<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 September 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 November 10,
1999: 24,576,129
<PAGE> 2
MKS INSTRUMENTS, INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets --
September 30, 1999 and December 31, 1998
Consolidated Statements of Income -- Three and nine
months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows -- Nine months
ended September 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>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ 23,784 $ 11,188
Short-term investments .............................................................. 34,562 --
Trade accounts receivable, net ...................................................... 32,613 20,674
Inventories ......................................................................... 25,559 24,464
Deferred tax asset .................................................................. 4,515 698
Other current assets ................................................................ 3,267 1,509
-------- --------
Total current assets ............................................................ 124,300 58,533
Property, plant and equipment, net .................................................. 31,004 32,725
Other assets ........................................................................ 6,646 4,974
-------- --------
Total assets .................................................................... $161,950 $ 96,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ............................................................... $ 10,940 $ 9,687
Current portion of long-term debt ................................................... 2,075 2,058
Current portion of capital lease obligations ........................................ 1,031 1,074
Accounts payable .................................................................... 7,059 3,677
Accrued compensation ................................................................ 8,239 3,985
Other accrued expenses .............................................................. 5,273 5,280
Income taxes payable ................................................................ 1,317 1,279
-------- --------
Total current liabilities ....................................................... 35,934 27,040
Long-term debt .......................................................................... 10,472 12,042
Long-term portion of capital lease obligations .......................................... 1,256 1,744
Deferred tax liability .................................................................. 638 117
Other liabilities ....................................................................... 460 463
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;
24,438,705 and 18,053,167 issued and outstanding at
September 30, 1999 and December 31, 1998, respectively .......................... 113 113
Additional paid-in capital .......................................................... 82,408 48
Retained earnings ................................................................... 29,221 52,479
Accumulated other comprehensive income .............................................. 1,448 2,186
-------- --------
Total stockholders' equity ...................................................... 113,190 54,826
-------- --------
Total liabilities and stockholders' equity ...................................... $161,950 $ 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 Nine Months Ended
September 30 September 30
--------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales .................................................................. $ 50,621 $ 28,834 $ 132,740 $ 109,023
Cost of sales .............................................................. 28,876 18,140 76,983 65,162
--------- --------- --------- ---------
Gross profit ............................................................... 21,745 10,694 55,757 43,861
Research and development ................................................... 3,482 2,568 9,754 9,469
Selling, general and administrative ........................................ 10,264 7,808 28,556 26,965
--------- --------- --------- ---------
Income from operations ..................................................... 7,999 318 17,447 7,427
Interest expense ........................................................... 341 356 1,025 1,140
Interest income ............................................................ 672 122 1,346 194
Other income (expense), net ................................................ 681 77 849 (81)
--------- --------- --------- ---------
Income before income taxes ................................................. 9,011 161 18,617 6,400
Provision for income taxes ................................................. 2,974 19 5,645 747
Non-recurring deferred tax credit (Note 9) ................................. -- -- (3,770) --
--------- --------- --------- ---------
Net income ................................................................. $ 6,037 $ 142 $ 16,742 $ 5,653
========= ========= ========= =========
Historical net income per share:
Basic .................................................................. $ 0.25 $ 0.01 $ 0.75 $ 0.31
========= ========= ========= =========
Diluted ................................................................ $ 0.24 $ 0.01 $ 0.72 $ 0.30
========= ========= ========= =========
Historical weighted average common shares outstanding:
Basic .................................................................. 24,458 18,053 22,193 18,053
========= ======== ======== =========
Diluted ................................................................ 25,628 18,553 23,327 18,680
========= ======== ======== =========
Pro forma data:
Historical income before income taxes .................................. $ 9,011 $ 161 $ 18,617 $ 6,400
Pro forma provision for income taxes assuming C
corporation tax .................................................... 3,334 61 6,984 2,432
--------- --------- --------- ---------
Pro forma net income ................................................... $ 5,677 $ 100 $ 11,633 $ 3,968
========= ========= ========= =========
Pro forma net income per share:
Basic .................................................................. $ 0.23 $ 0.01 $ 0.52 $ 0.22
========= ======== ========= =========
Diluted ................................................................ $ 0.22 $ 0.01 $ 0.50 $ 0.21
========= ======== ========= =========
Pro forma weighted average common shares outstanding:
Basic .................................................................. 24,458 18,053 22,193 18,053
========= ======= ========= =========
Diluted ................................................................ 25,558 18,434 23,133 18,513
========= ======= ========= =========
</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>
Nine Months Ended
September 30,
---------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ............................................................................... $ 16,742 $ 5,653
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ........................................................ 4,632 4,776
Loss (gain) on disposal of property, plant and equipment ............................. (184) 67
Non-recurring deferred tax credit .................................................... (3,770) --
Other ................................................................................ 75 143
Forward exchange contract gain realized .............................................. (78) (1,186)
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable .................................. (12,038) 12,805
(Increase) decrease in inventories ................................................ (1,093) 5,222
(Increase) decrease in other current assets ....................................... (1,913) 626
Increase (decrease) in accrued expenses and other current
liabilities ................................................................... 4,592 (4,729)
Increase (decrease) in accounts payable ........................................... 3,991 (4,399)
-------- --------
Net cash provided by operating activities ................................................ 10,956 18,978
-------- --------
Cash flows from investing activities:
Purchases of investments ............................................................. (34,562) --
Purchases of property, plant and equipment ........................................... (3,891) (2,619)
Proceeds from sales of property, plant & equipment ................................... 262 38
Increase in other assets ............................................................. (707) (178)
Cash received to settle forward exchange contracts ................................... 78 1,186
-------- --------
Net cash used in investing activities .................................................... (38,820) (1,573)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings .................................................. 6,692 741
Payments on short-term borrowings .................................................... (6,179) (741)
Principal payments on long-term debt ................................................. (1,534) (1,528)
Proceeds from issuance of common stock, net of issuance costs ........................ 82,062 --
Proceeds from exercise of stock options .............................................. 37 --
Cash distributions to stockholders ................................................... (40,000) (6,000)
Principal payments under capital lease obligations ................................... (768) (996)
-------- --------
Net cash provided by (used in) financing activities ...................................... 40,310 (8,524)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ............................. 150 (348)
-------- --------
Increase in cash and cash equivalents .................................................... 12,596 8,533
Cash and cash equivalents at beginning of period ......................................... 11,188 2,511
-------- --------
Cash and cash equivalents at end of period ............................................... $ 23,784 $ 11,044
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .......................................................................... $ 896 $ 1,053
======== ========
Income taxes ...................................................................... $ 6,394 $ 1,479
======== ========
Noncash transactions during the period:
Equipment acquired under capital leases ........................................... $ 237 $ 1,086
======== ========
</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 September 30, 1999 and for the three and
nine months ended September 30, 1999 and 1998 is unaudited; however, in the
opinion of MKS Instruments, Inc. ("MKS" or 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. Since the
adoption of SFAS No. 133, net unrealized losses in the three and six months
ended September 30, 1999 of $753,000 and $515,000, respectively, 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 and six months ended September 30, 1999
were immaterial. As of September 30, 1999, the amount that will be
reclassified from accumulated other comprehensive income to earnings over
the next twelve months is an unrealized loss of $515,000. The ineffective
portion of the derivatives is primarily related to option premiums. The
amortization of the premiums in the three and six months ended September
30, 1999 was $97,000 and $192,000, respectively. 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 and six months ended
September 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 September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Cash and money market instruments $19,788
Commercial paper 3,996
-------
$23,784
=======
</TABLE>
Cash and cash equivalents at December 31, 1998 consisted of cash and money
market instruments.
Short-term investments consist of the following at September 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Federal Government and Government Agencies obligations $20,178
Corporate obligations 10,599
Commercial paper 3,785
-------
$34,562
=======
</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% for 1998 and the six months ended June 30, 1999, and at a
pro forma rate of 37% for the three months ended September 30, 1999.
The following is a reconciliation of basic to diluted pro forma and
historical net income per share:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------------------- -------------------------
Pro Forma Historical Pro Forma Historical
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income .................................................. $ 5,677 $ 6,037 $ 100 $ 142
Shares used in net income per common
share-basic ............................................. 24,458 24,458 18,053 18,053
Effect of dilutive securities:
Employee and director stock options ..................... 1,100 1,170 381 500
------- ------- ------- -------
Shares used in net income per common
share-diluted ........................................... 25,558 25,628 18,434 18,553
======= ======= ======= ======
Net income per common share-basic ........................... $ 0.23 $ 0.25 $ 0.01 $ 0.01
======= ======= ======= ======
Net income per common share-diluted ......................... $ 0.22 $ 0.24 $ 0.01 $ 0.01
======= ======= ======= ======
</TABLE>
<PAGE> 8
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------------------- -------------------------
Pro Forma Historical Pro Forma Historical
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net income .................................................... $11,633 $16,742 $ 3,968 $ 5,653
Shares used in net income per common
share-basic ............................................... 22,193 22,193 18,053 18,053
Effect of dilutive securities:
Employee and director stock options ....................... 940 1,134 460 627
------- ------- ------- -------
Shares used in net income per common
share-diluted ............................................. 23,133 23,327 18,513 18,680
======= ======= ======= =======
Net income per common share-basic ............................. $ 0.52 $ 0.75 $ 0.22 $ 0.31
======= ======= ======= =======
Net income per common share-diluted ........................... $ 0.50 $ 0.72 $ 0.21 $ 0.30
======= ======= ======= =======
</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 zero, 98,570, 8,000 and 32,857 shares of common
stock were outstanding during the three months ended September 30, 1999 and
1998, and the nine months ended September 30, 1999 and 1998, 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.
6) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw material ............................................................. $ 6,718 $ 7,544
Work in process .......................................................... 6,633 5,718
Finished goods ........................................................... 12,208 11,202
------- -------
$25,559 $24,464
======= =======
</TABLE>
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. 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.
<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 September 30,
1999 1998
---- ----
<S> <C> <C>
Net income ............................................. $ 6,037 $ 142
Other comprehensive income, net of taxes:
Changes in value of financial instruments designated
as hedges of currency and interest rate exposures (504) --
Foreign currency translation adjustment ............ 574 320
Unrealized gain (loss) on investments .............. (59) (206)
------- -------
Other comprehensive income, net of taxes ............... 11 114
------- -------
Total comprehensive income ............................. $ 6,048 $ 256
======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
---- ----
<S> <C> <C>
Net income ............................................. $16,742 $ 5,653
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 (250) --
Foreign currency translation adjustment ............ (165) 34
Unrealized gain (loss) on investments .............. 353 (377)
------- -------
Other comprehensive income, net of taxes ............... (738) (343)
------- -------
Total comprehensive income ............................. $16,004 $ 5,310
======= =======
</TABLE>
8) SEGMENT INFORMATION AND SIGNIFICANT CUSTOMER
Segment Information for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
North America Far East Europe Total
------------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers 1999 $ 92,694 $ 25,620 $ 14,426 $132,740
1998 76,285 17,433 15,305 109,023
Intersegment net sales 1999 $ 24,465 $ 527 $ 707 $ 25,699
1998 19,717 196 755 20,668
Income from operations 1999 $ 14,915 $ 1,391 $ 1,141 $ 17,447
1998 4,991 1,181 1,255 7,427
</TABLE>
<PAGE> 10
MKS INSTRUMENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Tables in thousands, except per share data)
Segment Information for the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
North America Far East Europe Total
------------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated customers 1999 $ 35,700 $ 9,873 $ 5,048 $ 50,621
1998 18,942 4,949 4,943 28,834
Intersegment net sales 1999 $ 8,693 $ 200 $ 197 $ 9,090
1998 5,111 79 319 5,509
Income from operations 1999 $ 6,828 $ 768 $ 403 $ 7,999
1998 (483) 296 505 318
</TABLE>
The Company had one customer comprising 25% and 10% of net sales for the
three months ended September 30, 1999 and 1998, respectively, and 23% and
17% for the nine months ended September 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. Based on the Company's
estimate of the taxable income for the year ending December 31, 1999, MKS
believes that an additional future distribution to the pre-IPO stockholders
will be required under this agreement. The amount of the additional
distribution is currently estimated to be between $2,500,000 and
$3,500,000. The amount of the additional distribution will be charged
directly to historical retained earnings and will have no impact on net
income or earnings per share. 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
This 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 during 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 third quarter of 1999, MKS's net sales increased sequentially for the
fourth consecutive quarter. Net sales increased 15% as compared to the second
quarter of 1999. The increase was primarily due to increased sales to companies
in the semiconductor industry, thin film markets and to other markets for
energy, pharmaceutical and other applications.
The comparisons of the results of operations for the three and nine months
ending September 30, 1999 as compared to the three and nine months ending
September 30, 1998 have been significantly impacted by the decline in the
semiconductor capital equipment market in 1998, the cost containment program
implemented by MKS as a result of the decline, and the recovery in those markets
during 1999. 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ............................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................... 57.0 62.9 58.0 59.8
----- ----- ----- -----
Gross profit ............................ 43.0 37.1 42.0 40.2
Research and development ................ 6.9 8.9 7.4 8.7
Selling, general and administrative ..... 20.3 27.1 21.5 24.7
----- ----- ----- -----
Income from operations .................. 15.8 1.1 13.1 6.8
Interest income (expense), net .......... 0.7 (0.8) 0.3 (0.8)
Other income (expense), net ............. 1.3 0.3 0.6 (0.1)
----- ----- ----- -----
Income before income taxes .............. 17.8 0.6 14.0 5.9
Provision for income taxes .............. 5.9 0.1 4.3 0.7
Non-recurring deferred tax credit ....... -- -- (2.9) --
----- ----- ----- -----
Net income .............................. 11.9% 0.5% 12.6% 5.2%
===== ===== ===== =====
Pro forma data:
Historical income before income taxes 17.8% 0.6% 14.0% 5.9%
Pro forma provision for income taxes 6.6 0.3 5.2 2.3
----- ----- ----- -----
Pro forma net income ................ 11.2% 0.3% 8.8% 3.6%
===== ===== ===== =====
</TABLE>
<PAGE> 12
Results of Operations
Net Sales. Net sales increased 75.6% to $50.6 million for the three months
ended September 30, 1999 from $28.8 million for the three months ended September
30, 1998. International net sales were approximately $14.9 million for the three
months ended September 30, 1999 or 29.5% of net sales and $10.2 million for the
three months ended September 30, 1998 or 35.5% of net sales. Net sales increased
21.8% to $132.7 million for the nine months ended September 30, 1999 from $109.0
million in the same period of 1998. The increases in net sales were 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.
Gross Profit. Gross profit as a percentage of net sales increased to 43.0%
for the three months ended September 30, 1999 from 37.1% for the three months
ended September 30, 1998, and to 42.0% for the nine months ended September 30,
1999 from 40.2% for the same period of 1998. The increases were primarily due to
fuller utilization of existing manufacturing capacity as a result of increased
net sales.
Research and Development. Research and development expense increased 35.6%
to $3.5 million or 6.9% of net sales for the three months ended September 30,
1999 from $2.6 million or 8.9% of net sales for the three months ended September
30, 1998 due to increased spending of $0.4 million for development materials
related to projects in process and increased incentive compensation expense.
Research and development expenses increased 3.0% to $9.8 million for the nine
months ended September 30, 1999 from $9.5 million for the same period of 1998,
due to increased spending for development materials related to projects in
process.
Selling, General and Administrative. Selling, general and administrative
expenses increased 31.5% to $10.3 million or 20.3% of net sales for the three
months ended September 30, 1999 from $7.8 million or 27.1% of net sales for the
three months ended September 30, 1998. The increase was due primarily to
increased incentive compensation expense of $1.6 million, professional fees, and
other selling expenses. Selling, general and administrative expenses increased
5.9% to $28.6 million or 21.5% of net sales for the nine months ended September
30, 1999 from $27.0 million or 24.7% of net sales for the same period of 1998.
The increase was due to increased incentive compensation expense.
Interest Income (Expense), Net. During the three and nine months ended
September 30, 1999, the Company generated interest income of $0.7 million and
$1.3 million, respectively, 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 nine months ended September 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 of $0.7 million in the three
months ended September 30, 1999 represents a distribution from one of MKS's
mutual insurance carriers upon the initial public offering of the insurance
carrier. Other income of $0.8 million for the nine months ended September 30,
1999 also includes this distribution and gains recorded from foreign exchange
contracts which did not qualify for hedge accounting. Other income of $0.1
million in the three months ended September 30, 1998 represents gains recorded
from foreign exchange contracts which did not qualify for hedge accounting.
Other expense of $0.1 million for the nine months ended September 30, 1998
includes $0.7 million of costs associated with MKS's planned initial public
offering in early 1998, offset by translation gains on intercompany payables and
gains recorded from foreign exchange contracts which did not qualify for hedge
accounting.
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.
<PAGE> 13
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.
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 differs from the
federal statutory rate due primarily to the effects of state and foreign taxes
and certain tax credits. The pro forma provision for the three months ended
September 30, 1999 reflects a pro forma tax rate of 37%. This rate differs from
the pro forma tax rate of 38% for 1998 due to increased tax credits 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 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. Underwriting discounts and commissions were
approximately $6,200,000, and other 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 $11.0 million for the nine months ended September
30, 1999 primarily impacted by net income, depreciation and changes in the
levels of accounts payable, accrued expenses, and accounts receivable. Investing
activities utilized cash of $38.8 million for the nine months ended September
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 $40.3 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 $88.4 million as of September 30, 1999, an increase of $56.9
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 is
currently in the process of renewing the line of credit with the two banks.
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. Based on the
Company's estimate of the taxable income for the year ending December 31, 1999,
MKS believes that an additional future distribution to the pre-IPO stockholders
will be required under this agreement. The amount of the additional distribution
is currently estimated to be between $2,500,000 and $3,500,000. The amount of
the additional distribution will be charged directly to historical retained
earnings and will have no impact on net income or earnings per share. No current
shareholders, other than the pre-IPO stockholders, are parties to the Tax
Indemnification and S Corporation Distribution Agreement.
<PAGE> 14
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.
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
<PAGE> 15
installed new systems or upgraded existing systems. Based upon
post-implementation testing and review, management believes that all business
and manufacturing systems are Year 2000 compliant.
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 believes its critical and non-critical personal computer
based systems are Year 2000 compliant.
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.
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.
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 believes its facilities and
manufacturing equipment are Year 2000 compliant.
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. Based on this survey and its review
of survey data, MKS believes all critical third-parties have achieved
satisfactory compliance.
<PAGE> 16
Costs
MKS's costs to date associated with assessment, remediation and testing
activities concerning the Year 2000 problem have been approximately $3 million.
MKS has funded 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 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
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.
MKS believes it has taken steps in its multi-phase Year 2000 project to
identify and remediate material Year 2000 related issues. However, there can be
no assurance that MKS has identified and remediated all material Year 2000
related issues. Additionally, there can be no assurance that unexpected delays
or problems will not occur that would have a material adverse effect on the
Company's financial condition or results of operations.
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 semiconductor downturns will not recur. A 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
20% 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 1997 and 1998.
<PAGE> 17
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.
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.
<PAGE> 18
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
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
<PAGE> 19
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.
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
<PAGE> 20
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.
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.
<PAGE> 21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds from Sales of Registered Securities. There has been no
change to the information previously provided by the Company on Form 10-Q
for the period ended March 31, 1999 relating to the securities sold by the
Company pursuant to the Registration Statement on Form S-1 (Reg. No.
333-71363) that was declared effective by the Securities and Exchange
Commission on March 29, 1999.
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
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.
November 11, 1999 By: /s/ Ronald C. Weigner
-------------------------------------
Ronald C. Weigner
Vice President and Chief Financial
Officer (Principal Accounting
Officer)
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