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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT
TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR
VALUE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by referenced in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the registrant as of February 11, 2000: $331,073,252
Number of shares outstanding of the issuer's Common Stock, no par value, as of
February 11, 2000: 24,770,231
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the MKS 1999 Annual Report for the year ended December 31, 1999 are
incorporated by reference into Parts I, II and IV of this Form 10-K.
Portions of the definitive Proxy Statement for MKS' Annual Meeting of
Stockholders to be held on May 17, 2000 are incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
MKS is a leading worldwide developer, manufacturer and supplier of
instruments, components and subsystems used to measure, control and analyze
gases in semiconductor manufacturing and similar industrial manufacturing
processes. MKS offers a comprehensive line of products which are used to
manufacture, among other things:
- semiconductors
- optical filters and fiber optics cables for data and telecommunications
- flat panel displays
- magnetic and optical storage devices and media, including:
- compact disks
- hard disk storage devices
- magnetic devices for reading disk data
- digital video disks
- optical storage disks or laser readable disks
- solar panels
- eyeglasses
- architectural glass
- cutting tools
- freeze-dried pharmaceuticals
Products
MKS supplies products in three principal product areas. We also provide
value-added integrated subsystems combining these products. Our products
include:
- Pressure Measurement and Control Products
- Material Delivery and Analysis Products
- Vacuum Products
PRESSURE MEASUREMENT AND CONTROL PRODUCTS. MKS designs and manufactures a
wide range of gas pressure measurement and control instrumentation. Each product
line consists of products which are designed for a variety of pressure ranges
and accuracies.
Baratron Pressure Measurement Products. MKS's Baratron pressure measurement
products are high precision pressure measurement instruments. MKS has five
Baratron product families that range from high accuracy digital output
instruments to simple electronic switches. These products are typically used to
measure the pressure of the gases being distributed upstream of the process
chambers, to measure process chamber pressures and to measure pressures between
process chambers, vacuum pumps and exhaust lines. Baratron instruments measure
pressures at ranges from two hundred times atmospheric pressure to one billionth
of atmospheric pressure. MKS believes it offers the widest range of gas pressure
measurement instruments in the semiconductor and advanced thin-film materials
processing industries.
A key feature of Baratron instruments is the ability to measure pressure
independent of gas composition, which is critical for precise pressure control
of semiconductor processes that involve gas mixtures. In these processes, there
is a need to control both pressure and gas mixture, but the pressure measurement
instrument must measure only the pressure of the sum of the gases in the
chamber, independent of gas composition. The Baratron instruments enable users
to achieve
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a highly precise, accurate and repeatable measurement of gas pressure. Pressure
measurement, independent of gas composition, is also useful during process steps
used to remove atmospheric gases as well as those used to introduce specific
amounts of various types of gases. Such processes are used to manufacture
fluorescent bulbs and to fabricate gas lasers.
Automatic Pressure and Vacuum Control Products. MKS's automatic pressure
control products consist of analog and digital automatic pressure and vacuum
control electronic instruments and valves. These products enable precise control
of process pressure by electronically actuating valves which control the flow of
gases in and out of the process chamber to minimize the difference between
desired and actual pressure in the chamber. The electronic controllers vary from
simple analog units with precise manual tuning capability to state-of-the-art
self-tuning, digital signal processing controllers. The valve products vary from
small gas inlet valves to large exhaust valves.
In most cases, MKS's Baratron pressure measurement instruments provide the
pressure input to the automatic pressure control device. Together, these
components create an integrated automatic pressure control system. MKS's
pressure control products can also accept inputs from other measurement
instruments, enabling the automatic control of gas input or exhaust based on
parameters other than pressure.
MKS has recently introduced a line of integrated pressure controllers that
combine the functions of its Baratron pressure measurement instrument, flow
measurement instrument, control electronics and valve into a four-inch long
instrument which can be placed directly on a gas line to control pressure
downstream of the instrument while indicating the gas flow rate. This addresses
the need for smaller components, saving valuable clean room space.
MATERIALS DELIVERY AND ANALYSIS PRODUCTS. MKS designs and manufactures a
wide range of flow and composition analysis measurement and control
instrumentation. Each product line consists of products which are designed for
a variety of flow and composition ranges and accuracies.
Flow Measurement and Control Products. MKS's flow measurement products
include gas, vapor and liquid flow measurement products based upon thermal
conductivity, pressure and direct liquid injection technologies. The flow
control products combine the flow measuring device with valve control elements
based upon solenoid, piezo-electric and piston pump technologies. The products
measure and automatically control the mass flow rate of gases and vapors into
the process chamber. MKS's broad product lines include products that allow the
precise, automatic flow control of inert or corrosive gases, the automatic
control of low vapor pressure gases and heated liquid source materials, and the
automatic control of delicate, advanced technology liquid sources and vaporized
solid sources for next generation devices.
MKS's line of thermal-based mass flow controllers, which control gas flow
based on the molecular weight of gases, includes all-metal-sealed designs and
ultra-clean designs for semiconductor applications, and general purpose
controllers for applications where all-metal-sealed construction is not
required. MKS has also developed pressure-based mass flow controllers, based on
Baratron pressure instrument measurement and control technology, which use flow
restrictors in the gas line to transform pressure control into mass flow
control.
Certain new materials required for the next generation of semiconductor
devices are difficult to control using traditional thermal mass flow technology.
To control these new materials, MKS has designed a direct liquid injection
subsystem which pumps a precise volume of liquid into a vaporizer, which in turn
supplies a controlled flow of vapor into the process chamber. The direct liquid
injection subsystem pump and vaporizer are presently used principally for
research and development applications for next generation semiconductor device
conductors, diffusion barriers and insulators, such as copper, titanium nitride
and dielectric materials.
MKS's flow measurement products also include a calibration system which
independently measures mass flow and compares this measurement to that of the
process chamber mass flow controller. The demand for the MKS calibration system
is driven by the increasingly stringent process control needs of the
semiconductor industry and the need to reduce costly downtime resulting from
stopping operations to address mass flow controller problems.
Gas Composition Analysis Instruments. MKS's gas analysis instruments are
sold primarily to the semiconductor industry. The residual gas analysis product
lines include a quadrapole mass spectrometer sensor, which is a device that
separates gases based on molecular weight. MKS's quadrapole mass spectrometer
sensors include built-in electronics to analyze the composition of background
and process gases in the process chamber. MKS's ORION process monitoring system
is a sophisticated quadrapole mass spectrometer process analyzer for statistical
process monitoring of
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manufacturing processes operating from very low pressures to atmospheric
pressure. These instruments are provided both as portable laboratory systems and
as process gas monitoring systems used in the diagnosis of semiconductor
manufacturing process systems and are sold at prices ranging up to $80,000. The
gas monitoring systems can indicate out-of-bounds conditions, such as the
presence of undesirable atmospheric gases, water vapor or out-of-tolerance
amounts of specific gases in the process chamber, enabling operators to diagnose
and repair faulty equipment. MKS's gas sampling systems provide a turn-key
solution for withdrawing gases from chambers at relatively high pressures for
introduction into the low pressure gas analyzers. Next generation semiconductor
manufacturing processes, with smaller circuit patterns and larger wafer sizes,
are expected to require sophisticated gas analysis instruments and/or monitoring
equipment to ensure tighter process control and earlier diagnosis of equipment
malfunction.
VACUUM PRODUCTS. MKS designs and manufactures a wide variety of vacuum
technology products, including vacuum gauges, vacuum valves and components.
Vacuum Gauging Products. MKS offers a wide range of vacuum instruments
consisting of vacuum measurement sensors and associated power supply and readout
units. These vacuum gauges measure phenomena that are related to the level of
pressure in the process chamber and downstream of the process chamber between
the chamber and the pump. Unlike Baratron pressure measurement instruments,
vacuum gauges do not measure pressure directly. These gauges are used to measure
vacuum at pressures lower than those measurable with a Baratron pressure
measurement instrument or to measure vacuum in the Baratron pressure measurement
instrument range where less accuracy is required. MKS's indirect pressure gauges
use thermal conductivity and ionization gauge technologies to measure pressure
from atmospheric pressure to one trillionth of atmospheric pressure. MKS's
Baratron pressure measurement instruments, together with its vacuum gauges, are
capable of measuring the full range of pressures used in semiconductor and other
thin-film manufacturing processes from two hundred times atmospheric pressure to
one trillionth of atmospheric pressure.
MKS also manufactures a wide range of vacuum gauge instruments in which the
associated electronics are packaged with the vacuum sensor, reducing panel space
and installation cost. MKS offers both analog and digital versions of these
vacuum gauge transducers.
Vacuum Valves and Components. MKS's vacuum valves are used on the gas lines
between the process chamber and the pump downstream of the process chamber.
MKS's vacuum components consist of flanges, fittings, traps and heated lines
that are used downstream from the process chamber to provide leak free
connections and to prevent condensable materials from depositing particles near
or back into the chamber. The manufacture of small circuit patterns cannot
tolerate contamination from atmospheric leaks or particles. MKS's vacuum
components are designed to minimize such contamination and thus increase yields
and uptimes.
MARKETS AND APPLICATIONS
MKS estimates that approximately two-thirds of its sales in 1999 were made
to the semiconductor industry. MKS's products are also used in other markets and
applications including the manufacture of, among other things:
- optical filters and fiber optic cables for data and telecommunications
- flat panel displays
- magnetic and optical storage media
- solar panels
- gas lasers
- eyeglasses
- architectural glass
- cutting tools
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- freeze-dried pharmaceuticals
MKS sells its products primarily through its direct sales force in 22
offices in France, Germany, Japan, Korea, The Netherlands, Singapore, Taiwan,
the United Kingdom and the United States. This direct sales force is
supplemented by sales representatives and agents in Canada, China, India,
Israel, and Italy and in selected U.S. cities. The major markets for MKS's
products include:
Semiconductor Manufacturing
MKS's products are sold to semiconductor capital equipment manufacturers and
semiconductor device manufacturers. MKS's products are used in the major
semiconductor processing steps such as:
- depositing materials onto substrates
- etching circuit patterns
- implanting positively charged atoms into a substrate to alter
electrical characteristics
MKS's products are also used for process facility applications such as gas
distribution, pressure control and vacuum distribution in clean rooms where
semiconductor manufacturing takes place. MKS anticipates that the semiconductor
manufacturing market will continue to account for a substantial portion of its
sales. While the semiconductor device manufacturing market is global, the major
semiconductor capital equipment manufacturers are concentrated in the United
States, Japan and Europe.
Optical Filters, Optical Fibers and Other Coating
MKS's products are used in optical filter, optical fiber and other optical
thin-film coating processes. MKS's products are sold both to coating equipment
manufacturers and to manufacturers of products made using optical thin-film
coating processes. Optical filters and fibers used for data transmission are
manufactured using processes to deposit chemical vapors which are similar to
those used in semiconductor manufacturing. The requirement for greater data
transmission is driving the need for tighter control of optical filters and
fiber coating processes. Optical thin films for eyeglasses, solar panels and
architectural glass are deposited using processes to deposit chemical vapors and
gaseous metals similar to those used in semiconductor manufacturing. Optical
filter, optical fiber and other optical thin-film processing are concentrated in
the United States, Japan and Europe.
Flat Panel Display Manufacturing
MKS's products are used in the manufacture of flat panel displays, which
require the same or similar fabrication processes as semiconductor
manufacturing. MKS sells its products both to flat panel original equipment
manufacturers and to end-users in the flat panel display market. The transition
to larger panel size and higher definition is driving the need for defect
reduction which requires tighter process controls. The major manufacturers for
flat panel displays and flat panel display equipment are concentrated in Japan.
Magnetic and Optical Storage Media
MKS's products are used in the manufacture of:
- magnetic storage media which store and read data magnetically
- optical storage media which store and read data using laser technology
- compact disks
- hard disks
- data storage devices
- digital video or versatile disks
The transition to higher density storage capacity requires manufacturing
processes incorporating tighter process controls. While storage media
manufacturing is global, the major manufacturers are concentrated in Japan and
the Asia-
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Pacific region and storage media capital equipment manufacturers are
concentrated in the United States, Japan and Europe.
Other Coating Markets
MKS's pressure and flow measurement and control instruments are also used in
processes for the application of thin films to harden tool bit surfaces, for the
application of diamond thin films to enhance surface hardness and durability and
for coatings used for food container packaging, jewelry and ornaments. The major
equipment and process providers are concentrated in the United States, Japan and
Europe.
Other Markets
MKS's products are used in plasma processes used to sterilize medical
instruments, in vacuum freeze drying of pharmaceuticals, foods and beverages,
and in vacuum processes involved in light bulb and gas laser manufacturing.
MKS's products are also sold to government, university and industrial
laboratories for vacuum applications involving research and development in
materials science, physical chemistry and electronics materials. The major
equipment and process providers and research laboratories are concentrated in
the United States, Japan and Europe.
SALES, MARKETING AND SUPPORT
MKS's worldwide sales, marketing and support organization is critical to its
strategy of maintaining close relationships with semiconductor capital equipment
manufacturers and semiconductor device manufacturers. MKS sells its products
primarily through its direct sales force. As of December 31, 1999, MKS had 126
sales employees in 22 offices in France, Germany, Japan, Korea, The
Netherlands, Singapore, Taiwan, the United Kingdom and the United States. This
direct sales force is supplemented by sales representatives and agents in
Canada, China, India, Israel, and Italy and in selected U.S. cities. MKS
maintains a marketing staff to identify customer requirements, assist in
product planning and specifications and to focus on future trends in the
semiconductor and other markets.
As semiconductor device manufacturers have become increasingly sensitive to
the significant costs of system downtime, they have required that suppliers
offer comprehensive local repair service and close customer support.
Manufacturers require close support to enable them to repair, modify, upgrade
and retrofit their equipment to improve yields and adapt new materials or
processes. To meet these market requirements, MKS maintains a worldwide sales
and support organization with offices in 22 locations. Technical support is
provided by applications engineers located at offices in Arizona, California,
Colorado, Massachusetts, Oregon and Texas, as well as Canada, France, Germany,
India, Israel, Italy, Japan, Korea, The Netherlands, Singapore, Taiwan and the
United Kingdom. Repair and calibration services are provided at 14 service
depots located worldwide. MKS provides warranties from one to three years,
depending upon the type of product. In addition, MKS offers training programs
for its customers in a wide range of vacuum and gas processing technologies.
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RESEARCH AND DEVELOPMENT
MKS's research and development efforts are directed toward developing and
improving MKS's gas management instruments and components for semiconductor and
advanced thin-film processing applications and identifying and developing
products for new applications for which gas management plays a critical role.
MKS has undertaken an initiative to involve its marketing, engineering,
manufacturing and sales personnel in the concurrent development of new products
in order to reduce the time to market for new products. MKS's employees also
work closely with its customers' development personnel. These relationships help
MKS identify and define future technical needs on which to focus its research
and development efforts. In addition, MKS participates in S.I.S.A.
(Semiconductor Industry Suppliers Association), a consortium of semiconductor
equipment suppliers, to assist in product development and standardization of
product technology, and it supports research at academic institutions targeted
at advances in materials science and semiconductor process development.
COMPETITION
The market for MKS's products is highly competitive. Principal competitive
factors include:
- historical customer relationships
- product quality, performance and price
- breadth of product line
- manufacturing capabilities
- customer service and support
While MKS believes that it competes favorably with respect to these factors,
there can be no assurance that it will continue to do so.
MKS encounters substantial competition in each of its product lines from a
number of competitors, although no one competitor competes with MKS across all
product lines. Certain of MKS's competitors have greater financial and other
resources than MKS. In some cases, the competitors are smaller than MKS, but
well-established in specific product niches. Millipore Corporation offers
products that compete with MKS's pressure and flow products. Aera Corporation,
STEC, and Unit Instruments, each offer products that compete with MKS's mass
flow control products. Nor-Cal Products, Inc. and MDC Vacuum Products, Inc.,
each offer products that compete with MKS's vacuum components. Leybold-Inficon,
Inc., offers products that compete with MKS's vacuum measuring and gas analysis
products. Helix Technology Corporation offers products that compete with MKS's
vacuum gauging products. Spectra International LLC offers products that compete
with MKS's gas analysis products.
In some cases, particularly with respect to mass flow controllers,
semiconductor device manufacturers may direct semiconductor capital equipment
manufacturers to use a specified supplier's product in their equipment.
Accordingly, MKS's success depends in part on its ability to have semiconductor
device manufacturers specify that its products be used at their fabrication
facilities and MKS may encounter difficulties in changing established
relationships of competitors with a large installed base of products at such
customers' fabrication facilities. In addition, MKS's competitors can be
expected to continue to improve the design and performance of their products.
There can be no assurance that competitors will not develop products that offer
price or performance features superior to those of MKS's products.
PATENTS AND OTHER INTELLECTUAL PROPERTY RIGHTS
MKS relies on a combination of patent, copyright, trademark and trade
secret laws and license agreements to establish and protect its proprietary
rights. As of December 31, 1999, MKS held 55 U.S. patents and had 13 pending
U.S. patent applications. Foreign counterparts of certain of these applications
have been filed or may be filed at the appropriate time. While MKS believes that
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patents may be important for certain aspects of its business, MKS believes that
its success depends more upon close customer contact, innovation, technological
expertise, responsiveness and worldwide distribution.
The Company is not engaged in any material disputes with other parties with
respect to the ownership or use of the Company's proprietary technology.
However, there can be no assurance that other parties will not assert technology
infringement claims or other claims against the Company in the future. The
litigation of such a claim may involve significant expense and management time.
In addition, if any such claim were successful, the Company could be required to
pay monetary damages and may also be required to either refrain from
distributing the infringing product or obtain a license from the party asserting
the claim (which license may not be available on commercially reasonable terms).
EMPLOYEES
As of December 31, 1999, MKS employed 1,006 persons. Management believes
that MKS's ongoing success depends upon its continued ability to attract and
retain highly skilled employees. None of MKS's employees is represented by a
labor union or party to a collective bargaining agreement. MKS believes that its
employee relations are good.
FACTORS AFFECTING FUTURE OPERATING RESULTS
MKS believes that this document contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements are subject to risks and uncertainties and are based on the beliefs
and assumptions of management of MKS, based on information currently available
to MKS' management. Use of words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely" or similar expressions,
indicate a forward looking statement. Forward-looking statements involve risks,
uncertainties and assumptions. Certain of the information contained in this
Annual Report on Form 10-K consists of forward-looking statements. Important
factors that could cause actual results to differ materially from the
forward-looking statements include the following:
Cyclicality of the Semiconductor Industry
MKS estimates that approximately 66% of its sales during 1999 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.
Fluctuations in Operations 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
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- 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 1999 and 1998 accounted for approximately 33%
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 1999, one
customer, Applied Materials, Inc., accounted for approximately 22% 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, and 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.
Expansion into New Markets
MKS plans to build upon its experience in manufacturing and selling gas
measurement, control and analysis products used
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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 31% of net sales in 1999, 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 intercompany
sales 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.
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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.
MARKET RISK AND SENSITIVITY ANALYSIS
Foreign Exchange Rate Risk
MKS enters into forward exchange contracts and local currency purchased options
to reduce currency exposure arising from intercompany sales of inventory. The
potential fair value loss for a hypothetical 10% adverse change in forward
currency exchange rates on MKS's forward exchange contracts at December 31, 1999
would be $502,000. The potential loss was estimated by calculating the fair
value of the forward exchange contracts at December 31, 1999 and comparing that
with those calculated using the hypothetical forward currency exchange rates.
The value of the local currency purchased options at December 31, 1999 was
immaterial.
At December 31, 1999, MKS had $12,423,000 related to short-term borrowings
denominated in Japanese yen. The carrying value of these short-term borrowings
approximates fair value due to their short period to maturity. Assuming a
hypothetical 10% adverse change in the Japanese yen to U.S. dollar year end
exchange rate, the fair value of these short-term borrowings would increase by
$1,381,000. The potential increase in fair value was estimated by calculating
the fair value of short-term borrowings at December 31, 1999 and comparing that
with the fair value using the hypothetical year end exchange rate.
Interest Rate Risk
MKS is exposed to fluctuations in interest rates in connection with its variable
rate term loans. In order to minimize the effect of changes in interest rates on
earnings, MKS entered into an interest rate swap that fixed the interest rate on
its variable rate term loans. Under the swap agreement, MKS pays a fixed rate of
5.85% on the notional amount and receives LIBOR. At December 31, 1999, the
notional amount of the interest rate swap was equal to the principal amount of
the variable rate term loans. The potential increase in the fair value of term
loans when adjusting for the interest rate swap paying at a fixed rate resulting
from a hypothetical 10% decrease in interest rates was not material.
Due to its short-term duration the fair value of the Company's cash and
investment portfolio at December 31, 1999 approximated its carrying value.
Interest rate risk was estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in interest rates for securities
contained in the investment portfolio. The resulting hypothetical fair value was
not materially different from the year-end carrying value.
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ITEM 2. PROPERTIES
The following table provides information concerning MKS's principal and
certain other owned and leased facilities as of December 31, 1999:
LEASE
LOCATION SQ. FT. ACTIVITY PRODUCTS MANUFACTURED EXPIRES
Andover, Massachusetts 82,000 Headquarters, Pressure measurement and (1)
Manufacturing, Customer control products
Support and Research &
Development
Boulder, Colorado 86,000 Manufacturing, Customer Vacuum products (2)
Support, Service and
Research & Development
Methuen, Massachusetts 85,000 Manufacturing, Customer Pressure measurement and (1)
Support, Service and control products; Materials
Research & Development delivery and analysis products
Lawrence, Massachusetts 40,000 Manufacturing Pressure measurement and (1)
control products
Tokyo, Japan 20,700 Manufacturing, Sales, Materials delivery and (3)
Customer Support, analysis products
Service and Research &
Development
Richardson, Texas 14,600 Manufacturing, Sales, Pressure measurement and 8/31/01
Customer Support and control products
Service
Santa Clara, California 13,000 Sales, Customer Support Not applicable (4)
and Service
Munich, Germany 14,100 Manufacturing, Sales, Pressure measurement and (1)
Customer Support, control products; Materials
Service and Research & delivery and analysis products
Development
Le Bourget, France 13,700 Sales, Customer Support Not applicable (1)
and Service
Austin, Texas 8,200 Sales, Customer Support Not applicable 1/30/03
and Service
Seoul, Korea 4,760 Manufacturing, Sales, Materials delivery and 5/30/00*
Customer Support and analysis products
Service
Cheshire, U.K. 2,200 Manufacturing, Sales, Materials delivery and 10/5/09
Customer Support and analysis products
Service
Singapore 2,050 Sales, Customer Support Not applicable 3/25/01
and Service
Taiwan 2,050 Sales, Customer Support Not applicable 12/31/01
and Service
- ----------
(1) This facility is owned by MKS.
(2) MKS leases one facility which has 39,000 square feet of space and a lease
term which expires 10/31/01 and owns a second and third facility with
28,000 and 19,000 square feet of space, respectively.
(3) MKS leases a facility which has 14,000 square feet of space and a lease
term which expires 4/30/01 and owns another facility with 6,700 square feet
of space.
(4) MKS leases one facility with 4,000 square feet of space on a month-to-month
basis, a second facility of 4,000 square feet with a lease term which
expires on 1/30/03. MKS owns a third facility of 5,000 square feet.
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* MKS has an option to extend this lease for a period of two years.
In addition to manufacturing and other operations conducted at the foregoing
leased or owned facilities, MKS provides worldwide sales, customer support and
services from various other leased facilities throughout the world not listed in
the table above. See "Business -- Sales, Marketing and Support."
ITEM 3. LEGAL PROCEEDINGS
MKS is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1999 through the solicitation of proxies of otherwise.
PART II
ITEM 5. MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
The information required by this item is set forth under the caption
"Supplemental Stockholders Information" on page 28 of our 1999 Annual Report and
is incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The information required by this item is set forth under the caption
"Selected Consolidated Financial Data" on page 20 of our 1999 Annual Report and
is incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 21 through 27 of our 1999 Annual Report and is incorporated
herein by reference and is filed herewith as Exhibit 13.1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under the caption "Market
Risk and Sensitivity Analysis" on page 27 of our 1999 Annual Report and is
incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, Independent Accountants, dated January 28, 2000, and
appearing on pages 29 through 43 of our 1999 Annual Report is incorporated
herein by reference and is filed herewith as Exhibit 13.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item is set forth under the captions
"Election of Directors" and "Executive Officers" in our Proxy Statement for the
2000 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Executive Compensation" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Certain Relationships and Related Transactions" in our Proxy Statement for the
2000 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
(1) FINANCIAL STATEMENTS:
PART IV
MKS INSTRUMENTS, INC.
INDEX TO FINANCIAL STATEMENTS
ANNUAL REPORT
TITLE PAGE NUMBER
----- -----------
Report of Independent Accountants 29
Consolidated Balance Sheets at December 31, 1999 and 1998 30
Consolidated Statements of Income for the Years Ended December 31, 1999, 1998 and 1997 31
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 32
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 33
Notes to Consolidated Financial Statements 34
The consolidated financial statements and related notes, together with the
report thereon of PricewaterhouseCoopers LLP dated January 28, 2000, listed in
the above index that are included in our 1999 Annual Report which is filed
herewith as Exhibit 13.1 are hereby incorporated by reference. With the
exception of the pages listed in the above index and the portion of such report
referred to in Items 5, 6, 7, 7A, and 8 of this Form 10-K, our 1999 Annual
Report is not to be deemed filed as part of this report.
(2) FINANCIAL STATEMENT SCHEDULE:
The following financial statement schedule of MKS Instruments,
Inc. for the years ended December 31, 1999, 1998 and 1997 is filed as
part of this Form 10-K and should be read in conjunction with our
Consolidated Financial Statements included in Item 8 of this Report on
Form 10-K.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
BALANCE AT CHARGED TO
BEGINNING COSTS AND CHARGED TO BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF YEAR
YEAR ENDED DECEMBER 31, 1997:
Allowance for doubtful accounts............. $482,000 $258,000 $ ---- $130,000 $610,000
YEAR ENDED DECEMBER 31, 1998:
Allowance for doubtful accounts............. 610,000 253,000 ---- 207,000 656,000
YEAR ENDED DECEMBER 31, 1999:
Allowance for doubtful accounts............. 656,000 257,000 ---- (21,000) 934,000
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of MKS Instruments, Inc.:
Our audits of the consolidated financial statements referred to in
our report dated January 28, 2000 appearing in the 1999 Annual Report
to Shareholders of MKS Instruments, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 28, 2000
All other financial statement schedules have been omitted because
they are inapplicable, not required, or the information is included
elsewhere in the Consolidated Financial Statements or Notes thereto.
(3) EXHIBITS:
(i) The Exhibits listed in the Exhibit Index immediately
preceeding such Exhibits are filed as part of this Annual
Report on Form 10-K.
EXHIBIT NO. TITLE
----------- -----
+3.2 Amended and Restated Articles of Organization
+3.4 Amended and Restated By-Laws
+4.1 Specimen certificate representing the common stock
+10.1 Amended and Restated 1995 Stock Incentive Plan
+10.2 1996 Amended and Restated 1996 Director Stock Option Plan
+10.3 1997 Director Stock Option Plan
+10.4 1999 Employee Stock Purchase Plan
+10.5 Amended and Restated Employment Agreement dated as of
December 15, 1995 between Leo Berlinghieri and the
Registrant
+10.6 Amended and Restated Employment Agreement dated as of
December 15, 1995 between John J. Sullivan and the
Registrant
+10.7 Amended and Restated Employment Agreement dated as of
December 15, 1995 between Ronald C. Weigner and the
Registrant
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16
+10.8 Amended and Restated Employment Agreement dated as of
December 15, 1995 between William D. Stewart and the
Registrant
10.9 Loan Agreement dated as of October 31,
1995, as last amended January 1, 2000, by
and between the First National Bank of
Boston and the Registrant
+10.10 Lease Agreement dated as of October 12,
1989, as extended November 1, 1998, by and
between Aspen Industrial Park Partnership
and the Registrant
10.11 Loan Agreement dated as of November 1,
1993, as last amended January 1, 2000,
between the First National Bank of Boston
and the Registrant
+10.12 Lease dated as of September 21, 1995 by and between General
American Life Insurance Company and the Registrant
+10.13 Loan Agreement dated as of February 23,
1996, as last amended January 28, 1999,
between BankBoston, N.A., Chemical Bank
and the Registrant
+10.14 Revolving Credit Note ($8,000,000) dated February 23, 1996
between Chemical Bank, The First National Bank of Boston and
the Registrant
+10.15 Revolving Credit Note ($12,000,000) dated February 23, 1996
between Chemical Bank, The First National Bank of Boston and
the Registrant
+10.16 Promissory Note dated as of August 1990 between Jefferson
National Life Insurance Company and the Registrant
+**10.17 Comprehensive Supplier Agreement #982812 dated October 23,
1998 by and between Applied Materials, Inc. and the
Registrant
+**10.18 Management Incentive Program
+10.19 Lease dated as of December 21, 1989, as
last amended December 1996, between
Walpole Park South II Trust and the
Registrant
+10.20 Lease dated as of January 1, 1996 between MiFuji Kanzai Co.
Ltd. and the Registrant (covering Floor 5)
+10.21 Lease dated as of April 21, 1997 between MiFuji Kanzai Co.
Ltd. and the Registrant (covering Floors 1 and 2)
+10.22 Split-Dollar Agreement dated as of September 12, 1991
between the Registrant, John R. Bertucci and Claire R.
Bertucci and Richard S. Chute, Trustees of the John R.
Bertucci Insurance Trust of January 10, 1986
+10.23 Split-Dollar Agreement dated as of September 12, 1991
between the Registrant, John R. Bertucci and John R.
Bertucci and Thomas H. Belknap, Trustees of the Claire R.
Bertucci Insurance Trust of January 10, 1986
+10.24 Form of Tax Indemnification and S Corporation Distribution
Agreement
+10.25 Employment Agreement dated March 7, 1997 between Joseph
Maher and the Registrant
+10.26 Form of Contribution Agreement
*10.27 MKS Instruments, Inc. International
Employee Stock Purchase Plan
10.28 Loan Agreement dated as of January 1, 2000 between BankBoston, N.A., The Chase
Manhattan Bank, and the Registrant
10.29 Employment Agreement dated as of May 17, 1999 between Peter Younger and the Registrant
10.30 Employment Agreement dated as of December 6, 1999 between Robert Klimm and the
Registrant
13.1 1999 Annual Report to Shareholders (which
shall be deemed filed only with respect to
those portions specifically incorporated
by reference herein)
21.1 Subsidiaries of the Registrant
23.2 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
* Incorporated by reference to the Registration Statement on
Form S-8 (file No. 333-31224) filed with the Securities and
Exchange Commission on February 28, 2000.
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17
** Confidential materials omitted and filed separately with the
Securities and Exchange Commission.
+ Incorporated by reference to the Registration Statement on
Form S-1 (file No. 333-71363) filed with the Securities and
Exchange Commission on January 28, 1999, as amended.
(b) Reports on Form 8-K.
No reports filed on Form 8-K were filed during the last quarter of the
fiscal year ended December 31, 1999.
(c) Exhibits.
The Company hereby files as exhibits to our Annual Report on Form 10-K
those exhibits listed in Item 14(a)(3) above.
(d) Financial Statement Schedules.
Not Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MKS INSTRUMENTS, INC.
By: /s/ John R. Bertucci
-----------------------------------
John R. Bertucci
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURES TITLE DATE
/s/ John R. Bertucci Chairman of the Board of Directors and Chief
- -------------------------------------------- Executive Officer (Principal Executive Officer) 3/29/00
John R. Bertucci
/s/ Ronald C. Weigner Vice President and Chief Financial Officer
- -------------------------------------------- (Principal Financial and Accounting Officer) 3/29/00
Ronald C. Weigner
/s/ Richard S. Chute
- -------------------------------------------- Director 3/29/00
Richard S. Chute
/s/ Owen W. Robbins
- -------------------------------------------- Director 3/29/00
Owen W. Robbins
/s/ Robert J. Therrien
- -------------------------------------------- Director 3/29/00
Robert J. Therrien
/s/ Louis P. Valente
- -------------------------------------------- Director 3/29/00
Louis P. Valente
18