UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-30980
INFICON Holding AG
(Exact name of Registrant as specified in its charter)
INFICON Holding Inc.
(Translation of Registrantis name into English)
Switzerland
(Jurisdiction of incorporation or organization)
INFICON Inc.
Two Technology Place
East Syracuse, New York 13057
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
----------
Securities registered or to be registered pursuant to Section 12(g) of the Act.
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
American Depositary Shares, each The Nasdaq National Market
representing one-tenth of one INFICON
Holding AG share with a par value of CHF 10
INFICON Holding AG shares with a par value of CHF 10 each The SWX Swiss Exchange
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
2,315,000 shares
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 | |. Not applicable.
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 | | Item 18 |X|
TABLE OF CONTENTS
PART I................................................................................................3
Item 1. Identity of Directors, Senior Management and Advisors................................3
Item 2. Offer Statistics and Expected Timetable..............................................3
Item 3. Key Information......................................................................3
Item 4. Information on the Company..........................................................13
Item 5. Operating and Financial Review and Prospects........................................30
Item 6. Directors, Senior Management, and Employees.........................................44
Item 7. Major Shareholders and Related Party Transactions...................................51
Item 8. Financial Information...............................................................57
Item 9. The Offer and Listing...............................................................58
Item 10. Additional Information.............................................................59
Item 11. Quantitative and Qualitative Disclosures about Market Risk.........................73
Item 12. Description of Securities Other Than Equity Securities.............................74
PART II..............................................................................................74
Item 13. Defaults, Dividend Arrearages, and Delinquencies...................................74
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds.......74
Item 15. Controls and Procedures............................................................75
Item 16. [Reserved].........................................................................75
PART III.............................................................................................75
Item 17. Financial Statements...............................................................75
Item 18. Financial Statements...............................................................76
Item 19. Exhibits...........................................................................77
1
INFICON Holding AG is a corporation (Aktiengesellschaft) organized under the
laws of Switzerland. In this annual report, "INFICON Holding AG" refers solely
to the ultimate parent company of the INFICON Group. "INFICON," the "INFICON
Group," "we," "us" and "our" refer to INFICON Holding AG and its consolidated
subsidiaries. All references to "Unaxis" refer to our significant shareholder,
Unaxis Holding AG, a corporation (Aktiengesellschaft) organized under the laws
of Switzerland.
PRESENTATION OF FINANCIAL INFORMATION
We have prepared our consolidated financial statements in accordance with
U.S. generally accepted accounting principles, or U.S. GAAP. In accordance with
the requirements of the Swiss law, we have included our INFICON Holding AG
Financial Statements under Swiss generally accepted accounting principles. Our
shares are quoted on the SWX Swiss Exchange in Swiss Francs. Although we do not
anticipate paying dividends in the foreseeable future, any cash dividends
declared with respect to our shares will be declared in Swiss Francs.
MARKET SHARE AND INDUSTRY DATA
Market information contained in this annual report, including information
on our market share and the position of our business relative to our
competition, largely reflects management's best estimates. These estimates are
based upon information obtained from sources such as: customers, trade or
business organizations and associations, contacts within the industries in which
we compete and, in certain cases, upon published statistical data from
independent third parties. We also rely on forecasts of future market conditions
and trends from third-party sources. These third-party sources of statistical
data and forecasts typically address a broad market for finished products made
by our customers and do not address the vacuum instrumentation market directly.
We have not independently verified the data and assumptions upon which these
forecasts were prepared by the third-party sources, in addition to the rates of
general economic growth that were assumed in preparing the forecasts; however,
we believe them to be reasonable. Except as otherwise noted, market share
information and assessments of our competitive position were derived by
comparing our sales to the sales estimates of our competitors', as well as
general market conditions. Amounts and percentages included in this annual
report have been rounded and, accordingly, may not total.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F and other materials we have filed or may
file with the Securities and Exchange Commission, as well as information
included in oral statements or other written statements made, or to be made, by
us, contain disclosures which are "forward-looking statements." Forward-looking
statements include all statements that do not relate solely to historical or
current facts, and can be identified by the use of words such as "may,"
"believe," "will," "expect," "project," "assume," "estimate," "anticipate,"
"plan," "continue," "resumes," "opportunity" or "potential" or "guidance." These
forward-looking statements address, among other things, our strategic
objectives, trends in vacuum technology and in the industries that employ vacuum
instrumentation, such as the semiconductor and related industries, and the
anticipated effects of these trends on our business. These forward-looking
statements are based on the current plans and expectations of our management and
are subject to a number of uncertainties and risks that could significantly
affect our current plans and expectations, as well as future results of
operations and financial condition. Some of these risks and uncertainties are
discussed under "Key Information---Risk Factors."
As a consequence, our current and anticipated plans and our future
prospects, results of operations and financial condition may differ from those
expressed in any forward-looking statements made by or on behalf of our company.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
2
PART I
Item 1. Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected Financial Data
The following tables present our selected historical combined financial
data. This data has been derived from our consolidated financial statements
prepared in accordance with U.S. GAAP. The information set forth below should be
read in conjunction with the "Operating and Financial Review and Prospects"
section in addition to our historical financial statements and notes to those
statements included within this annual report. Our income statement data, set
forth below, for the years ended December 31, 2003, 2002 and 2001 and the
balance sheet data as of December 31, 2003 and 2002 are derived from our audited
consolidated financial statements and the notes to those statements included in
this annual report. Our selected historical combined financial and other data
for the years ended December 31, 2000 and 1999 and the balance sheet data as of
December 31, 2001, 2000 and 1999 have been derived from our audited combined
financial statements, which are not included in this annual report.
As of the present date, no dividends have been declared by the Company.
3
Years ended December 31,
---------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ----------- ----------- ---------- ----------
U.S.$ in thousands except for shares and per share amount
Income Statement Data:
Net sales
Semiconductor vacuum instrumentation ......................... $ 38,538 $ 30,716 $ 43,614 $ 54,187 $ 36,662
General vacuum instrumentation ............................... 120,900 99,563 98,619 104,024 87,838
---------- ----------- ----------- ---------- ----------
Total net sales .................................................. 159,438 130,279 142,233 158,211 124,500
Cost of sales .................................................... 89,102 72,364 77,146 78,908 65,988
---------- ----------- ----------- ---------- ----------
Gross profit ..................................................... 70,336 57,915 65,087 79,303 58,512
Research and development ......................................... 20,988 16,052 12,039 10,566 11,138
Impairment of long lived assets .................................. 7,370 -- -- -- --
Selling, general and administrative .............................. 48,326 39,264 38,097 38,809 36,608
---------- ----------- ----------- ---------- ----------
Operating income (loss) from continuing operations ............... (6,348) 2,599 14,951 29,928 10,766
Interest expense (income), net ................................... (126) (597) (478) 292 130
Other expense (income), net ...................................... (546) 383 1,337 1,332 921
---------- ----------- ----------- ---------- ----------
Income (loss) from continuing operations before income taxes ..... (5,676) 2,813 14,092 28,304 9,715
Provision (benefit) for income taxes ............................. 271 (120) 2,504 8,450 2,552
---------- ----------- ----------- ---------- ----------
Income (loss) from continuing operations ......................... (5,947) 2,933 11,588 19,854 7,163
Discontinued Operations (Note 13):
(Loss) from operations of discontinued Ultra Clean operations
(less applicable income tax (benefit) of $(177) in 2003, $(422)
in 2002, $(138) in 2001, $292 in 2000 and $32 in 1999) ........ (1,188) (2,828) (1,636) 3,077 213
(Loss) on disposal of Ultra Clean Operations (including 2,591
for operating losses during phase-out period, net of income tax
(benefit) of $(337) in 2003 ................................... (2,254) -- -- -- --
---------- ----------- ----------- ---------- ----------
Income (loss) from discontinued operations .................... (3,442) (2,828) (1,636) 3,077 213
Net income (loss) ................................................ $ (9,389) $ 105 $ 9,952 $ 22,931 $ 7,376
---------- ----------- ----------- ---------- ----------
Earnings (loss) per share:
Diluted:
Continuing operations ......................................... $ (2.57) $ 1.27 $ 5.01 $ 9.70 $ 3.58
Discontinued operations ....................................... (1.49) (1.22) (0.71) 1.50 0.11
---------- ----------- ----------- ---------- ----------
Total ......................................................... $ (4.06) $ 0.05 $ 4.30 $ 11.21 $ 3.69
Earnings (loss) per share:
Basic:
Continuing operations ......................................... $ (2.57) $ 1.27 $ 5.01 $ 9.70 $ 3.58
Discontinued operations ....................................... (1.49) (1.22) (0.71) 1.50 0.11
---------- ----------- ----------- ---------- ----------
Total ......................................................... $ (4.06) $ 0.05 $ 4.30 $ 11.21 $ 3.69
Weighted average number of shares - Diluted
2,315,000 2,315,397 2,315,000 2,046,000 2,000,000
Basic ............................................................ 2,315,000 2,315,000 2,315,000 2,046,000 2,000,000
Balance Sheet Data:
Working capital .................................................. $ 64,342 $ 63,796 $ 61,741 $ 55,087 $ 29,719
Total assets ..................................................... 150,674 147,928 138,194 152,934 56,198
Total debt ....................................................... -- -- -- 869 --
Stockholders' equity ............................................. 125,759 127,410 119,524 108,531 41,360
4
Exchange Rate Information
Since the primary listing for our shares is on the SWX Swiss Exchange in
Swiss Francs, we have set forth below, for the periods and dates indicated,
information regarding the noon buying rate in the City of New York for cable
transfers in Swiss Francs as certified for customs purposes by the Federal
Reserve Bank of New York, or the "noon buying rate," expressed in Swiss Francs
per Dollar.
We have provided these rates solely for your convenience. They should not
be construed as a representation that Swiss Franc amounts actually represent the
Dollar amounts or that the Swiss Franc amounts could have been, or could be,
converted into Dollars at these rates or at any other rate. We do not use these
rates for preparing our consolidated financial statements included in this
annual report. On February 29, 2004, the average buying rate was U.S.$1.00=CHF
1.2626.
CHF CHF
Month High Low
----- ---- ---
September 2003 1.42 1.32
October 2003 1.34 1.30
November 2003 1.38 1.29
December 2003 1.30 1.24
January 2004 1.27 1.21
February 2004 1.28 1.22
CHF CHF CHF CHF
Calendar Year Average(1) High Low At Period End
- ------------- ---------- ---- --- -------------
1995 1.1744 1.3130 1.1172 1.1540
1996 1.2419 1.3515 1.1573 1.3390
1997 1.4521 1.5360 1.3430 1.4610
1998 1.4507 1.5420 1.2935 1.3735
1999 1.5139 1.6015 1.3585 1.5930
2000 1.6885 1.8300 1.5420 1.6116
2001 1.6872 1.8226 1.5665 1.6732
2002 1.5565 1.7300 1.3850 1.3875
2003 1.3452 1.4299 1.2405 1.2423
(1) The average of the buying rates throughout the year.
5
B. Capitalization and Indebtedness.
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors.
Investing in our shares or ADSs involves a high degree of risk and
uncertainty. You should carefully consider the risks and uncertainties described
below prior to investing in our shares or ADSs. If any of the following risks
actually occur, our business, prospects, financial condition and results of
operations could be harmed. In that case, the value of our shares or ADSs could
decline, and you could lose all or part of your investment.
Risks Relating to Our Business
Downturns in the semiconductor chip manufacturing industry have had in the past,
and may have in the future, a material adverse effect on our sales and
profitability.
Our business depends upon the strength of demand from semiconductor chip
manufacturers and semiconductor equipment manufacturers, OEMs, or
microelectronic products, which in turn depend upon the current and anticipated
demand for semiconductors and products using semiconductors. In the year ended
December 31, 2003, we estimate that approximately 67% of our semiconductor
vacuum instrumentation sales, and approximately 16% of our general vacuum
instrumentation sales were to semiconductor chip manufacturers, OEMs and related
markets. For the year ended December 31, 2002, we estimate that approximately
68% of our semiconductor vacuum instrumentation sales and approximately 14% of
our general vacuum instrumentation sales were to semiconductor chip
manufacturers, OEMs and related markets. As we pursue an increased strategic
focus toward the semiconductor industry, we anticipate sales to these customers
will become an increasingly higher percentage of our sales. Periodic reductions
in demand from semiconductor chip manufacturers and OEMs may reduce revenues,
and we may be unable to increase sales to new or existing customers.
Historically, the semiconductor chip manufacturing market has been highly
cyclical and has experienced periods of overcapacity resulting in a reduction in
demand for capital equipment. For example, in 1998 the semiconductor chip
manufacturing industry experienced a severe downturn, which contributed to a
11.6% decrease in our net sales from 1997. Although the semiconductor chip
manufacturing industry recovered in late 1999 and 2000, the industry entered
another downturn in 2001 resulting in a 10.1% decrease in net sales from 2000.
The downturn continued throughout 2002 resulting in a 8.4% decrease in net sales
from 2001; however, the trend reversed in 2003 with a 22.4% increase in net
sales from 2002. We cannot assure you that:
o the semiconductor chip manufacturing industry will improve;
o the semiconductor industry is not experiencing a downturn which may
be severe or prolonged; or
o any recovery will result in increased demand for capital equipment
by the semiconductor chip manufacturing industry.
Any downturn in the semiconductor chip manufacturing industry could
reduce, or limit the growth of revenues from semiconductor chip manufacturers
and OEMs, which we expect to account for an increasingly higher percentage of
our sales.
Fluctuations in our quarterly financial results may cause volatility in the
price of our stock.
Given the highly cyclical nature of the markets in which we participate,
we cannot reliably predict future revenue and profitability. Our quarterly
financial results have become highly dependent on the volume and timing
6
of orders received during the quarter, which are difficult to forecast. The
reduced level of orders for our semiconductor vacuum instrumentation products,
resulting from the continued downturn in the semiconductor chip manufacturing
industry, affects our financial results and may result in fluctuations between
quarters. Consequently, our financial results may fall below the expectations of
analysts and investors. In those circumstances where our financial results fall
below the expectations of analysts and investors, we may experience volatility
in the price of our stock.
The loss of sales to our major customers would likely have a material adverse
effect on us.
Our largest customers in 2003, Pfeiffer Vacuum and various entities
related to Unaxis, including Leybold Vacuum, accounted for an aggregate of
approximately 30% of our net sales. The loss of a major customer or any
reduction in orders by these customers, including reductions due to market or
competitive conditions, would likely result in a significant decrease in revenue
for an extended period of time until new or existing customer orders can make up
for the reduction.
Attempts to mitigate the adverse impact of any loss or reduction of orders
through the rapid addition of new customers could be difficult. This difficulty
occurs because prospective customers typically require lengthy qualification
periods to test and evaluate new products prior to placing significant orders
with a new supplier. Our future success will continue to depend upon:
o our ability to maintain relationships with existing key customers;
o our ability to attract new customers;
o our ability to provide products and services that meet the needs and
expectations of our customers; and
o the success of our OEM customers in creating demand for
manufacturing systems which incorporate our products.
Some of our customers compete, or may in the future compete, with Unaxis, and to
the extent that we are perceived to be controlled by, or under common control
with, Unaxis, we may lose their business.
Some of our customers compete, or may in the future compete, with our
principal shareholder, Unaxis. Unaxis currently owns 19.51% of our shares, and
one Unaxis officer serves on our board of directors. Additionally, Unaxis has
agreed to provide certain general and administrative services on a continuing
basis. Since Unaxis has agreed to provide these general and administrative
services, some of our customers may perceive us to be closely affiliated with
Unaxis. To the extent that any of these customers may compete with Unaxis, they
may choose to discontinue buying our products for competitive or other business
reasons, resulting in a reduction in our revenues.
Our future growth and competitiveness depend upon our ability to develop new and
enhanced products for industries we target and to adapt rapidly to changing
technologies. We cannot assure you that we will be successful in our product
development efforts or that our new products will gain general market
acceptance.
The markets in which we sell our products, including the semiconductor
manufacturing and equipment markets, are characterized by rapidly changing
technology, evolving industry standards and practices, frequent new product and
service introductions and enhancements, pricing pressure and changing customer
demands. Our future growth will depend, in part, on our ability to adapt to
rapidly changing technology and our ability to design, develop, manufacture,
assemble, test, market and support new products and enhancements in a timely and
cost-efficient manner. We cannot assure you the introduction of new products and
product enhancements will gain market acceptance. For example, product
development efforts focused on the semiconductor market include the addition and
enhancement of products for process control, in situ analysis and vacuum
measurement. We cannot assure you that semiconductor device and semiconductor
manufacturing equipment manufacturers will accept these products. We may also
experience difficulties or delays in our development efforts with respect to
these and other products.
7
Additionally, products or technologies developed by our competitors may
render our products or technologies obsolete or noncompetitive. A fundamental
shift away from vacuum technology in the semiconductor chip manufacturing market
could render our product offerings obsolete and significantly reduce our
revenues and the value of our shares or ADSs.
Changes or developments in the semiconductor industry could cause shifts in our
infrastructure and increase the competition for our products.
The long-term business outlook for the semiconductor industry indicates a
migration toward fab-less semiconductor companies and the use of semiconductor
foundries due to the substantial expense of building or expanding a
semiconductor fabrication facility. This trend could shift our customer base
toward large foundries that may have more pricing power. Consequently, we may
experience an erosion in price in order to support this shift in customer base.
There has been a dramatic consolidation within the semiconductor industry
to reduce the number of suppliers and leverage the synergies between
consolidated companies. The consolidation within the industry could affect the
demand and competition for our products.
The markets for our products are highly competitive. The high degree of
competition may result in reduced selling prices in addition to a decrease in
market share for our products.
We are exposed to the competitive characteristics of several diverse
geographic and product markets. Competition is dependent on a variety of factors
that include price, quality, functionality, brand recognition, and the
effectiveness of our marketing, sales and customer service efforts. We believe
the rapid identification of new product applications and the ability to supply
commercial quantities of products that enable these applications are critical
competitive factors. As the markets for our products expand, particularly with
respect to our semiconductor vacuum instrumentation products, we expect the
emergence of new competitors along with our existing competitors committing
additional resources to the markets in which we participate. In particularly
competitive markets, we have reduced the prices on our products in order to
maintain market share. For example, our fittings and valves are especially
sensitive to pricing pressure, since there is minimal technical differentiation
among competitive products. Increased competition in these markets may result in
further price reductions.
Our sales and operating profit depend upon our ability to deliver products
with functional specifications at prices that compete successfully with our
competition, as well as our ability to manage operating costs. Some of our
competitors may have larger financial, technical and marketing resources than we
currently have. We cannot assure you that we will be able to compete effectively
in the future.
Our failure to protect our proprietary technology relating to vacuum
instrumentation may significantly impair our competitive position, which could
result in a loss of revenues and profits.
We rely, in part, on patent, trade secret, copyright and trademark law to
protect our intellectual property. Our future success and competitive position
depend upon our ability to obtain and maintain proprietary technology used in
our principal product families. We have obtained a number of patents relating to
our key product families and have filed applications for additional patents.
There can be no assurance that any pending patent applications will be approved,
that we will develop additional proprietary technology that is patentable, that
any patents obtained by or issued to us will provide us with competitive
advantages, or that these patents will not be challenged by any third parties.
Furthermore, there can be no assurance that third parties will not design around
our patents. Any of the foregoing results could harm our competitive position
and result in lost revenue and market share.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, there can be no
assurance these agreements will not be breached, that we will have adequate
remedies for any breach, or that our confidential and proprietary information
and technology will not be independently developed by, or become otherwise
known, to third parties.
8
We license technology used in our products from and to third parties. Our
inability to acquire third-party licenses, or to integrate the related
third-party technologies into our products, may result in delays in product
developments and enhancements until equivalent technologies can be identified,
licensed and integrated. We may also require new licenses, in the future, as our
business expands and technology evolves. We cannot assure you these licenses
will be available to us on commercially reasonable terms, if at all.
Our commercial success depends upon our ability to avoid infringing or
misappropriating any patents or other proprietary rights owned by third parties.
If we are found to have infringed or misappropriated a third party's patent or
other proprietary rights, we could be required to pay damages to such third
party, alter our products or processes, obtain a license from the third party or
cease activities using such proprietary rights. If we are required to do any of
the foregoing, we cannot assure you we will be able to do so on commercially or
financially favorable terms, if at all. Our inability to do any of the foregoing
on commercially or financially favorable terms could have a material adverse
effect on our business, prospects, financial condition and results of
operations.
Litigation may be necessary in order to enforce our patents or other
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement from third parties. Any such litigation could result in
substantial costs coupled with the diversion of resources.
Our inability to convince OEMs to use our products in their manufacturing
systems could weaken our competitive position.
Manufacturing systems built by OEMs typically have a lifespan of five to
ten years. OEMs subject components to rigorous and lengthy testing processes
before incorporating them into their systems. Once an OEM has selected a
vendor's equipment for a manufacturing system, the OEM generally relies, to the
extent possible, upon that vendor's equipment. As a result, when another
vendor's equipment is incorporated into an OEM's system, we may have difficulty
convincing an OEM to incorporate our products into their manufacturing systems
unless there are compelling reasons for a change, such as significant
performance or cost advantages. Additionally, a semiconductor chip manufacturer
who purchases a system from an OEM would typically seek replacement parts only
from that OEM's supplier. Convincing this manufacturer to change suppliers would
require a significant sales and marketing effort. Consequently, our success
depends in large part on our ability to convince OEMs to choose our products for
use in each new generation of their equipment. If we are unsuccessful in
convincing OEMs to choose our products, our competitive position may be harmed.
We must compete intensively to attract and retain key technical personnel to
help maintain our current level of success and to support our future growth.
Our success depends principally upon the efforts and abilities of our key
managers and other employees, particularly those with knowledge and experience
in semiconductor manufacturing and related industries. The loss of key employees
or officers could temporarily impair our ability to effectively manage our
business until new personnel are found. Our future growth and success will
depend upon our ability to attract and retain highly skilled technical,
financial, managerial and marketing personnel. Competition for such personnel in
our industry is intense, and we cannot be certain we will be successful in
attracting and retaining the appropriate personnel.
Our ability to expand our manufacturing capacity may be limited by our
suppliers' ability to meet our requirements.
During periods of increased demand for semiconductor equipment, we may
experience periodic delays and difficulties in receiving sufficient material
from selected suppliers. These shortages may result in delays in production and
delivery of our products which may limit our ability to fulfill our customers'
demand.
We have significant international sales to customers outside the United States.
A reduction in demand for our products resulting from economic downturns in one
or more of the markets we serve may have a material adverse effect on our sales
and profitability.
9
We distribute our products in many countries throughout the world.
Approximately 71% of our net sales in 2003, approximately 69% of our net sales
in 2002, and approximately 70% of our net sales in 2001 were to customers
outside the United States. Our overall success as a global business depends, in
part, upon our ability to succeed in differing economic, social and political
conditions. For example, the markets in Asia, one of the principal markets for
our semiconductor vacuum instrumentation, experienced significant turbulence in
the late 1990s. Our direct net sales to customers in the Asia-Pacific market
represented approximately 22%, 20% and 20% of our net sales in the years ended
December 31, 2003, 2002 and 2001, respectively, and we expect this percentage to
increase in the future. Future downturns in these or other markets could result
in reduced revenues.
We are confronted with different legal and regulatory requirements in many
jurisdictions throughout the world. These include, but are not limited to,
tariffs and trade barriers, requirements relating to withholding taxes on
remittances and other payments by subsidiaries, and different regimes
controlling the protection of intellectual property. Our international
operations also expose us to different local business risks and challenges. For
example, we must design local solutions to manage credit risks of local
customers and distributors. We cannot assure you that we will continue to
succeed in developing and implementing policies and strategies that are
effective within each country in which we conduct business.
Unfavorable exchange rate fluctuations may harm our results of operations.
Our operations are conducted through subsidiaries in twelve countries. The
results of operations and the financial position of these subsidiaries are
reported in their local currency and translated into U.S. Dollars, at the
applicable foreign currency exchange rate, when consolidating our financial
statements. Exchange rate fluctuations between these foreign currencies and the
U.S. Dollar may have a material adverse effect on our consolidated financial
statements as reported in U.S. Dollars.
We are also challenged with the transaction risk that results from
fluctuations in exchange rates between the various currencies in which we do
business. We believe a substantial portion of the transaction risk of our
operations in multiple currencies is mitigated by our hedging activities, as
well as the structural matching that occurs because many of our operating and
financial expenses are incurred in the same currency in which the sales relating
to such expenses are invoiced. This is particularly the case following the
introduction of the Euro. We are nevertheless exposed to fluctuations in
exchange rates between these currencies, and may need to raise our prices in
response to these fluctuations, which could result in reduced sales. We cannot
assure you that our operating profit will not be materially or adversely
affected by large exchange rate fluctuations.
We had gains (losses) from foreign currency transactions and foreign
exchange contracts of U.S.$0.4 million, U.S.$(0.57) million, and U.S.$(1.03)
million for the years ended December 31, 2003, 2002, and 2001, respectively.
Additionally, our shares are quoted on the SWX Swiss Exchange in Swiss
Francs. Although we do not anticipate paying dividends in the foreseeable
future, any cash dividends declared in respect to our shares will be declared in
Swiss Francs. Fluctuations in the exchange rate between the Swiss Franc,
Japanese Yen and other currencies, including the Euro and the U.S. Dollar, may
affect, among other things, the foreign currency equivalent of the Swiss Franc
value of an investment in our shares and of dividends and other distribution
payments on these shares.
We must make expenditures to comply with environmental laws and regulations
relating to the production of our vacuum instrumentation products.
We must comply with environmental laws and regulations relating to the
generation, storage, handling, emission, transportation and discharge of
materials. We require environmental permits to carry out some of our operations,
and these permits are subject to modification and renewal by issuing
authorities. If we violate these environmental laws and regulations, we may be
subject to fines or be prevented from conducting some of our business
activities. We do not believe that we will be required, under existing
environmental laws and enforcement policies, to incur any expenditures that will
adversely affect our financial condition or results of operations. However,
environmental laws and enforcement policies have generally become more stringent
in recent years. As a result, we cannot predict the ultimate cost of compliance
with these laws.
10
The effect of terrorist attacks or threats on the general economy could decrease
our revenues.
On September 11, 2001, the United States was subject to terrorist attacks
at the World Trade Center buildings in New York City and the Pentagon in
Washington, D.C. Consequently, the U.S., along with other supportive countries,
has taken active measures to combat the threat of terrorism. The current and
future impact the war against terrorism may have on our suppliers and customers,
the markets for their products, and the U.S. and global economies are uncertain.
There may be other potential adverse effects on our operating results, as a
result of the geopolitical unrest, that we cannot foresee.
Our business could be harmed if we fail to adequately capitalize on the market
opportunities within the Environmental Health and Safety (EH&S) business.
In its first two years of full operation, the Environmental Health &
Safety Business generated HAPSITE sales of U.S.$23.8 million and U.S.$13.7
million for the years ended December 31, 2003 and 2002, respectively. This
business focused on the military and emergency response markets in order to
achieve this level of sales. However, if the military's strategic approach
integrates an alternative solution other than HAPSITE or if government spending
is redirected from anti-terrorism efforts, the level of sales may decrease
significantly. Efforts to expand the market areas and product offerings for the
business are critical to the long term success of the EH&S business. Failure to
appropriately, penetrate and capitalize on these additional markets or expand
the product line may result in results substantially lower than current years'
results. Business and strategic challenges include:
o the definition and execution of a comprehensive product
strategy into markets beyond the current market for military
and emergency response;
o the effective management of the business to address
fluctuations in demand or changes in customer requirements;
o integration of future acquisition or partnership arrangements
of complementary technology or products; and
o the effective utilization of INFICON's worldwide sales network
to expand opportunities for the EH&S business;
Our business could be harmed if we fail to adequately integrate the operations
of a recent acquisition
In January 2003, we acquired the privately-held company, New Vision
Systems, a leader in advanced process control (APC) for patterning processes in
semiconductor manufacturing. During its first year of operations, the results of
operations, from this acquisition, have negatively impacted the Company's
consolidated statement of income and was dilutive to its shareholders. Our
management has committed resources to integrate, streamline, and improve the
operational results of New Vision Systems. If we are unsuccessful in executing
our integration strategy and projected revenue goals, we may not realize the
anticipated benefits of the acquisition. The process of integrating the daily
operations coupled with the execution of our research and development
initiatives along with the business and operational aspects of the Patterning
Solutions business presents a challenge to our management. Other business and
strategic challenges include:
o defining and executing a comprehensive product integration
roadmap;
o managing geographically remote units and personnel;
o effectively managing the business for fluctuations in demand
or changes in customer requirements;
11
o managing the risks of entering markets or business areas in
which we have limited or no direct experience;
o minimizing the loss of key employees of the acquired business;
and
o informing customers and suppliers of the effects of the
acquisition and integrating this into our overall operations.
Future acquisitions could adversely affect our business
We continue to explore opportunities to expand or enhance our product
offerings to existing customers, to new customers, and into new markets through
acquisitions. The identification of an appropriate acquisition candidate
involves risks inherent in assessing the values, strengths, weaknesses, risks
and profitability of acquisition candidates. If we identify an appropriate
acquisition candidate, we may not be able to afford the acquisition or may be
unsuccessful in doing so due to market conditions, competition, or failure to
agree on terms and conditions. Other risks include the effects of the possible
acquisition on the Company's business, diversion of management resources and
risks associated with unanticipated problems or latent liabilities. Should the
Company acquire another business, the process of integrating the acquired
operations into the Company's existing operations may result in unforeseen
operating difficulties and may require significant financial resources that
would otherwise be available to support existing operations. If the Company
pursues future acquisitions, it may be required to expend significant funds,
incur additional debt or issue additional securities, which may negatively
affect the Company's results of operations and be dilutive to its shareholders.
If the Company spends significant funds or incurs additional debt, its ability
to obtain financing for working capital or other uses could be jeopardized.
Additionally, the Company could become more vulnerable to economic downturns and
competitive pressures depending on the acquisition.
Benefits from deferred tax asset may not be realized.
The Company has recorded a net deferred tax asset of U.S.$41.4 million for
the year ended December 31, 2003. Although the Company believes it is more
likely than not that most of the deferred tax assets will be realized, a full
realization of the deferred tax asset amount may not be assured. The amount of
the deferred tax asset considered realizable could be reduced and negatively
impact our financial results if the Company is not able to generate sufficient
taxable income in future years to support the deferred tax asset.
Additional costs with divestiture of Ultra Clean Processing business
During 2003, the Company divested the ultra clean processing business
unit. The decision to divest this business was based upon the Company's
long-term strategy of focusing on its core competencies in the front-end of the
semiconductor manufacturing process. The divestment was completed as of December
31, 2003 and was structured as a management buyout with the terms of the
agreement allowing the Company to recoup a portion of its divestment costs over
the next three years. There is no guarantee the Company will receive the full
sales price for this transaction or recover the costs associated with the
divestment of this business.
Risks Relating to Our Separation from Unaxis
We have significant sales to Unaxis and its affiliates.
In 2003 and 2002, Leybold Vacuum, a division of Unaxis, accounted for
approximately 12% and 11% of our net sales, respectively, and other Unaxis
entities accounted for an additional 3% and 2% of our net sales, respectively.
There can be no assurance that, as Unaxis reduces its ownership interest in
INFICON, these companies will maintain similar levels of purchases from us. A
significant decrease in sales to Leybold Vacuum would have a significant impact
to our sales.
12
Risks Relating to our Shares and ADSs
Unaxis has a significant influence on our company and may make decisions that
are not in the best interests of all shareholders.
Insider control of a significant proportion of our shares could have an
adverse effect on the market price of our shares and ADSs. Unaxis currently owns
19.51% of our shares. Additionally, one of our directors is an officer of
Unaxis. This could present the potential for a conflict of interest with respect
to areas in which we compete with Unaxis and with respect to matters related to
the agreements between us and Unaxis described under "Major Shareholders and
Related Party Transactions---Related Party Transactions---Agreements in
Connection with our Separation from Unaxis---Agreements with Unaxis." In light
of its stock ownership position and representation on our board of directors,
Unaxis has significant influence on the outcome of corporate actions requiring
shareholder approval, including the election of directors, the amendment of our
articles of incorporation, mergers and consolidations, and sales of assets that
could provide our shareholders with the opportunity to realize a premium over
the prevailing market price of their shares. This influence may have the effect
of delaying or preventing a change of control of INFICON, even if this change of
control benefits our shareholders generally.
Future sales by Unaxis could adversely affect the market price of our shares and
ADSs.
Sales of our shares in the public market could adversely affect the market
price of the shares and ADSs. All of our shares are now freely tradable in the
open market except for certain shares sold to our executive officers and
employees. The shares sold to our directors may be sold after the expiration of
180-day lock-up agreements, on May 9, 2001. Up to 451,675 shares may be sold by
Unaxis.
Item 4. Information on the Company
A. History and Development of the Company.
INFICON Holding AG (commercial name: "INFICON") was incorporated on August
2, 2000. INFICON Holding AG is a corporation (Aktiengesellschaft) organized
under the laws of Switzerland. Its registered office (Sitz) is located at
Hintergasse 15 B, 7310 Bad Ragaz, Switzerland. The telephone number of our
registered office is 41-81-300-4980. The fax number is 41-81-300-4988. Our
global headquarters is at Two Technology Place, East Syracuse, New York 13057,
United States. Our telephone number in the United States is 1-315-434-1100. Our
address on the Internet is www.inficon.com. The information on our website is
not incorporated by reference into this annual report.
In our initial public offering on November 9, 2000, 1,736,000 INFICON
shares, with a par value of CHF 10 each, directly or in the form of ADSs, were
sold publicly in Switzerland and the United States and to institutional
investors outside Switzerland and the United States. Of the 1,736,000 shares,
315,000 shares were sold by us and 1,421,000 shares were sold by Unaxis as
selling shareholder.
Prior to our initial public offering, our business was wholly owned by
Unaxis. In order to implement our initial public offering, Unaxis restructured
the corporate ownership of the businesses in its instrumentation group, and
created INFICON Holding AG under the laws of Switzerland to hold the companies
through which we now conduct our operations. These companies acquired from
Unaxis all of the assets relating to our business. Unaxis currently owns 19.51%
of our shares and are no longer subject to its lock-up agreement.
Our capital expenditures amounted to U.S.$4.1 million, U.S.$7.3 million
and U.S.$5.6 million, in 2003, 2002 and 2001, respectively. These amounts were
used primarily for the purchase of manufacturing equipment, tooling, office
computer equipment, facility maintenance and leasehold improvements. We had
equipment divestitures in the amounts of U.S.$0 million, U.S.$0 million and
U.S.$0.7 million, respectively in 2003, 2002 and 2001, respectively. The
principal investing activities for 2002 include the building infrastructure
changes for our facility in Cologne, Germany and the move to a new building for
our operations in Balzers, Liechtenstein that began in the second half of 2001.
We invested approximately U.S.$5.6 million,
13
during 2002, for the move to a new building in Balzers, Liechtenstein. These
capital expenditures were funded through operating cash flows.
In January 2003, INFICON acquired the privately-held company, New Vision
Systems, that specializes in advanced process control (APC) and lithography
analysis for semiconductor manufacturing since 1989. The results of operations
for INFICON LT (formerly New Vision Systems) are reported as a separate
reporting unit under the semiconductor vacuum instrumentation segment for the
year ended December 31, 2003 since the date of acquisition.
During the third quarter of 2003, as a result of substantially lower than
expected financial performance for New Vision Systems, and in conjunction with
its annual test of goodwill, an impairment test of the intangible assets was
performed and the Company recorded an impairment charge of U.S.$7,370 to write
down the intangible assets associated with New Vision Systems.
In October 2003, we completed the divestment of our Ultra Clean Processing
Business Unit as planned. Our UCP business was sold to management, staff, and a
group of local investors in Liechtenstein. While Ultra Clean Processing is a
viable business, it was not considered a long-term strategic fit for INFICON. By
divesting this business, we are better able to focus on the Company's core
competencies in instrumentation and advanced process control software designed
exclusively for the first steps in the complex semiconductor manufacturing
process. The Ultra Clean Processing Business Unit (UCP) produces and markets
specialized cleaning systems which prepare the chips for final assembly prior to
use in computers, cell phones, and hundreds of other applications.
Our second acquisition of 2003 extended the Company's leadership in
critical, on-site monitoring and identification of toxic chemicals and
materials. In May 2003, we acquired privately-held Sentex Systems, Inc. of
Fairfield, New Jersey. Founded in 1980, Sentex Systems supplies sophisticated
monitoring and analysis instruments using gas chromatography (GC) technology to
detect volatile organic compounds (VOCs) for industrial and environmental
monitoring, testing, and security. These market-leading products complement
INFICON's offering of fully portable chemical identification systems (gas
chromatograph/mass spectrometer or GC/MS technology) used for fast on-scene
detection and analysis of chemical warfare agents and toxic industrial chemicals
in air, soil and water. As water purity and safety concerns increase, our
customers need faster and more accurate discovery of toxic chemical substances.
The acquisition of Sentex adds these products and technical expertise to our
business portfolio to help our customers make crucial decisions affecting life,
health and safety. The results of operations for Sentex Systems, Inc. are
reported as a separate reporting unit under the general vacuum instrumentation
segment for the year ended December 31, 2003 since the date of acquisition.
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B. Business Overview
General
We are a leading developer, manufacturer and supplier of innovative vacuum
instrumentation, critical sensor technologies, and process control software for
the semiconductor and related industries. These analysis, measurement and
control products are vital to original equipment manufacturers (OEMs) and
end-users in the complex manufacturing of semiconductors, flat panel displays,
magnetic and optical storage media and precision optics. The Company also
provides essential instrumentation for gas leak detection and toxic chemical
analysis to the air conditioning/refrigeration, emergency response, industrial
hygiene markets, military and government markets. In 1997, Unaxis formed our
business by consolidating its instrumentation businesses under a single global
management. In connection with this initiative, we decided to focus on
increasing our sales to semiconductor and related markets, to rationalize our
product offerings, and to consolidate our operations and research and
development efforts to improve operational efficiency in addition to supporting
our strategic focus. We expect to continue our primary focus on semiconductor
and related markets since we believe they are the largest and fastest growing
markets for our products.
We have four major product lines which form two business segments:
The semiconductor vacuum instrumentation group focuses on semiconductor
and related markets with products such as:
o process knowledge and control hardware and software (including
products from our former in situ analysis business unit), which
enable semiconductor chip manufacturers to monitor and control their
manufacturing processes by providing instantaneous or run-to-run
feedback on the condition of the wafer and on the process and
equipment parameters;
The general vacuum instrumentation group serves selected industries,
including refrigeration and air conditioning, automotive, emergency response
markets, and government and university laboratories with products such as:
o leak detectors, which provide verification of "leak tightness" for a
diverse set of customers who are faced with increasingly stringent
quality standards;
o vacuum control products, which measure and control gas pressures
during a manufacturing process;
o chemical identification instrumentation which provides on-site
detection of chemical agents and toxic materials in air, soil, and
water significantly reducing the cost, time, and difficulties of
laboratory testing.
Product lines are described under the heading "Our Principal Products."
Based upon our knowledge of our competitors and the markets we serve, we
believe many of our key products maintain leading market share positions, and
these leading market positions along with our competitive strengths should
enable us to take advantage of expected market growth.
The principal customers within our target markets include large
manufacturers who incorporate our products into their manufacturing processes
and original equipment manufacturers, or OEMs, who incorporate our products into
systems they build for their customers. Additionally, we sell to several large
distributors who serve diverse markets. Our customers are located primarily in
the United States, Europe and Asia.
15
Our Competitive Advantages
We believe that we have leading market shares in the process knowledge and
control, leak detection and environmental health and safety markets, along with
a strong position in the vacuum control market. We believe we can enhance our
market position, growth and profitability through the following competitive
advantages:
o Market-Driven Technology and Product Innovation. Our customers
operate in an environment of constant technological change. The
cornerstone of our strong market position is our investment in
technology and product innovation to keep pace with these
technological changes. Our investment is made through internal
product development coupled with the acquisition of advanced
technology that complements our vacuum instrumentation portfolio.
Our engineers and technical experts work directly with our customers
to develop optimal solutions for their manufacturing problems. We
seek to translate our knowledge of customer process requirements and
our advanced technology into innovative products that improve our
customers' process yield, quality, costs and profitability.
o Global Presence and Comprehensive Customer Support. We have direct
sales, application support and service centers in 12 countries
around the world. This global reach is an increasingly critical
success factor for a customer base that itself is increasingly
multinational in scope. Large end users have factories worldwide and
products sold to OEMs are often exported throughout the world. Our
customers expect us to provide comprehensive service and application
support to any location in which our products are used. We believe
we have an excellent reputation for sales, logistic, application and
service support in all important market areas of the world.
o State-of-the-Art Enabling Technologies. We maintain major
manufacturing operations in Syracuse, New York, USA; Balzers,
Liechtenstein; and Cologne, Germany. Each of these manufacturing
locations is highly focused on specific product lines. In the last
three years, each of our three factories has installed
state-of-the-art "enabling technologies" aimed at providing us with
the best available manufacturing efficiency, quality and information
technology to support our business.
o Demand-based Manufacturing. We employ a demand-based manufacturing
system, where products are manufactured upon receipt of an order,
enabling us to manufacture products rapidly and efficiently to meet
specific customer demands. Combined with an aggressive supply chain
management, our demand-based manufacturing system minimizes
inventory, dramatically reduces manufacturing cycle times, improves
on-time delivery, lowers manufacturing costs, and improves quality.
o Total Quality Management and ISO Registration. All of our factories
were early adopters of sophisticated total quality management
techniques, including extensive employee participation at all levels
in team-oriented programs aimed at improving product quality and
manufacturing process efficiency. All our factories were among the
earliest to apply for and achieve ISO 9001 Registration. This
world-recognized quality methodology mandates that companies adhere
to, and document their compliance with, stringent product/process
specifications.
o Integrated Management Information Systems. We have a company-wide
integrated management information system which provides us with
information on our manufacturing, sales, service and accounting
functions on a real-time basis.
o Brand Recognition. As a result of our strong market position, there
is considerable name recognition for the INFICON brand. Our brand
equity, coupled with our reputation for high quality and
comprehensive customer service, provides significant support for our
introduction of new and innovative products.
o Strong and Committed Management Team. We believe our company
benefits from a cohesive and highly experienced management team. As
of the date of this report, our six executive officers
16
have an average of 15 years of experience with INFICON and our
predecessors and originate from a variety of national backgrounds.
We believe that we have the leadership we need to continue to
leverage our competitive advantages in the future.
While we believe these competitive advantages will enable us to compete
favorably in our target markets, there can be no assurance we will continue to
do so. We encounter substantial competition in each of our product lines from
numerous competitors. Certain competitors have larger financial, technical and
marketing resources than we do. Other smaller competitors are well-established
in specific product niches making it difficult to break into those smaller
markets. Furthermore, in some cases, semiconductor chip manufacturers may direct
semiconductor capital equipment manufacturers to use a specified supplier's
product in their equipment. Accordingly, our success depends in part on our
ability to have semiconductor chip manufacturers specify our products for use at
their manufacturing facilities. We may encounter difficulties in changing
established relationships of competitors with a large installed base of products
at those customers' manufacturing facilities.
Our Strategy
Our principal business objective is to exploit our core competencies in
gas sensing, vacuum technologies and advanced process knowledge and control to
increase sales, cash flow and profitability. We seek to maintain and enhance our
position as a leading developer, manufacturer and supplier of vacuum
instrumentation, critical sensor technologies and advanced process control
software, with an emphasis on process engineering expertise for semiconductor,
thin films manufacturing, refrigeration and air conditioning, automotive,
security and emergency response, and other selected industrial markets. In this
regard, we intend to:
o Maintain our momentum in the High-growth Semiconductor and Related
Markets. We focus our sales and marketing, product development
efforts and potential future acquisitions on the semiconductor and
related markets, that are the largest and fastest growing markets
for our products. INFICON technology solutions and process expertise
directly address the most pressing cost and productivity
improvements demanded by semiconductor manufacturers. Hundreds of
process steps are required to create a chip and additional steps are
required for advanced chips of smaller sizes and greater speed. Each
step in the chip fabrication process represents an opportunity for
improvement in process consistency and product yield. INFICON
intersects the semiconductor industry's need to analyze, control and
improve manufacturing in three critical areas: process control,
photolithography, and OEM components and subsystems.
INFICON's market-leading in situ metrology and process control
products target those mission-critical and "bottleneck" processes
where increased control can create large and rapid paybacks. Our in
situ metrology sensors and software enable semiconductor
manufacturers to monitor and control the vacuum manufacturing
process directly, eliminating the need for time consuming external
analysis to determine product defects and process malfunctions. The
process control products acquired through New Vision Systems will
address the mission-critical photolithography and associated
patterning processes. The latest generation of INFICON vacuum gauge
products has benefited from increased sales to semiconductor
manufacturers. INFICON is establishing its reputation as a reliable
supplier of value-added vacuum gauges and subsystems with
performance and price advantages. We are beginning to build a major
market share at all major OEMs, and believe our technological
expertise and market knowledge will continue to enable us to
introduce new products and increase our market share in
semiconductor and related industries.
o Invest in Technological Innovation. We continue to invest in product
and process innovation in order to provide technologically advanced
products to our customers. Industries whose manufacturing processes
use vacuum systems, in particular the semiconductor, air
conditioning and refrigeration, automotive, and thin-film coating
industries, require increasingly sophisticated instrumentation. Our
aggressive R&D investing during the past 3 years has resulted in the
development of new products that address the specific challenges in
semiconductor manufacturing. The trend towards more expensive,
larger 300mm diameter silicon wafers for manufacturing chips has
necessitated more rapid fault detection with reduced reliance on
test
17
wafers. Our line of mass spectrometers and other products for in
situ metrology permit customers to monitor and control the
semiconductor manufacturing process within the process chamber,
reducing the need for test wafers. We have also developed and will
continue to develop more sophisticated leak detectors for efficiency
and mobility within the semiconductor fab environment and to meet
the increasing demand in the automotive industry for stringent
quality in the testing of air conditioning, air bags for safety, and
other sub systems. We generally seek to introduce innovative,
high-margin products that will enable us to maintain profitability
in a competitive market.
o Strengthen Our Position in Core Geographic Markets. The United
States and Asia are the strongest markets for the semiconductor
business. These are already the largest markets for our
semiconductor vacuum instrumentation products, and we have expanded
our sales, distribution, and customer service and support
infrastructure in these areas to meet the rising demand, including
strengthening our presence in China for the expected demand from new
semiconductor fabs.
o Maintain the Strength of the INFICON Brand. We intend to continue to
promote an image of quality, reliability, high performance, and
innovation associated with the INFICON brand. We have developed our
reputation by offering customers technologically advanced products
and providing responsive customer support services. We believe our
strong brand awareness, brand loyalty and reputation for superior
products enhances our competitiveness and provides us with a solid
foundation for future growth. We intend to maintain the efforts that
have already cemented customer loyalty to the INFICON brand.
o Enhance Our Distribution Channels to Reach Distinct Customer Bases.
We have developed specialized sales forces to target our distinct
customer segments. In our semiconductor and related markets and for
environmental and security markets, we employ a specially trained
force of direct sales, service, and application support
professionals. Similarly, we have a specialized group of sales
distributors and representatives who concentrate exclusively on the
refrigeration and air conditioning industry. In the more diffuse
markets for general vacuum instrumentation, we distribute our
products through vacuum pump manufacturers who have developed strong
relationships with small to mid-size vacuum instrumentation users.
We intend to continue to use our specialized sales forces to build
strong customer relationships in our major industrial and geographic
markets.
o Continue to Improve Manufacturing Efficiency. In order to maintain
the highest quality standards, we focus our internal manufacturing
efforts on our core proprietary vacuum sensor and accessory
technology, on the final assembly of our products, and on quality
assurance. We outsource the construction of most other parts and
components, including circuit boards, mechanical assemblies, and
housings. This strategy enables us to focus on our key technologies
that have been central to our success and on assuring the high
quality of our products, while reducing the capital investments and
fixed costs associated with non-core activities. In addition, we
believe this manufacturing approach significantly reduces our
susceptibility to periodic downturns in the volatile semiconductor
market. We also use a demand-based manufacturing system to reduce
inventory cycle times and production defects, in addition to our
Total Quality Management Programs and ISO registration which
supports our objectives of improving business practices and product
quality to increase profitability.
o Pursue Strategic Acquisitions. We intend to pursue strategic
acquisitions to strengthen our position in existing markets and to
expand our international presence. We may also consider strategic
acquisitions that could enhance our product offerings and
technological platforms. We intend to pursue acquisition targets
that we believe are consistent with our principal product focus and
will add value to our shareholders in the medium to long-term.
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Our Principal Products
We develop, manufacture and supply products in two principal areas:
o semiconductor vacuum instrumentation; and
o general vacuum instrumentation.
Our semiconductor vacuum instrumentation generally consists of
technologically advanced products developed specifically for use in
semiconductor and related applications. For the years ended December 31, 2003,
2002 and 2001, we estimate that approximately 67%, 68%, and 68%, respectively,
of our sales in the semiconductor vacuum instrumentation segment were to
semiconductor and related markets. The remaining net sales of this group were to
distributors who resell our product under their own private-label brands to
customers which we are unable to track, and from products originally designed
for the semiconductor market which we have adapted for use in other industries.
Our general vacuum instruments are versatile products which typically can be
used in multiple applications. For the years ended December 31, 2003, 2002 and
2001, we estimate that approximately 7%, 5% and 9%, respectively, of our sales
in the general vacuum instrumentation segment were to semiconductor and related
markets.
Semiconductor Vacuum Instrumentation
Our semiconductor vacuum instrumentation consists of one principal product
line: process knowledge and control.
Process Knowledge and Control
Our process knowledge and control hardware and software are used in
front-end chip manufacturing to provide process verification and control,
including run-to-run control of key process parameters for process optimization
and immediate and automatic feedback to the process equipment or a process
engineer on any faults detected and their probable cause. Net sales from our
process knowledge and control business for the years ended December 31, 2003,
2002 and 2001, were U.S.$38.5 million, U.S.$30.7 million and U.S.$43.6 million,
respectively.
As the cost of wafers increases and the complexity of the manufacturing
processes reduces the acceptable windows of process operation, the requirement
for faster parameter modifications in response to inevitable process changes and
for immediate fault detection becomes more critical. We believe the industry
will conduct more and more of these analyses in the process chamber itself using
in situ metrology and adopt automatic process control, leading to growth in the
market for our process knowledge and control products. The Semiconductor
Industry Association's National Technology Roadmap for Semiconductor
Manufacturing supports this expectation.
Products.
Our process knowledge and control product offerings include the following:
In Situ Metrology Sensors and Sensor Integration and Analysis Software
o Gas Analyzers. Our gas analyzers are well-established in the
semiconductor market as diagnostic tools to aid process engineers in
determining the source of contaminant gases. They also find use in
continuously monitoring the manufacturing process for the presence
of contaminant gases and for verifying the presence of desired
process gases. Our gas analyzers use mass spectrometer technology.
Our products include a photoresist detector designed to stop a
physical vapor deposition process if a wafer is contaminated with
photoresist.
o Particle Detectors. Our Stiletto particle detector is a breakthrough
in situ sensor that finds yield-limiting contamination in real time
on every wafer with scanning-laser sensitivity and accuracy. Its
submicron sensitivity detects particles which can destroy the
performance of the chip.
19
o Composer. The Composer, based on acoustic resonance technology,
monitors and controls the reactant feedgas to ensure that the gas
concentration is constant. The Composer is applied most frequently
in metal organic chemical vapor deposition applications.
o Thin Film Deposition Controllers. Our thin film deposition
controllers determine the thickness of a material deposited in a
batch evaporation process. Although these processes are less common
in semiconductor processing today, they are still used for very
specific applications. They are used more frequently in the optical
industry, including both high-precision, scientific optics and
consumer optics. Recently, they have found use in the manufacture of
organic electroluminescent displays.
o FabGuard. The FabGuard software takes data from the in situ sensors,
integrates that data with data from the process equipment itself,
and condenses and analyzes it to provide the process engineer with
actionable information. Alternatively, the engineer can choose to
have FabGuard automatically send control commands directly to the
process equipment. The software is typically sold in conjunction
with our process knowledge and control sensor products or separately
as an upgrade for use with the products.
To address the broader, non-semiconductor market for gas analysis, we
adapt and package our mass spectrometers for distribution through Pfeiffer
Vacuum, a vacuum pump manufacturer. Thus, we leverage our product development
efforts and technology without diminishing our direct sales force's focus on the
semiconductor and related markets.
Patterning Solutions Software
Pattering Solutions products target photolithography, a challenging and
strategically important process in the manufacturing of semiconductor devices.
As chips get smaller and faster, the complexity and high cost of error
associated with the photolithography process are driving device manufacturers to
seek world class process expertise to optimize lithographic equipment, the most
expensive tools in the fab. INFICON works directly with many of the world's
leading fabs to implement process control tailored to their specific production
requirements, as our process control software is compatible with tools from all
major lithography and metrology equipment suppliers.
Because the semiconductor market is in a constant state of technological
change, we concentrate key resources on understanding our customers' processes
so that we can better support our customers, embody that knowledge in our
software offerings, and define the right hardware and software products for
future process needs. We must continually innovate and produce both
next-generation products and new products for evolving applications. Our
internal development is twofold: (1) adapting our hardware technologies for
changing applications and (2) increasing our emphasis on software development.
In addition, we remain alert to new technology acquisitions that would enhance
our offering of process knowledge and control sensors and software capability.
Semiconductor Vacuum Instrumentation Products
Our customers for process knowledge and control include semiconductor chip
manufacturers and original equipment manufacturers such as IBM, Motorola, Intel,
Samsung, Applied Materials, Tokyo Electron, Novellus, Zeiss, Anelva, Sunic
Systems, and Ness Display; and a private label distributor, Pfeiffer Vacuum.
Semiconductor
20
chip manufacturers constitute the larger part of the market. Geographically, the
semiconductor market is concentrated in Asia and the United States.
General Vacuum Instrumentation
We have three product lines which serve general vacuum applications: leak
detection, vacuum control, and environmental health & safety.
Leak Detection
Our leak detection products are used for a wide variety of purposes in
numerous industries. They are used in vacuum applications, for example, to
confirm the integrity of a vacuum chamber, and in the maintenance of gas lines,
which must be airtight. We offer two families of leak detectors: helium leak
detectors and refrigerant leak detectors.
Helium leak detectors are used by manufacturers for quality control in a
broad range of applications. They are used primarily to test the integrity of a
container, whether it is a vacuum chamber or a pressurized container. The
central element of any leak detector is a sensor which is designed to detect the
presence of a certain gas. Helium is an ideal gas for use in leak detection
because (1) helium atoms are very small and can seep through the tiniest cracks
in a chamber and (2) helium is not commonly found in the atmosphere, so the
likelihood of false readings is reduced. A typical helium leak detection process
involves pressurizing a container with helium, sealing the container and using
sensors to detect if any helium leaks out. Another technique is to evacuate the
container, expose it to a helium environment and use the sensors to detect the
presence of helium inside the container. Our helium leak detection products
perform both of these functions.
Refrigerant leak detectors have sensors that can detect a range of
refrigerant gases. Refrigerant leak detectors are often used in conjunction with
helium leak detectors. For example, manufacturers of refrigeration systems will
initially test a refrigeration coil with a helium leak detector to ensure that
the chamber is leak-free. Later in the manufacturing process, the coil is filled
with refrigerant, resealed and then tested with a refrigerant leak detector to
assure integrity of the final seal. Our refrigerant leak detection products
range in size from large units which are used in assembly lines to small,
hand-held units that are used by air conditioning repairmen.
Net sales for our leak detection business for the years ended December 31,
2003, 2002 and 2001 were U.S.$38.8 million, U.S.$47.4 million and U.S.$55.3
million, respectively.
Products. Our most important leak detector products include the following:
Helium Leak Detectors
o UL1000 Fab. Designed as a mobile leak detection tool, the UL1000 Fab
is highly maneuverable for leak detection efficiency and mobility
within the fab environment. It provides an extremely fast leak rate
response across all measurement ranges.
o UL5000. The UL5000 is an enhanced version of the UL1000 Fab built on
the same platform. It is dedicated to perform very sensitive leak
tests on large chambers in a short time, a strong requirement of the
semiconductor tool manufacturer industry.
o UL1000. Designed for demanding applications, the UL1000 is a perfect
leak detector for industrial customers looking for high pumping
speed and reliable tests under extreme testing conditions.
o Protec. The Protec leak detector is often used in the automotive and
refrigeration and air conditioning industries to test the integrity
of a system before it is charged with refrigerant. This quality
control measure helps manufacturers ensure that resources are not
wasted by charging faulty systems with refrigerant.
21
o LDS1000. The updated LDS1000 is designed for OEMs to flexibly
incorporate into the larger leak test systems they build.
Refrigerant Leak Detectors
o Ecotec II. The Ecotec II is used in assembly lines in the automotive
and refrigeration and air conditioning industries. The Ecotec II can
differentiate among refrigerants and is used to perform a final
quality control test on systems after they are charged.
o HLD5000. Introduced in 2001, the HLD5000 is used for quality testing
in the manufacture of air conditioned systems. Its unique
functionality will improve productivity on the assembly line and
reduce the cost of ownership.
o D-Tek family. The D-Tek family of leak detectors consists of
hand-held units which are used by field service technicians in the
refrigeration and air conditioning and automotive industries.
We plan to continue to develop new leak detection products to expand the
range of leak detection applications and to serve our existing customers'
changing needs. For example, we developed the Contura Z. This leak detector was
designed for the food packaging industry.
Markets. Our largest markets for leak detectors are the refrigeration and
air conditioning, automotive and semiconductor markets. In the refrigeration and
air conditioning market, our key customers include Carrier, Whirlpool and York
International. In the automotive market, our customers include DaimlerChrysler,
General Motors, Volkswagen, Audi, Delphi Automotive Systems and Eaton Aeroquip.
Our leak detector customers in the semiconductor industry include Applied
Materials, IBM, Intel, Samsung and LAM Research. The users of our D-Tek leak
detectors are service technicians whom we reach through third-party
distributors. In addition, we serve other markets that require sensitive leak
detection, such as power plants, airplane manufacturers, printer manufacturers,
petroleum companies, and research and development institutes.
The market for leak detectors is global. We believe that we are a strong
leader in the European market and that we are well established in the United
States and South America. We also plan to continue expanding our presence in the
Asian market for leak detectors. We are a recognized provider of leak detectors
to the Chinese refrigeration and air conditioning market, and we intend to use
our Singapore office to pursue opportunities in countries such as Thailand,
Malaysia, the Philippines, and Indonesia.
Vacuum Control
Our vacuum control products include gauges, valves, and fittings. Gauges
enable our customers to monitor gas pressures during various stages of the
manufacturing process. Gauges vary widely in design depending on the pressure
range and the application. Valves, which control gas flow, and fittings, which
are used to connect components to a vacuum chamber, are used in all vacuum
systems.
Net sales generated by our vacuum control products for the years ended
December 31, 2003, 2002 and 2001 were U.S.$46.7 million, U.S.$38.4 million and
U.S.$43.3 million, respectively.
Products. Our principal vacuum control products include the following:
o Capacitance Diaphragm Gauge. Capacitance diaphragm gauges are used
in a wide variety of applications to provide precise pressure
measurement within a narrow pressure range. Our SKY capacitance
diaphragm gauge features a ceramic diaphragm which provides higher
accuracy, stability, longer life and greater resistance to corrosive
gases than conventional metal diaphragms. These benefits are
possible because ceramic has significant advantages over metal, such
as better thermal and chemical characteristics and less propensity
to fatigue.
22
o Bayard Alpert and Penning Gauges. These high-vacuum gauges provide
reliable pressure measurement in a wide range of industries
including optical coating, space simulation, and heat-treating, as
well as semiconductor manufacturing processes. Our transmitter
gauges are particularly well suited for incorporation in OEM vacuum
systems because they function as "smart sensors" requiring no
additional controllers.
o Pirani Gauge. Our Pirani gauge is the most cost-effective product we
offer to measure moderate vacuum ranges directly or as part of a
pumping system in applications such as thin film coating, analytical
instrumentation, or research and development.
o Combination Gauges. Our combination gauges integrate a low-vacuum
gauge, a high-vacuum gauge and an electronic controller into one
compact measuring device. These innovative gauges enable customers
to replace two conventional gauges and a controller with one
combination gauge to provide a cost-effective way to measure a wide
range of pressures. We expanded our range of combination gauges in
2002 with a new Pirani/Capacitance Combination Gauge and in 2003 we
launched the first TripleGauge, which combines three different
measurement technologies in one housing. Both new products are
targeted for semiconductor and thin film coating applications.
o Valves and Fittings. We offer a wide range of valves and fittings
for a variety of vacuum applications. We also started to market and
manufacture custom heated valves and fittings, especially made for
the etch exhaust lines of semiconductor manufacturing equipment.
o Gas Dosing Controller. Our gas-dosing controller has two different
valves that act as a complete, integrated upstream control system
for a variety of vacuum applications. This device has been
specifically designed to control pressure by communicating with all
our gauges. We believe that the option of buying the combination of
a gauge, a valve, and a controller from one supplier is attractive
to our customers because it reduces complexity and cost.
Markets. Gauges, valves and fittings are used in all vacuum applications
in a range of industries. We focus on serving OEMs and manufacturers of vacuum
pumps. The market for valves and fittings is characterized by high price
competition, low barriers to entry, and less technical differentiation among
competing products. The target customers of our gauges, valves, and fittings
products fall into three general categories:
o Manufacturers of vacuum pumps, who distribute our products under
their own private-label brands to small-end users with industrial,
analytical instrumentation and research and development
applications. Our private-label customers typically require a wide
array of our products to fit into their lines of vacuum pumps. Our
largest customers in this category are Leybold Vacuum and Pfeiffer
Vacuum.
o Large OEMs, including semiconductor and non-semiconductor coating
equipment manufacturers. Our large OEM customers generally use large
quantities of products specifically geared toward their
applications. Our largest customers in this market segment are
Applied Materials, Singulus and Unaxis. We have also received orders
for our gauges from Novellus, Applied Films and TEL, and we intend
to continue our efforts to increase sales to large OEM customers.
o Large end-users who purchase replacement parts.
The fastest growing market for vacuum control is the semiconductor market,
and we believe that the demand for the products sold to this market, such as
capacitance diaphragm and combination gauges, will grow significantly. Growth in
other market segments may be limited because of price competition and trends
toward the use of combination gauges to replace multiple stand-alone gauges. We
intend to pursue growth in this product line by focusing our sales efforts on
the semiconductor industry and intensifying our sales efforts in the United
States and Asia.
23
Environmental Health & Safety
Our Environmental Health & Safety (EH&S) product line features a
field-portable chemical identification system called HAPSITE(R) that is used in
emergency response and military applications for immediate, on-site detection of
chemical agents and toxic materials. This product utilizes gas chromatography in
conjunction with mass spectrometry (GC/MS) to provide laboratory quality results
in the field. The MS technology for HAPSITE draws heavily on the same vacuum
sensor expertise that has made INFICON the market leader in semiconductor gas
analysis, thus leveraging our knowledge of vacuum technology in less volatile
markets. Additionally, the acquisition of Sentex Systems Inc., in May 2003,
expands the EH&S capabilities to include environmental monitoring of air and
water using gas chromatography technology. In these applications, the technology
is directed at quickly obtaining critical data for decision-making in emergency
situations or for environmental applications, such as hazardous waste site
analysis and remediation or regulatory compliance for drinking or waste water.
Net sales for our Environmental Health & Safety product line for the years ended
December 31, 2003, 2002 and 2001 were U.S.$23.8million , U.S.$13.7million and
U.S.$2.6, respectively
Products. The GC/MS family of products consists of:
o HAPSITE Analytical Module - Chemical Identification System. HAPSITE
is a laboratory grade, field-portable gas chromatograph/mass
spectrometer (GC/MS) for easy and dependable on-site analysis of
volatile organic compounds (VOCs). Battery powered, lightweight, and
weatherproof, HAPSITE can speciate and quantify VOCs in minutes,
significantly reducing the cost, time, and difficulties of testing
for toxic chemicals in air, soil, and water. It allows the user to
obtain field information within minutes, instead of days or weeks
with competing methods and instruments.
o Vacuum Pumping System. (Service Module) This is a vacuum pumping
system, power supply, and battery charger that supports the HAPSITE
in a fixed-station mode. When the HAPSITE and Service Module are
paired together, they offer the capabilities of a complete
laboratory GC/MS in less than half the space.
o Water and Soil Sampling System. (Headspace) This accessory
instrument allows the HAPSITE to detect and identify VOCs which may
be present in water or soil samples. It can be operated in the same
field environments as the HAPSITE or set up in a fixed site.
The GC products consist of:
o Scentograph gas chromatographs for chemical monitoring of air and
water. Models CMS100 and CMS200 are battery powered, lightweight
units which can be easily transported and set up to sample or
monitor as needed, providing results in just a few minutes. The
model CMS500 is specifically intended for fixed site monitoring for
water security, drinking water compliance or wastewater compliance.
Markets. GC/MS is a relatively mature analytical approach to the detection
and identification of organic compounds. However, up until the development of
HAPSITE, the analytical procedure required that samples be obtained in the field
and transported to the laboratory for characterization. As noted, this procedure
takes anywhere from hours to weeks for the results to be delivered to the
customer. HAPSITE allows this analysis to be totally completed, on site, within
15 minutes. The results which have been judged by the Environmental Protection
Agency (EPA) to be equivalent to the laboratory results. The same is true for GC
work; the acquisition of the Sentex product line provides a complementary
product offering for applications where the customer is monitoring or checking
for specific compounds, as in the case of regulatory compliance.
These products have been sold into the following market areas:
o Military, Security, and Emergency Response. This is by far the
largest market segment for the HAPSITE product at the present time.
The largest customers are the U.S. National Guard Bureau
24
which has units deployed throughout the U.S. as part of the homeland
defense initiative and the U.S. Air Force, which has units deployed
worldwide. Other U.S. and Allied military and governmental agencies
are also key customers. Fire Departments, usually "first responders"
in the case of chemical spills and other environmental accidents,
are also important customers in this application.
o Industrial Hygiene. This market area relates to industrial safety
programs which are concerned with employee and/or personnel safety.
Recent improvements in the capability of the HAPSITE to detect and
identify VOCs in the industrial setting plus the acquisition of the
Scentograph make this a target market for the next few years.
o Chemical Processing. Areas of chemical plants require different
monitoring and testing procedures to ensure continued safety. While
certain monitoring technologies have been available for some time,
the HAPSITE offers enhanced detection capabilities which can be used
to describe the size of any chemical spill or release and help
ensure worker safety.
o Environmental Protection. We expect that enforcement of the clean
air act in the U.S. and similar laws in other countries will be
natural drivers for utilization of the HAPSITE and Scentograph. Some
sales have already been made into this market.
o Water Security. This is a relatively new market that is receiving
significant attention and funding in order to protect water
resources in the U.S. and elsewhere from contamination, either
accidental or terrorist related. Both the HAPSITE and the
Scentograph play a significant role in this area.
For a breakdown of our total net sales by segments and by geographic
market, please see "Operating and Financial Review and Prospects---Results of
Operations."
Sales and Marketing
We sell our semiconductor vacuum instrumentation products primarily
through our direct sales force, which is critical to our strategy of maintaining
close relationships with semiconductor chip manufacturers and OEMs. We have
direct sales organizations in China, France, Germany, Hong Kong, Japan, Korea,
Liechtenstein, Singapore, Taiwan, the United Kingdom and the United States. We
sell our general vacuum instrumentation products primarily through the vacuum
pump sales forces of our distributors. We also have sales representatives and
agents who sell our leak detectors in other countries, such as Argentina,
Brazil, Canada, Denmark, Israel and Mexico. For the years ended December 31,
2003 and 2002 , approximately 51% and 53%, respectively, of our sales were
through our direct sales force and approximately 49% and 47%, respectively, were
to distributors and agents.
The following table shows where we direct our worldwide operations for
each product line:
Product Line Location
- ------------ --------
Process Knowledge and Control................. Syracuse, New York, USA
Leak Detection................................ Cologne, Germany
Vacuum Control................................ Balzers, Liechtenstein
Environmental Health & Safety................. Syracuse, New York, USA
Our largest customer, Pfeiffer Vacuum, accounted for 16%, 18% and 17% of
total net sales in 2003, 2002 and 2001, respectively. Our next largest customer
is Unaxis. Leybold Vacuum, a division of Unaxis, accounted for 12%, 11% and 13%
of total sales in 2003, 2002 and 2001, respectively. Various other Unaxis
entities accounted for 3%, 2% and 2% of total net sales in 2003, 2002 and 2001,
respectively. The next six largest customers accounted in the aggregate for 22%,
13% and 12% of total net sales in 2003, 2002 and 2001, respectively.
25
Customer Service and Support
We believe that a strong customer service and support infrastructure is
critical to maintaining the long-term customer relationships that are critical
to our success. Customer service and support covers such varied functions as
installation, training, on-site or telephone applications advice including data
interpretation, field repair and maintenance, and factory repairs. The
functional lines between service/repair, technical support, sales, and marketing
are blurred because all customer contact people strive to meet the demands of
our customers. Some forms of support are included in the price of the product;
others are paid based on a service contract or a one-time arrangement. The
nature of the product, the application, and the marketing concept determine the
particular approach used.
Because we address global markets, our customer service and support is
also global. We have personnel located in China, France, Finland, Germany, Hong
Kong, Japan, Korea, Liechtenstein, Singapore, Taiwan, the United Kingdom and the
United States. In addition, many of our distributors also provide customer
service and support.
Research and Development
We firmly believe that market-driven innovation is the key to success in
our fast-moving industry. We invest heavily in product research and development,
particularly in the semiconductor vacuum instrumentation segment. We also pursue
technology acquisitions in the semiconductor and related markets when
appropriate. Our research and development staff works closely with our marketing
personnel and our customers to establish product innovation projects and goals.
We strive to minimize the time-to-market of our innovations, and are committed
to developing and maintaining strong proprietary positions through patents and
other intellectual property rights.
For the years ended December 31, 2003, 2002 and 2001, our research and
development expenditures were U.S.$21.0 million, U.S.$16.1 million and U.S.$12.0
million, respectively, which represented approximately 13.2 % and 12.3% and 8.5%
of net sales, respectively.
Patents and Other Intellectual Property Rights
We rely on a combination of patent, trademark, copyright, and trade secret
protection, as well as license arrangements, in the United States and in other
countries, to establish and protect our proprietary rights in our products and
our business. Although our intellectual property is important to our business,
we are not substantially dependent on any single patent, trademark, copyright,
or trade secret.
We have over 300 patents and patent applications. We intend to file
additional applications as we deem appropriate. We also own over 50 trademarks
and trademark applications. In addition, we have copyrights related to our
business, including copyrights in computer software.
We have entered into intellectual property license agreements with Unaxis
entities as part of the reorganization. Under these license agreements, the
Unaxis entities license certain intellectual property rights to us, and we
license certain intellectual property rights to the Unaxis entities. See "Major
Shareholders and Related Party Transactions---Related Party
Transactions---Agreements in Connection with our Separation from
Unaxis---Intellectual Property Assignment and License Agreements" for a
description of these license agreements.
In addition to patent, trademark, and copyright protections, we rely on
trade secret protection for our confidential and proprietary information and
technology. We routinely enter into confidentiality agreements with our
employees and contractors, pursuant to which they agree to maintain the
confidentiality of all our proprietary information and to assign to us all
inventions made while in our employ.
We cannot assure you that any of our pending patent or trademark
applications will be granted, that we will develop additional proprietary
technology, or that any of our proprietary technology will provide us with
competitive advantages. Moreover, despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use our
products or technologies. Monitoring unauthorized use of our
26
technology is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in countries where
the laws may not protect our proprietary rights as fully as in the United
States.
Finally, there has been substantial litigation regarding patent and other
intellectual property rights in our industries. In the future, we may be a party
to litigation to protect our intellectual property or to respond to allegations
that we infringe third-party intellectual property rights. An assertion that our
products infringe third-party proprietary rights would force us to defend
ourselves against the alleged infringement. If we are unsuccessful in any
intellectual property litigation, then we may be subject to significant
liability for damages and loss of our proprietary rights. Intellectual property
litigation, regardless of its success, would likely be time-consuming, expensive
and would divert management time and attention. Any of the foregoing results
could have a material adverse effect on our business, prospects, financial
condition or results of operations.
Manufacturing, Source of Supply and Quality Control
We concentrate our in-house operations on the manufacture of our core
proprietary vacuum sensor technology and the final assembly of our products in
order to assure the highest quality standards. We outsource all "non-core"
manufacturing, such as printed circuit boards, mechanical assemblies and
housings. This practice allows us to concentrate on those areas that are key
success factors, while reducing our investment and fixed costs associated with
non-core activities. In this manner, we strive to reduce our cost vulnerability
in periodic downturns associated with the high-growth, but volatile,
semiconductor market.
Manufacturing is conducted primarily in four locations: Syracuse, New York
United States; Cologne, Germany; Balzers, Liechtenstein and Mariehamn, Finland.
We employ a demand-based manufacturing system to reduce our inventory, cycle
times and defects. Additionally our quality management and ISO registration
programs stress team-driven, continuous improvement and comprehensive
documentation of process and product specifications.
Suppliers are certified to meet our standards for quality, delivery, and
financial stability. In a few instances, we have sole-source relationships with
suppliers.
Competition
The markets for our products are highly competitive. In all our markets,
we compete primarily on the basis of the following factors:
o performance and features;
o quality and reliability;
o on-time delivery;
o price;
o range of products;
o historical customer relationships;
o applications expertise;
o manufacturing capacity; and
o customer service and support.
With respect to our semiconductor vacuum instrumentation, the most
important competitive factors are performance and features, applications
expertise and historical customer relationships. With respect to our general
27
vacuum instrumentation, the most important competitive factors are performance
and features, price, customer service and support, and manufacturing capacity.
In some instances, especially with respect to vacuum control, our success
depends to a large extent on our ability to convince OEMs to use our products in
the manufacturing systems that they produce. Manufacturers are generally
hesitant to substitute brands when replacing parts on their manufacturing
systems without time-consuming evaluations. As a result, the company whose
vacuum components are specified into a manufacturing system at the time of
initial system design enjoys great potential for subsequent sales of replacement
parts.
We encounter substantial competition in each of our product lines from
numerous competitors, although there is no one competitor that competes with us
across all our product lines. Our major competitors in the process knowledge and
control market are Brooks Automation, MKS Instruments, and ULVAC Technologies.
Our major competitors in the leak detection market are Alcatel, Varian and
Ulvac. Our major competitors in the vacuum measurement market are BOC Edwards,
Helix Technologies, Millipore and MKS Instruments. Our major competitors in the
vacuum components market are BOC Edwards, MDC, Nor-Cal Products, Varian and VAT.
Our major competitors in the environmental health and safety market are Agilent
Technologies, Bruker, Intelligent Ion, Photovac, and Siemens. Our assessments of
our competitive position have been derived by comparing our sales to our
estimates of our competitors' sales as well as general market conditions.
Seasonality
Our net sales and results of operations are seasonally affected by the
summer vacations of our suppliers' and customers' employees. Additionally, our
refrigerant leak detection products, which comprise approximately 6 - 7% of
annual sales, are seasonally affected by a larger percentage of sales occurring
during the initial six months of the year. As a result, our net sales and
results of operations are usually lower in the third and fourth quarter of each
calendar year. This seasonality causes our operating results to vary from
quarter to quarter.
Sources and Availability of Raw Materials
It has been our experience that the raw materials used for our products
are generally readily available at relatively stable prices. Any scarcity in raw
materials used for our products has always been limited to a very small portion
thereof and has never had a material adverse effect on our business or financial
condition.
C. Organizational Structure.
INFICON Holding AG is the parent company of the INFICON group which
operates from 12 countries and consists of a parent company, four manufacturing
companies, seven sales subsidiaries, and a management company located in Bad
Ragaz, Switzerland which performs administrative, inter-company financing, and
intellectual property management functions. The organizational structure of the
INFICON group is as follows:
28
-------------------
INFICON Holding AG
Bad Ragaz
Switzerland
Parent Company
-------------------
|
---------------------------------------------------------------------------------
| | | | |
| ---------------- ----------------- -------------------- -------------------
|
| INFICON AG INFICON Inc. INFICON Aaland Ab. INFICON GmbH
| Balzers Syracuse Mariehamn Bad Ragaz
| Liechtenstein USA Finland Switzerland
| Manufacturing Manufacturing Manufacturing Managmement
|
| ---------------- ----------------- -------------------- -------------------
| | |
| ----------------- -------------------
|
| INFICON LT Inc. INFICON GmbH
| Cambridge Cologne
| USA Germany
| Software Manufacturing
|
| ----------------- -------------------
|
|------------------------------------------------------------------------------------------ --------------------------
| | | | | | |
- ---------------- --------------- ----------------- ---------------- --------------- ------------------- -----------------
INFICON S.A.R.L. INFICON Ltd. INFICON Ptd. Ltd. INFICON Ltd. INFICON Ltd. INFICON Ltd. INFICON Co. Ltd.
Courtaboeuf London Singapore Chubei City Hong Kong Bungdang-Ku Yokohama-Shi
France United Kingdom Taiwan China Korea Japan
Sales Sales Sales Sales Sales Sales Sales
- ---------------- --------------- ----------------- ---------------- --------------- ------------------- -----------------
|
-------------------
Leybold Guangzhou
Service Centre Ltd.
Guangzhou
China
Service
-------------------
Ownership
Subsidiary Name Location Percentage
--------------- -------- ----------
INFICON Inc....................... United States of America 100%
INFICON LT........................ United States of America 100%
INFICON AG........................ Liechtenstein 100%
INFICON GmbH...................... Germany 100%
INFICON GmbH...................... Switzerland 99.5%
INFICON Aaland Ab................. Finland 100%
INFICON Ltd....................... United Kingdom 100%
INFICON S.A.R.L................... France 100%
INFICON Co., Ltd.................. Japan 100%
INFICON Ltd....................... Taiwan 100%
INFICON Ltd....................... Korea 100%
INFICON Pte. Ltd.................. Singapore 99.99%
INFICON Ltd....................... Hong Kong 99.96%
INFICON Guangzhou................. China 100%
29
D. Property, Plants and Equipment.
Our global headquarters is located in Syracuse, New York, USA, and our
manufacturing facilities include the following:
Owned or Expiration
Location of Facility Leased of Lease Size (sq.ft.) (1) Primary Products
- -------------------- ------ -------- ----------------- ----------------
Syracuse, New York, USA....... Owned N/A 150,000 Process Knowledge and Control
Environmental Health & Safety
Balzers, Liechtenstein (2).... Leased 2014 125,000 Vacuum Control
Cologne, Germany (3).......... Leased 2010 50,000 Leak Detection
Mariehamn, Finland............ Leased 2004 5,400 Vacuum Measurement
(1) This figure includes gross space, i.e., including traffic and utility
areas.
(2) We relocated our operations to a new facility in 2002.
(3) We relocated a part of our operations to other buildings within the same
building complex in 2002.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion together with the rest of the
annual report, including our consolidated financial statements and related
notes. The results described below are not necessarily indicative of the results
to be expected in any future periods. This discussion contains forward-looking
statements based on current expectations, which involve risks and uncertainties.
Actual results and the timing of certain events may differ significantly from
those projected in these forward-looking statements, due to a number of factors,
including those set forth in the section entitled "Risk Factors" and elsewhere
in this annual report.
Overview
We are a leading developer, manufacturer and supplier of vacuum
instrumentation and critical sensor technologies to the semiconductor and
related markets, as well as other industries worldwide. We operate in two
business segments: the semiconductor vacuum instrumentation segment and the
general vacuum instrumentation segment. We have one major product line that we
include in the semiconductor vacuum instrumentation segment: our process
knowledge and control product line. The products we sell in our semiconductor
vacuum instrumentation segment are technologically advanced products, which were
developed for use in various semiconductor-manufacturing applications. Although
we sell some of these products outside of the semiconductor market, our general
level of sales of these products is sensitive to the cyclical fluctuations of
the semiconductor equipment market, which is generally more volatile than the
semiconductor chip manufacturing market. For the years 2003, 2002 and 2001, we
estimate that approximately 67%, 68% and 68%, respectively, of our sales in this
segment were to semiconductor and related markets such as manufacturers of
semiconductor chips, flat screen televisions and monitors, computer disc drive
components and various electronic storage media, such as compact discs, digital
video discs and floppy discs. While the semiconductor chip manufacturing market
has been highly cyclical, it has showed improvement during 1999 and 2000. This
resulted in an increased demand for our products. Although the semiconductor
chip manufacturing industry recovered in late 1999 and 2000, the industry
entered another downturn in 2001 which contributed to a 10.1% decrease in net
sales from 2000. The downturn continued throughout 2002 resulting in a 8.4%
decrease in net sales from 2001. The industry showed some improvement in 2003
which contributed to a 22.4% increase in net sales from 2002.
Our general vacuum instrumentation segment consists of versatile products
which are suitable for multiple applications in manufacturing and industrial
markets. Our products in this segment fall into two
30
product lines: our leak detection and our vacuum control product lines. These
products are used in many markets, including air conditioning, refrigeration,
automotive, environmental testing, and semiconductor manufacturing. For the
years 2003, 2002 and 2001, we estimate that approximately 7%, 5% and 9%,
respectively, of our sales in this segment were to semiconductor and related
markets. We anticipate that the percentage of our sales in this segment to the
semiconductor industry will increase in future years as our vacuum gauges become
more widely used in the semiconductor industry.
We are subject to risks common to companies in the semiconductor industry,
including the highly cyclical nature of the semiconductor industry leading to
recurring periods of oversupply, development by our competitors of new
technological innovations, dependence on key personnel, and the protection of
proprietary technology. Our general vacuum instrumentation segment sells to
diverse markets and, accordingly, we believe that it is less susceptible to the
risks associated with the semiconductor or any other single market, but is
susceptible to the performance of the economy as a whole. For more information
on the risks of our business, see "Risk Factors."
We generally recognize revenue (i.e., net sales) and accrue for
anticipated returns, warranty costs, and commissions, upon shipment. However,
where sales are contingent upon customer acceptance, we recognize revenue after
confirmation of acceptance. We typically ship our products within four to six
weeks after receiving orders. Because of this relatively short backlog period,
our revenue closely tracks changes in market conditions. Research and
development costs are expensed as incurred.
The effective tax rate in each year is less than the U.S. federal
statutory rate primarily due to the lower tax rates imposed by some of the local
jurisdictions in which our foreign operations are located.
From a cash flow perspective, the Company will realize a future tax
benefit as a result of the restructuring. Since the asset transfer that occurred
in the third and fourth quarter of 2000 related to the restructuring was a
taxable transaction for Unaxis, the transaction resulted in goodwill and other
intangible assets for tax purposes that will be deductible for tax purposes over
the next fifteen years. A deferred tax asset has been recorded on the balance
sheet for this future benefit and the expected cash flow. The Company's ability
to realize these deferred tax assets is dependent on it generating sufficient
taxable income in the related jurisdictions, primarily the United States,
Switzerland, and Germany, to offset the deferred tax asset.
Critical Accounting Policies and 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. On an on-going basis, management evaluates its estimates and
judgments, including, but not limited to, those related to revenue recognition,
pension actuarial assumptions and methods, reserves for obsolescence and excess
inventory, bad debt, warranty, goodwill and intangibles, and valuation
allowances for deferred tax assets. Management bases its estimates and judgments
on historical experience and on various other factors believed to be reasonable
under the circumstances that form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The following summarizes specific accounting
policies:
Revenue Recognition - Revenue is recognized upon the transfer of title
that is generally upon shipment. When a customer's acceptance is required,
revenue is not recognized until the customer's acceptance is received. The
Company accrues for anticipated returns and warranty costs upon shipment.
Goodwill and Intangible Assets - The Company reviews goodwill and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable, and also reviews goodwill annually. Under the provisions of
this standard, goodwill and intangible assets deemed to have indefinite
lives are no longer subject to amortization. All other identifiable
intangibles are amortized over their estimated useful life. Intangible
assets, such as
31
purchased technology, are generally recorded in connection with the
acquisition of a business. The value assigned to intangible assets is
determined by or with assistance of an independent valuation firm based on
estimates and judgment regarding expectations for the success and life
cycle of products and technology acquired. If actual results differ
significantly from the estimates, or other indications are present, the
Company may be required to record an impairment charge to write down the
asset to its realizable value. In addition, SFAS No. 142 requires that
goodwill be tested annually using a two-step process. The first step is to
identify any potential impairment by comparing the carrying value of the
reporting unit to its fair value. If a potential impairment is identified,
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. A severe decline in fair
value could result in an impairment charge to goodwill, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company performs its impairment analysis under
SFAS 142 annually during the third quarter.
Bad Debt - The allowance for doubtful accounts is for estimated losses
resulting from a customer's inability to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Warranties - The accrual for the estimated cost of product warranties is
provided for at the time revenue is recognized. While we engage in
extensive product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates, material usage,
and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty
liability may be required.
Inventory - The reserve for estimated obsolescence or unmarketable
inventory is equal to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
Pension Benefits - The pension benefit costs and credits are developed
from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates and expected return on plan assets.
The Company considers current market conditions, including changes in
interest rates, in selecting these assumptions. Changes in the related
pension benefit costs or credits may occur in the future in addition to
changes resulting from fluctuations in our related headcount due to
changes in the assumptions.
Deferred Tax Assets - As of December 31, 2003, the Company had net
deferred tax assets of U.S.$41.4 million reflecting tax credit and loss
carry forwards, basis differences primarily from intangible assets, and
other deductions available to reduce taxable income in future years. A
majority of the net deferred tax assets balance of U.S.$41.4 million
resides in the United States. In assessing the realization of the
Company's deferred tax assets, we consider whether it is more likely than
not the deferred tax assets will be realized. The ultimate realization of
our deferred income tax assets depends upon our ability to generate future
taxable income, including the implementation of tax planning strategies,
during the periods in which our basis differences and other deductions
become deductible and prior to the expiration of our net operating loss
carry forwards. On a quarterly basis, the Company evaluates the
recoverability of its deferred tax assets based upon historical results
and forecasted results over future years, considering tax planning
strategies, and matches this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss carry forwards to ensure there is adequate support for the
realization of the deferred tax assets. While we have considered future
operating results, in conjunction with ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in
the event we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged as a reduction to income in the
period such determination was made. Likewise, should we determine that we
would be able to realize future deferred tax assets in excess of its net
recorded amount, an adjustment to the deferred tax assets would increase
income in
32
the period such determination was made. For the year ended December 31,
2003, the Company's evaluation of the recoverability of our deferred tax
assets, in accordance with SFAS 109, showed that an increase to our
valuation allowance for its deferred income tax assets was required. An
additional valuation allowance of U.S.$1.6 million was recorded for the
year ended December 31, 2003. For the years ended December 31, 2003 and
December 31, 2002, the Company has a valuation allowance for deferred
taxes of approximately U.S.$4.3 million and U.S.$2.7 million,
respectively. If the Company generates future taxable income against which
these tax attributes may be applied, some portion or all of the valuation
allowance would be reversed and reported as income tax benefit in future
periods.
Although realization is not assured, the Company believes it is more
likely than not the net deferred tax asset balance as of December 31, 2003
will be realized. The Company was able to support this conclusion based
upon projections of future operating results and tax planning strategies
that support the realization of the deferred tax assets, and other
positive and negative evidence. Differences between forecasted and actual
future operating results could adversely impact our ability to realize our
deferred income tax assets; however, differences between forecasted and
actual future operating results are continually monitored to ensure the
Company has adequate support for the realization of the deferred tax
assets. The Company's analysis supporting the realization of the deferred
tax assets places careful consideration on the net operating loss carry
forward periods.
In recent years, the Company's U.S. operations have experienced losses
before income taxes for financial and tax reporting purposes; however, we
believe improvements in the order backlog, industry projections as well as
changes in our operations that occurred in the fourth quarter of 2003, in
addition to other improvements that will take place in future periods, are
sufficient to generate the minimum amounts of taxable income to utilize
our net operating loss carry forwards prior to their expiration. The
changes in the Company's operations include:
o Various cost saving and restructuring initiatives to reduce
manufacturing and overhead costs;
o Capitalization of the intercompany debt arrangement between
INFICON Inc. (US location) and INFICON GmbH (Switzerland);
o Review of R&D allocations between related parties to identify
and implement tax planning strategies to maximize the
Company's tax benefit;
o Other changes in an effort to increase the efficiency and
effectiveness of our business operations.
The Company believes it is more likely than not it will be able to
generate sufficient taxable income in the United States to absorb its net
operating loss carry forwards, which begin to expire in 2021, although
there can be no assurances. If the Company's expectations for future
operating results are not met due to general economic conditions or other
factors, the Company may need to establish additional valuation allowances
for all or a portion of its deferred tax assets primarily relating to its
U.S. operations. This could have a significant affect on our future
results of operations and financial position.
Impairment of Long-Lived Assets - SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," was early adopted by the
Company on January 1, 2002, and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," while retaining many of the requirements of SFAS No. 121. In
accordance with SFAS No. 144, long-lived assets to be held and used by an
entity are to be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, an impairment loss is
recognized by reducing the recorded value to fair value. The pre-tax
charge for impairment is included in operating income (loss) from
continuing operations, net, on the consolidated statements of operations
and totaled $7,370 and $0 for the years ended December 31, 2003 and
December 31, 2002, respectively (see Note 4). The impairment charge for
the year ended December 31, 2003 was allocated as follows:
33
Goodwill $4,342
Intangibles 2,635
PP&E 393
------
Total $7,370
======
Disposal of Long-Lived Assets/Discontinued Operations - SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was
early adopted by the Company on January 1, 2002 and supersedes a portion
of Accounting Principle Board (APB) No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business," relating to reporting the effects of disposal of a segment of a
business, while retaining many of the requirements of this statement.
Under SFAS No. 144, the definition of what constitutes a discontinued
operation is broader, discontinued operations are no longer measured on a
net realizable value basis, and future operating losses are no longer
recognized before they occur (see Note 13).
The Company does not have any off-balance sheet arrangements or
transactions, other than operating leases, that should be disclosed which would
have a significant impact on earnings. Our operating leases on our facilities in
Germany and Liechtenstein extend through 2010 and 2014, respectively and are not
subject to renegotiation prior to the expiration.
34
A. Results of Operations.
The following table sets forth, for the periods indicated, the amount and
percentage of total net sales of certain line items included in our consolidated
statements of income:
Years ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
------------------------------------------------------------
U.S. $ in thousands except for shares and per share amount
Income Statement Data:
Net sales
Semiconductor vacuum instrumentation .................... $ 38,538 $ 30,716 $ 43,614 $ 54,187 $ 36,662
General vacuum instrumentation .......................... 120,900 99,563 98,619 104,024 87,838
--------- --------- --------- --------- ---------
Total net sales ............................................ 159,438 130,279 142,233 158,211 124,500
Cost of sales .............................................. 89,102 72,364 77,146 78,908 65,988
--------- --------- --------- --------- ---------
Gross profit ............................................... 70,336 57,915 65,087 79,303 58,512
Research and development ................................... 20,988 16,052 12,039 10,566 11,138
Impairment of long lived assets ............................ 7,370 -- -- -- --
Selling, general and administrative ........................ 48,326 39,264 38,097 38,809 36,608
--------- --------- --------- --------- ---------
Operating income (loss) from continuing operations ......... (6,348) 2,599 14,951 29,928 10,766
Interest expense (income), net ............................. (126) (597) (478) 292 130
Other expense (income), net ................................ (546) 383 1,337 1,332 921
--------- --------- --------- --------- ---------
Income (loss) from continuing operations before income taxes (5,676) 2,813 14,092 28,304 9,715
Provision (benefit) for income taxes ....................... 271 (120) 2,504 8,450 2,552
--------- --------- --------- --------- ---------
Income (loss) from continuing operations ................... (5,947) 2,933 11,588 19,854 7,163
Discontinued Operations (Note 13):
(Loss) from operations of discontinued Ultra Clean
operations (less applicable income tax (benefit) of $(177)
in 2003, $(422) in 2002, $(138) in 2001, $292 in 2000 and
$32 in 1999) ............................................. (1,188) (2,828) (1,636) 3,077 213
(Loss) on disposal of Ultra Clean Operations (including
2,591 for operating losses during phase-out period, net of
income tax (benefit) of $(337) in 2003 ................... (2,254) -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) from discontinued operations ................. (3,442) (2,828) (1,636) 3,077 213
Net income (loss) .......................................... $ (9,389) $ 105 $ 9,952 $ 22,931 $ 7,376
========= ========= ========= ========= =========
35
The following table sets forth, for the periods indicated, certain segment
information:
Years ended December 31,
--------------------------------------------------------------------------
2003 2002 2001
--------------------------------------------------------------------------
US$ % US$ % US$ %
--- - --- - --- -
(in thousands)
Semiconductor Vacuum Instrumentation
Process Knowledge and Control ... $ 38,538 24.2 $ 30,716 23.6 $ 43,614 30.7
--------- --------- --------- --------- --------- ---------
Total net sales ............... 38,538 24.2 30,716 23.6 43,614 30.7
Gross profit ....................... 18,095 11.3 14,627 11.2 21,736 15.3
Earnings before interest and taxes . (15,552) (9.8) (5,724) (4.4) 1,100 0.8
Identifiable assets (1) ............ 55,467 -- 52,796 -- 56,563 --
General Vacuum Instrumentation
EH&S ............................ 23,803 14.9 13,744 10.6 2,558 1.8
Leak Detection .................. 50,421 31.6 47,426 36.4 52,714 37.1
Vacuum Control .................. 46,676 29.3 38,393 29.5 43,347 30.4
--------- --------- --------- --------- --------- ---------
Total net sales ............... 120,900 75.8 99,563 76.5 98,619 69.3
Gross profit ....................... 52,241 32.8 43,288 33.2 43,351 30.5
Earnings before interest and taxes . 9,751 6.1 7,941 6.1 12,514 8.8
Identifiable assets (1) ............ $ 95,207 -- $ 95,132 -- $ 81,631 --
(1) Identifiable assets refers to the assets utilized by the corresponding
segment, including working capital, property, plant and equipment and
intangible assets. Total assets on our combined balance sheet include
identifiable segment assets and general corporate assets, which are not
allocated to either segment. At this time, we have no general corporate
assets, which are not allocated to a specific segment.
Our semiconductor vacuum instrumentation segment products generally have
higher gross margins than our general vacuum instrumentation segment products
due to our stronger market positions in those markets and patented technology
that distinguishes our products from those of our competitors. The following
table sets forth, for the periods indicated, sales to customers, based on
customer location, in each geographical market expressed absolutely and as a
percentage of total net sales. (1)
Years ended December 31,
-----------------------------------------------------------------
2003 2002 2001
-----------------------------------------------------------------
US$ % US$ % US$ %
--- - --- - --- -
(in thousands)
Europe ........... $ 71,699 45.0% $ 58,471 44.9% $ 62,375 43.9%
North America .... 48,241 30.3% 42,325 32.5% 43,981 30.9%
Asia-Pacific ..... 37,763 23.7% 28,744 22.1% 34,080 24.0%
Other ............ 1,735 1.1% 739 0.6% 1,797 1.3%
-------- -------- -------- -------- -------- --------
Total ........ $159,438 100.0% $130,279 100.0% $142,233 100.0%
======== ======== ========
(1) The table above summarizes sales on the basis of a product's country of
destination, as opposed to its country of origin.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Net Sales
Net sales increased by 22.4% to U.S.$159.4 million for the year ended
December 31, 2003 from U.S.$130.3 million for the year ended December 31, 2002.
This increase is due primarily to favorable changes
36
in exchange rates relative to the US dollar and higher sales within our
semiconductor vacuum and general vacuum instrumentation segments. Price changes
did not have a significant impact on our net sales, however, our European sales
are subject to a currency translation effect due to the weak US Dollar. Sales
for the year ended December 31, 2003 were positively impacted by changes in
currency exchange rates of U.S.$11.3 million, primarily with respect to the
Swiss Franc, Yen and the Euro, as compared to 2002.
Semiconductor Vacuum Instrumentation Segment. Net sales increased by 25.5%
to U.S.$38.5 million for the year ended December 31, 2003 from U.S.$30.7 million
for the year ended December 31, 2002. This increase resulted from improved
demand for process knowledge and control instruments and software (formerly in
situ analysis) from semiconductor manufacturers in the United States and Asia,
primarily the result of a large sale to Samsung Electronics Co. Ltd, additional
revenue following the acquisition of New Vision Systems in January 2003 as well
as sales of thin film equipment resulting from an increased demand by flat panel
display and optical storage equipment OEM customers. Additionally, favorable
changes in exchange rates relative to the US Dollar had a favorable impact of
U.S.$2.0 million.
General Vacuum Instrumentation Segment. Net sales increased by 21.4% to
U.S.$120.9 million for the year ended December 31, 2003 from U.S.$99.6 million
for the year ended December 31, 2002. This increase resulted from higher
Environmental Health & Safety product sales from the U.S. military and homeland
defense agencies coupled with favorable changes in exchange rates relative to
the US Dollar of U.S.$9.3 million. This increase was primarily offset by a lower
demand for our leak detector products by our U.S. industrial customers.
Gross Profit
Gross profit increased by 21.4% to U.S.$70.3 million, or 44.1% of net
sales, for the year ended December 31, 2003 from U.S.$57.9 million, or 44.5% of
net sales, for the year ended December 31, 2002. This percentage decline is
primarily due to changes in foreign exchange rates relative to the U.S. dollar
coupled with an under absorption of fixed overhead costs for the semiconductor
lithography software product line. This decrease was partially offset by the
favorable absorption of fixed costs for the Environmental Health & Safety
product line.
Research and Development
Research and development costs increased by 30.8% to U.S.$21.0 million, or
13.2% of net sales, for the year ended December 31, 2003 from U.S.$16.1 million,
or 12.3% of net sales, for the year ended December 31, 2002. This increase was
driven primarily by the addition of research and development expenses following
the acquisitions of New Vision Systems and Sentex Systems during 2003, increased
new product development activity for process knowledge & control products for
the semiconductor industry, and changes in foreign exchange rates relative to
the U.S. dollar of U.S.$1.5 million.
Impairment of Long-Lived Assets
A one-time impairment charge of U.S.$7.4 million related to the write-down
of long-lived assets in our patterning solutions product line was recorded
during the third quarter of 2003.
Selling, General and Administrative
Selling, general and administrative expenses increased by 23.1% to
U.S.$48.3 million, or 30.3% of net sales, for the year ended December 31, 2003
from U.S.$39.3 million, or 30.1% of net sales, for the year ended December 31,
2002. This increase is primarily the result of additional costs following the
acquisitions of New Vision Systems and Sentex Systems during 2003, changes in
foreign exchange rates relative to the U.S. dollar of U.S.$3.5 million coupled
with higher compensation and commission cost associated with the growth
associated with the environment, health and safety business, the addition of the
water security and patterning solutions business during 2003, and additional
pension and compensation costs.
Operating Income (loss) from Continuing Operations
37
For the reasons stated above, income (loss) from operations decreased to
U.S.($6.3) million, or 4.0% of net sales, for the year ended December 31, 2003
from U.S.$2.6 million, or 2.0% of net sales, for the year ended December 31,
2002.
Other Expense (Income)
Other (income) was U.S.$(0.5) million, or 0.3% of net sales, for the year
ended December 31, 2003 as compared to other expense of U.S.$0.4 million, or
0.3% of net sales, for the year ended December 31, 2003. The increase in other
income is primarily the result of foreign currency gains recognized during the
year ended December 31, 2003.
Provision (Benefit) for Income Taxes
Provision for income taxes increased to U.S.$0.3 million, or 4.8% of a
(loss) before income taxes for the year ended December 31, 2003 from a (benefit)
of U.S.$(0.1) million, or 4.3% of income before taxes, for the year ended
December 31, 2002. The increase in the provision for income taxes resulted from
a U.S.$1.1 million valuation allowance relating to the Company's analysis of its
deferred tax assets. The effective tax rate, excluding the U.S.$1.1 million
valuation allowance, for the year ended December 31, 2003 was 14.6%. The change
in the effective tax rate from 14.6% for the year ended December 31, 2002 and
4.3% for the year ended December 31, 2002, was due to a change in the earnings
mix amongst tax jurisdictions.
Discontinued Operations
The Company recorded a loss from discontinued operations of U.S.$3.4
million for the year ended December 31, 2003 compared to a loss of U.S.$2.8
million for the year ended December 31, 2002. The increased loss is the result
of U.S.$2.3 million in costs associated with the divestment of the ultra clean
processing product line for the year ended December 31, 2003. These divestment
costs were partially offset by a lower loss from operations for the year ended
December 31, 2003 of U.S.$1.6 million.
Net Income (loss)
For the reasons stated above, a net loss of U.S.$(9.4) million, or 5.9% of
net sales, was recognized for the year ended December 31, 2003 versus a net
income U.S.$0.1 million, or 0.1% of net sales, for the year ended December 31,
2002.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Net Sales
Net sales decreased by 8.4% to U.S.$130.3 million for the year ended
December 31, 2002 from U.S.$142.2 million for the year ended December 31, 2001.
This decrease is due primarily to lower sales to one of our European private
label customers, lower sales to our thin film manufacturing customers in North
America, as well as lower sales to some of our Asian distributors. Increased
sales of our Environmental Health & Safety product line, acquired in November
2001 partially offset this decline. Price changes did not have a significant
impact on our net sales, however, our European sales are subject to a currency
translation effect due to the weak US Dollar. Sales for the year ended December
31, 2002 were positively impacted by changes in currency exchange rates of
U.S.$3.8 million, primarily with respect to the Swiss Franc, Yen and the Euro,
as compared to 2001.
Semiconductor Vacuum Instrumentation Segment. Net sales decreased by 29.6%
to U.S.$30.7 million for the year ended December 31, 2002 from U.S.$43.6 million
for the year ended December 31, 2001. This decrease resulted from a lower demand
for in-situ analysis products from semiconductor manufacturers and their
suppliers in the United States and Asia. Additionally, we saw a reduction in
demand for our thin film monitors from fiber optic equipment suppliers due to
weaker demand for telecommunications equipment. This was partially offset by
favorable changes in exchange rates relative to the US Dollar of U.S.$0.7
million.
38
General Vacuum Instrumentation Segment. Net sales increased by 0.9% to
U.S.$99.6 million for the year ended December 31, 2002 from U.S.$98.6 million
for the year ended December 31, 2001. This increase resulted from the
acquisition of the Environmental Health & Safety product line and an increased
demand for leak detection products from our refrigeration, air-conditioning,
automotive, coupled with favorable changes in exchange rates relative to the US
Dollar of U.S.$3.1 million. This increase was primarily offset by a lower demand
for our vacuum control products from our data storage customers as well as a
lower demand for leak detector products by our semiconductor customers.
Gross Profit
Gross profit decreased by 11.0% to U.S.$58.0 million, or 44.5% of net
sales, for the year ended December 31, 2002 from U.S.$65.1 million, or 45.8% of
net sales, for the year ended December 31, 2001. This percentage decline is
primarily due to an unfavorable product mix and unabsorbed fixed costs
associated with underutilized manufacturing capacity in our in-situ analysis and
vacuum control product lines. This effect was partially offset by the addition
of the Environmental Health & Safety product line.
Research and Development
Research and development costs increased by 33.3% to U.S.$16.1 million, or
12.3% of net sales, for the year ended December 31, 2002 from U.S.$12.0 million,
or 8.5% of net sales, for the year ended December 31, 2001. This increase
resulted primarily from an increased investment in new product development
projects for our vacuum control and in situ analysis businesses and the
inclusion of the Environmental Health & Safety product line acquired in November
2001. As a result of this increased investment in new product development the
company was able to introduce three major new products in 2002 and expects
further significant new product introductions in 2003. Additionally, the Company
incurred intellectual property charges relating primarily to the introduction of
a new product in 2002 that were approximately U.S.$0.3 million higher than 2001.
Selling, General and Administrative
Selling, general and administrative expenses increased by 3.1% to
U.S.$39.3 million, or 30.1% of net sales, for the year ended December 31, 2002
from U.S.$38.1 million, or 26.8% of net sales, for the year ended December 31,
2001. This increase is primarily due to the inclusion of the Environmental
Health & Safety product line acquired in November 2001 coupled with a U.S.$1.1
million charge for severance and other employee benefit costs related to a
reduction in workforce during the fourth quarter of 2002. This increase was
partially offset by lower costs for the year ended December 2002, that resulted
from a reduction in expenses for travel, advertising, outside services, bonuses,
and commissions.
Operating Income from Continuing Operations
For the reasons stated above, income from operations decreased to U.S.$2.6
million, or 2.0 of net sales, for the year ended December 31, 2002 from
U.S.$15.0 million, or 10.5% of net sales, for the year ended December 31, 2001.
Other Expense
Other expense was U.S.$0.4 million, or 0.3% of net sales, for the year
ended December 31, 2002 as compared to U.S.$1.3 million, or 0.9% of net sales,
for the year ended December 31, 2001. This reduction in expense primarily
relates to an impairment charge for leasehold improvements recorded in 2001
prior to the move to our new facility in Liechtenstein, as well as a U.S.$0.5
million decrease in foreign exchange losses as compared to 2001.
Provision (benefit) for Income Taxes
39
Income taxes decreased to a benefit of U.S.$(0.1) million, or 4.3% of
income before income taxes for the year ended December 31, 2002 from a provision
of U.S.$2.5 million, or 17.8% of income before taxes, for the year ended
December 31, 2001. This decrease resulted primarily from a decrease in taxable
income and the change in earnings mix among tax jurisdictions.
Discontinued Operations
The Company recorded a loss from discontinued operations of U.S.$2.8
million for the year ended December 31, 2002 compared to a loss of 1.6 million
for the year ended December 31, 2002. The increased loss is the result of lower
sales and higher overhead costs for the year ended December 31, 2002.
Net Income
For the reasons stated above, net income decreased to U.S.$0.1 million, or
0.1% of net sales, for the year ended December 31, 2002 from U.S.$10.0 million,
or 7.0% of net sales, for the year ended December 31, 2001.
B. Liquidity and Capital Resources.
Historically, we have been able to finance our operations and capital
requirements through cash provided by operations. Cash provided by operating
activities was U.S.$0.9 million, U.S.$10.2 million and U.S.$24.8 million for the
years ended December 31, 2003, 2002 and 2001 respectively. In 2003, cash
provided by operating activities of U.S.$0.9 million consisted of a net loss of
U.S.$9.4 million, depreciation and amortization of U.S.$5.2 million , impairment
of long lived assets of U.S.$7.4 million, and a net increase in working capital
with reductions in inventory and accounts receivable of U.S.$2.3 million. In
2002, cash provided by operating activities of U.S.$10.2 million consisted of
net income of U.S.$0.1 million, depreciation and amortization of U.S.$3.9
million and a net decrease in working capital with reductions in inventory and
accounts receivable of U.S.$6.2 million. In 2001, cash provided by operating
activities of U.S.$24.8 million consisted of net income of U.S.$10.0 million,
depreciation and amortization of U.S.$2.9 million, a loss on the disposal of
property, plant and equipment of U.S.$0.5, and a net decrease in working capital
of U.S.$11.4 million.
Working capital was U.S.$64.3 million as of December 31, 2003, compared to
U.S.$63.8 million as of December 31, 2002. The increase was the result of a
decrease in cash of U.S.$0.8 million, a decrease in inventory of U.S.$2.3
million, a decrease in other current and deferred tax assets of U.S.$2.3
million, an increase in accounts receivable of U.S.$5.1 million, a decrease in
other current assets of U.S.$0.4, a decrease in accounts payable of U.S.$0.8, an
increase in accrued liabilities of U.S.$2.0, a decrease in income taxes payable
of U.S.$2.0 million, and the favorable effect of foreign currency adjustments
which totaled U.S.$0.4 million. Depreciation and amortization increased to
U.S.$3.9 million for the year ended December 31, 2002 from U.S.$2.9 million for
the year ended December 31, 2001.
Cash used in investing activities was U.S.$5.6 million, U.S.$13.3 million
and U.S.$7.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively, primarily for the purchase of Sentex Systems, Inc. (Note 5) for
U.S.$1.5 million in 2003, loans to NVS (Note 4) for U.S.$5.9 million in 2002,
the purchase of the HAPSITE business in 2001 for U.S.$2.0 million and the
purchase of property and equipment in each period. Cash (used in) provided by
financing activities was U.S.$0.2 million, U.S.$0 million and U.S.$(11.3)
million in 2003, 2002 and 2001, respectively. In 2001 we repaid advances to
Unaxis of U.S.$11.2 million.
The Company entered into a U.S.$30.0 million working capital financing
arrangement with Credit Suisse on November 23, 2000. The financing arrangement
can be either in the form of a current account overdraft facility, fixed
advances with a maximum maturity of twelve months, bid/advance
payment/performance bonds, issuance of letters of credit, or as margin coverage
for foreign exchange forward transactions. The working capital financing was
automatically extended for one year on November 23, 2003. The Company has U.S.$0
outstanding under the financing arrangement as of December 31, 2003.
40
On September 30, 2001, the Company entered into a working capital
financing arrangement with Dresdner Bank in the amount of EUR 5.1 million
(approximately U.S.$6.4 million) at December 31, 2003. The financing arrangement
can be either in the form of a current account overdraft facility or fixed
advances. The interest rate for the overdraft facility is EURIBOR plus 0.95%.
The working capital financing arrangement was extended for one year on July 31,
2003. The Company has U.S.$0 outstanding under the financing arrangement as of
December 31, 2003.
Additionally, the Company entered into two revolving credit facilities
with HypoVereinsbank on February 28, 2001. The credit facilities include a HKD
5.5 million (approximately U.S.$0.7 million) working capital financing
arrangement and a HKD 9.25 million (approximately U.S.$1.2 million) margin
coverage arrangement for foreign exchange forward transactions. The working
capital financing arrangement can be either in the form of a current account
overdraft facility, fixed advances with a maximum maturity of nine months, short
term trust receipt financing, issuance of letters of credit, or issuance of bank
guarantees. The working capital financing arrangement expires on March 31, 2005
and has an option for extension. The Company has U.S.$0 million outstanding
under the financing arrangement as of December 31, 2003.
We made full recourse loans available to our executive officers eligible
to participate in the leveraged share plan for the purpose of purchasing up to
80% of the shares allocated to them under the plan. Loans made to executive
officers have a term of 7 years and are on a recourse basis. The loans are
collateralized by all of the shares purchased under the leveraged share plan,
and we have either a first, or, if a portion of the shares are financed or
refinanced by another lender, a second lien on the shares. The loans have an
interest rate equal to 120% of the mid-term applicable federal rate (as defined
in the Internal Revenue Code) determined on the date the loans are made. The
balances of the loans payable to us are offset against the value of the shares
on our balance sheet. As of December 31, 2003, there is an outstanding balance
on the loans of U.S.$0.4 million.
We currently believe the cash generated from operations, together with the
cash balance as of December 31, 2003, and borrowings available under our line of
credit, will be sufficient to satisfy our working capital and capital
expenditure requirements
C. Research and development, patents and licenses, etc.
For a description of our research and development policies for the last
three years, please refer to "Information on the Company---Business
Overview---Research and Development."
D. Trend Information.
Early in 2001 the semiconductor industry entered into a cyclical downturn
and consequently a decrease in net sales. The decrease in net sales is due to a
worldwide slowdown in demand for semiconductor products which resulted in a
decline in demand from semiconductor capital equipment manufacturers and
semiconductor device manufacturer customers. However, since many of our products
serve the more stable general industrial markets, and because of the
considerable geographic diversity of our customer base we were able to partially
mitigate the effects of the U.S.-led semiconductor sector downturn. In a period
of market uncertainty in the semiconductor sector, we believe we are well
positioned to outperform the sector as a whole because of our focus and
leadership in emerging technologies and employing some of the most advanced
enabling technologies in our manufacturing environment. We expect these new
technologies to be substantially less affected by a technology sector downturn.
Euro Conversion
Approximately 45%, 45% and 44% of our sales for the year ended December
31, 2003, 2002 and 2001, respectively, were to customers in the European Union.
On January 1, 1999, a single currency called the Euro was introduced in Europe.
Eleven of the fifteen member countries of the European Union adopted the Euro as
their common legal currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy currencies") and the
Euro were established as of that date. The legacy
41
currencies remained legal tender as denominations of the Euro until 2002. During
this transition period, parties settled transactions using either the Euro or a
participating country's legacy currency.
We believe that increased price transparency resulting from the use of a
single currency will render the prices charged for our semiconductor
instrumentation and vacuum instrumentation products more comparable and will
increase cross-border business among the participating countries. This will
affect our ability to price our products differently in the various European
markets. A possible consequence may be price harmonization at lower average
prices for products sold in some markets. Nevertheless, differences in national
value-added tax regimes may reduce the potential for price harmonization.
We believe the conversion to the Euro will reduce our exposure to changes
in foreign exchange rates, due to the netting effect of having assets and
liabilities denominated in a single currency, as opposed to the various legacy
currencies. As a result, we expect that our foreign exchange hedging costs will
be reduced. We believe the introduction of the Euro does not have any material
tax consequences. We also believe the Euro conversion will not have a material
effect on our financial position or results of operations.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This Interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others, which is being superseded.
This Interpretation does not apply to certain guarantee contracts:
guarantees issued by insurance and reinsurance companies and accounted for under
accounting principles for those companies, residual value guarantees provided by
lessees in capital leases, contingent rents, vendor rebates, and guarantees
whose existence prevents the guarantor from recognizing a sale or the earnings
from a sale. Furthermore, the provisions related to recognizing a liability at
inception for the fair value of the guarantor's obligation do not apply to the
following:
a. product warranties;
b. guarantees that are accounted for as derivatives;
c. guarantees that represent contingent consideration in a business
combination;
d. guarantees for which the guarantor's obligations would be reported
as an equity item (rather than a liability);
e. an original lessee's guarantee of lease payments when that lessee
remains secondarily liable in conjunction with being relieved from
being the primary obligor (that is, the principal debtor) under a
lease restructuring;
f. guarantees issued between either parents and their subsidiaries or
corporations under common control;
g. a parent's guarantee of a subsidiary's debt to a third party, and a
subsidiary's guarantee of the debt owed to a third party by either
its parent or another subsidiary of that parent.
However, the guarantees described in (a)-(g) above are subject to the disclosure
requirements of this Interpretation.
The initial recognition and measurement provisions of the Interpretation
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
financial position or results of operations.
42
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123 (SFAS 123),"
which is effective for financial statements for fiscal years ending after
December 15, 2002, with early adoption permitted. SFAS 148 will enable companies
that choose to adopt the preferable fair value based method to report the full
effect of employee stock options in their financial statements immediately upon
adoption, and to make available to investors better and more frequent disclosure
about the cost of employee stock options. We will continue to apply the
disclosure only provisions of both SFAS 123 and SFAS 148.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized (see Footnote 21).
In January 2003 the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46"). In December 2003 , the FASB approved
a partial deferral of the adoption of the interpretation and issued FIN 46-R on
December 24, 2003. This interpretation clarifies existing accounting principles
related to the preparation of consolidated financial statements when the equity
investors in an entity do not have the characteristics of a controlling
financial interest or when the equity at risk is not sufficient for the entity
to finance its activities without additional subordinated financial support from
others parties. FIN No. 46 requires a company to evaluate all existing
arrangements to identify situations where a company has a "variable interest"
(commonly evidenced by a guarantee arrangement or other commitment to provide
financial support) in a "variable interest entity" (commonly a thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. FIN No. 46 is effective immediately for all variable interest entities
created after January 31, 2003, and is effective for all variable interest
entities created prior to that date beginning January 1, 2004. The adoption of
FIN No. 46 did not have a material impact on the Company's financial position or
results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends SFAS 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. The adoption of SFAS 149, which is effective for
contracts entered into or modified after June 30, 2003, did not have a material
effect on the Company's financial condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150 establishes
standards on the classification and measurement of financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and for all
financial instruments at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the
Company's financial position or results of operations
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) (SFAS 132), "Employers' Disclosures about
Pensions and Other Postretirement Benefits," that improves financial statement
disclosures for defined benefit plans. The change replaces existing SFAS 132
disclosure requirements for pensions and other postretirement benefits and
revised employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by SFAS 87, "Employers' Accounting for Pensions," SFAS 88 and
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS 132 revised retains the
disclosure requirements contained in the original SFAS 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. SFAS 132 revised is effective for annual and interim
periods with fiscal years ending after December 15, 2003. We have adopted the
revised disclosure provisions in Note 19.
43
Item 6. Directors, Senior Management, and Employees
A. Directors and Senior Management.
Our articles of incorporation provide that the board of directors may
consist of one or more members who must be shareholders. Directors are elected
and removed by shareholder resolution. Members of our board of directors serve
three-year terms and may be reelected upon completion of their term of office.
The shareholders may remove the directors without cause. Our six directors
currently in office were elected by shareholder resolution.
Our board of directors establishes the strategic, accounting,
organizational, and financing policies to be followed by us. Our board of
directors further appoints the executive officers and the authorized signatories
and supervises our management. Moreover, our board of directors is entrusted
with preparing shareholders' meetings and carrying out shareholder resolutions.
Our executive officers are responsible for our day-to-day management. The
executive officers have individual responsibilities established by our
Organizational Regulations and by the board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to
any applicable employment agreements. Currently, our newly appointed Chief
Executive Officer and President, Mr. Winkler, Chief Financial Officer, Mr.
Maier, and our Vice President of Leak Detection, Mr. Doebler have employment
agreements with us. The amended and restated employment agreements with Mr.
Winkler, Mr. Maier, and Mr. Doebler are effective until it is terminated by
either Mr. Winkler, Mr. Maier, or Mr. Doebler or us upon at least twelve months
notice to the other party. Pursuant to the agreement for Mr. Winkler, his base
salary is reviewed and adjusted by the Board and he is eligible to receive an
annual bonus in an amount determined by the Board at its sole discretion. Mr.
Winkler is entitled to participate in the employee benefit plans provided to
other employees in accordance with our general policies in effect from time to
time.
If either we or Mr. Winkler, Mr. Maier, or Mr. Doebler terminate their
employment without cause upon at least twelve months notice, Mr. Winkler, Mr.
Maier, or Mr. Doebler will continue to provide services to us during the notice
period and we will continue to pay Mr. Winkler, Mr. Maier or Mr. Doebler their
base salary in addition to allowing them to continue to participate in our
employee benefit plans. Upon termination of the notice period, we will have no
further obligation to Mr. Winkler or Mr. Maier under these agreements. If Mr.
Winkler, Mr. Maier, or Mr. Doebler terminates their employment by reason of a
disability, they shall continue to receive their base salary for up to six
months following their termination of employment.
Set forth below are the name, age, principal position and biographical
description of each of our directors and executive officers (as of the date of
this report):
Name Age Position
- ---- --- --------
James L. Brissenden............. 65 Director (Retired Chief Executive Officer and President,
December 31, 2003)
Richard Fischer................. 48 Director
Mario Fontana................... 57 Director
John J. Grad.................... 65 Chairman of the Board of Directors
Kurt Muck....................... 49 Director
Paul E. Otth.................... 60 Vice-Chairman of the Board of Directors
Thomas Staehelin................ 56 Director
Peter G. Maier.................. 41 Vice President and Chief Financial Officer
Ulrich Doebler.................. 48 Vice President, Leak Detection
Gary W. Lewis.................. 58 Vice President, Environmental Health & Safety
Linda Van Roekel................ 55 Vice President, Environmental Health & Safety
Urs Walchli..................... 43 Vice President, Process Knowledge and Control
Lukas Winkler................... 41 Vice President, Vacuum Control (Effective March 1, 2004)
Formerly Vice President, Vacuum Control (Chief Executive
Officer and President effective January 1, 2004)
44
John J. Grad. (Chairman, Member Human Resource and Nominating Committee
and Audit Committee) Mr. Grad is President of John J. Grad and Associates, Inc.
Management Consultants. In 1987, Mr. Grad joined Landis & Gyr AG where he became
President of Landis & Gyr Powers, Inc. In 1991, he was named to their Executive
Board and in 1993, he assumed the responsibility for Landis & Gyr Holding, Inc.,
the holding company for all North American divisions, while retaining the
position of a President and CEO of Landis & Gyr Powers, Inc. In March 1996, he
became President and CEO of Landis & Staefa, Inc., a position that he retained
until the creation of Siemens Building Technologies. From October 1998 through
October 2000, Mr. Grad served as President and Chief Executive Officer of
Siemens Building Technologies, Inc. Mr. Grad holds a Bachelor of Science degree
in Industrial Management and a M.B.A. from the University of Cincinnati.
James L. Brissenden. (Director) Mr. Brissenden joined INFICON Leybold
Hereaus as President and Chief Executive Officer in 1984. Mr. Brissenden retired
as President and CEO of INFICON Holding AG on December 31, 2003. Mr. Brissenden
joined INFICON Leybold Hereaus as President and Chief Executive Officer in 1984.
In 1996, Mr. Brissenden became President and Chief Executive Officer of Balzers
and Leybold Instrumentation, our predecessor. Prior to joining INFICON, Mr.
Brissenden spent 20 years with Carborundum Company with his last position being
Vice President and General Manager, Electric Products Division. Mr. Brissenden
has served as President of the Unaxis holding company in the United States and
Chairman of Contraves Inc., a Unaxis subsidiary. Mr. Brissenden holds a BSBA
from Ohio State University and an MBA from the State University of New York.
Mario Fontana. (Chairman Strategy Committee and Member Audit Committee)
Mr. Fontana started his professional career in 1970 with IBM Switzerland. In
1977, he moved to Brazil where he worked for Brown Boveri. Mr. Fontana then
worked for Hewlett-Packard for over 15 years, first as General Manager in
Switzerland, Germany and Europe, and last as head of the Global Financial
Services unit in Cupertino, CA. Mr. Fontana studied at ETH Zurich and the
Georgia Institute of Technology. Since 1999, Mr. Fontana has served on the
boards of several companies in various capacities, including Leica Geosystems,
as Chairman, Swissquote Holding, as Chairman, and SBB Swiss Railway and Sulzer.
Richard Fischer. (Member Strategy Committee) Dr. Fischer is a co-owner of
VAT Holding AG. VAT is the global leading supplier of vacuum valves. Since 1984,
he has served as VAT's Chief Executive Officer, and since 1997 as the company's
President and Chairman of the Board. Prior to joining VAT, Dr. Fischer was
Technical Director of Gama Access Systems, an Austrian company. Dr. Fischer
holds a Ph.D. in Engineering from the University of Vienna.
Kurt Muck. (Member Human Resources and Nominating Committee and Strategy
Committee) Mr Muck was a Member of the Executive Board of Unaxis Corporation
from 2000 until 2003. During this period of time he held certain positions as a
Member of Boards within Unaxis. From 1985 to 1996 Mr. Muck held various
positions at Philips GmbH including Managing Director of Philips GmbH, Germany
and Managing Director of Philips Semiconductors for Central Europe. In 1997, Mr.
Muck served as President of Siemens Division for Electro Mechanical Components.
Mr. Muck holds an Engineering degree from the Technical College in Nuernberg.
Paul E. Otth. (Vice Chairman and Chairman Human Resources and Nominating
Committee) In June 2000, Mr. Otth became the Chief Financial Officer and a
Member of the Executive Board of Unaxis Holding AG. From 1989 until November
1996, Mr. Otth was with Landis & Gyr AG, where he became the Chief Financial
Officer and a Member of the Executive Board in November 1994. From November 1996
until October 1998, he served as the Chief Financial Officer and a Member of the
Executive Board of Elektrowatt AG (a successor company of Landis & Gyr AG). From
October 1998 until May 2000, he served as Chief Financial Officer and a Member
of the Group Board of Siemens Building Technologies (a successor company of
Elektrowatt AG). From June 2000 until December 2002, Mr. Otth served as Chief
Financial Officer and a Member of the Executive Board of Unaxis Corporation. Mr.
Otth is a Certified Public Accountant. Mr. Otth currently also holds
directorships in several other Swiss corporations which include Swiss Rail,
Ascom Holding AG, Swissquote Group Holding AG, ESEC Holding AG, and EAO Holding
AG.
45
Thomas Staehelin. (Chairman Audit Committee) Dr. Staehelin is a Swiss
corporate and tax attorney and partner in the Basel based law firm Fromer,
Schultheiss and Staehelin. Dr. Staehelin is a private investor and serves on the
boards of various Swiss listed or unlisted companies in various capacities
ranging from a member, Vice-Chairman, or Chairman. Dr. Staehelin currently holds
directorships in the following companies: Kuhne & Nagel International AG,
Siegfried Holding AG, Basler Kantonalbank, Rothornbahn und Scalottas AG,
Swissport International AG, Lantal Textiles, Regula Holding AG. Dr. Staehelin
holds a Ph.D. in Law from the University of Basel. He currently serves as
Chairman of the Chamber of Commerce of Basle and was a member of parliament.
Peter G. Maier. (Vice President and Chief Financial Officer) Mr. Maier
joined INFICON in 1996 as Director of Information Systems and became Vice
President of Finance for Leybold Inficon, and Controller for the Instrumentation
Division in 1998. Prior to joining us, Mr. Maier served Deloitte Consulting as
project manager and consultant for enterprise application integration from 1994
to 1996. From 1992 to 1994, Mr. Maier served as Controller for Heidelberger
Druckmaschinen AG in Germany. Mr. Maier holds a masters degree in business
administration and computer science from the University of Karlsruhe, Germany.
Ulrich Doebler. (Vice President, Leak Detection) Dr. Doebler joined
INFICON in 1986. From 1996 to December 1999, Dr. Doebler was the Marketing and
Engineering Manager of our Leak Detection business unit. Dr. Doebler holds a
Ph.D. in physics from the University of Cologne.
Gary W. Lewis. (Vice President, Environmental Health & Safety) Mr. Lewis
joined INFICON in November 1984 as Manufacturing Manager and was named Vice
President of Quality Assurance in 1991. He has managed some of the various leak
detection products since 1995 and assumed responsibility for the EH&S Business
Unit in 2000. Mr. Lewis holds a B.S. in electrical engineering from Clarkson
University and an MBA from Chapman University.
Linda Van Roekel. (Vice President, Process Knowledge and Control) Ms. Van
Roekel joined INFICON in December 1984. Ms. Van Roekel has been an officer since
November 1992, when she was named Vice President of Marketing. Ms. Van Roekel
holds an M.S. in chemistry from the University of Washington and an MBA from
Syracuse University.
Lukas Winkler. (President and Chief Executive Officer - as of 1/1/2004)
Mr. Winkler became President and Chief Executive Officer of INFICON Holding AG
January 1, 2004. Mr. Winkler joined the company in January 1993 and served as
our Vice President, Vacuum Control from January 1997 to December 2003. From
January 1995 to January 1997, Mr. Winkler served our Balzers AG subsidiary as
General Manager Production. Mr. Winkler has a Masters Degree in engineering from
the Swiss Federal Institute of Technology (ETH-Zurich) and an Executive-MBA from
Syracuse University.
Urs Walchli. (Vice President, Vacuum Control - as of 3/1/2004) Mr. Walchli
joined the company in 1998. In 2000, he was appointed R&D Manager of our Vacuum
Control business unit and became Technical Director of this unit in 2003. Mr.
Walchli holds a Ph.D. in physics from Berne University and a Master of
Industrial Management from ETH Zurich/Swiss Federal institute of Technology
Zurich.
B. Compensation.
During the fiscal year ended December 31, 2003, the aggregate amount of
compensation (including any benefits in kind granted) that we accrued for our
six executive officers (employed as of December 31, 2003) as a group amounted to
U.S.$1.8 million. During the fiscal year ended December 31, 2003 our board of
directors received CHF 479,244 (U.S.$356,262) in compensation. Approximately,
one half of this amount was paid in cash, payable semi-annually. The other half
was provided in the form of options to purchase INFICON shares. The aggregate
number of options provided to the directors was calculated based on the sum of
CHF 217,500 (approximately U.S.$174,432) divided by the Black-Scholes value of
an option on the grant date. The options vested immediately, and become
exercisable after a year and will expire seven years after the grant date. On
May 15 and November 15, 2003, the Company agreed to pay our directors an
aggregate of 3,817 and 2,382 options, respectively, at exercise prices of CHF 75
and 97.5. The exercise price is equal to the closing price of the shares on the
grant date.
46
During 2003 and 2002, we contributed an aggregate amount of approximately
U.S.$168,643 and U.S.$118,000, respectively, to provide pension, retirement and
similar benefits to our executive officers.
C. Board Practices.
General
Members of our board of directors serve three-year terms which for five
members expired in May 2003 and for one member in May 2004. Executive officers
are appointed by and serve at the discretion of the board of directors, subject
to any applicable employment agreements. As of December 31, 2003, our newly
appointed Chief Executive Officer and President, Mr. Winkler, Chief Financial
Officer, Mr. Maier and Vice President of Leak Detection, Mr. Doebler, have
employment agreements with us.
None of the directors of the Company have a service contract with the
Company, or its subsidiaries, that provides for benefits upon termination of
employment.
Committees of the Board of Directors (As of the date of filing)
During 2003, the audit committee is comprised of Dr. Thomas Staehelin
(Chairman), Mr. John Grad, and Mr. Mario Fontana. The audit committee must
consist of directors who are not officers or employees of INFICON. Each member
of the audit committee meets the independence requirements of the Nasdaq
National Market rules. The Board of Directors has adopted a written charter for
the audit committee. The purpose of the audit committee is to assist the board
of directors in fulfilling its responsibility to oversee our financial reporting
process, including monitoring the integrity of our financial statements and the
independence and performance of our external auditor.
The responsibilities of the audit committee include:
o recommending to the board of directors the independent public
accountants to be selected to conduct the annual audit of our
books and records;
o reviewing the proposed scope of such audit and approving the
audit fees to be paid;
o reviewing the adequacy and effectiveness of our accounting and
internal financial controls with the independent public
accountants and our financial and accounting staff;
o reviewing and approving transactions between us and our
directors, officers and affiliates; and o reviewing and
reassessing annually the adequacy of our audit committee
charter.
The Human Resources and Nominating Committee
The Human Resources and Nominating Committee consists of three non-executive
members of the Board of Directors and is comprised of Mr. Paul E. Otth
(Chairman), Mr. John Grad, and Mr. Kurt Muck. The responsibility of the Human
Resources and Nominating Committee is to provide a general review of our
compensation and benefit plans to ensure they meet corporate financial and
strategic objectives as well as to make recommendations to the board regarding
appointment, dismissal and career development of senior management positions.
The responsibilities of the Human Resources and Nominating Committee also
include the administration of employee incentive plans.
The Strategy Committee
The Strategy Committee consists of three non-executive members of the Board
of Directors and is comprised of Mr. Mario Fontana (Chairman), Mr. Richard
Fischer, and Mr. Kurt Muck. This Committee is responsible for advising the board
on the long term strategy and how to portray INFICON's strategy to shareholders
and the investment community.
47
Frequency of meetings of the Board of Directors and its Committees
The Board of Directors hold four or more meetings per year, and additional
ad hoc meetings and conference calls as necessary. The Audit Committee holds
four meetings per year in addition to three quarterly conference calls. The
Human Resources and Nominating Committee holds two or more meetings per year.
D. Employees.
As of December 31, 2003, we had 689 full time employees and on average
during 2003, we had approximately 17 temporary or part time employees. We had
706, 703 and 694 employees as of December 31, 2003, 2002 and 2001, respectively.
The following table shows a breakdown of employees by main category of
activity and geographic location:
Year 2003
Employees by Region
North
Employees by Activity Europe America Asia Total
------------------------------------------
Manufacturing & Service 138 105 13 256
Research and Development 66 56 -- 122
Sales & Marketing 68 73 69 210
General Administration 76 32 10 118
--- ---- -- ---
Total 348 266 92 706
Some of our non-management workers at our German facility belong to German
workers unions. However, we do not negotiate collective bargaining agreements
with these unions to cover our workers nor do we have any other direct relations
with them. Instead, in accordance with German practice, unions negotiate
agreements with industry-wide employers' associations. In recent years, unions
have cooperated with industry, agreeing to concessions to improve operating
efficiency. A German collective bargaining agreement governs the employment of
all workers of the categories organized in the relevant union, whether or not
the individual worker is a union member.
In Germany, employers and unions generally negotiate collective bargaining
agreements annually. The general umbrella agreement that covers our workers was
entered into for an indefinite term. A separate agreement, which covers
compensation and benefit matters and is usually entered into for a period of one
year, has a two-year term this time which expires in April 2004.
Our employees at our Cologne, Germany and Balzers, Liechtenstein
facilities are represented by workers councils (Betriebsrat), elected by all
non-management employees. In Germany, the members serve a four-year term and
elections were held in February 2002. In Liechtenstein, elections of the new
members were held in January 2004 and the members serve a three-year term.
48
The works councils facilitate communications between us and our staff at
the facility level. The members of our works councils share responsibilities
with us for managing staff-related matters and working condition issues such as
compensation issues (within the framework provided by the collective bargaining
agreement), the hiring of new employees, working hours, working shifts or
matters relating to employee facilities (e.g., cafeterias). In Germany, the
rights and responsibilities of works council are set forth in the German Works
Council Constitution Act (Betriebsverfassungsgesetz). The German Works Council
Constitution Act provides, among other things, that any termination of an
employee must be approved by members of the works council. Similarly, scheduled
overtime work must generally be approved by the works council.
We have never experienced a work stoppage, slowdown or strike, and we
consider our relations with our employees to be excellent.
E. Share Ownership.
Our directors and executive officers beneficially own, as a group, 14,099
shares and 46,098 options to purchase 95,474 shares of INFICON. The terms of
these options are described below.
Under our leveraged share plan described below, 23,683 options to purchase
118,415 INFICON shares were granted to our executive officers and certain key
employees. Each option entitles its holder to purchase five INFICON shares at
the initial public offering price of CHF 225. The options are non-transferable
and will expire on the seventh anniversary of the date of grant which was
November 8, 2000.
In connection with our initial public offering, we offered employees the
right to participate in one of two equity purchase programs. These are the
leveraged share plan and the discounted share purchase plan.
Leveraged Share Plan. The leveraged share plan was available only in
connection with our initial public offering to three tiers of employees: the
Chief Executive Officer, other executive officers and key employees. No shares
were made available to our directors under the leveraged share plan. Depending
on an eligible employee's tier, an eligible employee could purchase shares in
the offering at the initial public offering price for a total purchase price
between CHF 40,000 and CHF 1,000,000 (U.S.$22,504 and U.S.$562,588,
respectively). For each share purchased in the initial public offering by an
eligible employee pursuant to the leveraged share plan, such eligible employee
received an option to purchase five shares at the offer price. The amount of
shares authorized for issuance under the leveraged share plan had a maximum
aggregate value of CHF 7.0 million (U.S.$3.9 million), representing 31,111
shares at the initial offering price of CHF 225. Employees are at all times
fully vested in shares purchased under the plan.
Except as otherwise determined by the board of directors, none of the
shares purchased under this plan may be transferred or sold until the fourth
anniversary of the closing of the offering. In the case of an employee's
termination of employment as a result of resignation, dismissal for cause,
retirement or disability (unless otherwise determined by the board of directors
or any compensation committee of the board of directors), the shares will remain
subject to the lock up agreement. In the case of an employee's termination of
employment as a result of a dismissal without cause or upon death, the lock up
agreement will be released immediately.
The options are non-transferable and expire on the seventh anniversary of
the date of grant. Fifty percent of the options vest and become exercisable on
the second anniversary of the date of the grant and the remaining 50% of the
options vest and become exercisable on the third anniversary of the date of
grant. In the case of an employee's termination of employment as a result of
resignation other than as a result of a material adverse change in (i) his or
her compensation or (ii) the material terms of his or her employment, or
dismissal (other than for cause) unvested options lapse without compensation,
and vested options may be exercised within 90 days. Upon an employee's
termination of employment as a result of a termination of employment without
cause or a resignation due to a material adverse change in (i) his or her
compensation or (ii) the material terms of his or her employment, all vested
options remain exercisable for the term of the options and all unvested options
continue to vest as if the employee had remained employed with the Company and
such options remain exercisable for the term of the option. In the case of
termination of employment for cause, all vested and unvested options lapse with
immediate effect. In the case of termination of employment upon death or as a
result of retirement or disability, unless
49
otherwise determined by the board of directors or any compensation committee of
the board of directors, unvested options lapse and vested options may be
exercised within 360 days. The underlying shares related to the options will be
made available by us through authorized but non-issued shares (conditional share
capital) of us or through shares purchased in the market.
Loans were made available to executive officers and key employees who
participated in the leveraged share plan. We made loans available to executive
officers for purposes of purchasing up to 80% of the shares allocated to them
under the plan. The loans are for a term of 7 years. In addition, we made loans
available to key employees for purposes of purchasing up to 50% of the shares
allocated to them under the plan. The loans to key employees became due and
payable in full 30 days following the initial public offering date.
The loans were made on a full recourse basis and are collateralized by all
shares purchased under the plan by such executive officer or key employee and we
have either a first or if a portion of the shares are financed or refinanced by
another lender, a second lien on the shares. The loans have an interest rate
equal to 120% of the mid-term applicable federal rate (as defined in the
Internal Revenue Code) determined on the date the loans are made. The lock-up
agreement entered into with the underwriters and the restrictions on transfer
under the leveraged share plan and the discounted share purchase plan will be
released to the extent that it is necessary for us or any other lender to
realize on security in the shares. As of December 31, 2003, we had outstanding
loans to executive officers in an aggregate amount of approximately U.S.$0.4
million.
During the period during which the option may be exercised, an employee
may elect to pay for the shares, issuable upon exercise of such option and, if
required by us, to satisfy tax withholding obligations related to the option, in
full at the time of exercise as follows:
o in cash;
o at the discretion of the board of directors with shares that are
already owned by the participant;
o in a combination of cash or already owned shares; or
o through an exercise procedure approved by the board of directors by
which an employee sells some or all of the shares underlying the
exercised portion of the option.
56 employees participated in the leveraged share plan purchasing an aggregate of
23,683 shares representing 1.02% of the voting rights. In addition, 23,683
options to purchase 118,415 INFICON shares at the initial public offering price
of CHF 225 each were granted to our executive officers and certain key
employees.
Discounted Share Purchase Plan. The discounted share purchase plan were
offered to employees who were not eligible to participate in the leveraged share
plan. Under this plan, eligible persons were offered the opportunity to purchase
shares on the closing of the offering at a 30% discount to the offer price. Each
employee was entitled to purchase up to CHF 15,000 (U.S.$8,439) worth of shares
(based on the offering price and rounded down to the nearest whole share) in the
offering at a 30% discount. A total of approximately 600 employees were eligible
to participate and a total of 589 employees eventually participated in
discounted share purchase plan. Based on the amount of shares actually purchased
by our employees under the program, we incurred compensation expense of CHF
659,272 (U.S.$371,170) in the fourth quarter of 2000. The amount of shares
issued under the discounted share purchase plan had a maximum aggregate value of
CHF 1,538,303 (U.S.$865,431), representing 9,767 shares, at the initial offering
price of CHF 225, discounted by 30%. Employees are at all times fully vested in
their shares.
None of the shares purchased in the offering by employees under this plan
may be transferred or sold until the second anniversary from the date of the
closing of the offering, after which date they may either be retained or sold.
In the case of an employee's termination of employment as a result of
resignation, dismissal for cause, retirement or disability, the shares will
remain subject to the lock up agreement. In the case of termination of
employment upon dismissal (other than for cause) or death, the lock up agreement
will be released.
50
Shares purchased under the discounted share purchase plan and the
leveraged share plan may be settled either in shares or ADSs. Options exercised
under the leveraged share plan may be settled in shares. Provided below is a
summary of the option plans offered by the Company following its IPO in November
2000:
Directors Stock Option Plan - In fiscal year 2001 the Board of Directors
approved the Directors Stock Option Plan. The Directors Stock Option Plan is
solely for members of the Board, who are not employees of INFICON. The Company
grants options to the eligible Directors, on May 15 and November 15 of each
year, commencing May 15, 2001. The number of options granted to the eligible
Directors represents 30% of their annual compensation. Options are
non-transferable and will vest immediately upon date of grant and become
exercisable one year after the grant date and are exercisable within a period of
seven years after the allocation date. All options are granted at prices equal
to 100% of the market value of the common stock at the date of grant. The plan
includes specific requirements for the Directors who are removed or resign from
the Board.
Key Employee & Management Stock Option Plans - In fiscal year 2001 the
Board of Directors approved the Key Employee and Management Stock Option Plans.
The purpose of the plans is to provide management and key employees of the
Company with an opportunity to become shareholders, and in addition, to obtain
options on shares and allow them to participate in the future success of the
Company. It is intended that the plan will provide an additional incentive for
key employees to maintain continued employment, contribute to the future success
and prosperity, and enhance the value of the Company. Accordingly, the Company
will, from time to time during the term of this plan, grant to such key
employees options to purchase shares in such amounts as the Company shall
determine, subject to the conditions provided in the plan. The plan is effective
from May 15, 2001, and shall remain in effect through May 15, 2011.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders.
The following table sets forth the number and the percentages of shares,
on a fully diluted basis, that our principal shareholder Unaxis Holding AG owned
as of February 29, 2004 and December 31, 2003.
As of February 29, 2004 As of December 31, 2003
--------------------------------------- ----------------------------------------
Owner Number of Shares (1) Percent Number of Shares(1) Percent
- ----- -------------------- ------- ------------------- -------
Unaxis Holding AG 451,675 19.51% 451,675 19.51%
Churerstrasse 120
P.O. Box CH-8808
Pfaffikon/SZ Switzerland
1. Each share, including any of the shares owned by Unaxis, has one vote.
According to our records, 166,108 of our shares are held, directly or in
the form of ADS, by an aggregate of approximately 82 holders located in the
United States. However, some of the shareholders located in the United States
might have chosen not to register their name, citizenship or registered office
and address in our share register. For this reason, our records may not
accurately reflect the actual number of holders located in the United States and
the shares held by these holders.
There are no arrangements which INFICON is aware of that may result in a
change of control of INFICON.
B. Related Party Transactions.
Agreements in Connection with our Separation from Unaxis
51
In connection with our separation from Unaxis and our initial public
offering on November 9, 2000, we entered into a number of agreements with
related parties. The summary description of these agreements below does not
purport to be complete. You should read the full text of these agreements which
were included as exhibits to the registration statement on Form F-1 filed with
the Securities Exchange Commission in connection with our initial public
offering and which are incorporated herein by reference. The registration
statement (including the exhibits and schedules thereto) may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and are
also available for inspection and copying at the regional offices of the
Securities and Exchange Commission located at The Woolworth Building, 233
Broadway, New York, New York 10279 and at Citicorp Center, 500 West Madison
Street (Suite 1400), Chicago, Illinois 60661. Copies of such material may also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Securities and
Exchange Commission also maintains a website that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The address of this website is
http://www.sec.gov.
Agreements with Unaxis
We and Unaxis have entered into the master separation agreement which
contains the key provisions relating to our separation from Unaxis, our
capitalization by Unaxis and our initial public offering. In addition, the
master separation agreement provides for ancillary agreements which have been
entered into by us and companies which have or will become our subsidiaries on
the one hand and Unaxis and its subsidiaries on the other. The ancillary
agreements include:
o agreements with respect to the transfer of assets related to our
business by Unaxis entities to companies which have or will become
our subsidiaries (asset transfer agreements);
o intercompany service agreements;
o intellectual property assignments and license agreements; and
o a tax deed.
Master Separation Agreement
Separation from Unaxis. The master separation agreement governs key
matters relating to the separation of the INFICON divisions from the various
Unaxis subsidiaries of which they were a part, and the transfer of these
divisions into separate Unaxis subsidiaries. Unaxis' contribution of the
subsidiaries engaged in the INFICON business to INFICON Holding AG was
substantially complete on October 4, 2000. The master separation agreement sets
forth the obligations of the parties after the separation, including each
party's obligation to use its best efforts to cause its subsidiaries to comply
with the terms of its respective intercompany service agreement and the
following additional matters:
Non-Compete. We use subsidiaries of Unaxis as a distribution channel for
some of our vacuum control products. Generally speaking, we distribute these
products directly to OEMs and end users and the Unaxis subsidiaries distribute
these products to OEMs and end users under their private label. Except for these
areas which relate to leak detection and those described in "Intellectual
Property Assignment and License Agreements" below, we and Unaxis have agreed not
to compete with each other in our core lines of business for a period of five
years after the separation date.
Generally speaking, our core lines of business for these purposes
encompass the businesses we are in today, as described in this annual report.
In more specific terms, Unaxis has agreed not to compete with us in the
following businesses:
(1) Process Knowledge and Control:
52
Wafer state sensors, including sensors to determine etch rate, uniformity
of etch rate and completion of etch process; optical emission spectrometers; and
thin film deposition controllers. Process state sensors, including gas analyzers
based on mass spectrometer technology; and gas concentration controllers based
on acoustic resonance technology. Sensor integration and analysis software,
including FabGuard software.
(2) Leak Detection:
Helium leak detectors. Refrigerant leak detectors. Other leak detectors.
(3) Vacuum Control:
Capacitance diaphragm gauges (including such gauges with a ceramic
diaphragm), Bayard Alpert gauges, Penning gauges, Pirani gauges and combination
gauges. Various valves and fittings, including integrated gas-dosing
controllers.
We have agreed not to compete with Unaxis in the following businesses:
(1) Information Technology:
Semiconductor technology, including systems and processes used in the
manufacture of application-specific integrated circuits and coatings for
ultrathin semiconductor substrates. Data storage, including optical and magnetic
storage. Displays, including TFT displays and large area coating. Optical
coating systems and components. Coating materials.
(2) Surface Technology:
Tool coatings. Component coatings. Decorative coatings.
In the fields of information and surface technology we may, however,
compete with Unaxis: in connection with copper wire bonding processes in back
end semiconductor manufacturing processes; the continued sale of the small ultra
high-vacuum coater for research and development applications; and in any
instrumentation that is used to monitor or control processes, such as our
process knowledge and control products.
(3) Components:
Systems/Products for Vacuum Generation including:
o Dry pumps
o Turbomolecular pumps (including drag pumps)
o Cryogenic pumps
o Turbostream blowers
o Forevacuum pumps
o Cryo cooler technology
Gas Chromatograph/Mass Spectrometers for volatile organic compounds,
payload fairings for space industry, and satellite and solar generator
components.
We believe that the non-compete arrangement allows us to continue to
conduct our business as currently operated. However, technology in the
semiconductor industry is constantly evolving and could move rapidly in a
direction we have not anticipated. Accordingly, there can be no assurance that
these limitations will not have a material adverse effect on us.
53
Indemnities. Unaxis has agreed to indemnify us for any loss incurred by us
as a result of any claim or action resulting out of or from the operation of any
business other than our business prior to, on or after the date of separation.
In turn, we have agreed to indemnify Unaxis or any of its subsidiaries for any
loss incurred by any of them as a result of any claim or action resulting out of
or from the operation of our business prior to, on or after the date of
separation.
Expenses. We shared the costs and expenses related to our initial public
offering with Unaxis in relation to the amount of shares sold by each of Unaxis
and us in the initial public offering. Unaxis paid most of the costs and
expenses related to our separation from Unaxis.
Termination. The master separation agreement terminates on the earlier of
mutual consent of Unaxis and us and three years from the date of the separation.
Although the Master Separation Agreement was not negotiated at arm's
length, we believe that these terms and conditions, taken as a whole, are no
less favorable to us than we could have obtained from unaffiliated third
parties.
Asset Transfer Agreements
The asset transfer agreements identified the assets that Unaxis and other
wholly owned subsidiaries of Unaxis have transferred to us, the liabilities we
have assumed from them in 10 different jurisdictions and the terms of the asset
transfers in connection with our reorganization. In each jurisdiction, the
agreement was entered into by a subsidiary of INFICON as purchaser, and a Unaxis
subsidiary located in the same jurisdiction as seller.
Except with respect to China, Unaxis has transferred to INFICON all of its
assets related to the businesses described in this annual report which are
necessary to conduct the INFICON businesses as they were conducted by Unaxis
prior to the asset transfers. The aggregate transfer price with respect to the
various asset transfers of approximately CHF 250 million (U.S.$140.6 million)
was not negotiated at arm's length. The transfer prices were determined by
Unaxis in accordance with tax rulings, tax law requirements, and other statutory
requirements of the local jurisdictions in which the assets are located.
The asset transfer agreements were entered into on various dates during
the period from June 30, 2000 to December 15, 2000. Regulatory requirements in
China delayed the transfer of Chinese assets. The Chinese transfer became
effective in the second quarter of 2001. During the current transition period,
Unaxis held any benefits and liabilities derived from these assets for the
benefit of our new Hong Kong subsidiary.
Intercompany Service Agreements
Services. Each of our subsidiaries has signed one or several intercompany
service agreements with its respective Unaxis counterpart or counterparts in its
jurisdiction. These agreements cover various services that differ from
jurisdiction to jurisdiction, including finance, legal, tax, information
technology, human resources, and other services. Each agreement includes a
detailed description of the services to be provided and service terms. The
service fee for all the agreements was determined by Unaxis. Although these
agreements were not negotiated at arm's length, we believe that they are on
terms no less favorable to INFICON than could have been obtained from
unaffiliated third parties.
Standard of Care, Duty to Cooperate, and Delegation of Performance. Each
providing company has agreed to maintain a high professional standard of care in
rendering the services and to use reasonable efforts to follow the pre-existing
policies, procedures, and practices. The parties have agreed to use good faith
efforts to cooperate with each other in all matters relating to the provision
and receipt of the services. The providing company may engage a subcontractor to
perform a service, provided that the subcontractor agrees to abide by the terms
of the agreement and no extra compensation is owed to the providing company.
Term and Termination. Except for the agreement of our Taiwan subsidiary
which terminated March 30, 2001, the agreements remain in effect for an
unlimited period of time unless terminated in accordance with the terms
54
of the agreement. The agreement provides for a termination by any party upon six
months' prior written notice. In addition, any party may terminate the agreement
in case of a material breach of the agreement if the breaching party has not
remedied such breach within sixty business days after being given notice of the
breach. A termination may relate to all or any one or more services, except in
the event of a material breach of a service where it relates to this particular
service only.
Fees. Fees are determined annually and are calculated based on the
projected direct or indirect cost of providing the services for that year plus
7%. There are no adjustments made if the actual direct and indirect costs differ
from those projected. Fees for any additional services are determined on a case
by case basis.
Payment Terms. Under each agreement, the providing company bills the
receiving company on a monthly basis for all fees and expenses. The service fee
is due on the first day of each month and payable by the receiving company
within 15 days after receipt of an invoice. Late payments beyond 60 days are
subject to an 8% per annum interest charge on the invoiced amount.
Dispute Resolution. The parties agreed to make a good faith attempt to
resolve any dispute first by negotiation and arbitration before resorting to
litigation.
Intellectual Property Assignment and License Agreements
We have entered into intellectual property assignment and royalty-free
license agreements with various Unaxis entities as part of the reorganization.
Generally speaking, with the exception of the patents related to the ultra clean
processing business, all of the Unaxis patents and other intellectual property
which are currently used by Unaxis that relate to INFICON's business have been
assigned to INFICON, with royalty-free licenses granted back to Unaxis on the
basis described below. Unaxis has retained the patents related to the ultra
clean processing business and has granted INFICON a royalty-free license to use
such property on the basis described below. The licensing arrangements have been
drafted to be consistent with the non-compete arrangement described under
"Master Separation Agreement."
o A license agreement between Unaxis, as licensor, and INFICON, as
licensee, governs our use of a number of Unaxis patents related to
the ultra clean processing business and the leak detection business.
This license allows us to use Unaxis patents exclusively for five
years, and non-exclusively thereafter, in the fields of plasma
cleaning/activation of quad flat package, plastic ball grid array,
personal computer board, chip scale package and multi chip module,
with the exception of chip scale package and multi chip module
processed for or within the multi-chamber systems and modules, such
as cluster tools. This license also allows us to use such Unaxis
patents non-exclusively in the fields of leak detector and plasma
cleaning/activation processes for assembly and packaging concepts,
including wafer level and board level techniques, including chip
scale package and multi chip module processed for or within the
multi-chamber systems and modules, such as cluster tools. This
license is royalty-free, perpetual and worldwide. In addition,
Unaxis has agreed that it will not grant any further licenses under
the leak detector patents.
o A license agreement between INFICON, as licensor, and Unaxis, as
licensee, provides for the Unaxis entities' use of the intellectual
property we acquired under the intellectual property assignment
agreements described above. This license allows the Unaxis entities
to use such intellectual property exclusively for five years, and
non-exclusively thereafter, in the field of designing, producing,
selling and servicing information technology, surface technology and
components relating thereto. This license also allows the Unaxis
entities to use such intellectual property non-exclusively in all
other fields outside of the field of designing, producing, selling
and servicing of process knowledge and control systems,
semiconductor cleaning systems, leak detection products and various
gauges, valves and fittings associated with vacuum processes. This
license is royalty-free, perpetual, and worldwide.
The licenses granted to the licensee in each agreement, other than the
leak detector licenses, terminate upon a change of control which has not been
consented to by the relevant licensor. For purposes of the foregoing, "control"
means (i) the ownership of at least 50% of the equity of beneficial interest of
a person, (ii) the right to vote
55
for or appoint a majority of the board of directors or other governing body of
such person, or (iii) the power to directly or indirectly direct or cause the
direction of the management and policies of such person by any means whatsoever.
Although the license agreements were not negotiated at arm's length, we
believe that their terms and conditions, taken as a whole, are no less favorable
to us than we could have obtained from unaffiliated third parties. We also
believe that the licensing arrangements described above will allow us to
continue to conduct our business as currently operated. However, technology in
the semiconductor industry is constantly evolving and could move rapidly in a
direction we have not anticipated.
As part of the reorganization, we have also entered into a number of
intercompany license agreements to allow INFICON affiliates to use the
intellectual property acquired under the intellectual property assignment
agreements described above.
Tax Deed
We and Unaxis have entered into a tax deed in order to regulate our and
their subsidiaries' tax affairs in connection with our separation from Unaxis
and our initial public offering. In general, under the tax deed, Unaxis is
responsible for all taxes resulting from our separation, our initial public
offering, and all taxes relating to our business for any period ending on or
before the date of separation. We are responsible for all taxes relating to our
business for any period beginning after the date of separation. The tax deed
also provides that each of Unaxis and us will indemnify the other for all taxes
for which it is responsible.
Although the tax deed was not negotiated at arm's length, we believe that
its terms and conditions, taken as a whole, are reasonable.
Acquisition of HAPSITE Business from Unaxis
Effective November 1, 2001, the Company acquired substantially all the net
assets of the HAPSITE business (HAPSITE) of Leybold portable gas
chromatograph-mass spectrometer systems used for direct measurement of volatile
organic compounds in Inficon, Inc., a subsidiary of Unaxis. HAPSITE
manufacturers and sells self-contained, field portable gas chromatograph-mass
spectrometer systems used for direct measurement of volatile organic compounds
found in air, water and soil. The results of operations of the HAPSITE business
are included in the consolidated results for the twelve months ended 2003 and
2002 and the two months ended 2001, respectively.
The transaction was accounted for under the purchase method of accounting
for business combinations, and the results of operations of HAPSITE have been
included in the Company's consolidated financial statements since the effective
date of the acquisition. The purchase price was U.S.$2,000 in cash, which was
allocated to the net assets acquired and liabilities assumed based upon
estimated fair market values as follows (U.S.$ in thousands):
Accounts receivable $ 839
Inventories 1,814
Prepaid expenses 11
Machinery and equipment 234
Accounts payable (468)
Accrued expenses (430)
-------
$ 2,000
=======
Intercompany Loans
As of December 31, 2003 we have the following intercompany loans
outstanding:
56
Intercompany Loans
(in thousands)
Borrower Lender Currency Face Amount in USD Interest Rate
- -------- ------ -------- ----------- ------ -------------
INFICON Inc, US INFICON GmbH, CH USD 39,199 39,199 6.85%
INFICON GmbH, Cologne INFICON GmbH, CH EUR 6,000 7,534 3.90%
INFICON Ltd, United Kingdom INFICON GmbH, CH GBP 50 90 5.22%
INFICON Holding AG, Switzerland INFICON GmbH, CH CHF 34,664 27,910 0.79%
INFICON Inc, US INFICON Holding AG, CH USD 1,779 1,779 6.85%
INFICON AG, Liechtenstein INFICON Holding AG, CH CHF 12,250 9,865 1.69%
INFICON Ltd, Korea INFICON Holding AG, CH KRW 481,546 1,161 6.12%
INFICON Ltd, Korea INFICON Holding AG, CH USD 400 400 2.77%
INFICON Ltd, Korea INFICON Holding AG, CH EUR 285 358 3.92%
INFICON Pte Ltd, Singapore INFICON Holding AG, CH USD 200 200 2.79%
INFICON Pte Ltd, Singapore INFICON Holding AG, CH USD 300 300 2.75%
INFICON Ltd, Taiwan INFICON Holding AG, CH USD 600 600 2.87%
INFICON Aaland Ab, Finland INFICON Holding AG, CH EUR 850 1,067 2.89%
INFICON Ltd, Hong Kong INFICON Holding AG, CH USD 327 327 2.81%
INFICON LT, US INFICON Holding AG, CH USD 12,915 12,915 6.85%
All of these loans are unsecured fixed advances extended in connection
with the purchase by our subsidiaries of the assets relating to our business
from Unaxis.
C. Interests of Experts and Counsel.
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information.
Index to Financial Statements
Page Number
-----------
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Income for the three years in the period ended
December 31, 2003 F-4
Consolidated Statements of Stockholders' Equity for the three years in the period ended F-5
December 31, 2003
Consolidated Statements of Cash Flows for the three years in the period ended
December 31, 2003 F-6
Notes to Consolidated Financial Statements F-7
Legal Proceedings
We are not currently involved in any material court, arbitral, or
administrative proceedings, nor are we aware of any such proceeding pending or
threatened.
57
Dividend Policy
We currently intend to retain all future earnings to finance future growth
and therefore do not anticipate proposing to our shareholders the payment of any
dividends in the foreseeable future.
B. Significant Changes.
Since the date of the annual financial statements included in this annual
report, no significant change has occurred.
Item 9. The Offer and Listing
A. Offer and Listing Details.
The Company's registered shares are listed and principally traded on the
Swiss Exchange, where prices are expressed in Swiss Francs. The Company's
registered shares are also traded on the Nasdaq National Market as American
Depositary Shares. The table below presents, for the registered shares on the
Swiss Exchange and Nasdaq National Market the:
o annual high and low market prices for the last three years and,
o high and low market prices for each financial quarter for 2003 and,
o high and low market prices for each month for the most recent six
months.
For each of the periods indicated, the information presented is based on the:
o high and low closing sales prices quoted in Swiss Francs for the
registered shares on the Swiss Exchange.
o The U.S. Dollar equivalent based on the Noon Buying Rate on the last
trading day of the periods presented. The "Noon Buying Rate" is the
rate in New York City for cable transfers in selected currencies as
certified for customs purposes by the Federal Reserve Bank of New
York.
For the last three years and each financial quarter for 2003, our high and
low marked prices have been:
Period High Low
- ---------------------------------- ----------------------------------- -----------------------------------
Shares (in CHF) ADSs (in U.S.$) Shares (in CHF) ADSs (in U.S.$)
--------------- --------------- --------------- ---------------
Year Ended
Year ended December 31, 2001 197.00 11.50 86.00 5.40
Year ended December 31, 2002 179.00 10.74 51.00 3.40
Year ended December 31, 2003 116.25 8.85 44.00 3.31
Quarter Ended
Quarter ended March 31, 2003 66.75 4.83 44.00 3.31
Quarter ended June 30, 2003 87.50 6.28 56.00 4.15
Quarter ended September 30, 2003 102.00 7.34 77.00 5.60
Quarter ended December 31, 2003 116.25 8.85 90.00 6.95
58
B. Plan of Distribution.
Not applicable.
C. Markets.
Our shares are listed on the SWX Swiss Exchange and our ADSs are listed on
The Nasdaq National Market System, in each case under the symbol "IFCN."
D. Selling Shareholders.
Not applicable.
E. Dilution.
Not applicable.
F. Expenses of the Issue.
Not applicable.
Item 10. Additional Information
A. Share Capital.
Not applicable.
B. Memorandum and Articles of Association.
See Item 10.B on pages 54 through 63 of our Annual Report on Form 20-F for
the year ended December 31, 2002 for information regarding our articles of
incorporation and Swiss law relating to our company purpose and shareholder
rights. Our Annual Reports on Form 20-F are available on EDGAR at the website of
the U.S. Securities and Exchange Commission at www.sec.gov.
Register Entry Number and Purpose of INFICON Holding AG
INFICON Holding AG is registered in the commercial register of the Canton
of St. Gallen, Switzerland. There is no register entry number. On their first
page, our articles of incorporation describe the objects and purpose of our
corporation as follows:
" The purpose of the Corporation is to participate in manufacturing,
trading, and service businesses in Switzerland and abroad and to hold,
acquire, and sell such participations.
The Corporation may, in Switzerland as well as abroad, establish branches
and subsidiaries. The Corporation may perform all transactions which are
directly or indirectly related to its purpose.
Furthermore, the Corporation may acquire or sell real estate."
Transfer of Shares
There are no restrictions on the free transferability of our shares. A
transfer of shares is effectuated by corresponding entry in the books of a bank
or depositary institution following assignment in writing by the selling
59
shareholder and notification of such assignment to us which can be made by the
bank or the depositary institution. In order to be registered in our share
register as a shareholder with voting rights, a purchaser must file with us a
share registration form disclosing its name, citizenship, or registered office
and address.
A purchaser that does not make such disclosure will be registered as a
shareholder without voting rights. This means that the purchase r may not
participate in or vote at a shareholders' meeting, but will still be entitled to
dividends and other rights with financial value. Notwithstanding the foregoing,
any shares held by or on behalf of The Bank of New York, as depositary, or any
successor depositary for the ADSs, will be registered with voting rights. We may
enter into agreements with banks or finance companies which hold shares for the
account of other persons (nominees) regarding the entry of the beneficial owners
of our shares into the share register.
The shares and the pecuniary rights arising therefrom may only be pledged
in favor of the bank which has the book-entry regarding these shares by written
pledge agreement. A notification to us is not required.
Voting Rights and Share Certificates
Each of our shares carries one vote at our shareholders' meetings. Voting
rights may be exercised only after a shareholder has been recorded in our share
register (Aktienbuch) as a shareholder with voting rights. We may enter into
agreements with banks or financial companies which hold shares for the account
of other persons (nominees) regarding the exercise of the voting rights related
to the shares. Registration with voting rights is subject to restrictions. See
"The Offer and Listing--Transfer of Shares."
Our shares are cleared and settled through SIS SegaInterSettle AG. The
shares will not be physically represented by certificates but will be managed
collectively in book-entry form by SIS SegaInterSettle AG. Shareholders are
therefore not entitled to have their shares physically represented and delivered
in certificate form (aufgehobener Titeldruck). They can, however, request a
statement confirming their ownership of the shares.
Net Profits, Dividends and Liquidation Rights
Swiss law requires that at least 5% of our annual net profits must be
retained by us as general reserves for so long as these reserves amount to less
than 20% of our par share capital. Because INFICON Holding AG is a holding
company, any net profits remaining thereafter are distributable at the
shareholders' meeting.
Under Swiss law, dividends may be paid out only if a company has
sufficient distributable profits from previous business years, or if the
reserves of the company are sufficient to allow the distribution of a dividend.
In either event, dividends may be paid out only upon approval by the
shareholders' meeting. The board of directors may propose that a dividend be
paid out, but cannot itself declare the dividend. In practice, the shareholders'
meeting usually approves the dividend proposal of the board.
Dividends are usually due and payable immediately after the shareholders'
resolution relating to the allocation of profits has been passed. The statute of
limitations in respect to dividend payments is five years. For information about
deduction of withholding taxes, see "Taxation."
In the event of liquidation, any surplus arising out of a liquidation
(after the settlement of all claims of all creditors) is distributed to
shareholders in proportion to the paid par value of shares held, but this
surplus is subject to Swiss withholding tax of 35%. see "Taxation."
No Liability of Our Shareholders for Capital Calls; No Redemption, Sinking
Fund or Similar Provisions
Our shares are fully paid-up and non-assessable. No shareholder has any
liability to further capital calls by us. Our articles of incorporation do not
contain any redemption provisions, sinking fund provisions, or any provisions
discriminating against any existing or prospective holder of our shares as a
result of such shareholder owning a substantial number of shares.
60
Repurchase of Shares
Swiss law limits the number of our shares which we may hold or repurchase.
We and our subsidiaries may only repurchase our own shares if we have sufficient
available reserves to pay the purchase price, and if the aggregate par value of
such shares does not exceed 10% of our par share capital. Shares repurchased by
us and our subsidiaries do not carry any rights to vote at shareholders'
meetings but are generally entitled to the economic benefits applicable to our
shares generally. Furthermore, we must create a reserve on our balance sheet in
the amount of the purchase price of the acquired shares. Currently, we own none
of our own shares.
Change of Shareholder Rights
Under Swiss law, the rights of shareholders may only be changed by way of
amending the articles of incorporation which requires a shareholders' resolution
passed by the majority of the shares represented at the shareholders' meeting.
In addition, certain changes to shareholder rights require a supermajority of
votes. For instance, a reverse stock split may only be effectuated by a
unanimous vote of the shareholders of a corporation. The creation of shares with
privileged voting rights, restrictions on the transferability of shares, or a
restriction or elimination of preemptive rights of shareholders require a
resolution passed at a shareholders' meeting with a supermajority
(qualifiziertes Mehr) of two-thirds of the shares represented at such meeting
and a simple majority of the aggregate par value of the shares represented at
such meeting.
Shareholders' Meetings
Under Swiss law, an annual shareholders' meeting must be held within six
months after the end of a company's financial year. Shareholders' meetings may
be convened by the board of directors or, if necessary, by the statutory
auditors. The board of directors is further required to convene an extraordinary
shareholders' meeting if so resolved by a shareholders' meeting or if so
requested by holders of shares representing in aggregate at least 10% of the
share capital of the company. Shareholders holding shares with a par value of at
least CHF 1 million have the right to request in writing, at least 50 days prior
to the day of the respective shareholders' meeting, that a specific proposal be
discussed and voted upon at such shareholders' meeting. If the board of
directors does not call a shareholders' meeting within a reasonable period after
the request was made, it may be ordered by a judge at the request of the
shareholders seeking such a meeting. A shareholders' meeting is convened by the
board of directors publishing a notice in the Swiss official gazette of commerce
(Schweizerisches Handelsamtsblatt) at least 20 days prior to such meeting. In
addition, shareholders may be informed by a letter sent to the address indicated
in the share register.
There is no provision in our articles of incorporation requiring a
presence quorum at shareholders' meetings.
Restrictions on Right to Own our Securities and on Ability to Effect a Change of
Control
Apart from the limitations described above on the right of a company to
own its own securities and the restriction on the voting rights of a purchaser
of our shares that does not file with us a share registration form disclosing
its name, citizenship, and registered office or address, there are no
limitations on the rights to own securities of INFICON, regardless of who owns
them.
None of our organizational documents contain any provision that would have
an effect of delaying, deferring or preventing a change of control of INFICON.
Disclosure of Principal Shareholders
None of our organizational documents contain any provision governing the
ownership threshold above which ownership must be disclosed. However, under the
Swiss Stock Exchange Act, shareholders and groups of shareholders acting in
concert who acquire or dispose of shares and thereby reach, exceed, or fall
below the respective threshold of 5%, 10%, 20%, 33.33%, 50%, or 66.66% of the
voting rights of a Swiss listed company with a registered office in Switzerland
must notify the company and the SWX Swiss Exchange of such transactions in
61
writing within four trading days, whether or not the voting rights can be
exercised. Following receipt of such notification, the corporation must inform
the public within two trading days.
An additional disclosure obligation exists under the Swiss Code of
Obligations pursuant to which a company must disclose the identity and size of
shareholdings of all its shareholders and shareholder groups acting in concert
who hold more than 5% of its voting rights. This disclosure must be made once a
year in the notes to the financial statements as published in the company's
annual report.
Changes in Capital
Our articles of incorporation do not impose conditions governing changes
in the capital that are more stringent than is required by law. Under Swiss law,
additional capital may be raised by shareholders' resolution of a majority of
shares except for an increase in our share capital (i) by way of capitalization
of reserves (Kapitalerhohung aus Eigenkapital), (ii) against contribution in
kind (Sacheinlage), (iii) for the acquisition of assets (Sachubernahme), (iv)
involving the grant of special privileges or benefits, or (v) for the purpose of
creating authorized or conditional share capital which require a resolution
passed at a shareholders' meeting with the supermajority (qualifiziertes Mehr)
of at least two-thirds of the shares represented at such meeting and a simple
majority of the aggregate par value of the shares represented at such meeting.
Authorized and Conditional Share Capital
Under the Swiss Code of Obligations, the shareholders may decide on an
increase of the share capital in a specified aggregate par value up to 50% of
the existing share capital in the form of:
(1) authorized capital (genehmigtes Kapital) to be utilized at the discretion
of the board of directors within a period not exceeding two years; or
(2) conditional capital (bedingtes Kapital) for the purpose of issuing
shares, inter alia, (i) to grant rights to employees of a company or its
subsidiaries to subscribe to new shares or (ii) to grant conversion
rights or warrants to holders of convertible bonds. Such capital is
called "conditional" because the issuance of any new shares is
conditioned upon third parties, such as employees of the company or
convertible bondholders, exercising their rights to require the issuance
of such shares.
Director's Power to Vote on a Proposal in Which the Director is Materially
Interested
None of our organizational documents contain any provision with respect to
(a) a director's power to vote on a proposal, arrangement or contract in which
the director is materially interested; (b) the director's power, in the absence
of an independent quorum, to vote compensation to themselves or any members of
their body; (c) borrowing powers exercisable by the directors and how such
borrowing powers can be varied; (d) retirement or non-retirement of directors
under an age limit requirement; and (e) number of shares, if any, required for
director's qualification.
Under applicable Swiss law, however, a director or officer of a company is
prohibited from representing the company in a transaction to which such director
or officer is a party unless the director or officer is explicitly authorized to
do so by the company, the transaction is later approved by the company or there
is no potential risk of overreaching by the director or officer. The same holds
true if a person who is a director or officer of two companies acts on both
sides of a transaction between the two companies. However, Swiss case law seems
to permit such "double representation" between affiliated companies, at least in
transactions between a parent company and its wholly-owned subsidiary. In
addition, the duty of loyalty imposed on a director or officer by Swiss
corporation law requires such director or officer to abstain from voting on a
matter in which the director or officer is not only materially interested but in
which the director or officer's interest is directly opposite to the one of the
company.
62
The Rights of ADR Holders
The rights of our ADR holders are set out in and limited by the provisions
of the deposit agreement among us, The Bank of New York, and the owners and
beneficial owners from time to time of ADRs.
The following is a summary of the material provisions of the deposit
agreement. For more complete information, you should read the entire deposit
agreement and the form of ADR which were included as exhibits to the
registration statement on Form F-1 filed with the Securities Exchange Commission
in connection with our initial public offering and which are incorporated herein
by. The registration statement (including the exhibits and schedules thereto)
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and will also be available for inspection and copying at the regional
offices of the Securities and Exchange Commission located at The Woolworth
Building, 233 Broadway, New York, New York 10279, and at Citicorp Center, 500
West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Securities and Exchange Commission also maintains a website that
contains reports, proxy and information statements, and other information
regarding registrants that file electronically with the Commission. The address
of this website is http://www.sec.gov.
Share Dividends and Other Distributions
The Bank of New York has agreed to pay to you the cash dividends or other
distributions it or the custodian receives on shares or other deposited
securities, after deducting its fees and expenses. You will receive these
distributions in proportion to the number of shares your ADSs represent.
o Cash. The Bank of New York will convert any cash dividend or other
cash distribution we pay on the shares into U.S. Dollars, if it can
do so on a reasonable basis and can transfer the U.S. Dollars to the
United States. If that is not possible or if any approval from the
Swiss government is needed and can not be obtained, the deposit
agreement allows The Bank of New York to distribute the foreign
currency only to those ADR holders to whom it is possible to do so.
It will hold the foreign currency it cannot convert for the account
of the ADR holders who have not been paid. It will not invest the
foreign currency and it will not be liable for any interest.
Before making a distribution, The Bank of New York will deduct any
withholding taxes that must be paid under Swiss law. See "Additional
Information---Taxation" below. It will distribute only whole U.S. Dollars and
cents and will round fractional cents to the nearest whole cent. If the exchange
rates fluctuate during a time when The Bank of New York cannot convert the
foreign currency, you may lose some or all of the value of the distribution.
o Shares. The Bank of New York may distribute additional ADSs
representing any shares we distribute as a dividend or free
distribution, if we furnish it promptly with satisfactory evidence
that it is legal to do so. The Bank of New York will only distribute
whole ADSs. It will sell shares which would require it to issue a
fractional ADS and distribute the net proceeds in the same way as it
does with cash. If The Bank of New York does not distribute
additional ADRs, each ADS will also represent the new shares.
o Rights to purchase additional shares. If we offer holders of our
securities any rights to subscribe for additional shares or any
other rights, The Bank of New York may make these rights available
to you. The Bank of New York will first consult with us and we must
furnish The Bank of New York with satisfactory evidence that it is
legal to do so. If we don't furnish this evidence, and The Bank of
New York decides it is practical to sell the rights, The Bank of New
York will sell the rights and distribute the proceeds in the same
way as it does with cash. The Bank of New York will allow rights
that are not distributed or sold to lapse. In that case, you will
receive no value for them.
63
If The Bank of New York makes rights available to you, it will exercise
the rights and purchase the shares on your behalf. The Bank of New York will
then deposit the shares and deliver ADSs to you. It will only exercise rights if
you pay it the exercise price and any other charges the rights require you to
pay.
U.S. securities laws may restrict transfers and cancellation of the ADSs
represented by shares purchased upon exercise of rights. For example, you may
not be able to trade these ADSs freely in the United States. In this case, The
Bank of New York may deliver the ADSs under a separate restricted deposit
agreement which will contain the same provisions as the deposit agreement,
except for changes needed to put the necessary restrictions in place.
o Other Distributions. The Bank of New York will send to you anything
else we distribute on deposited securities by any means it thinks is
legal, fair, and practical, provided, if the distribution is of
securities, that we furnish it with satisfactory evidence that it is
legal to do so. If it cannot make the distribution in that way, The
Bank of New York has a choice. It may decide to sell what we
distributed and distribute the net proceeds, in the same way as it
does with cash. Or, it may decide to hold what we distributed, in
which case ADSs will also represent the newly distributed property.
The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. For example:
o if Switzerland were to impose restrictions on convertibility of its
currency into U.S. Dollars or transfers of currency out of the
country, it could be unlawful or impractical for The Bank of New
York to make a cash distribution to ADR holders (currently no
restrictions of this type exist);
o distribution of shares, rights or other securities to ADR holders
could be unlawful if the distribution would be considered a sale
under U.S. securities law and the shares, rights or other securities
were not registered under the Securities Act of 1933 for offer and
sale in the United States; and
o a distribution to ADR holders could be impractical if the expenses
The Bank of New York would incur in making the distribution would
exceed the value of the distribution to ADR holders.
We have no obligation to register ADSs, shares, rights, or other
securities under the Securities Act. We also have no obligation to take any
other action to permit the distribution of ADRs, shares, rights, or anything
else to ADR holders. This means that you may not receive the distributions we
make on our shares or any value for them if it is illegal or impractical for us
to make them available to you.
Deposit, Withdrawal, and Cancellation
The Bank of New York will deliver ADSs if you or your broker deposit
shares or evidence of rights to receive shares with the custodian. Upon payment
of its fees and expenses and of any taxes or charges, such as stamp taxes or
stock transfer taxes or fees, The Bank of New York will register the appropriate
number of ADSs in the names you request and will deliver the ADRs at its office
to the persons you request.
You may turn in your ADRs at The Bank of New York's office. Upon payment
of its fees and expenses and of any taxes or charges, such as stamp taxes or
stock transfer taxes or fees, The Bank of New York will deliver the shares and
any other deposited securities underlying the ADR to you or a person you
designate at the office of the custodian. Or, at your request, risk, and
expense, The Bank of New York will deliver the deposited securities at its
office, if feasible.
Voting Rights
You may instruct The Bank of New York to vote the shares underlying your
ADRs, but only if we ask The Bank of New York to ask for your instructions.
Otherwise, you won't be able to exercise your right to vote unless
64
you withdraw the shares. However, you may not know about the meeting enough in
advance to withdraw the shares.
If we ask for your instructions, The Bank of New York will notify you of
the upcoming vote and arrange to deliver our voting materials to you. The
materials will (1) describe the matters to be voted on and (2) explain how you
may instruct The Bank of New York to vote the shares or other deposited
securities underlying your ADSs as you direct. For instructions to be valid, The
Bank of New York must receive them on or before the date specified. The Bank of
New York will try, as far as practical, subject to Swiss law and the provisions
of our articles of incorporation, to vote or to have its agents vote the shares
or other deposited securities as you instruct. The Bank of New York will only
vote or attempt to vote as you instruct.
We can not assure you that you will receive the voting materials in time
to ensure that you can instruct The Bank of New York to vote your shares. In
addition, The Bank of New York and its agents are not responsible for failing to
carry out voting instructions or for the manner of carrying out voting
instructions. This means that you may not be able to exercise your right to vote
and there may be nothing you can do if your shares are not voted as you
requested.
The rules of The Nasdaq National Market currently require us to solicit
proxies from holders of ADSs. Accordingly, we intend to ask The Bank of New York
to seek your voting instructions for all shareholder meetings. However if we
were to delist the ADSs from The Nasdaq National Market, Nasdaq's rules no
longer require solicitation, we would have the right not to ask for voting
instructions. For example, we might decide to do so in order to save the
expenses of the solicitation, or if we decide that too few ADR holders were
interested in exercising voting rights, or if we preferred that the shares
represented by ADSs not be voted.
65
Fees and Expenses
ADR holders must pay: For:
--------------------- ----
$5.00 (or less) per 100 ADSs o Each issuance of an ADR, including as a result
of a distribution of shares or rights or other
property.
o Each cancellation of an ADR for the purpose of
withdrawal, including if the deposit agreement
terminates
$.02 (or less) per ADS o Any cash distribution to you.
A fee equivalent to the fee that would be o Distribution of securities distributed to
payable if the securities distributed to holders of deposited securities which are
you had been shares and the shares had distributed by The Bank of New York to ADR
been deposited for issuance of ADSs holders.
$1.50 per ADR delivered o Registration or transfer of ADRs.
Registration or transfer fees o Transfer and registration of shares on our share
register to or from the name of The Bank of
New York or its agent when you deposit or
withdraw shares. No such fees are currently
charged for registration or transfer of our
shares.
Expenses of The Bank of New York o Conversion of foreign currency to U.S. Dollars.
o Cable, telex and facsimile transmission expenses
(if expressly provided in the deposit
agreement).
Taxes and other governmental charges The o As necessary.
Bank of New York or the custodian have to
pay on any ADR or share underlying an
ADR, for example, stock transfer taxes,
stamp duty or withholding taxes
Any charges payable by The Bank of New York o As incurred. No charges of this type are
or its agents in connection with currently made in the Swiss market.
servicing the deposited securities.
Payment of Taxes
The Bank of New York may deduct the amount of any taxes owed from any
payments to you. It may also sell deposited securities, by public or private
sale, to pay any taxes owed. You will remain liable if the proceeds of the sale
are not enough to pay the taxes. If The Bank of New York sells deposited
securities, it will, if appropriate, reduce the number of ADSs to reflect the
sale and pay to you any proceeds, or send to you any property, remaining after
it has paid the taxes.
Reclassifications, Recapitalizations and Mergers
If we: Then:
------ -----
o Change the nominal or par value of our shares The cash, shares or other securities received by
o Reclassify, split up or consolidate any of The Bank of New York will become deposited
the deposited securities securities. Each ADS will automatically represent
its equal share of the new deposited securities.
o Distribute securities on the shares that are The Bank of New York may, and will if we ask it
not distributed to you to, distribute some or all of the cash, shares or
other securities it received. It may also issue
o Recapitalize, reorganize, merge, liquidate, new ADRs or ask you to surrender your outstanding
sell all or substantially all of our ADRs in exchange for new ADRs identifying the new
assets, or take any similar action deposited securities.
66
Amendment and Termination
We may agree with The Bank of New York to amend the deposit agreement and
the ADRs without your consent for any reason. If the deposit amendment adds or
increases fees or charges, except for taxes and other governmental charges or
expenses of The Bank of New York for registration fees, facsimile costs,
delivery charges or similar items, or prejudices a substantial right of ADR
holders, it will only become effective 30 days after The Bank of New York
notifies you of the amendment. At the time an amendment becomes effective, you
are considered, by continuing to hold your ADR, to agree to the amendment and to
be bound by the ADRs and the deposit agreement as amended.
The Bank of New York will terminate the deposit agreement if we ask it to
do so. The Bank of New York may also terminate the deposit agreement if The Bank
of New York has told us that it would like to resign and we have not appointed a
new depositary bank within 60 days. In both cases, The Bank of New York must
notify you at least 30 days before termination.
After termination, The Bank of New York and its agents will do the
following under the deposit agreement but nothing else: (1) advise you that the
deposit agreement is terminated, (2) collect distributions on the deposited
securities, and (3) deliver shares and other deposited securities upon
cancellation of ADRs. One year after termination, The Bank of New York may sell
any remaining deposited securities by public or private sale. After that, The
Bank of New York will hold the money it received on the sale, as well as any
other cash it is holding under the deposit agreement for the pro rata benefit of
the ADR holders that have not surrendered their ADRs. It will not invest the
money and has no liability for interest. The Bank of New York's only obligations
will be to account for the money and other cash. After termination, our only
obligations will be to indemnify The Bank of New York for some losses and to pay
certain amounts to The Bank of New York.
Limitations on Obligations and Liability
The deposit agreement expressly limits our obligations and the obligations
of The Bank of New York. It also limits our liability and the liability of The
Bank of New York. We and The Bank of New York:
o are only obligated to take the actions specifically set forth in the
deposit agreement without negligence or bad faith;
o are not liable if either of us is prevented or delayed by law or
circumstances beyond our control from performing our obligations
under the deposit agreement;
o are not liable if either of us exercises discretion permitted under
the deposit agreement;
o have no obligation to become involved in a lawsuit or other
proceeding related to the ADRs or the deposit agreement on your
behalf or on behalf of any other party; and
o may rely upon any documents we believe in good faith to be genuine
and to have been signed or presented by the proper party.
In the deposit agreement, we agree to indemnify The Bank of New York for
acting as depositary, except for losses caused by The Bank of New York's own
negligence or bad faith, and The Bank of New York agrees to indemnify us for
losses resulting from its negligence or bad faith.
Requirements for Depositary Actions
Before The Bank of New York will deliver or register a transfer of an ADR,
make a distribution on an ADR, or permit withdrawal of shares, The Bank of New
York may require:
o payment of stock transfer or other taxes or other governmental
charges and transfer or registration fees charged by third parties
for the transfer of any shares or other deposited securities;
67
o satisfactory proof of the identity and genuineness of any signature
or other information it deems necessary; and
o compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of
transfer documents.
The Bank of New York may refuse to deliver ADRs or register transfers of
ADRs generally when the transfer books of The Bank of New York or our transfer
books are closed or at any time if The Bank of New York or we think it advisable
to do so.
Your Right to Receive the Shares Underlying Your ADRs
You have the right to cancel your ADRs and withdraw the underlying shares
at any time except:
o When temporary delays arise because: (1) The Bank of New York has
closed its transfer books or we have closed our transfer books; (2)
the transfer of shares is blocked to permit voting at a
shareholders' meeting; or (3) we are paying a dividend on our
shares.
o When you or other ADR holders seeking to withdraw shares owe money
to pay fees, taxes and similar charges.
o When it is necessary to prohibit withdrawals in order to comply with
any laws or governmental regulations that apply to ADRs or to the
withdrawal of shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
Pre-release of ADRs
The deposit agreement permits The Bank of New York to deliver ADRs before
deposit of the underlying shares. This is called a pre-release of the ADR. The
Bank of New York may also deliver shares upon cancellation of pre-released ADRs
(even if the ADRs are canceled before the pre-release transaction has been
closed out). A pre-release is closed out as soon as the underlying shares are
delivered to The Bank of New York. The Bank of New York may receive ADRs instead
of shares to close out a pre-release. The Bank of New York may pre-release ADRs
only under the following conditions: (1) before or at the time of the
pre-release, the person to whom the pre-release is being made must represent to
The Bank of New York in writing that it or its customer owns the shares or ADRs
to be deposited; (2) the pre-release must be fully collateralized with cash or
other collateral that The Bank of New York considers appropriate; and (3) The
Bank of New York must be able to close out the pre-release on not more than five
business days' notice. In addition, The Bank of New York will limit the number
of ADSs that may be outstanding at any time as a result of pre-release, although
The Bank of New York may disregard the limit from time to time, if it thinks it
is appropriate to do so.
C. Material Contracts.
For a summary description of these agreements, to the extent they are
material, please see "Major Shareholders and Related Party Transactions--Related
Party Transactions.".
For a summary description of the deposit agreement between us, The Bank of
New York as depositary and the owners and beneficial owners from time to time of
ADRs, please see "Additional Information---The Rights of ADR Holders."
In consideration of the retirement of James L. Brissenden (Chief Executive
Officer) as of December 31, 2003, the Company entered into a separation
agreement. The separation agreement effectuates a final resolution of all
matters relating to Mr. Brissenden's employment and the termination thereof by
his retirement. The separation agreement includes special incentives which
aggregated U.S.$280 and were paid to Mr. Brissenden in March 2004. See Exhibit
10.23 "Separation Agreement and General Release" for a copy of the agreement.
68
Loan Agreement with Credit Suisse
The Company entered into a U.S.$30.0 million working capital financing
arrangement with Credit Suisse on November 23, 2000. The financing arrangement
can be either in the form of a current account overdraft facility, fixed
advances with a maximum maturity of twelve months, bid/advance
payment/performance bonds, issuance of letters of credit, or as margin coverage
for foreign exchange forward transactions. The working capital financing was
automatically extended for one year on November 23, 2003. The Company has U.S.$0
outstanding under the financing arrangement as of December 31, 2003.
Loan Agreement with HypoVereinsbank
The Company entered into two revolving credit facilities with
HypoVereinsbank on February 28, 2001. The credit facilities include a HKD 5.5
million (approximately U.S.$0.7 million) working capital financing arrangement
and a HKD 9.25 million (approximately U.S.$1.2 million) margin coverage
arrangement for foreign exchange forward transactions. The working capital
financing arrangement can be either in the form of a current account overdraft
facility, fixed advances with a maximum maturity of nine months, short term
trust receipt financing, issuance of letters of credit, or issuance of bank
guarantees. The working capital financing arrangement expires on March 31, 2005
and has an option for extension. The Company has U.S.$0 million outstanding
under the financing arrangement as of December 31, 2003.
Loan Agreement with Dresdner Bank
On September 30, 2001, the Company entered into a working capital
financing arrangement with Dresdner Bank in the amount of EUR 5.1 million
(approximately U.S.$6.4 million). The financing arrangement can be either in the
form of a current account overdraft facility or fixed advances. The interest
rate for the overdraft facility is EURIBOR plus 0.95%. The working capital
financing arrangement was extended for one year on July 31, 2003. The Company
has U.S.$0 outstanding under the financing arrangement as of December 31, 2003.
Lease Agreements for Manufacturing Facilities in Balzers, Liechtenstein and
Cologne, Germany
The lease agreement between Unaxis Balzers AG as landlord and INFICON AG,
Balzers as tenant for the manufacturing facility in Balzers, Liechtenstein was
entered into on September 1, 2000 and remained in effect until January 31, 2002
at which time it was terminated to relocate the operations to an alternative
facility in February 2002. The monthly rent for the new leased facility is CHF
254 (U.S.$189). This new facility is owned by a local private entrepreneur. The
lease has a fixed duration of 12 years with options to renew for two additional
terms of 7 years. Additionally, the rent may be increased by the landlord
according to the Swiss consumer goods index.
The lease agreement between BuL Vermietungsgesellschaft mbH & Co. KG as
landlord and INFICON GmbH as tenant for the manufacturing facility in Cologne,
Germany was entered on July 1, 2000 for a term of ten years. The monthly rent is
EURO 111 (U.S.$139) and will be adjusted according to the prevailing German cost
of living-index. The lease agreement is governed by German law and contains
customary representations and warranties. In addition, landlord and tenant
agreed that in the beginning of 2001 the tenant could vacate some of the used
area and take over some additional floor-space in other buildings and that the
landlord will make a correlating adjustment to the rent.
D. Exchange Controls.
Other than in connection with government sanctions imposed on Iraq,
Serbia, Libya (currently suspended), and portions of Angola (UNITA), there are
currently no government laws, decrees, or regulations in Switzerland that
restrict the export or import of capital, including, but not limited to, Swiss
foreign exchange controls on the payment of dividends, interest or liquidation
proceeds, if any, to non-resident holders of capital stock of Swiss
corporations.
69
E. Taxation.
Swiss Taxation of Residents of the United States
Under Swiss tax laws, dividends paid and similar cash or in-kind
distribution made by us to a holder of shares (including dividends on
liquidation proceeds and stock dividends) are subject to a Swiss federal
withholding tax at a rate of presently 35%. The withholding tax must be withheld
by us from the gross distribution and be paid to the Swiss Federal Tax
Administration.
Pursuant to the current Convention Between the United States of America
and the Swiss Confederation for the Avoidance of Double Taxation with Respect to
Taxes on Income entered into force on December 19, 1997 (the "Treaty"), a U.S.
holder of shares is eligible for a reduced rate of the withholding tax equal to
15% of the dividend, provided that such holder (1) is a resident of the United
States for purposes of the Treaty, (2) qualifies for benefits under the Treaty,
and (3) holds less than 10% of the voting stock of the company.
Such an eligible holder must apply for a refund of the amount of the Swiss
withholding tax in excess of the 15% Treaty rate. The claim for refund must be
filed on Swiss Tax Form 82, which may be obtained from any Swiss Consulate
General in the United States or from the Federal Tax Administration of
Switzerland at the address below. Three copies of the form must be duly
completed, signed before a notary public of the United States, and sent to the
Federal Tax Administration of Switzerland, Eigerstrasse 65, CH-3003 Berne,
Switzerland. The form must be accompanied by suitable evidence of deduction of
the Swiss withholding tax withheld at source, such as certificates of deduction,
signed bank vouchers, or credit slips. The form may be filed on or after July 1
or January 1 following the date the dividend was payable, but no later than
December 31 of the third year following the calendar year in which the dividend
became payable.
United States Taxation
The following discussion, based on current law, is a summary of the
material United States federal income tax considerations to you of the
acquisition, ownership, and disposition of the ADSs or shares as of the date
hereof. The discussion of the United States federal income tax consequences set
forth below is based upon the Internal Revenue Code of 1986, as amended, its
legislative history, existing and proposed regulations, and judicial decisions
and administrative interpretations thereunder, all as currently in effect, and
such authorities may be subject to subsequent changes in United States law or in
any double taxation convention or treaty between the United States and
Switzerland, which changes may have retroactive effect, so as to result in
federal income tax consequences different from those discussed below. In
addition, this summary is based, in part, upon representations made by the
Depositary to us and assumes that the Deposit Agreement, and all other related
agreements, will be performed in accordance with their terms. This discussion
does not purport to deal with all aspects of United States federal income
taxation that may be relevant to a particular holder in light of the holder's
circumstances, for example, persons subject to the alternative minimum tax
provisions of the Internal Revenue Code. Also, this discussion does not deal
with special rules that may apply to you if you are a member of a special class
of holders subject to special rules, including:
o a dealer in securities or currencies,
o a trader in securities that elects to use a mark-to-market method of
accounting for your securities holdings,
o a financial institution,
o a life insurance company,
o a tax-exempt organization,
o a person that actually or constructively owns 10% or more of our
voting stock,
70
o a person holding ADS or shares as part of a hedging, conversion or
constructive sale transaction or straddle, or
o a person whose "functional currency" is not the United States
Dollar.
The discussion also does not discuss any aspect of state, local or foreign
law, nor federal estate and gift tax law.
The discussion below pertains to you only if you are a "U.S. Holder" who
qualifies for benefits under the Treaty, holds less than 10% of our total shares
outstanding, holds the ADSs or shares as a capital asset, and whose functional
currency is the U.S. Dollar. You are a U.S. Holder if you are a beneficial owner
of ADSs or shares and you are:
o a citizen or individual resident of the United States,
o a corporation, partnership or other entity created in or under the
laws of the United States or any political subdivision thereof,
o an estate, the income of which is subject to United States federal
income taxation regardless of its source, or
o a trust if (A) a court within the United States is able to exercise
primary supervision over the administration of the trust and (B) one
or more United States persons have the authority to control all
substantial decisions of the trust.
You will qualify for benefits under the Treaty under most circumstances if
you are a resident of the United States for purposes of the Treaty and you are a
U.S. Holder.
You are urged to consult with your own tax advisor regarding the tax
consequences of investing in the ADSs or shares, including the tax effects of
any state, local, foreign, or other tax laws and possible changes in the tax
laws.
Distributions
For United States federal income tax purposes, you will be required to
include as ordinary dividend income the full amount (not reduced by any Swiss
withholding tax) of any distribution to the extent paid to you out of the our
current or accumulated earnings and profits as defined for United States federal
income tax purposes. Such dividend will constitute income from sources outside
the United States. Dividends paid by us are not eligible for the dividends
received deduction generally allowed to corporate shareholders. If any
distribution exceeds our current and accumulated earnings and profits, such
excess will be treated as a nontaxable return of capital to the extent of your
tax basis in the shares and thereafter as capital gain. Consequently, such
distributions in excess of our current and accumulated earnings and profits
would not give rise to foreign source income and as a U.S. Holder, you would not
be able to use the foreign tax credit arising from any Swiss withholding tax
imposed on such distribution unless such credit can be applied (subject to
applicable limitations) against United States tax due on other foreign source
income in the appropriate category for foreign tax credit purposes.
Because payments of dividends with respect to ADSs and shares are to be
made in Swiss Francs, a U.S. Holder will be required to determine the amount of
dividend income by translating the Swiss Francs into U.S. Dollars at the "spot
rate" on the date of receipt regardless of whether such Swiss Francs are
converted into U.S. Dollars. The tax basis of Swiss Francs received by you will
equal the U.S. Dollar equivalent of such Swiss Francs at the spot rate on the
date such Swiss Francs are received by you. Upon subsequent exchange of such
Swiss Francs for U.S. Dollars, or upon the use of such Swiss Francs to purchase
property, you will recognize exchange gain or loss equal to the difference
between your tax basis for the Swiss Francs and the U. S. Dollars received or,
if property is received, the fair value of the property on the date of the
exchange. Such gain or loss will be treated as United States source ordinary
income or loss. A U.S. Holder may be required to recognize exchange gain or loss
if the
71
amount of any refund of the Swiss withholding tax differs from the United States
Dollar value of such refund on the date the dividends were received.
You may be entitled to claim as a credit against your United States
federal income tax liability, or alternatively you may deduct from your United
States federal taxable income, the amount of the withholding tax to the extent
of the 15% Treaty rate. However, your ability to claim a foreign tax credit is
subject to a general limitation that is determined by the amount of your United
States source income relative to your total income. In addition, your ability to
claim the credit is subject to a specific basket limitation that is determined
in a similar way with respect to a specific type of income. Any refundable
portion of the paid Swiss withholding tax, such as the amount of the withholding
tax in excess of the 15% Treaty rate, would not be eligible for credit against
United States federal income tax liability. For foreign tax credit purposes,
dividends paid by us will constitute "passive income" or, in the case of some
U.S. holders, "financial services income." The rules governing the foreign tax
credit are complex. You are urged to consult your own tax advisor regarding the
availability of the foreign tax credit under your particular circumstances.
Sale, Exchange, or Other Disposition of Shares
Any gain or loss on a sale, exchange, or other disposition of ADSs or
shares by a U.S. Holder will be capital gain or loss for United States federal
income tax purposes in an amount equal to the difference between the amount
realized on the disposition and the U.S. Holder's tax basis in the ADSs or
shares. Any such gain or loss will be United States source gain or loss and will
be long-term capital gain or loss if you held the ADSs or shares for more than
one year. In the case of an individual U.S. Holder, capital gains will be
subject to U.S. federal income tax at preferential rates if specified minimum
holding periods are met. The deductibility of capital losses is subject to
limitations.
Passive Foreign Investment Company Considerations
We believe that we will not be treated as a passive foreign investment
company (a "PFIC") for United States federal income tax purposes for the current
taxable year and expect to continue our operations in such a manner that we will
not be a PFIC. However, this is a factual determination that must be made after
the close of each taxable year and therefore is subject to change. We would be a
PFIC with respect to you if for any taxable year in which you held our ADSs or
shares either (1) 75% or more of our gross income consists of some specified
types of "passive" income, such as dividends, interest, rents and royalties, or
(2) the average percentage of its assets (by value) that produce or are held for
the production of passive income is at least 50%. If we were to become a PFIC
for any taxable year during which you owned our ADSs or shares you (1) would be
subject to additional taxes on certain distributions received from us and on any
gain realized upon the sale or other dispositions of the ADSs or shares unless
you made a mitigating tax election if available and (2) would be required to
file an annual information return describing the distributions received from us
and any gain realized upon the disposition of a beneficial interest in us. You
should consult your own tax advisor regarding the potential application of the
PFIC rules to your ownership of ADSs or shares.
United States Information Reporting and Backup Withholding
Dividend payments with respect to the ADSs and shares and proceeds from
the sale, exchange or redemption of the ADSs and shares paid to U.S. Holders
other than some exempt recipients (such as corporations) may be subject to
information reporting to the Internal Revenue Service and possible United States
backup withholding at 31% rate. Backup withholding will not apply, however, to a
holder who furnishes a correct taxpayer identification number or certificate of
foreign status and makes any other required certification or who is otherwise
exempt from backup withholding. A U.S. Holder will provide such certification on
Internal Revenue Service Form W-9. Shareholders should consult their tax
advisors regarding the application of the information reporting and backup
withholding rules.
Amounts withheld as backup withholding may be credited against your federal
income tax liability, and you may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the Internal Revenue Service and furnishing any required information.
72
F. Dividends and Paying Agents.
Not applicable.
G. Statements by Experts.
Not applicable.
H. Documents on Display.
Except for the documents listed below, all documents referred to in this
annual report were either filed with the Securities and Exchange Commission as
exhibits to the registration statement on Form F-1 that became effective on
November 8, 2000 or are being filed as exhibits to this annual report on Form
20-F and may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Securities and Exchange Commission
located at The Woolworth Building, 233 Broadway, New York, New York 10279 and at
Citicorp Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661.
Copies of such material may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Securities and Exchange Commission also maintains a
website that contains reports, proxy, and information statements and other
information regarding registrants that file electronically with the Commission.
The address of this website is http://www.sec.gov.
Copies of the our articles of incorporation are available at the office of
INFICON Holding AG, Hintergasse 15 B, 7310 Bad Ragaz, Switzerland, and an
English translation thereof has been filed with the Securities and Exchange
Commission as an exhibit to the registration statement on Form F-1.
I. Subsidiary Information.
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign Exchange Rate Risk
Approximately 64%, 64%, and 64% of our net sales in the years ended
December 31, 2003, 2002, and 2001, respectively, were recognized through our
subsidiaries outside the United States. Our foreign subsidiaries maintain their
accounting records in their local currencies. Consequently, period-to-period
comparability of our results of operations is affected by fluctuations in
exchange rates. We derive a significant portion of our cash flows from
foreign-denominated revenue. To the extent the Dollar value of
foreign-denominated revenue is diminished as a result of a strengthening U.S.
Dollar, our results of operations and cash flows could be adversely affected.
The primary currencies to which we have exposure are the Japanese Yen, the
Swiss Franc, and the Euro. This exposure arises from our sales of inventory
among our subsidiaries for resale in local currencies. Consequently, the cash
flows from our subsidiaries are affected by exchange rate fluctuations. To
reduce the risks associated with foreign currency rate fluctuations, our
manufacturing facilities in the United States and Germany enter into forward
exchange contracts on a continuing basis for the purpose of controlling economic
risks related to accounts receivable not denominated in its local currency, as
well as risk related to our probable anticipated, but not firmly committed,
transactions. The anticipated transactions whose risks are being hedged are the
intercompany purchases of inventory among our various entities for resale in
local currency. The time periods of the anticipated transactions that are hedged
are generally one year or less.
We had (gains) and losses from foreign currency transactions and foreign
exchange contracts of U.S.$(0.40) million U.S.$0.57 million and U.S.$1.03
million for the years ended December 31, 2003, 2002 and
73
2001, respectively, which are recorded as "other expense, net". The potential
fair value loss for a hypothetical 10% adverse change in forward currency
exchange rates on our forward exchange contracts at December 31, 2003, 2002, and
2001 would be U.S.$0.0 million, U.S.$0.04 million, and U.S.$0.9 million,
respectively. This potential loss was estimated by calculating the fair value of
the forward exchange contracts at December 31, 2003, 2002, and 2001 and
comparing that to the calculation using the hypothetical forward currency
exchange rates. While we do not enter forward exchange contracts for trading
purposes, there can be no assurance that any losses realized on such instruments
will be fully offset by gains on the underlying exposure. We plan to continue to
use forward exchange contracts in order to mitigate the impact of exchange rate
fluctuations.
We have financial instruments, including cash, receivables, and payables,
that are denominated in foreign currencies other than in U.S. Dollars. The net
asset value of these financial instruments at December 31, 2003 and 2002 was
U.S.$41.7 million and U.S.$36.7 million, respectively. Foreign currency balances
are primarily denominated in Euros, Swiss Francs and Japanese Yen. Although we
generally enter into foreign currency forward contracts, there still exists the
risk related to functional currency exchange rate exposures. The result of a
uniform 10% strengthening in the value of the Dollar relative to the currencies
in which our net assets are denominated would result in a decrease in the net
equity balance of U.S.$6.8 million, U.S.$6.5 million and U.S.$6.2 million as of
December 31, 2003, 2002, and 2001, respectively and a decrease in net income and
cash flows of U.S.$0.2 million, U.S.$0.2 million, and U.S.$0.9 million for the
years ended December 31, 2003, 2002, and 2001, respectively.
Item 12. Description of Securities Other Than Equity Securities
Not applicable.
PART II
Item 13. Defaults, Dividend Arrearages, and Delinquencies
None.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Use of Proceeds
The registration statement in Form F-1 (Commission File No. 333-12706)
which we filed with the Securities and Exchange Commission in connection with
our initial public offering became effective on November 8, 2000, the offering
date. In our initial public offering, 1,736,000 INFICON shares, with a par value
of CHF 10 each, directly or in the form of ADSs, were registered with the
Securities and Exchange Commission and sold publicly in Switzerland and the
United States and to institutional investors outside of Switzerland and the
United States. Of the 1,736,000 shares, 315,000 were sold by us and 1,421,000 by
Unaxis. The aggregate price of the offering amount registered and sold was CHF
390,600,000 (U.S.$219,903,963).
Credit Suisse First Boston (Europe) Limited, Arnhold and S. Bleichroeder,
Inc., Credit Suisse First Boston, Zurich, Deutsche Bank AG London, Bank Julius
Baer & Co. Ltd., Pictet & Cie, and Bank Vontobel AG were the underwriters in our
initial public offering.
From November 9, 2000 to December 31, 2000, the amount of our expenses
incurred in connection with our formation and our initial public offering ,
including underwriting discounts and expenses paid to or for underwriters was
U.S.$4,165,000.
We received net offering proceeds of CHF 63,669,571 (U.S.$35,708,121). In
calculating this amount, we already considered the amount of shares purchased by
our employees and the amount borrowed from us by our employees under our equity
incentive plans described in "Directors, Senior Management, and
Employees---Share Ownership."
74
We used our net proceeds of the offering mainly to prepay a note in the
principal amount of CHF 50.1 million (U.S.$28.2 million), with a maturity date
of April 4, 2001 and bearing interest at the rate of LIBOR plus 0.25%, issued to
Unaxis in connection with the reorganization.
The remainder is being used, together with cash from other sources
available to us, for general corporate purposes, including working capital
requirements, and potentially, to fund acquisitions.
We have not received any portion of the proceeds from the sale of shares
by Unaxis.
Item 15. Controls and Procedures
Item 16. [Reserved]
A. Audit committee financial expert
The Company's Board of Directors has determined that Dr. Thomas Staehelin
(Chairman Audit Committee) is the financial expert serving on its audit
committee.
B. Code of Ethics
The Company's internal guidelines regarding corporate governance are
provided in its Articles of Incorporation, Organizational Regulations, Board
Committee Charters, CEO and CFO Code of Ethics as well as internal policies.
C. Principal Accountant Fees and Services
Audit fees to PriceWaterhouseCoopers for 2003 and 2002 were U.S$389 and
U.S.$310, respectively.
Fees paid to PriceWaterhouseCoopers for non-audit services for 2003 and
2002 were as follows:
2003 2002
---- ----
Audit related $ 53 $ 0
Tax work 73 35
Other 41 106
---- ----
Total $167 $141
Fees for non-audit services are pre-approved by the audit committee.
Fees paid to Ernst & Young for their consent opinion were approximately
U.S.$7 per year for 2003 & 2002.
D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
PART III
Item 17. Financial Statements
We have responded to Item 18 in lieu of responding to this item.
75
Item 18. Financial Statements
Index to Financial Statements
1. Audited Financial Statements
Page Number
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002 F-3
Consolidated Statements of Income for the three years in the period ended F-4
December 31, 2003
Consolidated Statements of Stockholders' Equity for the three years in the period F-5
ended December 31, 2003
Consolidated Statements of Cash Flows for the three years in the period ended F-6
December 31, 2003
Notes to Consolidated Financial Statements F-7
INFICON Holding AG (Stand-alone financial statements complying with Swiss Law)
76
Item 19. Exhibits
Index to Exhibits
Exhibit Description
No. -----------
- ---
1.1* Underwriting Agreement
1.2* Share Lending Agreement
2.1* Master Separation Agreement between Unaxis Holding AG and INFICON
Holding AG dated August 31, 2000
3.1* Articles of Incorporation of the Registrant (English translation)
3.2 INFICON Holding AG, a Swiss Company, is not required to have By-laws
under Swiss law
4.1* Deposit Agreement, dated as of November 8 , 2000, among the
Registrant, The Bank of New York, as depositary, and the owners and
beneficial owners from time to time of American Depositary Receipts,
including the form of American Depositary Receipt
10.1* INFICON Leveraged Share Plan
10.2* INFICON Discounted Share Purchase Plan
10.3.1* Intercompany Service Agreement between Leybold Vakuum GmbH and
INFICON GmbH
10.3.2* Intercompany Service Agreement between Unaxis Balzers Limited and
INFICON Limited
10.3.3* Intercompany Service Agreement between Leybold Vacuum UK Limited and
INFICON Limited
10.3.4* Intercompany Service Agreement between Leybold Vacuum Japan Co., Ltd
and INFICON Co., Ltd.
10.3.5* Intercompany Service Agreement between Leybold Vacuum Korea Ltd. And
INFICON Ltd.
10.3.6* Intercompany Service Agreement between Unaxis Singapore Pte. Ltd.
and INFICON Pte Ltd.
10.3.7* Intercompany Service Agreement between Leybold Vacuum Products, Inc.
and INFICON, Inc.
10.3.8* Intercompany Service Agreement between INFICON, Inc. and Leybold
Vacuum Products, Inc.
10.3.9* Intercompany Service Agreement between Leybold Vacuum France SAS and
INFICON SARL
10.3.10* Intercompany Service Agreement dated as of November 1, 2000, between
Balzers and Leybold Taiwan Ltd., as Providing Company and INFICON
Ltd. As Receiving Company.
10.4.1* Asset Purchase Agreement between Leybold Inficon, Inc. and INFICON,
Inc.
10.4.2* Asset Purchase Agreement between Leybold Vakuum GmbH and INFICON
GmbH, Cologne (formerly known as Leybold Vakuum Deutschland GmbH),
including Supplementary Agreement thereto
10.4.3* Asset Purchase Agreement between Unaxis Balzers Limited and INFICON
Limited
10.4.4* Asset Purchase Agreement between Leybold Vacuum UK Limited and
INFICON Limited
10.4.5* Asset Purchase Agreement between Leybold Vacuum Japan Co., Ltd. And
INFICON Co., Ltd.
10.4.6* Asset Purchase Agreement between Leybold Vacuum Korea Ltd. And
INFICON Ltd.
10.4.7* Asset Purchase Agreement between Unaxis Singapore Pte Ltd and
INFICON Pte. Ltd.
10.4.8* Asset Purchase Agreement between Balzers and Leybold China Limited
and INFICON Limited
10.4.9* Asset Purchase Agreement between Leybold SAS and INFICON GmbH,
Cologne regarding sales of assets of French subsidiary, including
English translation thereof
10.4.10* Asset Purchase Agreement between Leybold SAS and INFICON Limited,
Liechtenstein regarding sale of assets of French subsidiary,
including English translation thereof
10.4.11* Asset Purchase Agreement between Balzers and Leybold Taiwan, Ltd.
And INFICON Ltd. Regarding sale of assets of Taiwanese subsidiary
10.5* Tax Deed between Unaxis Holding AG and INFICON Holding AG
10.6* Intellectual Property Assignment from Leybold Vakuum GmbH to INFICON
GmbH
10.7* Intellectual Property Assignment from Leybold Inficon, Inc. to
INFICON GmbH
10.8* Intellectual Property Assignment from Unaxis Balzers Limited to
INFICON GmbH
10.9* Ultra Clean License Agreement between Unaxis Balzers Limited and
INFICON GmbH, including Side Agreement thereto
10.10* Intellectual Property License Agreement between INFICON GmbH
(Cologne) and INFICON GmbH
10.11* Intellectual Property License Agreement between INFICON GmbH and
INFICON Limited
10.12* Intellectual Property License Agreement between INFICON GmbH and
Unaxis Balzers Limited
10.13* Intellectual Property License Agreement between INFICON GmbH and
INFICON, Inc.
10.14* Lease Agreement for manufacturing facilities in Cologne, Germany
between INFICON GmbH and Balzers and Leybold Holding AG dated August
31, 2000 with English translation
77
10.15* Lease Agreement for manufacturing facilities in Balzers,
Liechtenstein between INFICON AG and Balzers AG dated August 31,
2000 with English translation
10.16* Employment Agreement between James L. Brissenden and Leybold Inficon
Inc.
10.17* Loan Agreement between INFICON Holding AG and Credit Suisse
10.18t Directors stock option plan
10.19t Management stock option plan
10.20t Key employee stock option plan
10.21 Employment Agreement dated January 1, 2004 between John Grad, Lukas
Winkler and INFICON Holding AG.
10.22 Employment Agreement dated October 3, 2003 between Peter G. Maier
and INFICON, Inc.
10.23 Separation Agreement and General Release dated August 12, 2003
between INFICON, Inc. and James L. Brissenden.
11. Code of Ethics for Principal Executive Officer and Senior Financial
Officers.
12.1 Certification required by Rule 13a-14(a) and Sarbanes-Oxley Act
Section 302(a) by Lukas Winkler.
12.2 Certification required by Rule 13a-14(a) and Sarbanes-Oxley Act
Section 302(a) by Peter G. Maier.
13(a).1 Statement Furnished Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, by Lukas Winkler.
13(a).2 Statement Furnished Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350, by Peter G. Maier.
14(a).1 Corporate Governance Report required by the Swiss Stock Exchange.
23.1 Consent of Ernst & Young LLP
23.2 Consent of PricewaterhouseCoopers LLP
- --------------------------------------------------------------------------------
* Incorporated by reference to our registration statement on Form F-1 and to
our Annual Report on Form 20-F filed April 2, 2001, filed with the
Securities and Exchange Commission.
t Incorporated by reference to our registration statement on Form S-8 filed
with the Securities and Exchange Commission on May 28, 2002 as
Registration No. 333-89214.
78
INFICON Holding AG
Consolidated Financial Statements
Years ended December 31, 2003, 2002, and 2001
Report of Independent Auditors.......................................F-2
Consolidated Financial Statements
Consolidated Balance Sheets..........................................F-3
Consolidated Statements of Income....................................F-4
Consolidated Statements of Stockholders' Equity......................F-5
Consolidated Statements of Cash Flows................................F-6
Notes to Consolidated Financial Statements...........................F-7
PRICEWATERHOUSECOOPERS LLP [LOGO]
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
One Lincoln Center
Syracuse NY 13202
Telephone (315) 474 8541
Facsimile (315) 473 1385
Report of Independent Auditors
To the Board of Directors and
Shareholders of INFICON Holding AG
In our opinion, the consolidated financial statements as of December 31, 2003
and 2002 listed in the index appearing under Item 18 on page 73 present fairly,
in all material respects, the financial position of INFICON Holding AG and its
subsidiaries at December 31, 2003 and 2002 and results of their operations and
their cash flows for the year ended in conformity with accounting principles
generally accepted it the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item 18, on
page 73 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
February 10, 2004, except for Note 27
for which the date is March 9, 2004
F-2
Report of Independent Auditors
To the Board of Directors
INFICON Holding AG
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of INFICON Holding AG for the year ended
December 31, 2001. Our audit also included the financial statement schedule
listed in the Index at Item 18. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
INFICON Holding AG for the year ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Buffalo, New York
January 25, 2002
F-2-A
INFICON Holding AG
Consolidated Balance Sheets
(U.S. Dollars in Thousands, except per share amounts)
December 31
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents $ 37,074 $ 37,846
Trade accounts receivable, net 22,197 15,895
Accounts receivable - affiliates 94 417
Inventories, net 19,395 19,880
Deferred tax assets 3,161 5,325
Other current assets 2,950 3,065
--------- ---------
Total current assets 84,871 82,428
Property, plant and equipment, net 22,398 21,419
Intangibles, net 1,526 343
Deferred tax assets 39,293 35,664
Other assets 2,586 8,074
--------- ---------
Total non-current assets 65,803 65,500
Total assets $ 150,674 $ 147,928
========= =========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 5,918 $ 5,736
Accounts payable - affiliates 193 172
Accrued liabilities 12,911 9,711
Income taxes payable 962 2,547
Deferred tax liabilities 545 466
--------- ---------
Total current liabilities 20,529 18,632
Deferred tax liabilities 479 696
Other liabilities 3,907 1,190
--------- ---------
Total non-current liabilities 4,386 1,886
Total liabilities 24,915 20,518
Stockholders' equity:
Common stock (2,315,000 shares issued; par value CHF 10 (U.S. $5.63) 13,033 13,033
Additional paid-in capital 94,024 94,024
Notes receivable from officers (383) (523)
Retained earnings 5,941 15,330
Accumulated other comprehensive income 13,144 5,546
--------- ---------
Total stockholders' equity 125,759 127,410
--------- ---------
Total liabilities and stockholders' equity $ 150,674 $ 147,928
========= =========
See notes to consolidated financial statements.
F-3
INFICON Holding AG
Consolidated Statements of Income
(U.S. Dollars in Thousands, except per share amounts)
Year ended December 31
2003 2002 2001
--------- --------- ---------
Net sales $ 159,438 $ 130,279 $ 142,233
Cost of sales 89,102 72,364 77,146
--------- --------- ---------
Gross profit 70,336 57,915 65,087
Research and development 20,988 16,052 12,039
Impairment of long lived assets (Note 4) 7,370 -- --
Selling, general and administrative 48,326 39,264 38,097
--------- --------- ---------
Operating income (loss) from continuing operations (6,348) 2,599 14,951
Interest (income), net (126) (597) (478)
Other expense (income), net (546) 383 1,337
--------- --------- ---------
Income (loss) from continuing operations before income taxes (5,676) 2,813 14,092
Provision (benefit) for income taxes 271 (120) 2,504
--------- --------- ---------
Income (loss) from continuing operations (5,947) 2,933 11,588
Discontinued Operations (Note 13):
(Loss) from operations of discontinued Ultra Clean operations (less
applicable income tax (benefit) of $(177) in 2003 and $(422) in 2002
and $(138) in 2001) (1,188) (2,828) (1,636)
(Loss) on disposal of Ultra Clean Operations (including 2,591 for
operating losses during phase-out period, net of income tax (benefit)
of $(337) in 2003 (2,254) -- --
--------- --------- ---------
(Loss) from discontinued operations (3,442) (2,828) (1,636)
Net income (loss) $ (9,389) $ 105 $ 9,952
========= ========= =========
Earnings (loss) per share:
Diluted:
Continuing operations $ (2.57) $ 1.27 $ 5.01
Discontinued operations (1.49) (1.22) (0.71)
--------- --------- ---------
Total $ (4.06) $ 0.05 $ 4.30
Earnings (loss) per share:
Basic:
Continuing operations $ (2.57) $ 1.27 $ 5.01
Discontinued operations (1.49) (1.22) (0.71)
--------- --------- ---------
Total $ (4.06) $ 0.05 $ 4.30
See notes to consolidated financial statements.
F-4
INFICON Holding AG
Consolidated Statements of Stockholders' Equity
(U.S. Dollars in Thousands, except per share amounts)
Note Accumulated
Additional Receivable Other Total
Common Paid-in From Retained Comprehensive Stockholders'
Stock Capital Officers Earnings Income (Loss) Equity
--------------------------------------------------------------------------------
Balance at December 31, 2000 $ 13,033 $ 93,531 $ (1,307) $ 5,273 $ (1,999) $108,531
Net income 9,952 9,952
Other comprehensive income, net of tax:
Cumulative effect of change in accounting
principle as of January 1, 2002 for
unrealized gains on foreign currency
hedges, net of related income tax of $218 327 327
Unrealized loss on foreign currency hedges,
net of related income tax of $144 (196) (196)
Foreign currency translation adjustments (3,692) (3,692)
--------
Total comprehensive income 6,391
Payments on promissory notes 784 784
Adjustments for IPO expenses and
reorganization taxes 3,818 3,818
--------------------------------------------------------------------------------
Balance at December 31, 2001 $ 13,033 $ 97,349 $ (523) $ 15,225 $ (5,560) $119,524
Net income 105 105
Other comprehensive income, net of tax:
Unrealized loss on foreign currency hedges,
net of related income tax of $65 (116) (116)
Foreign currency translation adjustments 11,222 11,222
--------
Total comprehensive income 11,211
Payments on promissory notes --
Adjustments to deferred taxes related
to pre-IPO reorganization (3,325) (3,325)
--------------------------------------------------------------------------------
Balance at December 31, 2002 $ 13,033 $ 94,024 $ (523) $ 15,330 $ 5,546 $127,410
Net (loss) (9,389) (9,389)
Other comprehensive income (loss);
Unrealized loss on foreign currency hedges,
net of related income tax of $8 (13) (13)
Foreign currency translation adjustments 7,611 7,611
--------
Total comprehensive income (1,791)
Foreign currency revaluation of notes (68) (68)
Payments on promissory notes 208 208
--------------------------------------------------------------------------------
Balance at December 31, 2003 $ 13,033 $ 94,024 $ (383) $ 5,941 $ 13,144 $125,759
================================================================================
See notes to consolidated financial statements.
F-5
INFICON Holding AG
Consolidated Statements of Cash Flows
(U.S. Dollars in Thousands)
Year ended December 31
2003 2002 2001
------------------------------------
Cash flows from operating activities:
Net income (loss) $ (9,389) $ 105 $ 9,952
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization of property, plant and equipment 5,222 3,879 2,854
Impairment of long lived assets 7,370 -- --
Loss on disposal of property, plant and equipment -- -- 559
Deferred taxes 60 (1,691) (56)
Changes in operating assets and liabilities:
Trade accounts receivable (4,481) 3,566 17,521
Inventories 2,317 4,319 1,260
Other assets 1,833 471 2,530
Accounts payable (813) 160 (10,165)
Accrued liabilities (1,918) (1,269) 211
Income taxes payable (2,022) 636 86
Other liabilities 2,711 60 --
------------------------------------
Net cash provided by operating activities 890 10,236 24,752
Cash flows from investing activities:
Purchases of property, plant and equipment (4,109) (7,341) (5,597)
Proceeds from sale of property, plant and equipment -- -- 149
Purchase of Sentex Systems, Inc. (see note 5) (1,500) -- --
Loans to New Vision Systems (see note 4) -- (5,947) --
Purchase of HAPSITE Business (see note 3) -- -- (2,000)
------------------------------------
Net cash used in investing activities (5,609) (13,288) (7,448)
Cash flows from financing activities:
Payments on notes receivable from officers 208 -- 795
(Payment on) proceeds from long-term debt -- -- (869)
(Payments to) Unaxis for reorganization -- -- (11,248)
------------------------------------
Net cash provided (used in) by financing activities 208 -- (11,322)
------------------------------------
Effect of exchange rate changes on cash and cash equivalents 3,739 7,110 (894)
------------------------------------
Increase (decrease) in cash and cash equivalents (772) 4,058 5,088
Cash and cash equivalents at beginning of period 37,846 33,788 28,700
------------------------------------
Cash and cash equivalents at end of period $ 37,074 $ 37,846 $ 33,788
====================================
See notes to consolidated financial statements.
F-6
Notes to Consolidated Financial Statements
(U.S.$ in thousands, except per share amounts)
1. Description of Business
INFICON Holding AG (INFICON or the "Company") is a leading developer,
manufacturer and supplier of innovative vacuum instrumentation, critical sensor
technologies, and process control software for the semiconductor and related
industries. These analysis, measurement and control products are vital to
original equipment manufacturers (OEMs) and end-users in the complex
manufacturing of semiconductors, flat panel displays, magnetic and optical
storage media, and precision optics. The Company also provides essential
instrumentation for gas leak detection and toxic chemical analysis to the air
conditioning/refrigeration, emergency response, and industrial hygiene markets.
The Company's products include process knowledge and control instruments and
software (formerly in situ analysis), leak detectors, vacuum measurement and
component products and field-portable gas chromatograph/mass spectrometer
instruments (instrumentation for environmental health and safety). Headquartered
in Syracuse, New York, INFICON has manufacturing facilities in the United States
and Europe and operations in the United States, Liechtenstein, Switzerland,
Germany, Finland, Japan, United Kingdom, France, Korea, Singapore, Taiwan,
China, and Hong Kong. INFICON is subject to risks common to companies in the
semiconductor industry including, but not limited to, the highly cyclical nature
of the semiconductor industry leading to recurring periods of oversupply,
development by INFICON or its competitors of technological innovations,
dependence on key personnel and the protection of proprietary technology.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
All highly-liquid investments with an original maturity of three months or
less at the date of purchase are considered to be cash equivalents.
Trade Accounts Receivable
Trade accounts receivable are shown net of allowances for doubtful
accounts of U.S.$1,155 and U.S.$1,820 at December 31, 2003 and 2002,
respectively. The Company markets its products to a diverse customer base
globally. Trade credit is extended based upon evaluation of each customer's
ability to perform its obligations, these evaluations are updated periodically
and the Company may require deposits on large orders but does not require
collateral to support customer receivables.
Concentration Risk
The Company had sales to one unaffiliated major customer of 16%, 18%, and
17% of consolidated sales for the years ended December 31, 2003, 2002, and 2001,
respectively. The Company had sales to Unaxis and their various divisions of
14%, 14%, and 15% for the years ended December 31, 2003, 2002, and 2001,
respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out method. The reserve for excess and obsolete
inventories was U.S.$7,193 and U.S.$5,604 for the years ended December 31, 2003
and 2002, respectively.
F-7
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the Consolidated Statements of Income in
the period that includes the enactment date. A valuation allowance is recorded
to reduce the carrying amounts of deferred tax assets if it is more likely than
not such assets will not be realized (see Note 19).
Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Expenditures for major
renewals and betterments that extend the useful lives of property, plant and
equipment are capitalized. Expenditures for maintenance and repairs are charged
to expense as incurred. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation are eliminated from the accounts and any
resulting gain or loss is recognized in earnings.
Depreciation is provided on the straight-line method over the estimated
useful lives of 20 years for buildings and 3 to 5 years for machinery and
equipment.
Intangible Assets
The costs of identified intangible (primarily completed software
technology) assets are amortized on a straight-line basis over five to ten
years. The net book value of intangibles was U.S.$1,526 and U.S.$343 at December
31, 2003 and 2002, respectively. Intangible assets are shown net of accumulated
amortization of U.S.$7,641 and U.S.$1,770 at December 31, 2003 and 2002,
respectively. The Company periodically reviews intangibles to evaluate whether
changes have occurred that would suggest their value may be impaired based on
the estimated undiscounted cash flows of the asset to which the intangible
relates. If this review indicates the remaining useful life of an intangible
requires revision or is not recoverable, the carrying amount of the intangible
is reduced by the estimated shortfall of cash flows on a discounted basis. The
Company recorded a one-time impairment charge of U.S.$7,370 to write down the
long-lived assets associated with New Vision Systems. The following are the
components of the intangible assets:
Balance 2003 Transactions Balance
@ 12/31/02 Additions Amortization Impairments @ 12/31/03
-------------------------------------------------------------------------
Goodwill -- 4,342 (4,342) --
Identifiable Intangibles 343 4,482 (664) (2,635) 1,526
-------------------------------------------------------------------------
Total Intangible Balance 343 8,824 (664) (6,977) 1,526
========== ===========
Research and Development
Research and development costs are expensed as incurred.
F-8
2. Summary of Significant Accounting Policies (continued)
Shipping and Handling Costs
Revenue and costs associated with shipping products to customers are
included in sales and cost of sales, respectively.
Advertising Costs
Advertising costs (U.S.$783 in 2003, U.S.$1,041 in 2002, and U.S.$1,455 in
2001) are expensed as incurred.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is the
applicable local currency. For those subsidiaries, assets and liabilities are
translated to U.S. Dollars at year-end exchange rates. Income and expense
accounts are translated at the average monthly exchange rates in effect during
the year. The effects of foreign currency translation adjustments are included
in accumulated other comprehensive income (loss) as a component of stockholders'
equity. Gains and losses from foreign currency transactions are reported in the
statement of income under other expense (income), net.
Critical Accounting Policies and 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. On an on-going basis, management evaluates its estimates and
judgments, including, but not limited to, those related to revenue recognition,
pension actuarial assumptions and methods, reserves for obsolescence and excess
inventory, bad debt, warranty, goodwill and intangibles, and valuation
allowances for deferred tax assets. Management bases its estimates and judgments
on historical experience and on various other factors believed to be reasonable
under the circumstances that form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The following summarizes specific accounting
policies:
Revenue Recognition - Revenue is recognized upon the transfer of title
that is generally upon shipment. When a customer's acceptance is required,
revenue is not recognized until the customer's acceptance is received. The
Company accrues for anticipated returns and warranty costs upon shipment.
Goodwill and Intangible Assets - The Company reviews goodwill and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable, and also reviews goodwill annually. Under the provisions of
this standard, goodwill and intangible assets deemed to have indefinite
lives are no longer subject to amortization. All other identifiable
intangibles are amortized over their estimated useful life. Intangible
assets, such as purchased technology, are generally recorded in connection
with the acquisition of a business. The value assigned to intangible
assets is determined by or with assistance of an independent valuation
firm based on estimates and judgment regarding expectations for the
success and life cycle of products and technology acquired. If actual
results differ significantly from the estimates, or other indications are
present, the Company may be required to record an impairment charge to
write down the asset to its realizable value. In addition, SFAS No. 142
requires that goodwill be tested annually using a two-step process. The
first step is to identify any potential impairment by comparing the
carrying value of the reporting unit to its fair value. If a potential
impairment is identified, the second step is to compare the implied fair
value of goodwill with its carrying amount to measure the impairment loss.
A severe decline in fair value could result in an impairment charge to
goodwill, which could
F-9
2. Summary of Significant Accounting Policies (continued)
have a material adverse effect on the Company's business, financial
condition and results of operations. The Company performs its impairment
analysis under SFAS 142 annually during the third quarter.
Bad Debts - The allowance for doubtful accounts is for estimated losses
resulting from a customer's inability to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Warranties - The accrual for the estimated cost of product warranties is
provided for at the time revenue is recognized. While we engage in
extensive product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates, material usage,
and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty
liability may be required.
Inventory - The reserve for estimated obsolescence or unmarketable
inventory is equal to the difference between the cost of inventory and the
estimated fair value based upon assumptions about future demand and market
conditions. If actual future demand or market conditions are less
favorable than those projected by management, additional inventory
write-downs may be required.
Pension Benefits - The pension benefit costs and credits are developed
from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates and expected return on plan assets.
The Company considers current market conditions, including changes in
interest rates, in selecting these assumptions. Changes in the related
pension benefit costs or credits may occur in the future in addition to
changes resulting from fluctuations in our related headcount due to
changes in the assumptions.
Deferred Tax Assets - As of December 31, 2003, the Company had net
deferred tax assets of U.S.$41.4 million reflecting tax credit and loss
carry forwards, basis differences primarily from intangible assets, and
other deductions available to reduce taxable income in future years. A
majority of the net deferred tax assets balance of U.S.$41.4 million
resides in the United States. In assessing the realization of the
Company's deferred tax assets, we consider whether it is more likely than
not the deferred tax assets will be realized. The ultimate realization of
our deferred income tax assets depends upon our ability to generate future
taxable income, including the implementation of tax planning strategies,
during the periods in which our basis differences and other deductions
become deductible and prior to the expiration of our net operating loss
carry forwards. On a quarterly basis, the Company evaluates the
recoverability of its deferred tax assets based upon historical results
and forecasted results over future years, considering tax planning
strategies, and matches this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss carry forwards to ensure there is adequate support for the
realization of the deferred tax assets. While we have considered future
operating results, in conjunction with ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in
the event we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged as a reduction to income in the
period such determination was made. Likewise, should we determine that we
would be able to realize future deferred tax assets in excess of its net
recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made. For the year ended
December 31, 2003, the Company's evaluation of the recoverability of our
deferred tax assets, in accordance with SFAS 109, showed that an increase
to our valuation allowance for its deferred income tax assets was
required. An additional valuation allowance of U.S.$1.6 million was
recorded for the year ended December 31, 2003. For the years ended
December 31, 2003 and December 31, 2002, the Company has a valuation
allowance for deferred taxes of approximately U.S.$4.3 million and
U.S.$2.7 million, respectively. If the Company generates future taxable
income against which these tax attributes may be applied, some portion or
all of the valuation allowance would be reversed and reported as income
tax benefit in future periods.
F-10
2. Summary of Significant Accounting Policies (continued)
Although realization is not assured, the Company believes it is more
likely than not the net deferred tax asset balance as of December 31, 2003
will be realized. The Company was able to support this conclusion based
upon projections of future operating results and tax planning strategies
that support the realization of the deferred tax assets, and other
positive and negative evidence. Differences between forecasted and actual
future operating results could adversely impact our ability to realize our
deferred income tax assets; however, differences between forecasted and
actual future operating results are continually monitored to ensure the
Company has adequate support for the realization of the deferred tax
assets. The Company's analysis supporting the realization of the deferred
tax assets places careful consideration on the net operating loss carry
forward periods.
In recent years, the Company's U.S. operations have experienced losses
before income taxes for financial and tax reporting purposes; however, we
believe improvements in the order backlog, industry projections as well as
changes in our operations that occurred in the fourth quarter of 2003, in
addition to other improvements that will take place in future periods, are
sufficient to generate the minimum amounts of taxable income to utilize
our net operating loss carry forwards prior to their expiration. The
changes in the Company's operations include:
o Various cost saving and restructuring initiatives to reduce
manufacturing and overhead costs;
o Capitalization of the intercompany debt arrangement between
INFICON Inc. (US location) and INFICON GmbH (Switzerland);
o Review of R&D allocations between related parties to identify
and implement tax planning strategies to maximize the
Company's tax benefit;
o Other changes in an effort to increase the efficiency and
effectiveness of our business operations.
The Company believes it is more likely than not it will be able to
generate sufficient taxable income in the United States to absorb its net
operating loss carry forwards, which begin to expire in 2021, although
there can be no assurances. If the Company's expectations for future
operating results are not met due to general economic conditions or other
factors, the Company may need to establish additional valuation allowances
for all or a portion of its deferred tax assets primarily relating to its
U.S. operations. This could have a significant affect on our future
results of operations and financial position.
Impairment of Long-Lived Assets - SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," was early adopted by the
Company on January 1, 2002, and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," while retaining many of the requirements of SFAS No. 121. In
accordance with SFAS No. 144, long-lived assets to be held and used by an
entity are to be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. If the sum of the expected future undiscounted cash flows is
less than the carrying amount of the asset, an impairment loss is
recognized by reducing the recorded value to fair value. The pre-tax
charge for impairment is included in operating income (loss) from
continuing operations, net, on the consolidated statements of operations
and totaled $7,370 and $0 for the years ended December 31, 2003 and
December 31, 2002, respectively (see Note 4). The impairment charge for
the year ended December 31, 2003 was allocated as follows:
Goodwill $ 4,342
Intangibles 2,635
PP&E 393
--------
Total $ 7,370
========
F-11
2. Summary of Significant Accounting Policies (continued)
Disposal of Long-Lived Assets/Discontinued Operations - SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was
early adopted by the Company on January 1, 2002 and supersedes a portion
of Accounting Principle Board (APB) No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business," relating to reporting the effects of disposal of a segment of a
business, while retaining many of the requirements of this statement.
Under SFAS No. 144, the definition of what constitutes a discontinued
operation is broader, discontinued operations are no longer measured on a
net realizable value basis, and future operating losses are no longer
recognized before they occur (see Note 13).
Software Cost
The Company capitalizes internal-use software development costs in
accordance with the provisions of SOP 98-1, "Accounting for Costs of Computer
Software Developed or Obtained for Internal Use." The capitalized cost is
amortized beginning when it is placed into service on a straight-line basis over
its estimated life.
Reclassification
Certain reclassifications have been made to prior years' financial
statements to conform to the 2003 presentation.
Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This Interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others, which is being superseded.
This Interpretation does not apply to certain guarantee contracts:
guarantees issued by insurance and reinsurance companies and accounted for under
accounting principles for those companies, residual value guarantees provided by
lessees in capital leases, contingent rents, vendor rebates, and guarantees
whose existence prevents the guarantor from recognizing a sale or the earnings
from a sale. Furthermore, the provisions related to recognizing a liability at
inception for the fair value of the guarantor's obligation do not apply to the
following:
a. product warranties;
b. guarantees that are accounted for as derivatives'
c. guarantees that represent contingent consideration in a business
combination;
d. guarantees for which the guarantor's obligations would be reported
as an equity item (rather than a liability);
e. an original lessee's guarantee of lease payments when that lessee
remains secondarily liable in conjunction with being relieved from
being the primary obligor (that is, the principal debtor) under a
lease restructuring;
f. guarantees issued between either parents and their subsidiaries or
corporations under common control;
g. a parent's guarantee of a subsidiary's debt to a third party, and a
subsidiary's guarantee of the debt owed to a third party by either
its parent or another subsidiary of that parent.
However, the guarantees described in (a)-(g) above are subject to the disclosure
requirements of this Interpretation. See Note 11 for warranty activity
disclosure.
F-12
2. Summary of Significant Accounting Policies (continued)
The initial recognition and measurement provisions of the Interpretation
apply on a prospective basis to guarantees issued or modified after December 31,
2002. The adoption of FIN No. 45 did not have a material impact on the Company's
financial position or results of operations.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123 (SFAS 123),"
which is effective for financial statements for fiscal years ending after
December 15, 2002, with early adoption permitted. SFAS 148 will enable companies
that choose to adopt the preferable fair value based method to report the full
effect of employee stock options in their financial statements immediately upon
adoption, and to make available to investors better and more frequent disclosure
about the cost of employee stock options. We will continue to apply the
disclosure only provisions of both SFAS 123 and SFAS 148.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized (see Note 22).
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
(U.S.$ in thousands, except per share amounts)
2003 2002 2001
---------- ---------- ----------
Net income (loss), as reported $ (9,389) $ 105 $ 9,952
Income (loss) from continuing operations (5,947) 2,933 11,588
Less: Stock based compensation expense, net of tax (5,509) (3,263) (2,298)
Pro forma income (loss) from continuing operations (11,456) (330) 9,290
(Loss) from discontinued operations (3,442) (2,828) (1,636)
---------- ---------- ----------
Total pro forma (14,898) (3,158) 7,654
========== ========== ==========
Earnings (loss) per share
Diluted:
Continuing operations - as reported $ (2.57) $ 1.27 $ 5.01
Discontinued operations - as reported (1.49) (1.22) (0.71)
---------- ---------- ----------
Total - as reported $ (4.06) $ 0.05 $ 4.30
========== ========== ==========
Continuing operations - pro forma $ (4.95) $ (0.14) $ 4.01
Discontinued operations - pro forma (1.49) (1.22) (0.71)
---------- ---------- ----------
F-13
Total - pro forma $ (6.44) $ (1.36) $ 3.30
========== ========== ==========
Earnings (loss) per share Basic:
Continuing operations - as reported $ (2.57) $ 1.27 $ 5.01
Discontinued operations - as reported (1.49) (1.22) (0.71)
---------- ---------- ----------
Total - as reported $ (4.06) $ 0.05 $ 4.30
========== ========== ==========
Continuing operations - pro forma $ (4.95) $ (0.14) $ 4.01
Discontinued operations - pro forma (1.49) (1.22) (0.71)
---------- ---------- ----------
Total - pro forma $ (6.44) $ (1.36) $ 3.30
========== ========== ==========
In January 2003 the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). In December 2003 , the FASB approved
a partial deferral of the adoption of the interpretation and issued FIN 46-R on
December 24, 2003. This interpretation clarifies existing accounting principles
related to the preparation of consolidated financial statements when the equity
investors in an entity do not have the characteristics of a controlling
financial interest or when the equity at risk is not sufficient for the entity
to finance its activities without additional subordinated financial support from
others parties. FIN No. 46 requires a company to evaluate all existing
arrangements to identify situations where a company has a "variable interest"
(commonly evidenced by a guarantee arrangement or other commitment to provide
financial support) in a "variable interest entity" (commonly a thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. FIN No. 46 is effective immediately for all variable interest entities
created after January 31, 2003, and is effective for all variable interest
entities created prior to that date beginning January 1, 2004. The adoption of
FIN No. 46 did not have a material impact on the Company's financial position or
results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends SFAS 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. The adoption of SFAS 149, which is effective for
contracts entered into or modified after June 30, 2003, did not have a material
effect on the Company's financial condition or results of operations.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150 establishes
standards on the classification and measurement of financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and for all
financial instruments at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the
Company's financial position or results of operations.
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) (SFAS 132), "Employers' Disclosures about
Pensions and Other Postretirement Benefits," that improves financial statement
disclosures for defined benefit plans. The change replaces existing SFAS 132
disclosure requirements for
F-14
pensions and other postretirement benefits and revised employers' disclosures
about pension plans and other postretirement benefit plans. It does not change
the measurement or recognition of those plans required by SFAS 87, "Employers'
Accounting for Pensions," SFAS 88 and "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS 132 revised retains the disclosure requirements contained in the original
SFAS 132, but requires additional disclosures about the plan assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. SFAS 132 revised
is effective for annual and interim periods with fiscal years ending after
December 15, 2003. We have adopted the revised disclosure provisions in note 19.
3. Acquisition of HAPSITE Business
Effective November 1, 2001, the Company acquired substantially all the net
assets of the HAPSITE business (HAPSITE) of Leybold portable gas
chromatograph-mass spectrometer systems used for direct measurement of volatile
organic compounds in Inficon, Inc., a subsidiary of Unaxis. HAPSITE
manufacturers and sells self-contained, field portable gas chromatograph-mass
spectrometer systems used for direct measurement of volatile organic compounds
found in air, water and soil. The results of operations of the HAPSITE business
are included in the consolidated results for the twelve months ended 2003 and
2002 and the two months ended 2001, respectively.
The transaction was accounted for under the purchase method of accounting
for business combinations, and the results of operations of HAPSITE have been
included in the Company's consolidated financial statements since the effective
date of the acquisition. The purchase price was U.S.$2,000 in cash, which was
allocated to the net assets acquired and liabilities assumed based upon
estimated fair market values as follows (U.S.$ in thousands):
Accounts receivable $ 839
Inventories 1,814
Prepaid expenses 11
Machinery and equipment 234
Accounts payable (468)
Accrued expenses (430)
-------
$ 2,000
=======
4. Acquisition of New Vision Systems
In January 2003, the Company acquired 100% of the stock of a
privately-held company, New Vision Systems, a leader in advanced process control
(APC) for patterning processes in semiconductor manufacturing pursuant to an
Agreement and Plan of Merger which closed on January 3. The acquisition of New
Vision Systems helps expand the Company's reach in the semiconductor fab
industry by extending its range of process capability in the advanced process
control (APC) market to include photolithography. Photolithography, fundamental
to creating the pattern of integrated circuits (IC) on a semiconductor wafer, is
the most challenging and strategically important process in manufacturing
semiconductor devices. New Vision Systems develops and deploys a full suite of
process control software compatible with tools from all major photolithography
and metrology equipment suppliers. These products improve equipment productivity
and chip yield in semiconductor fabrication. As of December 31, 2002, New Vision
Systems had an outstanding note payable to INFICON of U.S.$5.9 million. The note
receivable is recorded in other assets for the Company's December 31, 2002
financial report since the results of operations for New Vision Systems were not
part of the Company's consolidated financial statements until January 2003.
The transaction was accounted for under the purchase method of accounting
for business combinations, and the results of operations for INFICON LT
(formerly New Vision Systems) have been included in the Company's consolidated
financial statements, and reported as a separate reporting unit under the
semiconductor vacuum instrumentation segment, for the year ended December 31,
2003 since the date of acquisition.
F-15
An independent valuation of the assets acquired and liabilities assumed
from the purchase of New Vision Systems was completed during the first quarter
of 2003. The valuation methodology was based on the income approach-discounted
cash flow method and was based upon the Company's financial projections,
backlog, non-competition and non-solicitation classes and workforce value. The
valuation was based on a weighted average cost of capital of 17% and expected
life of the purchased technology. The following table summarizes the estimated
fair values of those assets and liabilities.
Liabilities assumed:
Current liabilities $4,047
Long-term debt (intercompany) 5,890
------
Total liabilities assumed $9,937
------
Less Tangible assets acquired:
Current assets $ 693
Leases, licenses, furniture and equipment 365
Other assets 955
------
Total tangible assets acquired $2,013
------
Allocation of excess liabilities over assets:
Goodwill $4,342
Identifiable intangibles 3,582
------
Total net liabilities assumed $7,924
======
The intangible assets that made up the intangible asset balance, on the
opening balance sheet for New Vision Systems, include completed technology of
U.S.$2,660 (10 year useful life), trade names of U.S.$382 (10 year useful life),
certain non-compete and non-solicitation agreements of U.S.$220 (5 year useful
life) and order backlog of U.S.$320 (1 year useful life). Of the total
intangible assets, of U.S.$7,924, the identifiable intangible balance of
U.S.$3,582 is the allowable amount that may be deducted for tax purposes.
As consideration for the stock of New Vision Systems, the Company assumed
liabilities in excess of assets, and entered into a contingent "Earn Out"
agreement through 2004 with the stockholders of New Vision Systems, not to
exceed $27 million, payable in a combination of the Company's ADRs, valued at
the current market price when payable, and cash, based on specific sales targets
of New Vision Systems in calendar years 2003 and 2004. As of December 31, 2003,
no amounts have been recorded for the contingent purchase price.
During the third quarter of 2003, as a result of substantially lower than
expected financial performance for New Vision Systems, and in conjunction with
its annual test of goodwill, an impairment test of the intangible assets was
performed and the Company recorded an impairment charge of U.S.$7,370 to write
down the intangible assets associated with New Vision Systems. The impairment
charge, based on an independent valuation utilizing discounted cash flows, was
allocated as follows:
Goodwill $4,342
Identifiable intangibles 2,635
PP&E 393
------
Total $7,370
======
As of December 31, 2003, the goodwill and identifiable intangible asset
balances, after amortization of U.S.$594 and impairment of U.S.$6,977, were
U.S.$0 (goodwill) and U.S.$353 (intangible), respectively.
Pro forma results of operations:
The following unaudited pro forma information summarizes the Company's
consolidated results of operations as if New Vision Systems acquisition had
taken place at the beginning of 2002:
F-16
Year ended
December 31
2003 2002 2001
--------------------------------------
Net sales $159,438 $133,059 $149,669
Net (loss) $ (9,389) $(7,646) $ 10,092
======================================
Diluted net (loss) per share $ (4.06) $ (3.30) $ 4.36
Basic net (loss) per share $ (4.06) $ (3.30) $ 4.36
The pro forma results for 2002 are not necessarily indicative of the
results that would have occurred had the acquisition been in effect during 2002.
5. Acquisition of Sentex Systems Inc.
In May 2003, the Company acquired 100% of the assets and assumed certain
liabilities of a privately-held company, Sentex Systems Inc. Sentex Systems,
founded in 1980, supplies sophisticated monitoring and analysis instruments
using gas chromatography (GC) technology to detect volatile organic compounds
(VOCs) for industrial and environmental monitoring, testing, and security.
Sentex product lines include continuous, on-line water monitors for applications
such as factory discharge water or water security, air monitors for spot
analysis or continuous on-site monitoring and explosives detectors for building
and site security and protection. Sentex products complement the HAPSITE fully
portable chemical identification systems (gas chromatograph/mass spectrometer or
GC/MS technology) used for fast on-scene detection and analysis of chemical
agents and toxic materials in air, soil and water. The financial results for
Sentex products are reported under the general vacuum instrumentation segment.
The transaction was accounted for under the purchase method of accounting
for business combinations, and the results of operations have been included in
the Company's consolidated financial statements as of the second quarter ending
June 30, 2003. The valuation methodology was performed by the Company with
assistance from an independent party and was based on the income approach-
discounted cash flow method and was based upon the Company's financial
projections. The valuation was based on a weighted average cost of capital of
11% and expected life of the purchased technology.
A valuation of the assets and certain liabilities acquired from the
purchase of Sentex Systems Inc. was prepared by the Company. The following table
summarizes the estimated fair values of those assets and liabilities.
Purchase price $1,500
======
Tangible assets acquired:
Current assets $ 354
Equipment 30
Other assets 5
------
Total tangible assets acquired $ 389
------
Less: Liabilities assumed
Current liabilities $ (89)
Allocation of excess purchase price over net assets:
Identifiable intangible asset $1,200
F-17
The acquired identifiable intangible asset (primarily gas chromatography
and completed software technology) has a useful life of 10 years. The intangible
asset balance is comprised of completed technology of U.S.$1,200 (10 year useful
life). The U.S.$1,200 is deductible for tax purposes.
Pro forma results of operations:
The following unaudited pro forma information summarizes the Company's
consolidated results of operations as if Sentex Systems acquisition had taken
place at the beginning of 2002:
Year ended
December 31
2003 2002 2001
--------------------------------------
Net sales $159,904 $131,301 $142,886
Net income (loss) $ (9,341) $ 290 $ 9,976
======================================
Diluted net (loss) per $ (4.03) $ 0.13 $ 4.31
share
Basic net (loss) per $ (4.03) $ 0.13 $ 4.31
share
6. Sale of Diffusion Pump Business
During the second quarter of 2003, the Company sold its diffusion pump
business line. There was no gain or loss realized during 2003 from the sale. The
Company's decision to sell the diffusion pump business was based upon its
long-term strategy of focusing financial and personnel resources on the
Company's core strategies.
The Company sold certain assets and intellectual property associated its
diffusion pump business. The terms of the sale are as follows:
In thousand CHF
---------------
Sale price 1,800 (U.S.$1,400)
Payment Terms:
Due at signing 300 (U.S.$234)
The balance of 1,500 is due based on 10% of buyers revenues derived from the
diffusion pump sales. Payment is made twice a year (Jan 15th & July 15th). The
initial payment, based on sales, was received in January 2004 in the amount of
CHF 140 (U.S.$109).
7. Inventories
Inventories consist of the following:
December 31
2003 2002
--------------------
Raw material $14,866 $14,950
Work-in-process 1,054 1,075
Finished goods 3,475 3,855
--------------------
$19,395 $19,880
====================
F-18
8. Property, Plant, and Equipment
The components of property, plant, and equipment consist of the following:
December 31
2003 2002
--------------------
Land $ 700 $ 700
Buildings and improvements 17,872 15,783
Machinery and equipment 22,844 22,439
--------------------
41,416 38,922
Less accumulated depreciation 19,018 17,503
--------------------
$22,398 $21,419
====================
9. Other Assets
The components of other assets are as follows:
December 31
2003 2002
--------------------
Deferred compensation asset $ 674 $ 557
Deposits 602 354
Note receivable (See Note 4) -- 5,947
Cash surrender value of life insurance 490 470
Other 820 1,089
--------------------
$ 2,586 $ 8,417
====================
10. Accrued Liabilities
The components of accrued liabilities are as follows:
December 31
2003 2002
--------------------
Salaries, wages and related costs $ 3,735 $ 2,827
Warranty 2,514 2,246
Commissions 2,321 1,274
Deferred revenue 1,028 463
Accrued professional fees 440 251
Accrued restructuring / other reserves 389 1,052
Other 2,484 1,598
--------------------
$12,911 $ 9,711
====================
11. Warranty
The activity of the warranty reserve was as follows:
F-19
Balance at Deduct:
Beginning of Add: Charges Claims against Balance at
Year to Reserve Reserve End of Year
-------------------------------------------------------------
Year ended December 31, 2003 $2,246 $1,707 $1,442 $2,514
Year ended December 31, 2002 $2,717 $ 389 $ 860 $2,246
12. Restructuring Charges
During the fourth quarter of 2002, the Company recorded restructuring
charges of U.S.$ 1,274 as part of a worldwide cost-reduction program in response
to the continued reduced demand and slowdown in the semiconductor capital
equipment industry. The U.S.$1,274 charged to restructuring primarily consists
of severance and fringe benefits for approximately 33 employees who either
elected the voluntary severance program or were terminated. The affected
employees were located in the United States and Liechtenstein and are comprised
of manufacturing and nonmanufacturing employees. Notification of termination and
benefits were communicated to employees in the fourth quarter of 2002. The
majority of the terminations occurred in 2002 and the balance of these
terminations were completed by the end of the first quarter of 2003. As of
December 31, 2002, a balance of U.S.$1,052 remained in the restructuring reserve
and was reported within accrued liabilities. As of December 31, 2003, the
balance of U.S.$1,052 was paid. The vacuum control and process knowledge &
control product lines were primarily affected by the restructuring charges.
13. Discontinued Operations - Ultra Clean Processing
During the third quarter of 2003, the Company recorded a loss from
discontinued operations of U.S.$2.8 million related to the divestment of its
ultra clean processing product line. The divestment was structured as a
management buyout where selected assets were purchased for approximately
U.S.$614, with the payment terms allowing the Company the potential to recoup a
portion of the divestment costs over the next three years. The Company received
a payment of approximately U.S.$123 during 2003. The remaining balance will be
paid over the next three years. The ultra clean processing product line is a
segment of the Company's business. As a result of the sale of this segment the
Company has reported the results of this segment, within the Consolidated
Statements of Income, as discontinued operations for the years ended December
31, 2003, 2002 and 2001.
The Company's decision to divest the ultra clean processing business unit
was based upon its long-term strategy of focusing on the Company's core
competencies in the front-end of the semiconductor manufacturing process. The
divestment was completed as of December 31, 2003. The ultra clean processing
products service the semiconductor market and were reported under the
semiconductor vacuum instrumentation segment.
The balance sheet applicable to the ultra clean processing business unit,
included in the consolidated balance sheet, for the year ended December 31, 2003
is as follows:
Assets:
Current assets $1,138
Other assets 78
------
Total Assets $1,216
======
Liabilities & Equity:
Current liabilities $ 319
Other liabilities 1
Equity 896
------
Total Liabilities & Equity $1,216
======
F-20
Revenues associated with the ultra clean processing product line were
U.S.$1,437 and U.S.$1,192 for the years ended December 31, 2003 and 2002,
respectively. The balance of the reserve, relating to the discontinued
operations, as of December 31, 2003 is U.S.$1,394 and is comprised of the
following reserves:
Reserve for uncollectible accounts $ 467
Reserve for staff reductions 122
Reserve for excess/obsolete inventory 272
Reserve for receivable resulting from sale of UCP business 533
------
Total reserve for discontinued operations as of December 31, 2003 $1,394
======
During the fourth quarter of 2003 the Company reduced certain accruals
associated with staff reductions, excess/obsolete inventory and the transfer of
certain assets by U.S.$182 based on adjustments of original estimates to actual
costs. The reduction of these accruals was recorded as income from discontinued
operations during the fourth quarter of 2003.
14. Debt
The Company entered into a U.S.$30.0 million working capital financing
arrangement with Credit Suisse on November 23, 2000. The financing arrangement
can be either in the form of a current account overdraft facility, fixed
advances with a maximum maturity of twelve months, bid/advance
payment/performance bonds, issuance of letters of credit, or as margin coverage
for foreign exchange forward transactions. The working capital financing was
automatically extended for one year on November 23, 2003. The Company has U.S.$0
outstanding under the financing arrangement as of December 31, 2003.
On September 30, 2001, the Company entered into a working capital
financing arrangement with Dresdner Bank in the amount of EUR 5.1 million
(approximately U.S.$6.4 million) at December 31, 2003. The financing arrangement
can be either in the form of a current account overdraft facility or fixed
advances. The interest rate for the overdraft facility is EURIBOR plus 0.95%.
The working capital financing arrangement was extended for one year on July 31,
2003. The Company has U.S.$0 outstanding under the financing arrangement as of
December 31, 2003.
Additionally, the Company entered into two revolving credit facilities
with HypoVereinsbank on February 28, 2001. The credit facilities include a HKD
5.5 million (approximately U.S.$0.7 million) working capital financing
arrangement and a HKD 9.25 million (approximately U.S.$1.2 million) margin
coverage arrangement for foreign exchange forward transactions. The working
capital financing arrangement can be either in the form of a current account
overdraft facility, fixed advances with a maximum maturity of nine months, short
term trust receipt financing, issuance of letters of credit, or issuance of bank
guarantees. The working capital financing arrangement expires on March 31, 2005
and has an option for extension. The Company has U.S.$0 million outstanding
under the financing arrangement as of December 31, 2003.
15. Related Party Transactions
The financial statements include transactions with Unaxis for the years
ended December 31, 2003, 2002 and 2001. The Company incurred corporate general
and administrative expenses of U.S.$3,515, U.S.$3,996, and U.S.$3,904 for the
fiscal years 2003, 2002, and 2001, respectively. These charges represent
allocations for expenses incurred by Unaxis on the Company's behalf including
costs for occupancy, finance, legal, tax, information technology, and human
resources functions. The amounts are primarily allocated based on net sales,
which management believes to be reasonable. Effective January 1, 2000, and
through the date of the initial public offering on November 9, 2000, Unaxis
charged the Company an additional fee based on third party sales which amounted
to U.S.$1,244 for the year ended December 31, 2000. The payment of this fee was
waived in 2001 and reversed to income in 2001. INFICON and Unaxis have entered
into agreements following the separation of the companies that governing various
F-21
relationships for separating employee benefits and tax obligations,
indemnification and transition services. The Company leases certain buildings
from Unaxis and Unaxis subsidiaries. The leases are for approximately U.S.$177
per month and are due to expire between December 2005 and 2010. Rent expense,
which is included in the above corporate charges, under such operating leases
was U.S.$2,129, U.S.$1,801, and U.S.$1,868 for the years ended December 31,
2003, 2002, and 2001, respectively.
Net sales include U.S.$22,707, U.S.$17,599, and U.S.$21,602 of sales to
Unaxis subsidiaries for the fiscal years ended December 31, 2003, 2002, and
2001, respectively. There was a receivable of U.S.$94, and U.S.$417 at December
31, 2003 and 2002, respectively, from Unaxis subsidiaries. There was a payable
of U.S.$193 and U.S.$172 at December 31, 2003 and 2002, respectively, to Unaxis
subsidiaries (see Note 3).
16. Financial Instruments and Risk Management
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and equivalents: The carrying amount reported in the balance sheet
for cash and equivalents approximates its fair value.
Foreign currency exchange contracts: On January 1, 2001, the Company
adopted Financial Accounting Standards Board ("FASB") No. 133 ("FASB 133"),
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
FASB No. 133 requires that all derivatives, including foreign currency exchange
contracts, be recognized on the balance sheet at fair value. Derivatives that
are not hedges must be recorded at fair value through earnings. Since the
adoption of FASB 133, as of January 1, 2001, a cumulative after tax credit of
U.S.$2 has been recorded to comprehensive income.
The Company maintains a foreign currency exchange risk management strategy
that uses derivative instruments, in the form of forward exchange contracts, to
hedge against future movements in foreign exchange rates that affect certain
foreign currency denominated sales and related purchase transactions, caused by
currency exchange rate volatility. These contracts are designated as cash flow
hedges and generally have durations of less than one year. The Company attempts
to match the forward contracts with the underlying items being hedged in terms
of currency, amount and maturity. The primary currencies in which the Company
has exposure are the Japanese Yen, the Swiss Franc, and the Euro. This exposure
arises in certain locations from intercompany purchases and sales of inventory
in foreign currency for resale in local currency, in addition to intercompany
billings relating to research and development and management services.
The Company's accounting policy, for derivative financial instruments, is
based on its designation of such instruments as hedging transactions. An
instrument is designated as a hedge based in part on its effectiveness in risk
reduction and one-to-one matching of derivative instruments to underlying
transactions. The Company records all derivatives on the balance sheet at fair
value. For derivative instruments that are designated and qualify as cash flow
hedges, the effective portion of the gain or loss on the derivative instrument
is reported as a component of accumulated other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The gain or loss (ineffectiveness) on the
derivative instrument in excess of the hedged item, if any, is recognized in
current earnings during the period in which it occurs. The Company recognized
gains net of taxes from ineffective hedges of U.S.$0 and U.S.$264 at December
31, 2003 and 2002, respectively.
The aggregate value of contracts for the sale of U.S. Dollars in exchange
for foreign currencies was U.S.$2,200 and U.S.$320 at December 31, 2003 and
2002, respectively. The aggregate value of contracts for the exchange of other
foreign currencies was U.S.$4,269 and U.S.$137 at December 31, 2003 and 2002,
respectively. The Company had unrealized net (losses) under foreign currency
contracts of U.S.$(13) and U.S.$(116) at December 31, 2003 and 2002,
respectively, net of taxes, in accumulated other comprehensive income. These
unrealized net losses are expected to be recognized into earnings over the next
twelve months.
F-22
For the years ended December 31, 2003, 2002, and 2001, the Company
recorded income (expense) of U.S.$(113), U.S.$438, and U.S.$115, respectively,
in other expense, net, which represented the release of the derivatives into
earnings to offset the items being hedged. The Company had gains (losses) from
all foreign currency transactions and foreign exchange contracts of U.S.$398,
U.S.$(573), and U.S.$(1,029) for fiscal years 2003, 2002, and 2001,
respectively, which are recorded in other expense, net.
17. Operating Leases
The Company leases some of its facilities and machinery and equipment
under operating leases, from Unaxis and third parties, expiring in years 2004
through 2014. Generally, the facility leases require the Company to pay
maintenance, insurance and real estate taxes.
Rental expense under operating leases totaled U.S.$5,681, U.S.$5,008, and
U.S.$2,936 for the years ended December 31, 2003, 2002, and 2001, respectively.
Minimum lease payments under operating leases are as follows:
2004 $ 4,477
2005 4,287
2006 4,185
2007 4,206
2008 4,252
2009 & After 22,180
18. Supplemental Cash Flow Information
Cash payments for income taxes were U.S.$2,200, U.S.$1,062, and U.S.$2,618
for 2003, 2002, and 2001, respectively. Interest payments were U.S.$149,
U.S.$33, and U.S.$162 in 2003, 2002, and 2001, respectively.
Cash receipts from the following sales of specific product lines during 2003:
Diffusion pump product line (see Note 6) U.S.$234
Ultra clean processing product line (see Note 13) U.S.$123
--------
Total U.S.$357
19. Income Taxes
For financial reporting purposes, income (loss) before income taxes
included the following:
2003 2002 2001
-----------------------------------------------
Income (loss) from continuing operations before income taxes
United States $ (9,177) $ (3,218) $ 140
Foreign 3,501 6,031 13,846
-----------------------------------------------
Total income (loss) from continuing operations before income taxes $ (5,676) $ 2,813 $ 13,986
===============================================
Income (loss) from discontinued operations before income taxes
United States $ -- $ $ --
Foreign (3,956) (3,251) (1,774)
-----------------------------------------------
Total income (loss) from discontinued operations before income taxes $ (3,956) $ (3,251) $ (1,774)
===============================================
Total income (loss) before income taxes $ (9,632) $ (438) $ 12,212
===============================================
F-23
Provision (benefit) for income taxes included the following:
2003 2002 2001
-----------------------------------
Current:
Federal $ -- $ -- $ --
State (103) 31 34
Foreign (30) 1,118 2,388
-----------------------------------
(133) 1,149 2,422
-----------------------------------
Deferred:
Federal (1,330) (1,388) (351)
Foreign 1,219 (303) 295
-----------------------------------
(111) (1,691) (56)
-----------------------------------
Provision (benefit) for income taxes $ (243) $ (542) $ 2,366
===================================
The differences between the United States federal statutory income tax
rate and the Company's effective tax rate were as follows:
2003 2002 2001
------------------------------------
U.S. federal statutory rate (34.0%) (34.0%) 34.0%
Effect of permanent differences 8.9% (19.7%) (2.6%)
Effect of foreign subsidiaries with different tax rates 1.9% (249.7%) (17.1%)
State taxes, net of federal benefit 0.0% 7.1% (0.8%)
Increase in valuation allowance 16.5% 191.5% 6.0
Other 4.2% (19.2%) (0.3%)
------------------------------------
Effective tax rate (2.5%) (124.0%) 19.2%
====================================
F-24
19. Income Taxes (con't)
Deferred tax assets and liabilities were comprised of the following:
2003 2002
-----------------------
Deferred tax assets:
Accrued liabilities $ 1,250 $ 3,365
Loss carryforwards and tax credits 14,100 7,101
Basis differences/ intangible assets 30,047 31,948
Inventory 895 963
Deferred revenue and other 503 289
-----------------------
Total gross deferred tax assets 46,795 43,666
Less valuation allowance (4,269) (2,677)
-----------------------
Total deferred tax assets 42,526 40,989
-----------------------
Deferred tax liabilities:
Accrued employee benefits 283 460
Property, plant, and equipment 393 277
Other 420 425
-----------------------
Total deferred tax liabilities 1,096 1,162
-----------------------
Net deferred tax asset $ 41,430 $ 39,827
=======================
Presented as:
Current deferred tax asset $ 3,161 $ 5,325
Long-term deferred tax asset 39,293 35,664
Current deferred tax liability (545) (466)
Long-term deferred tax liability (479) (696)
-----------------------
$ 41,430 $ 39,827
=======================
F-25
19. Income Taxes (continued)
During the year ended December 31, 2000, Unaxis Holding AG transferred the
assets and liabilities of various INFICON subsidiaries to newly created legal
entities that are wholly-owned by INFICON Holding AG. For income tax purposes,
the asset transfer was considered a taxable transaction creating a new income
tax basis of the assets and liabilities transferred. The transaction resulted in
a basis difference of approximately U.S.$84 million which will be deductible for
tax purposes over various periods, no longer than 15 years. As a result, a
deferred tax asset of U.S.$37,385 related to the basis difference was recorded
with a corresponding credit in stockholders' equity.
In conjunction with the business transfers and taxable transaction
described above, it was agreed that Unaxis would be responsible for the payment
of taxes for the period up to the date of transfer. The tax liability for the
period through the transfer date was estimated and recorded as part of the
equity reclass upon reorganization of the Company. Upon filing of the 2000 tax
return during 2001, the actual amount of the tax applicable to the period
through the transfer was calculated and the difference between this amount and
the 2000 estimate of U.S.$2.4 million has been recorded as an increase to
additional paid in capital as an adjustment to reorganization taxes in the
statement of stockholders' equity.
At December 31, 2003, the Company has federal and foreign net operating
loss carryforwards of approximately U.S.$43,233, which are available to offset
future taxable income, if any, which expire at various dates through 2023.
Realization of the deferred tax benefit is dependent on generating sufficient
taxable income to offset the deferred tax asset prior to its expiration. The
Company has recorded a valuation allowance of approximately U.S.$2,700, which
represents the tax benefit for net operating losses incurred for which the
Company is uncertain as to the amount, if any, of future tax benefits to be
received for the future utilization of such loss carryforwards.
Undistributed earnings of INFICON 's foreign subsidiaries, are permanently
reinvested. Distribution of earnings to INFICON would generally be exempt from
taxation in Switzerland in accordance with their participation exemption. The
participation exemption, in most cases, exempts income such as dividends,
interest, and capital gains from taxation in Switzerland if such income is
derived from qualifying investments in subsidiaries. Upon distribution of those
earnings in the form of dividends, withholding taxes ranging from 5% to 20%
would be payable upon the remittance of all previous unremitted earnings as of
December 31, 2003.
20. Employee Benefit Plans
Certain INFICON employees (primarily United States, Liechtenstein, and
Germany) participate in the contributory and noncontributory defined benefit
plans. Benefits under the defined benefit plan are generally based on years of
service and or final average pay. The Company funds the pension plans in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974, as amended, and the Internal Revenue Code in the United States and in
accordance with local regulations in foreign countries. As part of the
reorganization, INFICON assumed the existing defined benefit plan obligations
for all of INFICON's employees.
INFICON also participates in U.S. and foreign defined contribution plans
for substantially all of its employees. The costs associated with these plans
were U.S.$593, U.S.$569, and U.S.$433 in 2003, 2002, and 2001, respectively.
F-26
20. Employee Benefit Plans (con't)
The following tables show reconciliations of defined benefit pension plans as of
December 31:
2003 2002
--------------------------------
Change in benefit obligation
Benefit obligation, January 1 $ 46,281 $ 35,622
Service cost 2,336 2,655
Interest cost 2,201 2,070
Actuarial losses (gains) (752) (597)
Benefits paid (5,161) (374)
Participant contributions 892 771
Plan amendments 122 704
Foreign currency translation adjustments 4,492 5,430
--------------------------------
Benefit obligation, December 31 $ 50,411 $ 46,281
================================
Change in plan assets
Fair value of plan assets, January 1 $ 36,124 $ 30,241
Actual return on plan assets 2,233 (1,482)
Company contributions 2,278 2,235
Participant contributions 892 771
Benefits paid (5,161) (374)
Foreign currency translation adjustments 3,253 4,733
--------------------------------
Fair value of plan assets, December 31 $ 39,619 $ 36,124
================================
2003 2002
--------------------------------
Reconciliation of funded status
Funded status $ (10,792) $ (10,157)
Unrecognized prior service (benefit) cost 486 426
Unrecognized net transition asset -- --
Unrecognized actuarial (gains) losses 7,411 9,182
--------------------------------
(Accrued) prepaid benefit costs $ (2,895) $ (549)
================================
Range of assumptions
Discount rate 3.70% - 6.00% 4.00% - 6.75%
Expected return on plan assets 2.00% - 8.00% 4.50% - 8.00%
Rate of compensation increase 1.25% - 5.50% 2.50% - 5.50%
F-27
20. Employee Benefit Plans (continued)
The following table summarizes the components of the net periodic benefit costs
for defined benefit pension plans for the periods ended December 31:
2003 2002
---------------------
Service cost $ 2,336 $ 2,655
Interest cost 2,201 2,070
Expected return on plan assets (2,024) (1,731)
Amortization of prior service cost 305 256
Amortization of transition asset -- (37)
Net amortization and deferral of actuarial
gains / (losses) 1,235 139
---------------------
Net periodic benefit cost $ 4,053 $ 3,352
=====================
Additional Information
Information about the expected cash flows for the US pension plan is as
follows:
Allocation of Assets
The asset allocation for the Company's US pension plan for the years ended
December 31, 2003 & 2002, and the target allocation for 2004, by asset category,
follows:
20 - 40% Fixed Income - Intermediate Term
5 - 10% Fixed Income - Short Term
5 - 15% Fixed Income - Multiple Strategy
20 - 60% Equity - US Large Cap
10 - 20% Equity - US Small Cap
7 - 20% Equity - International, Large Cap
2 - 5% Equity - International, Emerging Markets
3 - 7% Equity - US Real Estate Securities
2 - 60% Money Market
The Company's US pension plan assets are managed by outside investment
managers; assets are rebalanced at the end of each quarter. The Company's
investment strategy with respect to pension assets is to maximize return while
protecting principal. The investment manager will have the flexibility to adjust
the asset allocation and move funds to the asset class that offers the most
opportunity for investment returns.
Accumulated Benefit Obligation
The Plan's accumulated benefit obligation as of November 30, 2003 was
U.S.$9,668.
Estimated Contributions
It is anticipated the Company will contribute approximately U.S.$945 to
the pension plan for the fiscal year ending December 31, 2004.
The Company maintains bonus and profit sharing plans that provide cash
awards to key employees based upon operating results and employee performance.
Bonus expense to key employees was U.S.$1,905, U.S.$1,095, and U.S.$1,519 for
the years ended December 31, 2003, 2002, and 2001, respectively.
F-28
The Company has a deferred compensation plan that covers certain
executives. The deferred compensation plan provides that participants may defer
up to 15% of their base compensation and/or up to 100% of any performance bonus.
Participants in this plan are fully vested in all amounts paid into the plan.
The amounts paid into the plan are invested in life insurance contracts, money
markets, mutual funds, and fixed income funds.
One executive participates in the SERP. During 2002, this benefit was
transferred to the qualified defined benefit plan. During 2002 and 2001, the
Company contributed an actuarially determined portion into the plan of U.S.$35,
and U.S.$78, respectively. Upon termination of employment, the individual will
receive a single sum amount based upon age at the date of termination and
reduced by benefits payable under other INFICON qualified retirement plans and
benefits payable pursuant to social security, and any debts or amounts that are
owed to the Company by the individual.
21. Stockholder's Equity
Under the Swiss Code of Obligations, the shareholders may decide on an
increase of the share capital in a specified aggregate par value up to 50% of
the existing share capital in the form of authorized capital to be used at the
discretion of the Board of Directors. The Board of Directors is authorized to
issue at any time until May 7, 2005 up to 1,157,500 shares of par value CHF 10
per share. Such issuance may be made by full underwriting or in partial amounts.
The Board of Directors is authorized to determine the issue price, period of
dividend entitlement, and the form of the contribution upon the issuance of the
shares. In addition, the General Meeting of Stockholders approved conditional
capital in the amount 115,000 shares which shall be issued upon the exercise of
option rights which some employees and members of the Board of Directors will be
granted pursuant to the Employee Incentive Plan. The Board of Directors will
regulate the details of the issuances.
Share Purchase Plans
In the Company's initial public offering on November 9, 2000, 1,736,000
INFICON shares, with a par value of CHF 10 each, directly or in the form of
ADRs, were sold publicly in Switzerland and the United States and to
institutional investors outside Switzerland and the United States. Of the
1,736,000 shares, 315,000 shares were sold by us and 1,421,000 shares were sold
by Unaxis as selling shareholder. In connection with the initial public
offering, the Company offered employees the opportunity to participate in one of
two equity purchase programs. The two programs are the leveraged share plan and
the discounted share purchase plan.
Leveraged Share Plan - The leveraged share plan was available to three
tiers of employees: the Chief Executive Officer, other executive officers, and
key employees. Depending on an eligible employee's tier, an eligible employee
may have purchased shares in the offering for a total purchase price between
U.S.$22,500 and U.S.$562,500. Approximately 56 employees participated in the
leveraged share plan purchasing either ADRs or shares totaling 38,109 and
19,872, respectively. Each ADR represents one-tenth of one share (or a right to
receive one-tenth of one share). These ADRs and shares issued to employees under
the leveraged share plan are included in the 315,000 shares offered by the
Company as part of the initial public offering.
The shares purchased under the leveraged share plan may not be transferred
or sold until the fourth anniversary of the closing of the offering (November 9,
2004). The plan includes specific requirements for employees who are terminated
prior to the fourth anniversary of the closing of the offering.
Discounted Share Purchase Plan - The discounted share purchase plan was
offered to employees who are not eligible to participate in the leveraged share
plan. Under this plan, eligible persons were offered the opportunity to purchase
shares on the closing of the offering at a 30% discount to the offer price. Each
employee was entitled to purchase up to $8,439 worth of shares in the offering
at a 30% discount. Employees who participated in the discounted share purchase
plan purchased either ADRs or shares totaling 26,011 and 7,166, respectively.
The ADRs and shares issued under the discounted share purchase plan are included
in the 315,000 shares offered by the Company as part of the initial public
offering. The 30% discount was treated as compensation.
F-29
None of the shares purchased in the offering may be transferred or sold
until the second anniversary (November 9, 2002) from the date of the closing of
the offering, after which date they may be either retained or sold. The plan
includes specific requirements for employees who are terminated prior to the
second anniversary from the date of closing.
Notes Receivable from Officers
In November 2000, certain officers and key employees purchased 16,480
shares of common stock and paid the exercise price by issuing cash plus full
recourse promissory notes, denominated in U.S. Dollars, Swiss Francs, or Euro,
to the Company totaling U.S.$1,371. At December 31, 2003 and 2002, the
outstanding balance on the notes was U.S.$383 and U.S.$523, respectively. The
remaining notes, which have been offset against stockholders' equity for
financial statement presentation, are due in November 2007 and bear an interest
rate equal to 120% of the mid-term applicable federal rate (as defined in the
Internal Revenue Code). The interest is payable on a quarterly basis.
22. Stock Option Plans
Leveraged Share Plan - The aggregate amount of shares that may be issued in the
form incentive stock options under the Leveraged Share Plan was 155,555 shares.
All options are granted at prices equal to 100% of the market value of the
common stock at the date of grant. The options are non-transferable and expire
on the seventh anniversary of the date of grant. Fifty percent of the options
vest and become exercisable on the second anniversary of the date of the grant.
The remaining 50% of the options will vest and become exercisable on the third
anniversary of the date of grant. The plan includes specific requirements for
employees who are terminated prior to exercising their options or prior to the
options becoming vested.
Directors Stock Option Plan - In fiscal year 2001 the Board of Directors
approved the Directors Stock Option Plan. The Directors Stock Option Plan is
solely for members of the Board, who are not employees of INFICON. The Company
grants options to the eligible Directors, on May 15 and November 15 of each
year, commencing May 15, 2001. The number of options granted to the eligible
Directors represents 30% of their annual compensation. Options are
non-transferable and will vest immediately upon date of grant and become
exercisable one year after the grant date and are exercisable within a period of
seven years after the allocation date. All options are granted at prices equal
to 100% of the market value of the common stock at the date of grant. The plan
includes specific requirements for the Directors who are removed or resign from
the Board.
Key Employee Stock Option Plan - In fiscal year 2001 the Board of Directors
approved the Key Employee Stock Option Plan. The purpose of the plan is to
provide key employees of the Company with an opportunity to become shareholders,
and in addition, to obtain options on shares and allow them to participate in
the future success of the Company. It is intended that the plan will provide an
additional incentive for key employees to maintain continued employment,
contribute to the future success and prosperity, and enhance the value of the
Company. Accordingly, the Company will, from time to time during the term of
this plan, grant to such key employees options to purchase shares in such
amounts as the Company shall determine, subject to the conditions provided in
the plan. The plan is effective from May 15, 2001, and shall remain in effect
through May 15, 2011.
The following is a summary of option transactions under the three Plans:
Shares Price Range
------ -----------
Outstanding December 31, 2001 121,497 CHF 124.00 - CHF 225.00
Granted 27,541 CHF 69.00 - CHF 170.00
Forfeited (1,415) CHF 165.00 - CHF 225.00
Exercised -- --
-------
F-30
Outstanding December 31, 2002 147,623 CHF 69.00 - CHF 225.00
Granted 42,410 CHF 50.00 - CHF 97.50
Forfeited (1,080) CHF 165.00
Exercised --
-------
Outstanding December 31, 2003 188,953 CHF 50.00 - CHF 225.00
=======
Exercisable at December 31, 2003 131,660 CHF 69.00 - CHF 225.00
The following table summarizes information about stock options outstanding
and exercisable (in thousands) at December 31, 2003.
Outstanding Options Options Exercisable
Average Remaining Average
Exercise Price Shares Price Term Shares Price
-------------- ------ ----- ---- ------ -----
CHF 45.00 - CHF 67.50 29,800 CHF 50.00 6.1 -- CHF 0.00
CHF 67.51 - CHF 90.00 6,990 CHF 72.28 5.4 3,173 CHF 69.00
CHF 90.01 - CHF 112.50 8,793 CHF 93.13 6.8 951 CHF 91.50
CHF 112.51 - CHF 135.00 2,030 CHF 124.00 4.3 2,030 CHF 124.00
CHF 157.50 - CHF 180.00 24,750 CHF 165.91 4.9 8,916 CHF 167.53
CHF 202.50 - CHF 225.00 116,590 CHF 225.00 3.9 116,590 CHF 225.00
------- -------
Totals 188,953 131,660
The options are granted in Swiss Francs. The average rate for 2003 was
U.S.$1.00=CHF 1.3452.
Pro forma information regarding net income is required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"). The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions: risk free interest rate of 2.02% and 3.07% for
2003 and 2002; a dividend yield of 0% and 0% for 2003 and 2002; volatility
factors of the expected market price of the Company's common stock of 63.70% and
63.43% for 2003 and 2002; and a weighted average expected life of the options of
5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
23. Business Segments
INFICON is a global supplier of instrumentation for analysis, monitoring,
and control in the vacuum, semiconductor, refrigeration, automotive, security,
emergency response, and environmental markets, with headquarters and
manufacturing facilities in the United States, and administrative offices and
manufacturing in the United States, Germany, and Liechtenstein, in addition to
sales and service locations worldwide. INFICON operates in two primary business
segments: Semiconductor Vacuum Instrumentation and General Vacuum
Instrumentation.
F-31
The semiconductor vacuum instrumentation segment includes two major
product lines: process knowledge and control and patterning solutions. The
products in this segment are developed for use in various semiconductor
manufacturing applications. The general vacuum instrumentation segment includes
three major product lines: leak detection and vacuum measurement and components
and environmental health and safety. These products are used in numerous markets
including air conditioning, refrigeration, automotive, security, emergency
response, and environmental applications.
Information on the Company's business segments (excluding discontinued
operations) was as follows:
Years ended December 31
2003 2002 2001
------------------------------------
(U.S.$ in thousands)
Sales:
Semiconductor vacuum instrumentation $ 38,538 $ 30,716 $ 43,614
General vacuum instrumentation 120,900 99,563 98,619
------------------------------------
Total sales $159,438 $130,279 $142,233
====================================
Sales between business segments, which were not material, generally were
priced at prevailing market prices.
Years ended December 31
2003 2002 2001
-----------------------------------------
Gross profit:
Semiconductor vacuum instrumentation $ 18,095 $ 14,627 $ 21,736
General vacuum instrumentation 52,241 43,288 43,351
-----------------------------------------
Total gross profit $ 70,336 $ 57,915 $ 65,087
=========================================
Earnings (loss) before interest and taxes:
Semiconductor vacuum instrumentation $ (15,552) $ (5,724) $ 1,100
General vacuum instrumentation 9,750 7,941 12,514
-----------------------------------------
Total earnings (loss) before interest and taxes $ (5,802) $ 2,217 $ 13,614
=========================================
Depreciation, amortization and impairment:
Semiconductor vacuum instrumentation $ 9,578 $ 1,363 $ 1,285
General vacuum instrumentation 3,014 2,516 1,569
-----------------------------------------
$ 12,592 $ 3,879 $ 2,854
==========================================
Capital expenditures:
Semiconductor vacuum instrumentation $ 1,590 $ 1,950 $ 1,868
General vacuum instrumentation 2,519 5,391 3,729
-----------------------------------------
$ 4,109 $ 7,341 $ 5,597
=========================================
Identifiable assets:
Semiconductor vacuum instrumentation $ 55,467 $ 52,796 $ 56,563
General vacuum instrumentation 95,207 95,132 81,631
-----------------------------------------
$ 150,674 $ 147,928 $ 138,194
=========================================
Long-lived assets:
Semiconductor vacuum instrumentation $ 9,996 $ 14,314 $ 9,818
General vacuum instrumentation 16,514 15,523 10,358
-----------------------------------------
$ 26,510 $ 29,837 $ 20,176
=========================================
Sales by geographic location (1):
United States $ 58,759 $ 47,392 $ 51,062
Europe 69,340 59,377 66,346
Other 31,339 23,510 24,825
-----------------------------------------
Total sales $ 159,438 $ 130,279 $ 142,233
=========================================
F-32
(1) The geographic location of a sale is determined by the subsidiary that
recorded the sale, rather than customer location.
24. Earnings Per Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 ("FASB 128") "Earnings
per Share." FASB 128 requires both basic earnings per share, which is based on
the weighted average number of common shares outstanding, and diluted earnings
per share, which is based on the weighted average number of common shares
outstanding and all dilutive common equivalent shares outstanding. The average
number of shares outstanding is based upon the capitalization of INFICON after
the reorganization. The dilutive effect of options is determined under the
treasury stock method using the average market price for the period. Common
equivalent shares are included in the per share calculations where the effect of
their inclusion would be dilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
Years ended December 31
2003 2002 2001
--------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per share:
Income (loss) from continuing operations $ (5,947) $ 2,933 $ 11,588
Income (loss) from discontinued operations (3,442) (2,828) (1,636)
--------------------------------------------------
Net income $ (9,389) $ 105 $ 9,952
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding - Basic 2,315,000 2,315,000 2,315,000
Weighted average shares outstanding - Diluted 2,315,000 2,315,397 2,315,000
Earnings per share:
Diluted
Continuing operations $ (2.57) $ 1.27 $ 5.01
Discontinued operations (1.49) (1.22) (0.71)
--------------------------------------------------
Total $ (4.06) $ 0.05 $ 4.30
Basic
Continuing operations $ (2.57) $ 1.27 $ 5.01
Discontinued operations (1.49) (1.22) (0.71)
--------------------------------------------------
Total $ (4.06) $ 0.05 $ 4.30
For the year ended December 31, 2003, the fully diluted earnings per share
calculation excluded 10,541 shares (total of 2,325,541 shares) since these
shares would have been antidilutive for 2003.
25. Quarterly Data (unaudited)
Quarter ended
March 31 June 30 September 30 December 31
------------------------------------------------------
2003
Sales 39,477 36,437 38,520 45,004
Gross profit 17,504 15,244 17,126 20,462
Income (loss) from continuing operations 650 (772) (6,165) 340
Income (loss) from discontinued operations (607) (788) (2,471) 424
Net income (loss) 43 (1,560) (8,636) 764
F-33
Earnings (loss) per share:
Diluted
Continuing operations $ 0.28 $ (0.33) $ (2.66) $ 0.14
Discontinued operations (0.26) (0.34) (1.07) 0.18
---------------------------------------------------
Total* $ 0.02 $ (0.67) $ (3.73) $ 0.33
Basic
Continuing operations $ 0.28 $ (0.33) $ (2.66) $ 0.15
Discontinued operations (0.26) (0.34) (1.07) 0.18
---------------------------------------------------
Total* $ 0.02 $ (0.67) $ (3.73) $ 0.33
* Total EPS amounts do not agree due
to rounding
2002
Sales 30,691 32,643 33,617 33,328
Gross profit 13,025 14,850 14,820 15,220
Income (loss) from continuing operations 530 574 827 1,002
Income (loss) from discontinued operations (510) (509) (815) (994)
Net income 20 65 12 8
Earnings (loss) per share:
Diluted
Continuing operations $ 0.23 $ 0.25 $ 0.36 $ 0.43
Discontinued operations (0.22) (0.22) (0.35) (0.43)
---------------------------------------------------
Total $ 0.01 $ 0.03 $ 0.01 $ 0.00
Basic
Continuing operations $ 0.23 $ 0.25 $ 0.36 $ 0.43
Discontinued operations (0.22) (0.22) (0.35) (0.43)
---------------------------------------------------
Total $ 0.01 $ 0.03 $ 0.01 $ 0.00
26. Subsequent Event
On March 9, 2004, the Company retained the services of an investment bank
in connection with the possible sale of its patterning solutions software
business. The Company's decision to pursue a sale of its patterning solutions
software business is based upon its decision to further focus its resources.
There is no assurance a sale will occur.
27. Additional information required by Swiss Law
As required by article 663 paragraph 3 of the Swiss Code of Obligations,
the following supplementary information is disclosed:
2003 2002 2001
--------------------------------
Total personnel costs $47,388 $42,121 $37,800
---------------------------------
Total depreciation of property, plant,
and equipment 4,951 3,678 2,634
Total amortization and impairment on intangible assets 7,641 201 220
---------------------------------
Total amortization, impairment and depreciation $12,592 $ 3,879 $ 2,854
---------------------------------
F-34
The fire insurance values of property, plant, and equipment are:
December 31
2003 2002
--------------------
Buildings and improvements $10,821 $10,903
Machinery and equipment 26,024 25,055
--------------------
$36,845 $35,958
--------------------
Schedule I - Valuation and Qualifying Accounts
INFICON Holding AG
Balance at Add: Balance
Beginning Charged to Deduct: at End of
Allowance for doubtful accounts: of Year Expense Write-Offs Year
--------- ---------- ---------- ---------
Year ended December 31, 2003 1,820 712 1,377 1,155
Year ended December 31, 2002 1,685 441 306 1,820
Year ended December 31, 2001 1,154 753 222 1,685
Balance at Add: Balance
Beginning Charged to Deduct: at End of
Inventory Reserve: of Year Expense Write-Offs Year
--------- ---------- ---------- ---------
Year ended December 31, 2003 5,604 685 759 5,530
Year ended December 31, 2002 4,753 1,823 972 5,604
Year ended December 31, 2001 4,629 1,531 1,407 4,753
F-35
SIGNATURES
The registrant hereby certifies that it meets all of the requirement for filing
on Form 20-F and that it has duly caused and authorized the undersigned to sign
this annual report on Form 20-F on its behalf.
INFICON Holding AG
Date: March 31, 2004 /s/ Lukas Winkler
-------------------------------
Name: Lukas Winkler
Title: President and Chief
Executive Officer
Date: March 31, 2004 /s/ Peter G. Maier
--------------------------------
Name: Peter G. Maier
Title: Vice President and Chief
Financial Officer