20-F 1 d59094_20f.txt ANNUAL REPORT 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. 14 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. 18 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