<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 (I.R.S. Employer
of 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
-----------------------------
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 [ ].
Number of shares outstanding of the issuer's common stock as of August 10, 1999:
24,430,407
<PAGE> 2
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998
Consolidated Statements of Income -
Three and six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows -
Six months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MKS INSTRUMENTS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 30,671 $11,188
Short-term investments .................................................... 23,202 --
Trade accounts receivable, net ............................................ 28,860 20,674
Inventories ............................................................... 25,142 24,464
Deferred tax asset ........................................................ 4,014 698
Other current assets ...................................................... 2,926 1,509
-------- -------
Total current assets .................................................. 114,815 58,533
Property, plant and equipment, net ........................................ 30,934 32,725
Other assets .............................................................. 6,101 4,974
-------- -------
Total assets .......................................................... $151,850 $96,232
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ..................................................... $ 9,172 $ 9,687
Current portion of long-term debt ......................................... 2,035 2,058
Current portion of capital lease obligations .............................. 1,040 1,074
Accounts payable .......................................................... 7,166 3,677
Accrued compensation ...................................................... 6,285 3,985
Other accrued expenses .................................................... 4,955 5,280
Income taxes payable ...................................................... 1,386 1,279
-------- -------
Total current liabilities ............................................. 32,039 27,040
Long-term debt ................................................................. 10,775 12,042
Long-term portion of capital lease obligations ................................. 1,359 1,744
Deferred tax liability ......................................................... 392 117
Other liabilities .............................................................. 441 463
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $0.01 par value, 2,000,000 shares
authorized; none issued and outstanding ............................... -- --
Common Stock, no par value, 50,000,000 shares authorized;
24,430,407 and 18,053,167 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively ..................... 113 113
Additional paid-in capital ................................................ 82,110 48
Retained earnings ......................................................... 23,184 52,479
Accumulated other comprehensive income .................................... 1,437 2,186
-------- -------
Total stockholders' equity ............................................ 106,844 54,826
-------- -------
Total liabilities and stockholders' equity ............................ $151,850 $96,232
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------- -----------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales ........................................................ $44,209 $34,026 $82,119 $80,189
Cost of sales .................................................... 25,550 20,265 48,107 47,022
------- ------- ------- -------
Gross profit ..................................................... 18,659 13,761 34,012 33,167
Research and development ......................................... 3,317 3,107 6,272 6,901
Selling, general and administrative .............................. 9,435 9,045 18,292 19,157
------- ------- ------- -------
Income from operations ........................................... 5,907 1,609 9,448 7,109
Interest expense ................................................. 346 384 684 784
Interest income .................................................. 578 47 674 72
Other income (expense), net ...................................... -- 123 168 (158)
------- ------- ------- -------
Income before income taxes ....................................... 6,139 1,395 9,606 6,239
Provision for income taxes ....................................... 2,333 163 2,671 728
Non-recurring deferred tax credit (Note 9) ....................... (3,770) -- (3,770) --
------- ------- ------- -------
Net income ....................................................... $ 7,576 $ 1,232 $10,705 $ 5,511
======= ======= ======= =======
Historical net income per share:
Basic ....................................................... $ 0.31 $ 0.07 $ 0.51 $ 0.31
======= ======= ======= =======
Diluted ..................................................... $ 0.30 $ 0.07 $ 0.48 $ 0.29
======= ======= ======= =======
Historical weighted average common shares outstanding:
Basic ....................................................... 24,065 18,053 21,060 18,053
======= ======= ======= =======
Diluted ..................................................... 24,951 18,737 22,177 18,744
======= ======= ======= =======
Pro forma data:
Historical income before income taxes ....................... $ 6,139 $ 1,395 $ 9,606 $ 6,239
Pro forma provision for income taxes assuming C
corporation tax ......................................... 2,333 530 3,650 2,371
------- ------- ------- -------
Pro forma net income ........................................ $ 3,806 $ 865 $ 5,956 $ 3,868
======= ======= ======= =======
Pro forma net income per share:
Basic ....................................................... $ 0.16 $ 0.05 $ 0.28 $ 0.21
======= ======= ======= =======
Diluted ..................................................... $ 0.15 $ 0.05 $ 0.27 $ 0.21
======= ======= ======= =======
Pro forma weighted average common shares outstanding:
Basic ....................................................... 24,065 18,053 21,060 18,053
======= ======= ======= =======
Diluted ..................................................... 24,951 18,548 21,921 18,553
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
MKS INSTRUMENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 10,705 $ 5,511
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ......................................... 3,095 3,322
Loss (gain) on disposal of property, plant and equipment .............. (181) 49
Non-recurring deferred tax credit ..................................... (3,770) --
Other ................................................................. 198 94
Forward exchange contract gain realized ............................... (64) (836)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable .................. (9,328) 9,137
(Increase) decrease in inventories ................................ (1,205) 3,365
(Increase) decrease in other current assets ....................... (248) 123
Increase (decrease) in accrued expenses and other current
liabilities ................................................... 2,422 (4,166)
Increase (decrease) in accounts payable ........................... 3,665 (3,626)
-------- -------
Net cash provided by operating activities ................................. 5,289 12,973
-------- -------
Cash flows from investing activities:
Purchases of investments .............................................. (23,756) --
Purchases of property, plant and equipment ............................ (2,421) (1,701)
Proceeds from sales of property, plant & equipment .................... 208 --
Increase in other assets .............................................. (221) (174)
Cash received to settle forward exchange contracts .................... 64 836
-------- -------
Net cash used in investing activities ..................................... (26,126) (1,039)
-------- -------
Cash flows from financing activities:
Proceeds from short-term borrowings ................................... 5,209 755
Payments on short-term borrowings ..................................... (5,211) (755)
Principal payments on long-term debt .................................. (1,029) (1,026)
Proceeds from issuance of common stock, net of issuance costs ......... 82,062 --
Cash distributions to stockholders .................................... (40,000) (6,000)
Principal payments under capital lease obligations .................... (419) (569)
-------- -------
Net cash provided by (used in) financing activities ....................... 40,612 (7,595)
-------- -------
Effect of exchange rate changes on cash and cash equivalents .............. (292) (284)
-------- -------
Increase in cash and cash equivalents ..................................... 19,483 4,055
Cash and cash equivalents at beginning of period .......................... 11,188 2,511
-------- -------
Cash and cash equivalents at end of period ................................ $ 30,671 $ 6,566
======== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................... $ 605 $ 743
======== =======
Income taxes ...................................................... $ 2,738 $ 1,041
======== =======
Noncash transactions during the period:
Equipment acquired under capital leases ........................... $ 86 $ 456
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except per share data)
1) BASIS OF PRESENTATION
The interim financial data as of June 30, 1999 and for the three and
six months ended June 30, 1999 and 1998 is unaudited; however, in the
opinion of MKS Instruments, Inc. (the "Company"), the interim data
includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the results for the
interim periods. The unaudited financial statements presented herein
have been prepared in accordance with the instructions to Form 10-Q
and do not include all the information and note disclosures required
by generally accepted accounting principles. The financial statements
should be read in conjunction with the December 31, 1998 audited
financial statements and notes thereto.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated
as part of a hedge transaction and, if it is, the type of hedge
transaction. 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 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. These derivatives are designated as cash-flow hedges, and
changes in their fair value are carried in accumulated other
comprehensive income until the underlying forecasted transaction
occurs. Once the underlying forecasted transaction is realized, 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. The Company utilizes an interest rate swap
to fix the interest rate on certain variable term loans in order to
minimize the effect of changes in interest rates on earnings. Net
unrealized gains in the three months ended June 30, 1999 of $254,000
from derivatives designated as cash-flow hedging instruments have
been recorded in accumulated other comprehensive income. Net realized
gains and losses recorded in earnings in the three months ended June
30, 1999 were immaterial. As of June 30, 1999, the amount that will
be reclassified from accumulated other comprehensive income to
earnings over the next twelve months is an unrealized gain of
$258,000. The ineffective portion of the derivatives is primarily
related to option premiums. The amortization of the premiums in the
three months ended June 30, 1999 was immaterial. The Company hedges
certain of its 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 changes in fair value of these options as
well as the underlying exposures are generally offsetting and are
recorded in other income or expense. The amounts of the changes were
immaterial for the three months ended June 30, 1999.
3) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates.
<PAGE> 7
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
4) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Cash and money market instruments $25,500
Commercial paper 3,471
Corporate obligations 1,700
-------
$30,671
=======
</TABLE>
Cash and cash equivalents at December 31, 1998 consisted of cash and
money market instruments.
Short-term investments consist of the following at June 30, 1999:
<TABLE>
<S> <C>
Federal Government and Government Agencies obligations $ 9,073
Corporate obligations 7,597
Commercial paper 6,532
-------
$23,202
=======
</TABLE>
5) HISTORICAL AND PRO FORMA NET INCOME PER SHARE
Historical net income per share is not meaningful because of the
Company's conversion from an S corporation to a C corporation in
April, 1999 upon the closing of its initial public offering.
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 rate of 38%.
The following is a reconciliation of basic to diluted pro forma and
historical net income per share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income ....................................... $ 3,806 $ 7,576 $ 865 $ 1,232
Shares used in net income per common
share-basic ................................. 24,065 24,065 18,053 18,053
Effect of dilutive securities:
Employee and director stock options ......... 886 886 495 684
------- ------- ------- -------
Shares used in net income per common
share-diluted ............................... 24,951 24,951 18,548 18,737
======= ======= ======= =======
Net income per common share-basic ................ $ 0.16 $ 0.31 $ 0.05 $ 0.07
======= ======= ======= =======
Net income per common share-diluted .............. $ 0.15 $ 0.30 $ 0.05 $ 0.07
======= ======= ======= =======
</TABLE>
<PAGE> 8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income ....................................... $ 5,956 $10,705 $ 3,868 $ 5,511
Shares used in net income per common
share-basic ................................. 21,060 21,060 18,053 18,053
Effect of dilutive securities:
Employee and director stock options ......... 861 1,117 500 691
------- ------- ------- -------
Shares used in net income per common
share-diluted ............................... 21,921 22,177 18,553 18,744
======= ======= ======= =======
Net income per common share-basic ................ $ 0.28 $ 0.51 $ 0.21 $ 0.31
======= ======= ======= =======
Net income per common share-diluted .............. $ 0.27 $ 0.48 $ 0.21 $ 0.29
======= ======= ======= =======
</TABLE>
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 12,000 shares of common
stock were outstanding during the six months ended June 30, 1999, 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. There were no options
outstanding with an exercise price greater than the average market
price of the common shares for the three and six months ending June
30, 1998 and the three months ending June 30, 1999.
6) INVENTORIES
Inventories consist of the following:
June 30, December 31,
1999 1998
-------- ------------
Raw material .......................... $ 6,391 $ 7,544
Work in process ....................... 6,305 5,718
Finished goods ........................ 12,446 11,202
------- -------
$25,142 $24,464
======= =======
7) STOCKHOLDERS' EQUITY
In March 1999, the Company amended its Articles of Organization to:
i) eliminate the authorized shares of Class A Common Stock and Class
B Common Stock; ii) increase the authorized number of shares of
Common Stock to 50,000,000 shares; iii) authorize 2,000,000 shares of
Preferred Stock, $0.01 par value per share; and iv) provide that each
outstanding share of Class A Common Stock and Class B Common Stock be
converted into one share of Common Stock.
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 of $14.00 per share. The
net proceeds to the Company were approximately $82,000,000. 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.
<PAGE> 9
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Total comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
------ ------
<S> <C> <C>
Net income .......................................................... $7,576 $1,232
Other comprehensive income, net of taxes:
Non-recurring deferred tax charge to comprehensive
income (Note 9) .............................................. (660) --
Impact of adopting SFAS No. 133 ................................ (16) --
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures ............ 254 --
Foreign currency translation adjustment ........................ (172) (110)
Unrealized gain (loss) on investments .......................... 293 (407)
------ ------
Other comprehensive income, net of taxes ............................ (301) (517)
------ ------
Total comprehensive income .......................................... $7,275 $ 715
====== ======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------- ------
<S> <C> <C>
Net income .......................................................... $10,705 $5,511
Other comprehensive income, net of taxes:
Non-recurring deferred tax charge to comprehensive
income (Note 9) .............................................. (660) --
Impact of adopting SFAS No. 133 ................................ (16) --
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures ............ 254 --
Foreign currency translation adjustment ........................ (739) (286)
Unrealized gain (loss) on investments .......................... 412 (171)
------- ------
Other comprehensive income, net of taxes ............................ (749) (457)
------- ------
Total comprehensive income .......................................... $ 9,956 $5,054
======= ======
</TABLE>
8) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER
Segment Information for the three months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers 1999 $30,861 $8,658 $4,690 $44,209
1998 23,814 5,401 4,811 34,026
Intersegment net sales 1999 $ 8,931 $ 195 $ 342 $ 9,468
1998 5,792 62 253 6,107
Income from operations 1999 $ 5,230 $ 331 $ 346 $ 5,907
1998 787 494 328 1,609
</TABLE>
<PAGE> 10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Segment Information for the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
NORTH AMERICA FAR EAST EUROPE TOTAL
------------- -------- ------ -------
<S> <C> <C> <C> <C>
Net sales to unaffiliated customers 1999 $56,994 $15,747 $ 9,378 $82,119
1998 57,343 12,484 10,362 80,189
Intersegment net sales 1999 $15,772 $ 327 $ 510 $16,609
1998 14,606 117 436 15,159
Income from operations 1999 $ 8,087 $ 623 $ 738 $ 9,448
1998 5,474 885 750 7,109
</TABLE>
The Company had one customer comprising 22% and 13% of net sales for
the three months ended June 30, 1999 and 1998, respectively and 21%
and 18% for the six months ended June 30, 1999 and 1998,
respectively.
9) INCOME TAXES
Prior to its initial public offering, the Company 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.
The Company terminated its S corporation status upon the closing of
the initial public offering 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 $660,000.
10) COMMITMENTS AND CONTINGENCIES
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 cannot be
determined until MKS calculates the amount of its taxable income for
the year ending December 31, 1999. Management believes that any
additional distributions would not have a material impact on its
financial position or results of operations. No current shareholders,
other than the pre-IPO stockholders, are parties to the Tax
Indemnification and S Corporation Distribution Agreement.
<PAGE> 11
ITEM 2.
MKS INSTRUMENTS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Quarterly Report on Form 10-Q contains a number of statements, including,
without limitation, statements relating to MKS's beliefs, expectations and plans
which are forward-looking statements, as are statements that certain actions,
conditions or circumstances will continue. Such statements are based upon
management's current expectations and are subject to a number of factors and
uncertainties. Information contained in these forward-looking statements is
inherently uncertain and actual performance and results may differ materially
due to many important factors. See "Factors That May Affect Future Results" for
factors that could cause actual results to differ materially from any
forward-looking statements made by MKS.
MKS's quarterly net sales have fluctuated primarily due to the decline in the
semiconductor capital equipment market and the semiconductor device market in
1998 and the recovery in those markets in the first half of 1999. MKS's net
sales declined in each of the first three quarters of 1998. In response to the
decline, MKS implemented a comprehensive cost containment program that included
manufacturing outsourcing, expense reductions, and the elimination of some
temporary and contract positions. Worldwide staffing levels were decreased from
1,195 at the end of 1997 to 821 at the end of 1998. As a result of these
actions, MKS maintained quarterly profitability during the decline despite lower
net sales.
In the second quarter of 1999, MKS's net sales increased sequentially for the
third consecutive quarter. Net sales increased 17% as compared to the first
quarter of 1999. The increase was primarily due to increased sales to companies
in the semiconductor industry.
The comparisons of the results of operations for the three and six months ending
June 30, 1999 as compared to the three and six months ending June 30, 1998 have
been significantly impacted by the decline in the semiconductor capital
equipment market in 1998, and the cost containment program implemented by MKS as
a result of the decline. The following table sets forth for the periods
indicated the percentage of total net sales of certain line items included in
MKS's consolidated statement of income data.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales ........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 57.8 59.6 58.6 58.6
----- ----- ----- -----
Gross profit ..................................... 42.2 40.4 41.4 41.4
Research and development ......................... 7.5 9.1 7.6 8.6
Selling, general and administrative .............. 21.3 26.6 22.3 23.9
----- ----- ----- -----
Income from operations ........................... 13.4 4.7 11.5 8.9
Interest income (expense), net ................... 0.5 (1.0) -- (0.9)
Other income (expense), net ...................... -- 0.4 0.2 (0.2)
----- ----- ----- -----
Income before income taxes ....................... 13.9 4.1 11.7 7.8
Provision for income taxes ....................... 5.3 0.5 3.3 0.9
Non-recurring deferred tax credit ................ (8.5) -- (4.6) --
----- ----- ----- -----
Net income ....................................... 17.1% 3.6% 13.0% 6.9%
===== ===== ===== =====
Pro form data:
Historical income before income taxes ....... 13.9% 4.1% 11.7% 7.8%
Pro forma provision for income taxes ........ 5.3 1.6 4.4 3.0
----- ----- ----- -----
Pro forma net income ........................ 8.6% 2.5% 7.3% 4.8%
===== ===== ===== =====
</TABLE>
<PAGE> 12
Results of Operations
Net Sales. Net sales increased 30% to $44.2 million for the three
months ended June 30, 1999 from $34.0 million for the three months ended June
30, 1998. International net sales were approximately $13.3 million for the three
months ended June 30, 1999 or 30.2% of net sales and $10.5 million for the three
months ended June 30, 1998 or 31.0% of net sales. The increase in net sales was
due to increased sales volume of MKS's existing products in the United States
and Far East which resulted primarily from increased sales to the Company's
semiconductor capital equipment manufacturer and semiconductor device
manufacturer customers. Net sales increased 2.4% to $82.1 million for the six
months ended June 30, 1999 from $80.2 million in the same period of 1998.
Gross Profit. Gross profit as a percentage of net sales increased to
42.2% for the three months ended June 30, 1999 from 40.4% for the three months
ended June 30, 1998. The increase was primarily due to fuller utilization of
existing manufacturing capacity as a result of increased net sales. Gross profit
as a percentage of net sales was 41.4% for the six months ended June 30, 1999
and for the same period of 1998.
Research and Development. Research and development expense increased
6.8% to $3.3 million or 7.5% of net sales for the three months ended June 30,
1999 from $3.1 million or 9.1% of net sales for the three months ended June 30,
1998 due to increased spending for development materials related to projects in
process. Research and development expense decreased 9.1% to $6.3 million for the
six months ended June 30, 1999 from $6.9 million for the same period of 1998 due
to reduced compensation expense resulting from the reduction in personnel during
the latter part of 1998.
Selling, General and Administrative. Selling, general and
administrative expenses increased 4.3% to $9.4 million or 21.3% of net sales for
the three months ended June 30, 1999 from $9.0 million or 26.6% of net sales for
the three months ended June 30, 1998. The increase was due to increased
incentive compensation expense. Selling, general and administrative expenses
decreased 4.5% to $18.3 million for the six months ended June 30, 1999 from
$19.2 million for the same period of 1998 due to reduced compensation expense
resulting from the reduction in personnel during the latter part of 1998.
Interest Expense, Net. During the three and six months ended June 30,
1999 the Company generated interest income of approximately $0.6 million
primarily from the invested net proceeds of the initial public offering, offset
by interest expense on outstanding debt. Net interest expense for the three and
six months ending June 30, 1998 represents interest on outstanding loans, offset
by interest income earned on cash and cash equivalents and short-term
investments.
Other Income (Expense), Net. Other income in 1999 represents gains
recorded from foreign exchange contracts which did not qualify for hedge
accounting. Other income in the three months ended June 30, 1998 represents
gains from foreign exchange contracts which did not qualify for hedge
accounting. Other expense for the six months ended June 30, 1998 also includes
$0.7 million of costs associated with MKS's planned initial public offering in
early 1998 which was postponed, offset by translation gains on intercompany
payables.
Effective April 1, 1999 MKS adopted Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of SFAS No. 133 did not have a
material impact on MKS's financial position or results of operations. The
derivative instruments currently held by MKS which have been designated as
hedges, including forward exchange contracts, local currency purchased options,
and an interest rate swap, qualify for hedge accounting under SFAS No. 133, and
changes in their fair value will be recorded as a component of other
comprehensive income until the hedged transaction occurs.
<PAGE> 13
Pro Forma 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's status as an S corporation was terminated and it became subject to
taxes as a C corporation. The pro forma provision for income taxes reflects the
estimated tax expense MKS would have incurred had it been subject to federal and
state income taxes as a C corporation. The pro forma provision reflects a pro
forma tax rate of 38%, which differs from the federal statutory rate due
primarily to the effects of state and foreign taxes and certain tax credits.
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 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 of $14.00 per share.
The net proceeds to the Company were approximately $82,000,000 and were received
in the second quarter of 1999. Offering costs were approximately $1,000,000. On
April 5, 1999 MKS distributed $40,000,000, which is the estimated amount of its
undistributed S corporation earnings as of the day prior to the closing of the
offering.
Operations provided cash of $5.3 million for the six months ended June 30, 1999
primarily impacted by net income, depreciation and changes in the levels of
accounts payable and accounts receivable. Investing activities utilized cash of
$26.1 million for the six months ended June 30, 1999 primarily from purchasing
short-term investments with the net proceeds from the initial public offering
and for the purchase of property and equipment. Financing activities provided
cash of $40.6 million, with net proceeds from the initial public offering of
$82.1 million offset by the distribution to stockholders of $40.0 million.
Working capital was $82.8 million as of June 30, 1999, an increase of $51.3
million from December 31, 1998. MKS has a combined $30.0 million line of credit
with two banks, expiring December 31, 1999, all of which is available.
MKS believes that the net proceeds from its initial public offering, 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 24 months.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 of Notes to Consolidated Financial Statements for a discussion of the
impact of recently issued accounting pronouncements.
YEAR 2000 COMPLIANCE
The Year 2000 problem stems from the fact that many currently installed computer
systems include software and hardware products that are unable to distinguish
21st century dates from those in the 20th century. As a result, computer
software and/or hardware used by many companies and governmental agencies may
need to be upgraded to comply with Year 2000 requirements or risk system failure
or miscalculations causing disruptions to normal business activities.
<PAGE> 14
State of Readiness
MKS designed and began implementation of a multi-phase Year 2000
project which consists of:
* assessment of the corporate systems and operations including both
information technology and non-information technology that could
be affected by the Year 2000 problem
* remediation of non-compliant systems and components
* testing of systems and components following remediation
MKS, under the guidance of its Information Technology Steering
Committee, has focused its Year 2000 review on four areas:
* internal computer software and hardware
* product compliance
* facilities and manufacturing equipment
* third-party compliance
Internal Computer Software and Hardware. MKS uses information
technology for its internal infrastructure, which consists of its main
enterprise systems which include the systems used, in part, for purchase orders,
invoicing, shipping and accounting, and individual workstations, including
personal computers, and its network systems.
Because MKS's business and manufacturing systems, such as its main
enterprise systems, are essential to its business, financial condition and
results of operations, MKS began its assessment of these systems prior to its
other non-critical information technology systems. MKS began its assessment in
the fall of 1997, and in November 1997, MKS developed a remediation plan for all
identified noncompliant business and manufacturing systems. This remediation
plan was implemented in January 1998. By July 1998, MKS had installed new
systems or upgraded existing systems. Based upon post-implementation testing and
review, management believes that all business and manufacturing systems within
its manufacturing operations are Year 2000 compliant.
One of MKS's international subsidiaries is currently undergoing
conversion of its business systems in order to become Year 2000 compliant.
Management believes that these systems will be operational by the end of the
third quarter of 1999. This phase of the Year 2000 project is currently on
schedule.
MKS's personal computer based systems were assessed in early 1998. MKS
believes that all non-compliant hardware and software was identified by March
1998, at which time it made a list prioritizing databases to be remedied.
Critical databases were identified and were scheduled for remediation prior to
other databases. Remediation plans to convert the databases were initiated in
November 1998. MKS anticipates that it will complete its critical and
non-critical conversions by the end of the third quarter of 1999. This phase of
the Year 2000 project is currently on schedule.
Product Compliance. Throughout 1998, MKS assessed and addressed the
Year 2000 compliance of its products. This assessment resulted in the
identification of MKS's products that were compliant and non-compliant. The
substantial majority of MKS's products were deemed to be compliant.
<PAGE> 15
The date related functions of all non-compliant products, other than
certain residual gas analysis products, are believed by MKS to be non-critical
in that such noncompliance would not affect the independent performance of the
product; would not cause the MKS product to cease operating on any particular
date; and independently would not pose a safety risk. MKS believes that Year
2000 problems associated with non-compliant residual gas analysis products will
also be non-critical. However, these products contain components of other
manufacturers and cannot be tested and therefore it is possible that such
products could cause unanticipated performance problems. MKS made available to
its customers a list which describes Year 2000 readiness of its products. This
phase of the Year 2000 project is currently on schedule.
Facilities and Manufacturing Equipment. Some aspects of MKS's
facilities and manufacturing equipment may include embedded technology, such as
microcontrollers. The Year 2000 problem could cause a system failure or
miscalculation in such facilities or manufacturing equipment which could disrupt
MKS's operations. Affected areas include security systems, elevator controls,
voice mail and phone systems, clean room environmental controls, numerically
controlled production machinery and computer based production equipment. MKS
organized a team of experienced managers in November 1998 to assess the
potential problems in these areas. An assessment of all facilities and
manufacturing equipment was conducted through December 1998, and a remediation
plan was developed in January 1999. MKS anticipates completion of all corrective
actions including testing and review to occur by the end of the third quarter of
1999. This phase of the Year 2000 project is currently on schedule.
Third-Party Compliance. MKS has relationships with third-parties
including customers and vendors and suppliers of goods, services and computer
interfaces. The failure of such persons to implement and execute Year 2000
compliance measures in a timely manner, if at all, could, among other things:
* adversely affect MKS's ability to obtain components in a timely
manner
* cause a reduction in the quality of components obtained by MKS
* cause a reduction, delay or cancellation of customer orders
received by MKS or a delay in payments by its customers for
products shipped
* result in the loss of services that would be necessary for MKS to
operate in the normal course of business
MKS assessed which of these third-party goods, services and interfaces
were critical to its operations and developed and mailed a standard survey to
each third-party deemed critical in January 1998. By March 1998, MKS had
reviewed most responses received. To date, the responses received indicate that
the third-parties are either in the process of developing remediation plans, or
are compliant. MKS continued its assessment through March 1999 and began
conducting reviews at that time. All critical third-parties are expected to
achieve satisfactory compliance by the end of August 1999. This phase of the
Year 2000 project is currently on schedule.
Costs
MKS's costs to date associated with assessment, remediation and testing
activities concerning the Year 2000 problem have been approximately $2.1
million. MKS estimates that an additional $1.1 million, the major portion of
which will be capitalized and expensed over the life of the assets, will be
required to complete the replacement or modification of its facilities,
manufacturing equipment, computer software and products and to address the
noncompliance of key third-parties. MKS has funded and will continue to fund
these activities principally through cash provided by operations and existing
leasing lines of credit. It is not possible for MKS to completely estimate the
costs incurred in its remediation effort as many of its employees have focused
<PAGE> 16
and will continue to focus significant efforts in evaluating MKS's Year 2000
state of readiness and in remediating problems that have arisen, and will
continue to arise, from such evaluation.
Contingency Plan
To date, MKS has not formulated contingency plans related to the
failure of its or a third-party's Year 2000 remediation efforts. Contingency
plans for the failure to implement compliance procedures have not been completed
because it is the intent of MKS to complete all required modifications and to
test modifications thoroughly prior to December 31, 1999. However, as discussed
above, MKS is engaged in ongoing assessment, remediation and testing activities
and the internal results as well as the responses received from third-parties
will be taken into account in determining the nature and extent of any
contingency plans if necessary.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Cyclicality of the Semiconductor Industry
MKS estimates that approximately 60% of its sales during 1997 and 1998
were to semiconductor capital equipment manufacturers and semiconductor device
manufacturers, and MKS expects that sales to such customers will continue to
account for a substantial majority of its sales. MKS's business depends
substantially upon the capital expenditures of semiconductor device
manufacturers, which in turn depend upon the demand for semiconductors and other
products utilizing semiconductors. Periodic reductions in demand for the
products manufactured by semiconductor capital equipment manufacturers and
semiconductor device manufacturers may adversely affect MKS's 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 industry experienced a significant decline,
which caused a number of MKS's customers to reduce their orders. MKS cannot be
certain that the current semiconductor downturn that began in 1998 will not
continue. A further decline in the level of orders as a result of any future
downturn or slowdown in the semiconductor industry could have a material adverse
effect on MKS's business, financial condition and results of operations.
Asian Economies
The financial markets in Asia, one of MKS's principal international
markets, have experienced significant turbulence. Turbulence in the Asian
markets can adversely affect MKS's net sales and results of operations. MKS's
direct net sales to customers in Asian markets have been approximately 17% to
18% of total net sales for the past three years. MKS's sales include both direct
sales to the semiconductor industry in Asia, as well as to semiconductor capital
equipment manufacturers that derive a significant portion of their revenue from
sales to the Asian semiconductor industry. Turbulence in the Asian markets began
to adversely affect the semiconductor device manufacturers and semiconductor
capital equipment manufacturers in the fourth quarter of 1997 and throughout
1998.
Fluctuations in Operating Results
A substantial portion of MKS's shipments occur shortly after an order
is received and therefore MKS operates with a low level of backlog. As a
consequence of the just-in-time nature of shipments and the low level of
backlog, a decrease in demand for MKS's products from one or more customers
could occur with limited advance notice and could have a material adverse effect
on MKS's results of operations in any particular period.
<PAGE> 17
A significant percentage of MKS's 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's results of operations.
Factors that could cause fluctuations in MKS's 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
* Specific features requested by customers
For example, MKS was in the process of increasing 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's 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's 1998 and
first quarter 1999 operating results. 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, MKS's operating results
will fall below the expectations of public market analysts or investors. In any
such event, the price of MKS's common stock could decline significantly.
Customer Concentration
MKS's five largest customers in 1996, 1997 and 1998 accounted for
approximately 26%, 32% and 24%, respectively, of its net sales. The loss of a
major customer or any reduction in orders by such customers, including
reductions due to market or competitive conditions, would likely have a material
adverse effect on MKS's business, financial condition and results of operations.
During 1998, one customer, Applied Materials, Inc., accounted for approximately
16% of MKS's net sales. While the Company has entered into a purchase contract
with Applied Materials, Inc. that expires in 2000 unless it is extended by
mutual agreement, none of MKS's significant customers, including Applied
Materials, Inc., has entered into an agreement requiring it to purchase any
minimum quantity of MKS's products. The demand for MKS's 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. The Company's future success will continue to
depend upon:
* MKS's ability to maintain relationships with existing key
customers
* MKS's ability to attract new customers
* the success of MKS's customers in creating demand for their
capital equipment products which incorporate MKS's products
<PAGE> 18
Competition
The markets for MKS's products are highly competitive. The Company's
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, the Company's success will depend in part on its
ability to have semiconductor device manufacturers specify that the Company's
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.
Technological Changes
New products designed by semiconductor capital equipment manufacturers
typically have a lifespan of five to ten years. MKS's success depends on its
products being designed into new generations of equipment for the semiconductor
industry. The Company must develop products that are technologically current so
that they are positioned to be chosen for use in each successive new generation
of semiconductor equipment. If its products are not chosen by its customers, the
Company's net sales may be reduced during the lifespan of its customers'
products.
Risks Related to Year 2000 Compliance
MKS has implemented a multi-phase Year 2000 project consisting of
assessment and remediation, and testing following remediation. MKS cannot,
however, be certain that it has identified all of the potential risks. Failure
by the Company to identify and remediate all material Year 2000 risks could
adversely affect its business, financial condition and results of operations.
MKS has identified the following risks:
* MKS cannot be certain that the entities on whom it relies for
certain goods and services that are important for its business
will be successful in addressing all of their software and
systems problems in order to operate without disruption in the
year 2000 and beyond
* MKS's customers or potential customers may be affected by Year
2000 issues that may, in part:
- cause a delay in payments for products shipped
- cause customers to expend significant resources on Year 2000
compliance matters, rather than investing in MKS's products
* MKS has not developed a contingency plan related to the failure
of its or a third-party's Year 2000 remediation efforts and may
not be prepared for such an event
Further, while MKS has made efforts to notify its customers who have
purchased potential non-compliant products, the Company cannot be sure that
customers who purchased such products will not assert claims against MKS
alleging that such products should have been Year 2000 compliant at the time of
purchase, which could result in costly litigation and divert management's
attention.
Expansion into New Markets
MKS plans to build upon its experience in manufacturing and selling gas
measurement, control and analysis products used by the semiconductor industry by
designing and selling such products for applications in other industries which
use production processes similar to those used in the semiconductor industry.
<PAGE> 19
For example, MKS plans to expand its business to the manufacture of, among other
things, hard coatings to minimize wear on cutting tools. Any failure by the
Company to penetrate additional markets would limit its ability to reduce its
vulnerability to downturns in the semiconductor industry and could have a
material adverse effect on MKS's business, financial condition and results of
operations.
MKS has limited experience selling its products in certain markets
outside the semiconductor industry. The Company cannot be certain that it will
be successful in the expansion of its business outside the semiconductor
industry. MKS's future success will depend in part on its ability to:
* identify new applications for MKS's products
* adapt MKS's products for such applications
* market and sell such products to customers
Expansion of Manufacturing Capacity
MKS's ability to increase sales of certain products depends in part
upon its ability to expand manufacturing capacity for such products in a timely
manner. If the Company is unable to expand manufacturing capacity on a timely
basis or to manage such expansion effectively, its customers could seek such
products from others and 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 the Company's fixed operating expenses and if sales
levels do not increase to offset the additional expense levels associated with
any such expansion, the Company's business, financial condition and results of
operations could be materially adversely affected.
International Operations and Sales
International sales, which include sales by MKS's foreign subsidiaries,
but exclude direct export sales which were less than 10% of total net sales,
accounted for approximately 30% of net sales in 1996, 27% of net sales in 1997
and 32% of net sales in 1998. MKS anticipates that international sales will
continue to account for a significant portion of net sales. In addition, certain
of MKS's key domestic customers derive a significant portion of their revenues
from sales in international markets. Therefore, MKS's sales and results of
operations could be adversely affected by economic slowdowns and other risks
associated with international sales.
Exchange rate fluctuations could have an adverse effect on MKS's net
sales and results of operations and the Company 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 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's
foreign subsidiaries are denominated in the currency of the country in which
these products are sold and the currency MKS receives in payment for such sales
could be less valuable at the time of receipt as a result of exchange rate
fluctuations. While MKS enters into forward exchange contracts and local
currency purchased options to reduce currency exposure arising from these sales
and associated intercompany purchases of inventory, MKS cannot be certain that
its efforts will be adequate to protect the Company against significant currency
fluctuations or that such efforts will not expose MKS to additional exchange
rate risks.
<PAGE> 20
Need to Retain and Attract Key Employees
MKS's 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 and adverse effect
on MKS's business, financial condition and results of 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.
Competition for such personnel is intense, and MKS cannot be certain that it
will be successful in attracting and retaining such personnel.
Intellectual Property Matters
Although MKS seeks to protect its intellectual property rights through
patents, copyrights, trade secrets and other measures, MKS cannot be certain
that:
* it will be able to protect its technology adequately
* competitors will not be able to develop similar technology
independently
* any of its pending patent applications will be issued
* intellectual property laws will protect its intellectual property
rights
* third parties will not assert that MKS's products infringe
patent, copyright or trade secrets of such parties
Litigation may be necessary in order to enforce MKS's 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. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business, financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning market risk is contained in the annual Management's
Discussion and Analysis of Financial Condition and Results of Operations in
MKS's recent filings with the Securities and Exchange Commission. There were no
material changes in MKS's exposure to market risk from December 31, 1998.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MKS is not aware of any material legal proceedings to which it or any of its
subsidiaries is a party.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities. On April 5,
1999 MKS closed the initial public offering of its Common Stock. The
shares of Common Stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form
S-1 (the "Registration Statement") (Reg. No. 333-71363) that was
declared effective by the Securities and Exchange Commission on March
29, 1999.
<PAGE> 21
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Ex. No. Description
10.4 Amended and Restated 1999 Employee Stock Purchase Plan
27 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this
report on Form 10-Q is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MKS INSTRUMENTS, INC.
August 13, 1999 By: /s/ Ronald C. Weigner
------------------------------------------
Ronald C. Weigner
Vice President and Chief Financial Officer
(Principal Accounting Officer)
<PAGE> 1
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") 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
six 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 Section 424(d) of
the Code shall apply in determining the stock ownership of an employee,
<PAGE> 2
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
commissions 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.
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.
2
<PAGE> 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 shares, including any fractional shares thereof, 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. The Board may, in its discretion, limit any purchases to a
whole number of shares.
3
<PAGE> 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 of
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.
4
<PAGE> 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
5
<PAGE> 6
such amendment by 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 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
6
<PAGE> 7
Approval by the Stockholders
on February 17, 1999
Amended and Restated by the Board of Directors on
April 22, 1999
7
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 30,671
<SECURITIES> 23,202
<RECEIVABLES> 28,860
<ALLOWANCES> 883
<INVENTORY> 25,142
<CURRENT-ASSETS> 114,815
<PP&E> 75,323
<DEPRECIATION> 44,389
<TOTAL-ASSETS> 151,850
<CURRENT-LIABILITIES> 32,039
<BONDS> 10,775
0
0
<COMMON> 113
<OTHER-SE> 106,731
<TOTAL-LIABILITY-AND-EQUITY> 151,850
<SALES> 82,119
<TOTAL-REVENUES> 82,119
<CGS> 48,107
<TOTAL-COSTS> 48,107
<OTHER-EXPENSES> 23,722
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> 684
<INCOME-PRETAX> 9,606
<INCOME-TAX> (1,009)
<INCOME-CONTINUING> 10,705
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,705
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
