Plan Period") during which Payroll deductions will be made and held for the purchase of Common Stock at the end of the Plan Period. The Board or the Committee may, at its discretion, choose a different Plan Period of twelve (12) months or less for subsequent Offerings. 4. PARTICIPATION. An employee eligible on the Offering Commencement Date of any Offering may participate in such Offering by completing and forwarding a payroll deduction authorization form to the employee's appropriate payroll office at least 30 days prior to the applicable Offering Commencement Date. The form will authorize a regular payroll deduction from the Compensation, as defined below, received by the employee during the Plan Period. Unless an employee files a new form or withdraws from the Plan, his deductions and purchases will continue at the same rate for future Offerings under the Plan as long as the Plan remains in effect. The term "Compensation" means the amount of money reportable on the employee's Federal Income Tax Withholding Statement, including overtime, shift premium, incentive or bonus awards and sales expenses and excluding allowances and reimbursements for expenses such as relocation allowances for travel expenses, income or gains on the exercise of Company stock options or stock appreciation rights, and similar items, whether or not shown on the employee's Federal Income Tax Withholding Statement, but including, in the case of salespersons, sales commissions to the extent determined by the Board or the Committee. 5. DEDUCTIONS. The Company will maintain payroll deduction accounts for all participating employees. With respect to any Offering made under this Plan, an employee may authorize a payroll deduction in any whole percent amount up to a maximum of 10% (or such lower percentage as may be established by the Board or the Committee) of the Compensation he or she receives during the Plan Period or such shorter period during which deductions from payroll are made. The minimum payroll deduction is such percentage of compensation as may be established from time to time by the Board or the Committee. No employee may be granted an Option (as defined in Section 9) which permits his rights to purchase Common Stock under this Plan and any other employee stock purchase plan (as defined in Section 423(b) of the Code) of the Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value of such Common Stock (determined at the Offering Commencement Date of the Plan Period) for each calendar year in which the Option is outstanding at any time. 3
6. DEDUCTION CHANGES. An employee may decrease, subject to section 5 hereof or discontinue his payroll deduction once during any Plan Period, by filing a new payroll deduction authorization form. However, an employee may not elect to increase his payroll deduction during a Plan Period. If an employee elects to discontinue his payroll deductions during a Plan Period, but does not elect to withdraw his funds pursuant to Section 8 hereof, funds deducted prior to his election to discontinue will be applied to the purchase of Common Stock on the Exercise Date (as defined below). 7. INTEREST. Interest will not be paid on employee accounts. 8. WITHDRAWAL OF FUNDS. An employee may at any time prior to the close of business on the last business day in a Plan Period and for any reason permanently draw out the balance accumulated in the employee's account and thereby withdraw from participation in an Offering. Partial withdrawals are not permitted. The employee may not begin participation again during the remainder of the Plan Period. The employee may participate in any subsequent Offering in accordance with terms and conditions established by the Board or the Committee. 9. PURCHASE OF SHARES. On the Offering Commencement Date of each Plan Period, the Company will grant to each eligible employee who is then a participant in the Plan an option ("Option") to purchase on the last business day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter provided for, the largest number of whole shares of Common Stock of the Company as does not exceed the number of shares determined by multiplying $2,083 by the number of full months in the Offering Period and dividing the results by the closing price (as defined below) on the Offering Commencement Date of such Plan Period. The purchase price for each share purchased will be 85% of the closing price of the Common Stock on (i) the first business day of such Plan Period or (ii) the Exercise Date, whichever closing price shall be less. Such closing price shall be (a) the closing price on any national securities exchange on which the Common Stock is listed, (b) the closing price of the Common Stock on the Nasdaq National Market or (c) the average of the closing bid and asked prices in the over-the-counter-market, whichever is applicable, as published in The Wall Street Journal. If no sales of Common Stock were made on such a day, the price of the Common Stock for purposes of clauses (a) and (b) above shall be the reported price for the next preceding day on which sales were made. Each employee who continues to be a participant in the Plan on the Exercise Date shall be deemed to have exercised his Option at the Option Price on such date and shall be deemed to have purchased from the Company the number of full shares of Common Stock reserved for the purpose of the Plan that his accumulated payroll deductions on such date will pay for, but not in excess of the maximum number determined in the manner set forth above. 4
Any balance remaining in an employee's payroll deduction account at the end of a Plan Period will be automatically refunded to the employee, except that any balance which is less than the purchase price of one share of Common Stock will be carried forward into the employee's payroll deduction account for the following Offering, unless the employee elects not to participate in the following Offering under the Plan, in which case the balance in the employee's account shall be refunded. 10. ISSUANCE OF CERTIFICATES. Certificates representing shares of Common Stock purchased under the Plan may be issued only in the name of the employee, in the name of the employee and another person of legal age as joint tenants with rights of survivorship, or (in the Company's sole discretion) in the name of a brokerage firm, bank or other nominee holder designated by the employee. The Company may, in its sole discretion and in compliance with applicable laws, authorize the use of book entry registration of shares in lieu of issuing stock certificates. 11. RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT. In the event of a participating employee's termination of employment prior to the last business day of a Plan Period, no payroll deduction shall be taken from any pay due and owing to an employee and the balance in the employee's account shall be paid to the employee or, in the event of the employee's death, (a) to a beneficiary previously designated in a revocable notice signed by the employee (with any spousal consent required under state law) or (b) in the absence such a designated beneficiary, to the executor or administrator of the employee's estate or (c) if no such executor or administrator has been appointed to the knowledge of the Company, to such other person(s) as the Company may, in its discretion, designate. If, prior to the last business day of the Plan Period, the Designated Subsidiary by which an employee is employed shall cease to be a subsidiary of the Company, or if the employee is transferred to a subsidiary of the Company that is not a Designated Subsidiary, the employee shall be deemed to have terminated employment for the purposes of this Plan. 12. OPTIONEES NOT STOCKHOLDERS. No employee shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Option until becoming the record holder or such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend (and the exercise price of and the number of shares subject to such Option are adjusted as of the date of the distribution of the dividend rather than as of the record date for such dividend), then an optionee who is deemed to have exercised an Option between the record date and the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock. 5
13. RIGHTS NOT TRANSFERABLE. Rights under this Plan are not transferable by a participating employee other than by will or the laws of descent and distribution, and are exercisable during the employee's lifetime only by the employee. 14. APPLICATION OF FUNDS. All funds received or held by the Company under this Plan may be combined with other corporate funds and may be used for any corporate purpose. 15. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. In the event, at any time after the 1999 Stock Split, of a subdivision of outstanding shares of Common Stock, or the payment of a dividend in Common Stock, the number of shares approved for this Plan, and the share limitation set forth in Section 9, shall be increased proportionately, and such other adjustment shall be made as may be deemed equitable by the Board or the Committee. In the event of any other change affecting the Common Stock, such adjustment shall be made as may be deemed equitable by the Board or the Committee to give proper effect to such event. 16. MERGER. If the Company shall at any time merge or consolidate with another corporation and the holders of the capital stock of the Company immediately prior to such merger or consolidation continue to hold at least 80% by voting power of the capital stock of the surviving corporation ("Continuity of Control"), the holder of each Option then outstanding will thereafter be entitled to receive at the next Exercise Date upon the exercise of such Option for each share as to which such Option shall be exercised the securities or property which a holder of one share of the Common Stock was entitled to upon and at the time of such merger or consolidation, and the Board or the Committee shall take such steps in connection with such merger or consolidation as the Board or the Committee shall deem necessary to assure that the provisions of Section 15 shall thereafter be applicable, as nearly as reasonably may be, in relation to the said securities or property as to which such holder of such Option might thereafter be entitled to receive thereunder. In the event of a merger or consolidation of the Company with or into another corporation which does not involve Continuity of Control, or of a sale of all or substantially all of the assets of the Company while unexercised Options remain outstanding under the Plan, all outstanding Options shall be cancelled by the Board or the Committee as of the effective date of any such transaction, provided that notice of such cancellation shall be given to each holder of an Option, and each holder of an Option shall have the right to exercise such Option in full based on payroll deductions then credited to his account as of a date determined by the Board or the Committee, which date shall not be less than ten (10) days preceding the effective date of such transaction. 17. AMENDMENT OF THE PLAN. The Board may at any time, and from time to time, amend this Plan in any respect, except that (a) if the approval of any such amendment by 6
the shareholders of the Company is required by Section 423 of the Code, such amendment shall not be effected without such approval, and (b) in no event may any amendment be made which would cause the Plan to fail to comply with Section 423 of the Code. 18. SUFFICIENT SHARES. In the event that the total number of shares of Common Stock specified in elections to be purchased under any Offering plus the number of shares purchased under previous Offerings under this Plan exceeds the maximum number of shares issuable under this Plan, the Board or the Committee will allot the shares then available on a pro rata basis. 19. TERMINATION OF THE PLAN. This Plan may be terminated at any time by the Board. Upon termination of this Plan all amounts in the accounts of participating employees shall be promptly refunded. 20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and deliver Common Stock under this Plan is subject to listing on a national stock exchange or quotation on the Nasdaq National Market and the approval of all governmental authorities required in connection with the authorization, issuance or sale of such stock. 21. GOVERNING LAW. The Plan shall be governed by Massachusetts law except to the extent that such law is preempted by federal law. 22. ISSUANCE OF SHARES. Shares may be issued upon exercise of an Option from authorized but unissued Common Stock, from shares held in the treasury of the Company, or from any other proper source. 23. NOTIFICATION UPON SALE OF SHARES. Each employee agrees, by entering the Plan, to promptly give the Company notice of any disposition of shares purchased under the Plan where such disposition occurs within two years after the date of grant of the Option pursuant to which such shares were purchased or one year after the date of exercise of the Option. 24. EFFECTIVE DATE AND APPROVAL OF STOCKHOLDERS. The Plan shall take effect on June 1, 1999 if at such time the Common Stock is listed for trading on the Nasdaq National Market or a national securities exchange, subject to approval by the stockholders of the Company as required by Section 423 of the Code, which approval must occur within twelve months of the adoption of the Plan by the Board. Adopted by the Board of Directors on February 10, 1999 Approval by the Stockholders on February 17, 1999 Amended and Restated by the Board of Directors on April 22, 1999 7
Exhibit 10.8 MKS INSTRUMENTS, INC. INTERNATIONAL EMPLOYEE STOCK PURCHASE PLAN 2001 AMENDMENT Whereas, the above titled plan (the "Plan") was adopted by the Board of Directors (the "Board") of MKS Instruments, Inc. (the "Company") and Whereas, Section 17 of the Plan provides that the Board may at any time, and from time to time, amend this Plan in any respect, Now therefore, the Plan is hereby amended, effective for the Plan Period beginning June 1, 2001, as follows: Section 2(a) is amended by deleting the requirement that a person be employed by the Subsidiary for "at least six (6) months prior to enrolling in the Plan" and substituting a requirement that a person be employed for "at least three (3) months prior to enrolling in the Plan." Now therefore, the Plan is hereby further amended, effective for the Plan Period beginning June 1, 2001, as follows: The first paragraph of Section 9 is hereby deleted in its entirety and the following paragraph is inserted in lieu thereof: "9. PURCHASE OF SHARES. On the Offering Commencement Date of each Plan Period, the Company will grant to each eligible employee who is then a participant in the Plan an option ("Option") to purchase on the last business day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter provided for, the largest number of shares (fractional or whole) of Common Stock of the Company as does not exceed the number of shares determined by multiplying $2,083 by the number of full months in the Offering Period and dividing the results by the closing price (as defined below) on the Offering Commencement Date of such Plan Period." Adopted by the Board of Directors on April 19, 2001.
Exhibit 10.25 MKS INSTRUMENTS, INC. CONSENT, WAIVER AND FIRST AMENDMENT TO CREDIT AGREEMENT This Consent, Waiver and First Amendment (the"Amendment") dated as of January 28, 2002 concerns the Credit Agreement dated as of July 31, 2001 (the "Credit Agreement"), by and among MKS Instruments, Inc. (the "Borrower"), Fleet National Bank ("Fleet") and JPMorgan Chase Bank (formerly known as The Chase Manhattan Bank, "Chase"; hereinafter Fleet and Chase may be referred to individually as a "Lender" or collectively as the "Lenders"), and Fleet in its capacity as agent for the Lenders. Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Credit Agreement. WHEREAS, the Borrower has requested that the Lender waive compliance with certain covenants in the Credit Agreement and consent to its acquisition of ENI Technology, Inc. and certain related transactions, as well as amend another covenant in the Credit Agreement as a result of the effect of such acquisition; and WHEREAS, the Lender is willing to agree to the Borrower's requests; NOW, THEREFORE, the Lenders and the Borrower agree as follows: Section 1. CONSENT AND WAIVER. The Lenders hereby consent to the transactions contemplated by the Agreement and Plan of Merger with respect to the Acquisition of the ENI Business, dated October 30, 2001, between the Borrower and Emerson Electric Co. (the "Acquisition Agreement") including without limitation the acquisition of ENI Technology, Inc. ("ENI") and waives compliance with Sections 8.1(b) and 8.4 of the Loan Agreement with respect to such transactions. Section 2. AMENDMENT OF THE LOAN AGREEMENT. (a) Any and all references in the Credit Agreement or the other Loan Documents to "The Chase Manhattan Bank" are hereby amended to read "JPMorgan Chase Bank". (b) Section 8.9 of the Credit Agreement is hereby amended by deleting "$292,000,000" therefrom and replacing it with "$260,000,000". Section 3. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance of this Amendment, the Credit Agreement as amended hereby and each of the other Loan Documents, and the transactions contemplated hereby and thereby, have been authorized by all necessary corporate actions of the Borrower. This Amendment, the Credit Agreement as amended hereby and each of the other Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms.
(b) The Borrower has all requisite corporate power and authority to execute, deliver and perform its obligations under this Amendment, the Credit Agreement as amended hereby and each of the other Loan Documents. Neither the authorization, execution, delivery or performance by the Borrower of this Amendment nor the performance of the Credit Agreement as amended hereby or any other Loan Document nor the performance of the transactions contemplated hereby or thereby violates or will violate any provision of the corporate charter or by-laws of the Borrower, or does or will, with the passage of time or the giving of notice or both, result in a breach of or a default under, or require any consent under or result in the creation of any lien, charge or encumbrance upon any property or assets of the Borrower pursuant to, any material instrument, agreement or other document to which the Borrower is a party or by which the Borrower or any of its properties may be bound or affected. (c) The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of the Credit Agreement as amended hereby and the Loan Documents do not and will not violate any provision of law or regulation applicable to the Borrower, or any writ, order or decree of any court or governmental or regulatory authority or agency applicable to the Borrower. (d) The representations and warranties contained in Article V of the Credit Agreement are true and correct, and the Borrower and its Subsidiaries are in compliance with all covenants set forth in Article VIII of the Credit Agreement, provided that for this purpose that all references to the "Disclosure Schedule" in such Articles V and VIII shall be deemed to mean the Disclosure Schedule attached hereto, which is true and complete. Section 4. LOAN DOCUMENTS. This Amendment shall be a Loan Document for all purposes. Section 5. CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is conditioned on the following: (a) The Borrower and the Lenders shall each have executed and delivered a counterpart of this Amendment; (b) The representations and warranties contained in Article V of the Credit Agreement shall be true and correct in all material respects as of the date hereof as though made on and as of the date hereof; (c) No Default or Event of Default under the Loan Agreement shall have occurred and be continuing; (d) The conditions set forth in Section 6.1 of the Credit Agreement shall have been met as of the date hereof, provided that for purposes thereof and Section 5.5 of the Credit Agreement, the "Balance Sheet Date" shall mean September 30, 2001 and the financial statements referred to therein shall mean the unaudited statements for the period ended September 30, 2001, that have been furnished to the Lenders. -2-
(e) Promptly following the closing under the Acquisition Agreement, the Borrower shall cause to be delivered to the Lenders a guaranty of the Obligations by ENI in the form attached here to as well as a certificate of the secretary of ENI as to the votes of ENI's directors authorizing the execution and delivery of such guaranty and the incumbency of the officers authorized to execute such guaranty on behalf of ENI. (f) The Lenders shall have received a certificate of the clerk of the Borrower as to the votes of Borrower's directors authorizing the execution and delivery of this Amendment and the incumbency of the officers authorized to execute this Amendment on behalf of the Borrower. Section 6. MISCELLANEOUS. (a) On and after the date hereof, each reference in the Loan Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Credit Agreement as amended hereby. (b) Except as amended and modified hereby, the Credit Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, covenants and agreements therein shall remain in full force and effect. (c) This Amendment and the modifications to the Credit Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. [Remainder of page intentionally left blank.] -3-
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. MKS INSTRUMENTS, INC. By: /s/ Ronald C. Weigner ------------------------------ Title: Vice President and Chief Financial Officer FLEET NATIONAL BANK By: /s/ Daniel G. Head ------------------------------- Title: Vice President JP MORGAN CHASE BANK By: /s/ A. Neil Sweeny ------------------------------- Title: Vice President -4-
Exhibit 10.26 MKS INSTRUMENTS, INC. CONSENT, WAIVER AND TENTH AMENDMENT TO LOAN AGREEMENT This Consent, Waiver and Tenth Amendment (the "Amendment") dated as of January 28, 2002 concerns the Loan Agreement dated as of October 31, 1995 (the "Loan Agreement"), between MKS Instruments, Inc. (the "Borrower") and Fleet National Bank (f/k/a BankBoston, N.A. and The First National Bank of Boston, the "Lender"), as amended on February 23, 1996, February 4, 1997, February 3, 1998, January 28, 1999, January 1, 2000, September 1, 2000, January 1, 2001, April 30, 2001 and July 31, 2001. Capitalized terms used herein but not otherwise defined shall have the meanings assigned to them in the Loan Agreement. WHEREAS, the Borrower has requested that the Lender waive compliance with certain covenants in the Loan Agreement and consent to its acquisition of ENI Technology, Inc. and certain related transactions, as well as amend another covenant in the Loan Agreement as a result of the effect of such acquisition; and WHEREAS, the Lender is willing to agree to the Borrower's requests; NOW, THEREFORE, the Lender and the Borrower agree as follows: Section 1. Consent and Waiver. The Lender hereby consents to the transactions contemplated by the Agreement and Plan of Merger with respect to the Acquisition of the ENI Business, dated October 30, 2001, between the Borrower and Emerson Electric Co. (the "Acquisition Agreement") including without limitation the acquisition of ENI Technology, Inc. ("ENI") and waives compliance with Sections 7.1(b) and 7.4 of the Loan Agreement with respect to such transactions. Section 2. Amendment of the Loan Agreement. Section 7.9 of the Loan Agreement is hereby amended by deleting "$292,000,000" therefrom and replacing it with "$260,000,000". Section 3. Representations and Warranties. The Borrower hereby represents and warrants as follows: (a) The execution and delivery of this Amendment and the performance of this Amendment, the Loan Agreement as amended hereby and each of the other Loan Documents, and the transactions contemplated hereby and thereby, have been authorized by all necessary corporate actions of the Borrower. This Amendment, the Loan Agreement as amended hereby and each of the other Loan Documents constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. (b) The Borrower has all requisite corporate power and authority to execute, deliver and perform its obligations under this Amendment, the Loan Agreement as amended hereby and each of the other Loan Documents. Neither the authorization, execution, delivery or
performance by the Borrower of this Amendment nor the performance of the Loan Agreement as amended hereby or any other Loan Document nor the performance of the transactions contemplated hereby or thereby violates or will violate any provision of the corporate charter or by-laws of the Borrower, or does or will, with the passage of time or the giving of notice or both, result in a breach of or a default under, or require any consent under or result in the creation of any lien, charge or encumbrance upon any property or assets of the Borrower pursuant to, any material instrument, agreement or other document to which the Borrower is a party or by which the Borrower or any of its properties may be bound or affected. (c) The execution and delivery by the Borrower of this Amendment and the performance by the Borrower of the Loan Agreement as amended hereby and the Loan Documents do not and will not violate any provision of law or regulation applicable to the Borrower, or any writ, order or decree of any court or governmental or regulatory authority or agency applicable to the Borrower. (d) The representations and warranties contained in Article IV of the Loan Agreement are true and correct, and the Borrower and its Subsidiaries are in compliance with all covenants set forth in Article VII of the Loan Agreement, provided that for this purpose that all references to the "Disclosure Schedule" in such Articles IV and VII shall be deemed to mean the Disclosure Schedule attached hereto, which is true and complete. Section 4. Loan Documents. This Amendment shall be a Loan Document for all purposes. Section 5. Conditions to Effectiveness. The effectiveness of this Amendment is conditioned on the following: (a) The Borrower and the Lender shall each have executed and delivered a counterpart of this Amendment; (b) The representations and warranties contained in Article IV of the Loan Agreement shall be true and correct in all material respects as of the date hereof as though made on and as of the date hereof; (c) No Default or Event of Default under the Loan Agreement shall have occurred and be continuing; (d) The conditions set forth in Sections 5.2-5.5 of the Loan Agreement shall have been met as of the date hereof, provided that for purposes thereof and Section 4.5 of the Loan Agreement, the "Balance Sheet Date" shall mean September 30, 2001 and the financial statements referred to therein shall mean the unaudited statements for the period ended September 30, 2001, that have been furnished to the Lender. (e) Promptly following the closing under the Acquisition Agreement, the Borrower shall cause to be delivered to the Lender a guaranty of the Obligations by ENI in the form attached here to as well as a certificate of the secretary of ENI as to the votes of ENI's directors authorizing the execution and delivery of such guaranty and the incumbency of the officers authorized to execute such guaranty on behalf of ENI. -2-
(f) The Lender shall have received a certificate of the clerk of the Borrower as to the votes of Borrower's directors authorizing the execution and delivery of this Amendment and the incumbency of the officers authorized to execute this Amendment on behalf of the Borrower. Section 6. Miscellaneous. (a) On and after the date hereof, each reference in the Loan Agreement to "this Agreement" or words of like import shall mean and be deemed to be a reference to the Loan Agreement as amended hereby. (b) Except as amended and modified hereby, the Loan Agreement is in all respects ratified and confirmed as of the date hereof, and the terms, covenants and agreements therein shall remain in full force and effect. (c) This Amendment and the modifications to the Loan Agreement set forth herein shall be deemed to be a document executed under seal and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts. (d) This Amendment may be executed in counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. [Remainder of page intentionally left blank.] -3-
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the date and the year first above written. MKS INSTRUMENTS, INC. By: /s/ Ronald C. Weigner ------------------------------------ Title: Vice President and Chief Financial Officer ---------------------------------- FLEET NATIONAL BANK By: /s/ Daniel G. Head ------------------------------------ Title: Vice President ---------------------------------- - 4 -
Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT JURISDICTION OF SUBSIDIARY INCORPORATION MKS International, Inc. Massachusetts MKS Instruments France S.A. France MKS Instruments Canada Ltd. Canada MKS Instruments, U.K. Limited United Kingdom MKS East, Inc. Massachusetts MKS Japan, Inc. Japan Spectra International Japan Co. Ltd. Japan MKS Korea Co., Ltd. Korea MKS FSC, Inc. Barbados D.I.P., Inc. Ohio Telvac Engineering Limited United Kingdom Spectra Sensortech, Ltd. United Kingdom Applied Science and Technology, Inc. Delaware MKS MSC, Inc. Massachusetts ASTeX CPI, Inc. Massachusetts ASTeX Plasmaquest, Inc. Texas ASTeX Realty Corporation Massachusetts Newton Engineering Services, Inc. Massachusetts Klee Corporation Delaware Shamrock Technology Corporation Delaware ETO, Inc. Nevada MKS (Bermuda) Ltd. Bermuda MKS Luxembourg S.A.R.L. Luxembourg MKS Germany Holding GmbH Germany MKS Instruments Deutschland GmbH Germany ASTeX Sorbios GmbH Germany US Branches of MKS Instruments, Inc. MKS Taiwan Taiwan MKS Singapore Singapore Post-Dec, 2001: ENI Technology, Inc. Delaware MKS (Asia) Ltd. Bermuda MKS Hong Kong Hong Kong MKS China China ENI Taiwan Ltd. Taiwan
Exhibit 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-78069, 333-78071, 333-78073, 333-31224,333-54486, 333-54488 and 333-54490) and Form S-3 (No. 333-34450) of MKS Instruments, Inc. of our report dated January 31, 2002 relating to the financial statements and the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts March 29, 2002
Exhibit 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES: We consent to the incorporation by reference in the registration statements (No. 333-78069, 333-78071, 333-78073, 333-31224, 333-54486, 333-54488 and 333-54490) on Form S-8 and No. 333-34450 on Form S-3 of MKS Instruments, Inc. of our report dated July 31, 2000, with respect to 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, which appears in the December 31, 2001 annual report on Form 10-K of MKS Instruments, Inc. /s/ KPMG LLP Boston, Massachusetts March 29, 2002