As filed with the Securities and Exchange Commission on July 17, 2002

Registration No. 333-90150

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

Form S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Celerity Group, Inc.

(Exact name of Registrant as specified in its charter)


Delaware	3672	94-3372329
(State or other jurisdiction of incorporation or organization)	(Primary standard industrial classification code number)	(I.R.S. Employer identification no.)

Celerity Group, Inc.

1463 Centre Pointe Drive

Milpitas, California 95035

(408) 946-3100

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

David J. Shimmon

Chief Executive Officer

1463 Centre Pointe Drive

Milpitas, California 95035

(408) 946-3100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:


Daniel J. Winnike, Esq. Scott J. Leichtner, Esq. Fenwick & West, LLP Two Palo Alto Square Palo Alto, CA 94306 (650) 494-0600		Charles Ayres Frank Schiff DB Capital Partners, Inc. 31 W. 52nd Street, 26th Floor New York, NY 10019 (646) 324-2200		Grant Behrman William Matthes Behrman Capital 126 E. 56th Street, 27th Floor New York, NY 10022 (212) 980-6500		Jeffrey D. Saper, Esq. Robert G. Day, Esq. Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 (650) 493-9300

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay the effective date of this Registration Statement until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS (Subject to Completion)

Issued July 17, 2002

Shares

(CELERITY LOGO)

COMMON STOCK

Celerity Group, Inc. is offering shares of its common stock and the selling stockholders are offering shares. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $ and $ per share. We will not receive any of the proceeds from the shares of common stock sold by the selling stockholders.

We have applied to list our common stock for quotation on the Nasdaq National Market under the symbol “CLRT.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 12.

PRICE $ A SHARE

Underwriting

Proceeds to

Discounts and

Proceeds to

Selling

Price to Public

Commissions

Celerity

Stockholders

Per Share

Total

The selling stockholders have granted the underwriters the right to purchase up to an additional shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Deutsche Bank Securities, Inc. and Morgan Stanley & Co. Incorporated expect to deliver the shares to purchasers on , 2002.

Joint Book-Running Managers


DEUTSCHE BANK SECURITIES	MORGAN STANLEY

MERRILL LYNCH & CO.


	LEHMAN BROTHERS


	UBS WARBURG

, 2002.

1. Research and development

THE SEMICONDUCTOR MANUFACTURING PROCESS

The diagram below illustrates the basic process steps in integrated circuit manufacturing for high-performance copper-based chips. The process steps are repeated many times until the integrated circuit is completed. Each process step uses a precise and complex mix of gases and/or chemicals, temperature, and pressure to achieve desired effects.

LEGEND

Process step using gas delivery module Process step using chemical blending and delivery module

Portion of conventional gas stick eliminated with FloGuard

2. Engineering and design

3. Manufacturing

4. Flow control expertise instruments

5. Gas delivery

6. Chemical delivery

7. Module tool integration

8. Global service modules modules and support

Design and manufacturing of gas and chemical process modules

Celerity employs more than 100 engineers and scientists engaged in technology and product development. Our solutions come from expertise in fluid dynamics, thermal heat transfer, and physical chemistry. We combine this expertise with knowledge in precision mechanical engineering and thermal and magnetic modeling to produce advanced features such as MultiFlo™ and FloGuard™ utilized in our mass flow controllers.

FloGuard Technology

• eliminates sensitivity to pressure changes • reduces cost • reduces equipment down time

MultiFlo Technology

• reduces inventory requirements • increases flexibility • highly configurable • reduces equipment down time

World Class Manufacturing and R&D

Global Customer Service and Support

• Flexible global operations • Advanced supply chain management • ISO 9001/9002 certified • 24/7 customer support

Manufacturing and service locations

USA

Mesa, Arizona Milpitas, California Redwood City, California Richardson, Texas Richmond, Virginia Roundrock, Texas Tualatin, Oregon Yorba Linda, California

Europe

Dublin, Ireland Munich, Germany

Asia

Hsinchu, Taiwan Kashima, Japan Shanghai, China Singapore Sungham City, South Korea Yokohama, Japan

TABLE OF CONTENTS


PROSPECTUS SUMMARY
RISK FACTORS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
OUR BUSINESS SEPARATION
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
RELATED PARTY TRANSACTIONS
PRINCIPAL AND SELLING STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
UNDERWRITERS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
INDEX TO FINANCIAL STATEMENTS
EXHIBIT 3.06
EXHIBIT 10.05
EXHIBIT 10.18
EXHIBIT 21.01
EXHIBIT 23.02
EXHIBIT 23.03

TABLE OF CONTENTS


	Page

Prospectus Summary		5
Risk Factors		12
Special Note Regarding Forward-Looking Statements		26
Our Business Separation		27
Use of Proceeds		31
Dividend Policy		31
Capitalization		32
Dilution		34
Selected Combined and Consolidated Financial Data		36
Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Business		52
Management		61
Related Party Transactions		72
Principal and Selling Stockholders		79
Description of Capital Stock		83
Shares Eligible for Future Sale		87
Underwriters		89
Legal Matters		91
Experts		92
Where You Can Find Additional Information		92
Index to Financial Statements		F-1

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Until , 2002 (25 days after the commencement of this offering), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we nor the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

In this prospectus, “Celerity,” “we,” “us,” and “our” refer to Celerity Group, Inc. and our consolidated subsidiaries, which includes our operating subsidiary Kinetics Fluid Systems, Inc., and not to Kinetic Systems, Inc., Kinetics Biopharm, Inc., the underwriters or the selling stockholders. We will distribute the shares of each of Kinetic Systems and Kinetics Biopharm, which are currently our subsidiaries and which we refer to collectively as Kinetic Systems or the Kinetic Systems companies, through a dividend to our existing stockholders concurrent with the completion of this offering, as described in “Our Business Separation.” The purchase of shares of our common stock in this offering will not entitle you to this dividend. Unless otherwise indicated, all information in this prospectus assumes:


	•	the underwriters do not exercise their over-allotment option;


	•	the conversion of all outstanding shares of our Series A preferred stock into shares of our common stock; and



	•	the distribution of the shares of the Kinetic Systems companies to our existing stockholders concurrent with the completion of this offering.

In December 2001, we amended our certificate of incorporation and converted our Class A and Class B common stock into a single class of common stock. We issued all shares of our Class A and Class B common stock for the same price, and the shares of Class A and Class B common stock had identical terms except that the Class B common stock was non-voting stock. For all periods presented in this prospectus, including periods prior to December 2001, we refer to shares of our Class A and Class B common stock as “common stock” without differentiation.

PROSPECTUS SUMMARY

This summary may not contain all of the information that may be important to you. You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus, before deciding whether to buy our common stock. You should carefully consider, among other things, the matters discussed in “Risk Factors.”

CELERITY GROUP, INC.

We are a leader in the design and production of high performance gas and chemical delivery process modules that are integral to manufacturing semiconductors. We also design and manufacture advanced mass flow controllers that enable us to substantially improve the performance of our gas delivery modules. Our proprietary flow control technology enables us to deliver highly flexible and configurable solutions to our customers, which principally consist of manufacturers of semiconductor capital equipment that is used by integrated circuit, or IC, manufacturers.

Historically, these semiconductor original equipment manufacturers, or OEMs, designed, manufactured and integrated the majority of the elements used in their capital equipment products. Increasingly, OEMs are outsourcing the design and manufacturing of elements of their products to a small number of preferred suppliers. These elements, referred to as process modules, include gas delivery, chemical delivery, laser sources, power management and wafer handling. We believe the primary driver of growth in outsourcing is the desire of OEMs to leverage the expertise and resources of module suppliers, enabling OEMs to focus on providing their customers with even better solutions.

Our proprietary technology, combined with our design and manufacturing expertise as well as our advanced supply chain management and logistics, enable us to provide our customers with higher performance process modules and shorter equipment manufacturing cycle times. In addition, our global service and support organization helps to reduce equipment downtime during the IC manufacturing process. Combined, these benefits contribute to lowering costs for OEMs and IC manufacturers. Our top five OEM customers by revenues for the twelve months ended June 30, 2002 were Applied Materials, Inc., ASML Holding N.V., Axcelis Technologies, Inc., Lam Research Corporation and Novellus Systems, Inc.

Our Strategy

We are committed to being the leading supplier of high performance gas and chemical delivery process modules to the semiconductor industry. Our strong competitive position comes from delivering what we believe to be the highest performance, most cost-effective product offerings in the markets that we serve. The key elements of our strategy are to:

Continue Reshaping the Supply Chain. We intend to reduce costs by proactively managing our supply chain. We also intend to continue to make significant investments in logistics and supply chain management tools as well as enterprise systems.

Expand into New Process Modules and Adjacent Markets. We intend to offer process modules for additional elements of semiconductor capital equipment. We also believe there are significant market opportunities in related electronics and advanced technology markets.

CORPORATE HISTORY AND BUSINESS SEPARATION

Current Structure. We were incorporated in 1999 to facilitate the acquisition of Kinetics Group, Inc., or KGI, from United States Filter Corporation, or USFilter, which was then a subsidiary of Vivendi, S.A., in a management and investor led buy-out completed in August 2000, which we refer to as the 2000 Buy-Out. In the 2000 Buy-Out we acquired, and have subsequently expanded, two groups of companies that operate different businesses: (1) gas and chemical delivery process module design and manufacturing for OEMs and IC manufacturers; and (2) turnkey process systems and operating services for electronics, biotechnology and pharmaceutical manufacturers. Our process module business is conducted through our operating subsidiary Kinetics Fluid Systems, Inc., or KFS. The turnkey process systems business is conducted through our operating subsidiaries Kinetic Systems, Inc., or KSI, and Kinetics Biopharm, Inc., or KBI, which we refer to collectively as the Kinetic Systems companies or Kinetic Systems. The following diagram illustrates our corporate structure before the completion of this offering.

(CELEBRITY STOCKHOLDERS FLOW CHART)

Business Separation. Concurrent with the completion of this offering, we will distribute all of the shares of the Kinetic Systems companies through a dividend to our existing stockholders. The purchase of shares of our common stock in this offering will not entitle you to receive this dividend. Following this dividend, Kinetic Systems will no longer be a part of our company.

To effect this separation, we will undertake the following steps concurrently with the closing of this offering:



	1.	Kinetics Group will distribute all of its shares of the Kinetic Systems companies to Celerity;


	2.	Celerity will then distribute these shares to our existing stockholders in the form of a stock dividend; and


	3.	Kinetics Group will merge into Celerity, with Celerity succeeding to all the assets and liabilities of Kinetics Group by operation of law, including all right, title and interest in a $150.0 million note payable by Kinetic Systems, which we refer to as the separation note.

As a result of these steps, Celerity will directly own Kinetics Fluid Systems as shown in the following diagram.

Debt Refinancing and Repayment. Concurrent with the completion of this offering, we will repay debt that we incurred in connection with the 2000 Buy-Out and other corporate debt subsequently incurred. As of June 30, 2002, we had outstanding debt carried on our balance sheet at approximately $291.2 million, net of a discount from the face amount of this debt of $14.1 million. This debt consists of term loans and revolving lines of credit from a syndicate of banks and lending institutions as well as promissory notes payable to institutional investors and to Vivendi, through USFilter. See “Use of Proceeds.”

All of our debt will be repaid through funds received from two sources. First, KSI has obtained a commitment letter from The Bank of Nova Scotia, which expires on August 31, 2002, for a senior credit facility in the amount of $150.0 million which will be consummated upon completion of this offering. KSI will use the proceeds of this facility to repay the separation note. We will use the proceeds from the repayment of the separation note, together with approximately $172.3 million of the proceeds to us from this offering, to repay our outstanding debt, plus accrued interest through June 30, 2002 and prepayment premiums. Of the debt to be repaid, $13.1 million will be repaid upon maturity in December 2002.

Tax Treatment of the Business Separation. The separation of the Kinetic Systems companies from Celerity will be a taxable transaction, measured by the difference between the value of the Kinetic Systems companies at the time of the separation and our basis in the Kinetic Systems companies. We do not believe that the transaction will result in any corporate tax liability to us because we anticipate that our calculated basis in the Kinetic Systems companies will be greater than the fair market value of the Kinetic Systems companies. Under our tax sharing agreement with the Kinetic Systems companies, these companies will assume all tax liabilities associated with the business separation and indemnify us for any tax-related liability or loss that we might incur as a result of the separation.

For more information regarding agreements relating to and the effects of the separation of the Kinetic Systems companies from Celerity, see “Our Business Separation.”

Corporate Information. We were incorporated as Kinetics Holdings Corporation in Delaware in October 1999 and changed our name to Celerity Group, Inc. in June 2002. Our principal executive offices are located at 1463 Centre Pointe Drive, Milpitas CA 95035, and our telephone number at that address is (408) 946-3100.

Celerity, the Celerity logo, MultiFlo, FloGuard and Unit Instruments are our trademarks in the United States and other countries. All other trademarks, trade names or service marks appearing in this prospectus are the property of their respective owners.

THE OFFERING


Common stock offered by Celerity		shares

Common stock offered by selling stockholders		shares

Common stock to be outstanding after this offering		shares


Use of proceeds		We will use a portion of the net proceeds to us from this offering to repay approximately $172.3 million in outstanding debt, including accrued interest through June 30, 2002 and prepayment premiums. Of this amount, $31.1 million will be paid to an affiliate of one of our 5% or greater stockholders. We anticipate using the balance of these net proceeds for general corporate purposes and working capital requirements. We may also use a portion of these net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. See “Use of Proceeds.”


Proposed Nasdaq National Market symbol		CLRT

The number of shares of our common stock to be outstanding immediately after this offering is based on 119,316,559 shares of our common stock outstanding on June 30, 2002, and assumes the conversion of all of our outstanding preferred stock into 25,652,051 shares of our common stock upon completion of this offering.

The number of shares of our common stock that will be outstanding immediately after this offering excludes:


	•	8,333,333 shares of common stock issuable upon conversion of a $25.0 million note held by USFilter, which will become convertible in certain circumstances after August 30, 2002. We will use a portion of the net proceeds from the offering to repay this note;


	•	8,062,199 shares of common stock subject to warrants outstanding at June 30, 2002, having a weighted average exercise price of $1.77 per share, of which 4,737,308 shares are subject to warrants held by USFilter. The warrants held by USFilter are not exercisable prior to August 30, 2002 and will expire upon our repayment of notes held by USFilter with a portion of the net proceeds of this offering;



	•	4,883,734 shares of common stock subject to options outstanding at June 30, 2002 awarded to our employees under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share;



	•	6,267,637 shares of common stock subject to options outstanding at June 30, 2002 awarded to employees of Kinetic Systems under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share, 2,541,024 of which were vested as of June 30, 2002. All stock options held by employees of Kinetic Systems that are unvested as of the date of the completion of this offering will be converted into unvested stock options of Kinetic Systems;



	•	4,279,520 shares of restricted stock awarded under our 2000 Deferred Stock Plan issued to 14 individuals. On July 1, 2002, we converted these shares into options under our 2002 Stock Option Plan B to purchase an aggregate of 5,135,424 shares of common stock, each having an exercise price of $3.00 per share; and


	•	7,500,000 shares of common stock available for issuance under our 2002 Equity Incentive Plan.

The exercise price of, and, in some cases, the number of shares subject to, outstanding options and warrants will be adjusted in connection with our business separation in order to preserve the intrinsic value of

these securities. Assuming a closing price for our common stock on The Nasdaq National Market on the first trading day of $ per share, outstanding options and warrants will be adjusted as follows:


	•	of the outstanding warrants to purchase 8,062,199 shares of common stock, warrants to purchase 3,324,891 shares of common stock, each having an exercise price of $.01 per share, will convert into warrants to purchase shares of our common stock, each having an exercise price of $ per share;


	•	the 4,883,734 shares of common stock subject to options outstanding at June 30, 2002 awarded to our employees under our 2000 Stock Option Plan will convert into options to purchase shares of our common stock, each having an exercise price of $ per share;



	•	the 2,541,024 shares of common stock subject to options awarded under our 2000 Stock Option Plan held by employees of Kinetic Systems that were vested as of June 30, 2002 will convert into options to purchase shares of our common stock, each having an exercise price of $ per share; and



	•	the exercise price of the 5,135,424 shares of common stock subject to options issued under our 2002 Stock Option Plan B in substitution for the shares of restricted stock awarded under our 2000 Deferred Stock Plan will adjust from $3.00 per share to $ per share. However, the number of shares subject to these options will not adjust. See “Our Business Separation.”

SUMMARY COMBINED AND CONSOLIDATED FINANCIAL DATA

The following tables provide summary consolidated financial data and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

The combined and consolidated statements of operations data presented below have been derived from the financial statements contained in this prospectus. The combined and consolidated statement of operations data for the year ended December 31, 1999 is derived by combining the statement of operations data for the period January 1, 1999 through April 28, 1999 with the data for the period from April 29, 1999 through December 31, 1999. The combined and consolidated statement of operations data for the year ended December 31, 2000 is derived by combining the statement of operations data for the period from January 1, 2000 through August 30, 2000 with the data for the period from August 31, 2000 through December 31, 2000. The unaudited pro forma combined statements of operations data presents our results of operations, with the results of operations of Poly Concepts, Inc., for the year ended December 31, 2001 and the six months ended June 30, 2002, giving effect to the acquisition as if it had occurred as of January 1, 2001 and January 1, 2002, respectively.

We have a 52 or 53 week fiscal year which ends on the Friday nearest to the last day in December. For purposes of the disclosure in this prospectus, each of our fiscal quarters is described as having ended on the 30th or 31st, depending on the calendar month end date, and the fiscal year is described as having ended on December 31st.



															Six Months Ended
	Jan. 1, 1999			Apr. 29, 1999			Jan. 1, 2000		Aug. 31, 2000						June 30,
	Through			Through			Through		Through			Year Ended
	Apr. 28, 1999			Dec. 31, 1999			Aug. 30, 2000		Dec. 31, 2000			Dec. 31, 2001			2001			2002


	(in thousands, except per share data)
Combined and Consolidated Statements of Operations Data:
Revenues	$	31,196		$	169,932		$	294,221	$	192,353		$	194,691		$	136,715		$	91,175
Cost of goods sold		23,534			152,653			233,852		159,569			172,812			118,670			75,626

Gross margin		7,662			17,279			60,369		32,784			21,879			18,045			15,549
Total operating expenses		12,340			36,940			35,736		28,814			63,848			30,472			27,428

Income (loss) from operations		(4,678	)		(19,661	)		24,633		3,970			(41,969	)		(12,427	)		(11,879	)
Deemed non-cash dividend		—			—			—		—			—			—		$	(6,255	)
Net income (loss) applicable to common stockholders	$	(5,060	)	$	(18,337	)	$	15,146	$	(1,368	)	$	(65,048	)	$	(22,861	)	$	(25,827	)

Net loss per share; basic and diluted									$	(0.01	)	$	(0.70	)	$	(0.25	)	$	(0.28	)
Shares used in computation of basic and diluted net loss per share										92,109			93,128			93,128			93,665



	Total for			Total for					Pro Forma			Six Months Ended
	Year Ended			Year Ended					Year Ended			June 30,						Pro Forma Six
	Dec. 31,			Dec. 31,		Year Ended			Dec. 31,									Months Ended
	1999			2000		Dec. 31, 2001			2001			2001			2002			June 30, 2002


	(in thousands, except per share data)
Combined and Consolidated Statements of Operations Data:
Revenues	$	201,128		$	486,574	$	194,691		$	216,005		$	136,715		$	91,175		$	94,905
Cost of goods sold		176,187			393,421		172,812			185,896			118,670			75,626			77,930

Gross margin		24,941			93,153		21,879			30,109			18,045			15,549			16,975
Total operating expenses		49,280			64,550		63,848			70,009			30,472			27,428			28,325

Income (loss) from operations		(24,339	)		28,603		(41,969	)		(39,900	)		(12,427	)		(11,879	)		(11,350	)
Deemed non-cash dividend		—			—		—			—			—			—			(6,255	)
Net income (loss) applicable to common stockholders	$	(23,397	)	$	13,778	$	(65,048	)	$	(63,328	)	$	(22,861	)	$	(25,827	)	$	(25,327	)

Net loss per share; basic and diluted						$	(0.70	)	$	(0.68	)	$	(0.25	)	$	(0.28	)	$	(0.27	)
Shares used in computation of basic and diluted net loss per share							93,128			93,128			93,128			93,665			93,665

The following table presents our summary unaudited consolidated balance sheet data as of June 30, 2002. The pro forma for preferred stock conversion information reflects the automatic conversion of our outstanding shares of our Series A preferred stock into 25,652,051 shares of our common stock upon the completion of this offering. The pro forma as adjusted information reflects:


	•	our sale of shares of common stock in this offering, at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and our estimated offering expenses; and


	•	the use of approximately $172.3 million in net proceeds to us from this offering, and $150.0 million to be paid to us under the separation note, to repay approximately $322.3 million in outstanding debt following the completion of this offering. This debt includes accrued interest through June 30, 2002 and prepayment premiums.



	June 30, 2002

				Pro Forma
				For Preferred			Pro Forma
	Actual			Stock Conversion			As Adjusted


	(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	21,393		$	21,393		$
Working capital (deficit)⁽¹⁾		(109,330	)		(109,330	)
Total assets		401,619			401,619
Total debt⁽²⁾		291,248			291,248
Preferred stock⁽³⁾		93,305			—
Total stockholders’ equity (deficit)		(49,890	)		43,415



⁽¹⁾	Working capital includes the effect of the separation note receivable of $150.0 million and debt of $291.2 million classified as current.



⁽²⁾	Total debt excludes debt discount of $14.1 million, accrued interest of $14.2 million and prepayment premium of $2.8 million.



⁽³⁾	As required by EITF D-98, the preferred stock is not classified as part of permanent stockholders’ equity due to its liquidation provisions.

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and operating results would suffer. In this case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business operations.

Risks Related to Our Business and Industry

Our business depends on semiconductor industry capital spending, which has recently experienced an extended and severe downturn, and is characterized by periodic fluctuations that could cause a sudden and significant reduction in demand for our products.

Our business depends substantially on capital expenditures by IC manufacturers, which, in turn, depend on the demand for semiconductors. The semiconductor industry has historically been characterized by up and down business cycles, the duration and volatility of which are difficult to predict. The semiconductor industry has experienced periods of overcapacity, resulting in significantly reduced demand for the capital equipment used to manufacture semiconductors. The semiconductor industry has recently experienced an extended and severe downturn, and we cannot predict to what degree the industry will recover.

Our business is significantly impacted by the cyclical nature of the semiconductor industry. In 2001, we derived substantially all of our revenues from sales to OEMs and IC manufacturers, and we anticipate that sales to these customers will continue to account for substantially all of our revenues. Reflecting the recent industry downturn, our revenues declined from $486.6 million in 2000 to $194.7 million in 2001. We cannot assure you that our revenues and operating results will not be adversely affected in the future due to the cyclical nature of the semiconductor industry.

Our operating results are likely to continue to fluctuate, which could cause us to miss expectations about these results and would likely cause the trading price of our common stock to decline.

Our quarterly operating results have fluctuated significantly in the past and are likely to fluctuate significantly in the future based on a number of factors related to our industry and the markets for our products. If we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock would likely decline. Some of the important factors that could cause our revenues and operating results to fluctuate from period to period include:


	•	changes in customer demand for our products, which are influenced by economic conditions in the semiconductor industry and market acceptance of our products and those of our customers;

	•	the timing and size of orders placed by our customers;

	•	customer cancellations of previously placed orders and shipment delays;

	•	our product sales mix;

	•	pricing pressure from our competitors and our customers;

	•	the timing and success of new product introductions and new technologies by our competitors and us;

	•	changes in the availability and cost of raw materials, components and subassemblies;

	•	the timing and amount of expenses related to obsolescence and disposal of excess inventory;

	•	changes in the amount of our investments in research and development; and

	•	our completion of additional acquisitions and the incurrence of related integration costs.

Companies in the semiconductor capital equipment industry experience ongoing pressure to reduce costs. Our customers periodically require us to reduce prices or shorten delivery times. This could significantly impact our operating results from quarter to quarter. These changes often occur quickly and make it difficult for us to predict our revenues and operating results.

As a result of these factors, our operating results are likely to fluctuate significantly. Accordingly, we believe that period-to-period comparisons of our revenues and operating results are not necessarily meaningful and should not be relied upon as indications of future performance.

We derive a substantial portion of our revenues from a small number of OEM customers, and our revenues would likely decline significantly if any of these customers elects not to make, cancels, reduces or defers purchases of our products.

A relatively small number of OEM customers have historically accounted for a significant portion of our revenues. Our five largest OEM customers accounted for approximately 75% of our total revenues in 1999, 88% in 2000, 73% in 2001 and 78% in the six months ended June 30, 2002. We anticipate that sales of our products to a relatively small number of OEM customers will continue to account for a significant portion of our revenues. Our agreements with our customers do not contain minimum purchase commitments. As a result, these customers could cease purchasing our products with short notice to us. In some situations, our customers might be able to defer or cancel orders without any penalty, which would likely cause our revenues to decline. Because the number of OEMs in our industry is relatively small, and because many of the largest OEMs are currently our customers, if we were to lose one of these customers, or if a customer were to defer or reduce its purchases of our products, it would be difficult to replace the lost revenues. Furthermore, attempts to lessen the adverse effect of any loss, deferral or reduction in sales through the rapid addition of new customers could be difficult because prospective customers typically require lengthy qualification periods prior to placing volume orders with a new supplier.

We have derived a majority of our revenues from Applied Materials and expect that our operating results will continue to significantly depend on sales to Applied Materials.

Sales to Applied Materials accounted for approximately 66%, 78%, 64% and 72% of our revenues in 1999, 2000, 2001 and the six months ended June 30, 2002, respectively. If we were to lose Applied Materials as a customer, or if it were to significantly reduce its purchases from us, our operating results would be seriously harmed. Our sales to Applied Materials declined from $377.5 million in 2000 to $124.0 million in 2001 as a result of the severe downturn in the semiconductor industry during that period.

In May 2002, we entered into a new supply agreement with Applied Materials for the design and production of gas delivery modules for their equipment. This agreement does not require Applied Materials to make future purchases from us in any minimum amounts, or at all. In addition, Applied Materials may defer delivery of products and may, in some cases, cancel orders without penalty. Under this agreement, we are obligated to achieve price reductions and to further reduce manufacturing cycle times, as well as to make other advances in the efficiency of our manufacturing processes. If we do not perform our obligations under the agreement, Applied Materials may reduce the amount of products that it purchases from us and may have the right to recover damages from us. If we fail to any material extent to satisfy our obligations under our agreement with Applied Materials, if Applied Materials elects not to make purchases from us or if it defers or cancels orders under the agreement, our operating results would likely be seriously harmed. In addition, if satisfying our obligations under the agreement proves more costly than we have anticipated, our operating results would be materially and adversely affected.

Because we are subject to order and shipment uncertainties, any significant changes, cancellations or deferrals could cause our revenues and gross margin to decline.

Our revenues are difficult to forecast because we generally do not have a material backlog of unfilled orders and because of the short time frame within which we are often required to produce and deliver products to our customers. Most of our revenues in any quarter depend upon customer orders for our products that we

receive and fulfill in that quarter. We do not usually obtain long-term purchase orders or commitments from our customers. Instead, we work closely with our customers to develop non-binding forecasts of the future volume of orders. Customers may cancel or defer delivery of their orders, change production quantities from forecasted volumes or delay production for reasons beyond our control. Order cancellations or deferrals could cause us to hold inventory for longer than anticipated, which could reduce our gross margin, restrict our ability to fund our operations and cause us to incur unanticipated reductions or delays in revenues. In addition, because many of our costs are fixed, we could experience deterioration in our gross margin when volumes decline.

The manufacturing of our products is highly complex, and if we are not able to manufacture our products efficiently or to meet the requirements of our customers, our business and operating results would suffer.

The manufacturing of our products is a highly complex process that uses advanced equipment and software and requires effective management of our supply chain. Through the course of the manufacturing process, our OEM customers may modify module configurations in response to changes in IC manufacturers’ requirements. In order to rapidly respond to these modifications and provide our products to our customers in a timely manner, we must effectively manage our manufacturing and procurement process. If we fail to meet customer requirements, we could lose customers and our reputation could be damaged, and our business and operating results would suffer.

If OEMs do not elect to outsource gas and chemical delivery for their capital equipment in the form of process modules, our growth would be impeded.

The growth of our business depends on OEMs continuing to transition to the use of outsourced process modules for gas and chemical delivery. Although OEMs have been purchasing some elements of their capital equipment in the form of process modules for a number of years, including laser sources, power management and wafer handling, some have only recently begun outsourcing gas and chemical delivery in the form of process modules. If OEMs do not increase their outsourcing of gas and chemical delivery for their capital equipment, our growth would be impeded.


	*We must achieve design wins to retain our existing customers and to obtain new customers.*

New semiconductor capital equipment designed by OEMs typically has a lifespan of several years, and these designs frequently specify which modules, subassemblies and instruments are to be used. Once an OEM chooses these modules, subassemblies and instruments for use in a particular product, the OEM is likely to use that equipment for the life of that product. Accordingly, it is critical that our products are designed into the new equipment of OEMs, which we refer to as a design win, in order to retain existing customers and to obtain new customers. We incur significant research and development and sales expenses with no assurance that our products will ultimately be designed into an OEM’s equipment. Our operating results and potential growth would be materially and adversely affected if we fail to achieve design wins with leading OEMs. In addition, design wins do not always result in substantial revenues. We believe that OEMs often select their suppliers based on long-term relationships. Accordingly, we may have difficulty achieving design wins from OEMs that are not currently our customers.

An inability to convince IC manufacturers to specify the use of our mass flow controllers to OEMs would harm our operating results.

IC manufacturers sometimes direct OEMs to use a specified supplier’s mass flow controllers in the gas delivery module on their equipment. Accordingly, our success will depend, in part, on IC manufacturers specifying that our mass flow controllers be used in the semiconductor capital equipment that they purchase when our mass flow controllers are not already designed-in by the OEM. If IC manufacturers specify our competitors’ mass flow controllers, our operating results would be harmed.

If IC manufacturers do not implement large scale production on 300 millimeter diameter wafers, or if they implement this large scale production more slowly than expected, our operating results could suffer.

We have invested significant resources to develop products that address the market for 300 millimeter diameter wafer semiconductor equipment. If IC manufacturers do not implement large scale production on 300 millimeter diameter wafers, or if they implement this large scale production more slowly than expected, our operating results could suffer. In addition, any delay in large scale adoption of manufacturing based upon 300 millimeter diameter wafers would provide time for other companies to develop and market products that compete with ours, which could harm our competitive position.

If OEMs and IC manufacturers do not transition to module solutions for chemical blending and delivery, our operating results could suffer.

We have recently acquired Poly Concepts to expand our chemical module design and manufacturing capabilities. Historically, chemical delivery has been provided by bulk blending and distribution systems remotely located from the semiconductor capital equipment. OEMs and IC manufacturers have begun to transition chemical blending and delivery to module solutions on or adjacent to the equipment. In the event that the transition to module solutions is not widely accepted or occurs more slowly than we expect, our operating results could suffer.


	*Our inability to meet any increase in demand could reduce our market share.*

Demand shifts in the semiconductor industry are rapid and difficult to predict, and we may not be able to respond quickly enough to any increase in demand. Our ability to increase sales of our products depends, in part, upon our ability to optimize the use of our manufacturing capacity in a timely manner, to mobilize our supply chain, and, if necessary, expand our manufacturing capacity. If we are unable to respond to rapid increases in demand for our products on a timely basis or to manage any corresponding expansion of our manufacturing capacity effectively, our customers could increase their purchases from our competitors, which would reduce our market share.

If we do not keep pace with developments in the semiconductor industry, and with technological innovation generally, our products may not be competitive.

Rapid technological innovation in semiconductor manufacturing processes requires the semiconductor capital equipment industry to anticipate or respond quickly to evolving customer requirements and could render our current product offerings obsolete. We believe that our future success will depend upon our ability to develop and provide products that meet the changing needs of our customers, including the transition from the use of 200 millimeter to 300 millimeter diameter wafers, the shrinking of IC geometries and the use of new materials and processes, such as copper for interconnects and new insulating materials, such as low-k dielectrics. This requires that we successfully anticipate and respond to technological changes in manufacturing processes in a cost-effective and timely manner. Our inability to develop the technical specifications necessary for new products or enhancements to our existing products or to manufacture and ship these products or enhancements in volume in a timely manner could harm our business prospects and significantly reduce our sales. In addition, if our new products have reliability or quality problems, we may experience reduced orders, higher manufacturing costs, delays in acceptance and payment, additional service and warranty expenses and damage to our reputation. The timely development of new or enhanced products is a complex and uncertain process which requires that we:


	•	design innovative and performance-enhancing features that differentiate our products from those of our competitors;

	•	identify emerging technological trends in the semiconductor industry, including new standards for our products;

	•	accurately identify and design new products to meet market needs;

	•	collaborate with OEMs to develop these products on a timely and cost-effective basis;


	•	successfully manage development cycles;

	•	maintain effective marketing strategies; and

	•	respond effectively to technological changes or product announcements by others.

We must devote resources to research and development to keep pace with the rapidly evolving technologies used in the semiconductor manufacturing process. These innovations are inherently complex. Not only do we need the technical expertise to implement the changes necessary to keep our technologies current, we must also rely on the judgment of our management to anticipate future market trends. If we are not able to predict industry changes in a timely fashion, or if we are unable to modify our products in a timely manner, we would likely lose customers and market share.

The industry in which we participate is highly competitive and rapidly evolving, and if we are unable to compete effectively, our operating results would be harmed.

Our industry is highly competitive and rapidly evolving. We compete with a number of foreign and domestic suppliers. Our competitors are primarily public companies that compete against us either in high-purity instruments or the design and manufacturing of semiconductor capital equipment process modules. The largest subsystem and components suppliers have focused their efforts primarily on other elements of the semiconductor capital equipment process module outsourcing market, namely laser sources, power management and wafer handling, and have not competed with us in gas and chemical delivery modules. However, these suppliers could decide to compete with us at any time. When we compete for new business at OEMs that have not yet outsourced their gas and chemical delivery systems, we face competition from process module suppliers as well as the OEM’s internal engineering group.

Increased competition has in the past and could in the future result in price reductions, reduced gross margin or loss of market share, any of which would harm our operating results. To the extent that more OEMs outsource their gas and chemical delivery manufacturing operations to module suppliers, we may face increasing competitive challenges. Competitors may introduce new competitive products for the markets currently served by our products. These products may have better performance, lower prices and broader acceptance than our products. Our potential competitors may have greater name recognition, larger customer bases and greater financial, technical, manufacturing, marketing and other resources than we do. As a result, they may be able to respond more quickly to new or emerging technologies and changes in customer requirements, devote greater resources to the development, promotion, sale and support of their products, and reduce prices to increase market share. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors, particularly during the recent downturn in the semiconductor capital equipment industry. For example, Advanced Energy Industries, Inc., a power management module supplier, recently acquired Aera Japan Limited, a leading supplier of mass flow controllers. Acquisitions may provide our competitors and potential competitors with a competitive advantage over us by enabling them to expand their product offerings and service capabilities to meet a broader range of customer needs. In addition, if one of our customers acquired one of our competitors in order to develop internal solutions for gas and chemical delivery, the loss of that customer could seriously harm our business and operating results. The introduction of new technologies and new market entrants may also increase competitive pressures.

We must maintain a relatively large inventory of components and instruments to support customer delivery requirements, and if this inventory becomes obsolete and we are required to write down our inventory, our operating results would be adversely affected.

We must maintain a relatively large number of components and instruments, including conventional mass flow controllers, in our inventory to meet customer delivery requirements for our gas delivery modules. Our inventory may become obsolete as our customers cease to require these products and as we develop new process modules for our customers. In this regard, we took significant inventory impairment charges for excess and obsolete raw materials and inventory revaluation to the lower of cost or market value during the first

quarter of 2002, which adversely affected our operating results. Inventory obsolescence could seriously harm our operating results.

Defects in our products could damage our reputation, decrease market acceptance of our technology, cause the unintended release of hazardous materials and result in potentially costly litigation.

A number of factors, including design flaws, materials failures, contamination in the manufacturing environment, impurities in the materials used, unknown sensitivities to process conditions, such as temperature and humidity as well as equipment failures, may cause our products to contain undetected errors or defects. Problems with our products may:


	•	cause delays in product introductions and shipments;

	•	result in increased costs and diversion of development resources;

	•	cause us to incur increased charges due to unusable inventory;

	•	require design modifications;

	•	decrease market acceptance or customer satisfaction with these products, which could result in decreased sales and product returns; or

	•	result in lower yields for IC manufacturers.

If any of our products contain defects, or have reliability, quality or compatibility problems, our reputation might be damaged significantly and customers might be reluctant to buy our products. This could result in the loss of, or impair our ability to attract, customers. In addition, we may not find defects or failures in our products until after they are installed in an IC manufacturer’s fabrication facility. We may have to invest significant capital and other resources to correct these problems. Our current or potential customers also might seek to recover from us any losses resulting from defects or failures in our products. Hazardous materials flow through and are controlled by our products and an unintended release of these materials could result in serious injury or death. Liability claims could require us to spend significant time and money in litigation or to pay significant damages.

We have acquired a number of companies and technologies and plan to continue to evaluate acquisition opportunities, but we may not be able to integrate our acquisitions successfully or complete future acquisitions.

Since December 1998, we have acquired a number of companies and technologies. We must continue to expend significant management and financial resources to successfully integrate the companies and technologies that we acquire. Any future acquisition would likely require additional resources, including substantial attention from our management team. We may not be successful in integrating our acquired businesses or technologies and may not achieve the anticipated benefits. Our ability to manage acquisitions depends on our success in:


	•	integrating acquired operations and personnel;

	•	retaining existing customers and strategic partners of acquired companies;

	•	retaining key employees and management;

	•	maintaining effective quality controls of acquired companies;

	•	monitoring operations of acquired companies; and

	•	controlling costs and unanticipated expenses of acquired companies.

We may not be able to acquire companies or technologies that complement our present product offerings. If we identify appropriate target companies or technologies, we may not be able to afford to acquire them or may be otherwise unsuccessful in doing so due to market conditions, competition, failure to agree on terms and other circumstances. Implementation of our growth, acquisition and product enhancement strategy may be delayed or altered as these factors affect our acquisition and development decisions.

In connection with future acquisitions, we may issue equity securities, incur or assume debt, recognize substantial one-time expenses, incur unforeseen liabilities or create goodwill or other intangible assets that could result in significant future charges for impairment. Parties to whom we issue equity securities in acquisitions may seek to liquidate their ownership following an acquisition, which may lead to a decline in the market price of our common stock. The market price of our common stock may also decline upon announcement of an acquisition if investors do not view it favorably. Also, potential acquisition opportunities may be for foreign companies or for divisions of larger companies, for which cash is generally a more attractive consideration than securities. The use of cash for these acquisitions may reduce our future financial flexibility.

In order to manage future growth and our operation as a public company effectively, we need to upgrade our infrastructure, systems and financial controls. Any failure to do so may impact our ability to accurately report our financial results on a timely basis, which may result in a loss of investor confidence and could result in litigation.

In recent periods, before the semiconductor industry decline in 2001, rapid growth strained our operations and resources. We plan to increase the scope of our operations, including our global service and support, research and development and sales and marketing organizations. To accommodate this anticipated growth and effectively operate as a public company, we will be required to:


	•	improve existing, and implement new, operational and financial systems, procedures and controls; and

	•	hire, train and manage additional qualified personnel.

We may not be able to install adequate control systems in an efficient and timely manner and our current systems and personnel may not be adequate to support our operations. We have installed an Oracle management information system in all but two of the companies that we have acquired in the past three years, and we plan to continue to implement, modify and improve our systems to meet our needs. The difficulties associated with installing and implementing these new systems, procedures and controls may place a significant burden on our management and our internal resources. Our customers submit change requests throughout the manufacturing process for our process modules, and we must ensure that the appropriate information reaches our systems regarding these changes and that our systems can appropriately process this data. As we have expanded our manufacturing operations, we have found that appropriately capturing and processing all of the financial aspects of our manufacturing processes is an ongoing challenge, particularly in periods of rapid growth. If we are unable to maintain an adequate level of financial processes or controls, we may not be able to accurately report our financial performance on a timely basis, which may result in a loss of investor confidence and could result in litigation, which would likely cause our stock price to decline.

Our failure to comply with the registration requirements of section 12(g) of the Securities Exchange Act of 1934 could subject us, our officers and directors to an enforcement action brought by the Securities and Exchange Commission that could result in civil fines or criminal penalties.

Section 12(g) of the Securities Exchange Act of 1934 requires that companies having more than $10 million in assets and more than 500 holders of any class of equity security register as a reporting company under the Securities Exchange Act. We have issued stock options to more than 500 persons and, according to the Securities and Exchange Commission’s interpretation of section 12(g), were required to have registered as a reporting company on or prior to January 31, 2002. Although we will register as a reporting company under the Securities Exchange Act in connection with the completion of this offering, we have failed to so register in a timely manner. Our failure to comply with the registration requirements of section 12(g) of the Securities Exchange Act could subject us, our officers and directors to an enforcement action brought by the Securities and Exchange Commission. If this were to occur, the Securities and Exchange Commission could impose civil fines against us or our officers and directors and criminal penalties against us or our officers and directors if it determines that we willfully violated the Securities Exchange Act, any of which could distract our management from the operation of our business, cause us to be perceived adversely by the investment community or cause our stock price to decline significantly. In addition, the Securities and Exchange Commission could require us to prepare and file all periodic reports that we would have been required to file as

a reporting company had we timely registered under the Securities Exchange Act on or prior to January 31, 2002. Preparing and filing these reports would be costly and time-consuming, and could distract our management from the operation of our business, which could negatively impact our business.

We may be subject to claims of infringement of other parties’ proprietary rights, or to claims that our intellectual property rights are invalid, which could result in significant expense and loss of intellectual property rights.

We may receive claims that we are infringing third parties’ intellectual property rights. We may also receive claims that our patents or other intellectual property rights are invalid. Our industry is characterized by uncertain and conflicting intellectual property claims and vigorous protection and pursuit of these rights. The resolution of any claims of this nature, with or without merit, could be time consuming, result in costly litigation or cause product shipment delays. In the event of an adverse ruling, we might be required to discontinue the use of certain processes, cease the manufacture and sale of infringing products, expend significant resources to develop non-infringing technology or enter into royalty or licensing agreements. Royalty or licensing agreements, if required, might not be available on terms acceptable to us or at all. The loss of access to any of our intellectual property could harm our business.

In the process of designing and manufacturing products for our customers, we frequently obtain access to intellectual property relating to their products and manufacturing processes. Similarly, they may be provided with access to intellectual property owned by us. In addition, in working with our customers, we may develop new intellectual property that may have application not only to the processes undertaken for that customer but other customers as well. It is possible that we or our customers may determine or allege that the other has misused intellectual property that is shared between us, and we may disagree with them about the ownership of new intellectual property that we develop. Any such disputes could harm our relations with our customers and impair our ability to use intellectual property that would be valuable to other customers, as well as subject us to the other risks associated with intellectual property disputes.

If we fail to protect our proprietary rights, our competitors may gain access to our technology, which could adversely affect our ability to compete successfully in our markets and harm our operating results.

We believe that our success depends, in part, upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual procedures with employees and third parties to protect our proprietary rights. If we fail to adequately protect our proprietary rights, our competitors may gain access to our technology. Furthermore, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of many foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. As a result, our competitors might offer similar products, which could adversely affect our ability to compete successfully in our market. We also cannot assure you that:


	•	our means of protecting our proprietary rights will be adequate;

	•	patents will be issued from our currently pending or future applications;

	•	our existing patents or any new patents will be sufficient in scope or strength to provide any meaningful protection or commercial advantage to us;

	•	any patent or registered trademark owned by us will not be invalidated, circumvented or challenged in the United States or foreign countries;

	•	others will not misappropriate our proprietary technologies or independently develop similar technology, duplicate our products or design around any of our patents or our other intellectual property rights; or

	•	competitors will not be issued patents that would impede our ability to compete with them.

We may be required to spend significant resources to monitor and protect our intellectual property rights. We may initiate claims or litigation against third parties for infringement of our proprietary rights to establish

the validity of our proprietary rights. This litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.

We depend upon a limited number of suppliers for some of the components, subassemblies and raw materials used in the manufacturing of our products, which could result in increased costs or delays in the manufacture and sale of our products.

We rely on outside suppliers to deliver and manufacture some of the components, subassemblies and raw materials used in the manufacturing of our products. We obtain some of these components, subassemblies and raw materials from a limited number of suppliers. Some of these suppliers are also our competitors. Because of our reliance on outside suppliers generally, and a limited number of suppliers in some cases, we may be unable to obtain an adequate supply of required components, subassemblies and raw materials on a timely basis or at a price and on other terms acceptable to us, or at all. Any shortages of required components, subassemblies or raw materials could affect our ability to meet our customers’ needs, which would damage our reputation and could result in the loss of market share or adversely affect our operating results.

Our international operations subject us to operational, financial and political risks.

We maintain facilities in Ireland, Singapore and South Korea to support our manufacturing and sales and support operations. In addition, we provide service and support through authorized representatives located in Germany, Japan, the People’s Republic of China and Taiwan. As we increase our international operations, we will be subject to risks and challenges that we would not otherwise face if we conducted our business only in the United States. These include:


	•	compliance with a wide variety of laws and regulations, including taxes, tariffs, quotas, export controls, export licenses and other trade barriers;

	•	effectively monitoring geographically dispersed operations;

	•	political and economic instability in, or foreign conflicts involving, the countries in which we and our customers are located, causing delays or reductions in orders for our products;

	•	difficulties in staffing, managing and training personnel and representatives in foreign countries;

	•	reduced protection for intellectual property rights in some countries, particularly in Asia;

	•	currency exchange rate fluctuations, which could increase the price of our products in local currencies; and

	•	transportation disruptions.

Any of these factors could harm our existing international operations and business or impair our ability to continue expanding into international markets.

We are subject to a variety of environmental laws and regulations that could cause us to incur significant expenses and may result in costly litigation.

We are subject to a variety of federal, state, local and foreign environmental laws and regulations relating to the storage, use, discharge, disposal, clean-up of, and human exposure to, hazardous materials. Our operations generate and use materials that are considered hazardous under applicable laws and regulations. Compliance with these or future laws or regulations subjects us to substantial costs and associated risks and penalties for non-compliance. We cannot assure you that violations of these laws and regulations will not occur in the future as a result of our inability to obtain permits, human error, accidents, equipment failure or other causes. If we fail to comply with any present or future laws or regulations, we could be subject to future liabilities or prohibited from selling our products, which would harm our financial condition and operating results.

Past violations of environmental laws and regulations have occurred in facilities currently or formerly operated by Kinetic Systems that could subject us to enforcement action, penalties and other liabilities. For example, we spent approximately $100,000 to obtain air and storm water permits and conduct voluntary

remediation of oil saturated soil at the Burleson, Texas facility operated by a subsidiary of Kinetic Systems, which we acquired in connection with the purchase of this subsidiary. In addition, we may be liable for the remediation of sites where hazardous materials, including those of acquired companies, have been disposed. The process of remediating contamination in soil and groundwater is costly, and could affect our future results of operations. In addition, any contamination could migrate offsite, and any resulting personal injuries or property damage could subject us to costly and time-consuming litigation and resulting liabilities. We have entered into a separation agreement with the Kinetic Systems companies that provides that they would indemnify us in the event we are required to pay damages resulting from violations of environmental laws and regulations that occurred at facilities currently or formerly operated by them. However, Kinetic Systems may not fulfill its obligation to indemnify us for any damages or may not have the financial resources to do so.

Our business depends on the continued service of key management and technical personnel on whose knowledge, leadership and technical expertise we rely.

Our success depends heavily upon the continued contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. In particular, we depend upon the continued service of our Chairman and Chief Executive Officer, David J. Shimmon, who is also the Chairman and Chief Executive Officer of each of the Kinetic Systems companies. Several of these personnel have been with us for a number of years. All of our executive officers and key personnel are employees at-will. We have no employment contracts with our executive officers and key personnel that contractually commit them to remain in our employ for any period of time, and we do not maintain key person insurance on any of our personnel. In the future, we may need technical personnel experienced in competencies that we do not currently require. Competition for these employees may be intense, and we may not be successful in attracting or retaining these personnel. The loss of any key employee, the failure of any key employee to perform in his or her current position or our inability to attract and retain skilled employees as needed could impair our ability to meet customer and technological demands.

We may require additional capital to support business growth, and this capital may not be available on terms satisfactory to us or at all.

We intend to continue to make investments to support business growth and may require additional funds to respond to business challenges, which include the need to develop new products or enhance existing products, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to secure additional funds through the issuance of equity or debt securities. Equity and debt financing, however, may not be available when needed or, if available, may not be available on terms satisfactory to us. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to grow and to respond to business challenges could be significantly limited.

Earthquakes or other disasters may damage our facilities or the facilities of our suppliers, which could result in manufacturing and shipping delays, which could damage our relationships with our customers.

Our corporate headquarters, some of our manufacturing facilities and many of our suppliers are located in seismically active areas that have experienced earthquakes in the past. For example, we manufacture most of our mass flow controllers at our Yorba Linda, California facility. If an earthquake or other disaster damaged this facility or a facility of one of our suppliers, it could result in manufacturing and shipping delays, which could damage our relationships with our customers. If this were to occur, our operating results could be harmed.

Risks Related to Our Business Separation


	*Potential corporate tax liabilities could negatively affect our financial results.*

The separation of the Kinetic Systems companies from Celerity will be a taxable transaction, measured by the difference between the value of the Kinetic Systems companies at the time of the separation and our basis in the Kinetic Systems companies. We do not believe the transaction will result in any corporate tax

liability to us because we anticipate that our calculated basis in the Kinetic Systems companies will be greater than the fair market value of the Kinetic Systems companies. However, the taxing authorities may disagree with our determination of either the tax basis of the Kinetic Systems companies or the valuation of the Kinetic Systems companies, in which case we could be assessed tax in connection with the reorganization. If the taxing authorities subsequently determine that we should have paid corporate tax as a result of the separation of the Kinetic Systems companies, the taxing authorities may require us to pay tax, interest and penalties, which could adversely affect our financial results. We have entered into a tax sharing agreement with the Kinetic Systems companies which provides that they will indemnify us for any tax liability, including interest and penalties, arising as a result of the separation and for other specific tax liabilities. However, the Kinetic Systems companies might not fulfill their obligation to indemnify us or might not have the financial resources at the time of such a tax assessment to satisfy any required indemnification obligations.

Our historical financial information may not be representative of our results as a stand-alone company and, therefore, may not be reliable as an indicator of our historical or future results.

Concurrent with the completion of this offering, we will distribute shares of the Kinetic Systems companies to our stockholders as a dividend. The historical financial information that we have included in this prospectus, which does not include the results of the Kinetic Systems companies, has been derived from financial statements that consolidated the results of Celerity and the Kinetic Systems companies and may not be indicative of our financial position, operating results, changes in stockholders’ net investment or cash flows in the future. It is also not necessarily indicative of what our financial position, results of operation or cash flows would have been had we been a stand-alone entity for the periods presented. Our historical combined financial statements reflect allocations, primarily with respect to legal, tax, treasury and centralized accounting functions as well as general corporate infrastructure expenses. These allocations may be less than the actual expenses we will incur in the future as a stand-alone company. Our historical combined financial statements do not reflect the significant changes that we expect to occur in the future as a result of our business separation, this offering and the distribution, including changes in how we fund our operations, conduct tax planning and manage employee matters. Following our separation, we expect to incur incremental operating costs and expenses associated with increased marketing expenses related to establishing a new brand identity.

Our business separation may expose us to litigation risks, and if the Kinetic Systems companies breach their obligations under our separation agreements, our financial and operating results could be impaired.

In connection with our business separation, we may be subject to legal claims stemming from our previous status as the parent corporation of the Kinetic Systems companies. Under our separation agreement with the Kinetic Systems companies, the Kinetic Systems companies and we will agree to indemnify each other for the liabilities owed or otherwise assumed by each of us pursuant to the separation. We cannot assure you that the Kinetic Systems companies will be capable of honoring their obligations. If the Kinetic Systems companies breach their obligations to us, or pursue an indemnification claim against us, our financial condition and operating results could be materially and adversely affected.

The transitional services agreements among the Kinetic Systems companies and us were made in the context of an affiliate relationship, and we may not be able to replace the services we will receive from the Kinetic Systems companies in a timely manner or on as favorable terms as we will receive from the Kinetic Systems companies.

The Kinetic Systems companies have agreed to provide transitional services to us, including tax and risk management and insurance. Although the Kinetic Systems companies are contractually obligated to provide us with these services, these services may not be provided at the same level as when we were part of the same corporate organization, and we may not be able to obtain the same benefits. After the expiration of the management services agreement, we may not be able to replace the transitional services in a timely manner or on terms and conditions, including cost, as favorable as those we will receive from the Kinetic Systems companies. The management services agreement was made in the context of an affiliate relationship and was

negotiated in the overall context of our business separation. The prices charged to us under this agreement may be lower than the prices that we may be required to pay third parties for similar services or the costs of similar services if we were to undertake them ourselves.

Several members of our board of directors, including our Chairman and Chief Executive Officer, may face conflicts of interest in connection with and following our business separation.

Many members of our board of directors, including Messrs. Austrian, Ayres, Behrman, Mandaric, Schiff and Shimmon, will be members of the board of directors of each of the Kinetic Systems companies following this offering. In addition, Mr. Shimmon will be the Chairman and Chief Executive Officer of each of the Kinetic Systems companies. These responsibilities may create conflicts of interest in dealing with decisions that have different implications for our company and Kinetic Systems. These conflicts of interest may occur in matters related to our business separation, including indemnification with respect to taxes and other matters governed by our separation agreement with Kinetic Systems and support services among us and Kinetic Systems pursuant to our management services agreement.

Risks Related to this Offering

The trading price of our common stock is likely to be volatile, and you may not be able to sell your shares at or above the initial public offering price.

The trading prices of securities of technology companies have been highly volatile. Accordingly, the trading price of our common stock is likely to be subject to wide fluctuations. Factors that are likely to affect the trading price of our common stock include:


	•	market conditions in the semiconductor and the semiconductor capital equipment industries and the economy as a whole;

	•	variations in our operating results;

	•	announcements of technological innovations, new products or product enhancements, strategic alliances, acquisitions or significant agreements by us or by our competitors;

	•	departure of key personnel;

	•	the gain or loss of significant orders or customers; and

	•	changes in the estimates of our operating performance or changes in recommendations by any securities analysts who publish research regarding our common stock.

In addition, if the market for technology stocks or the stock market in general experiences a continued or greater loss in investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, operating results and financial condition. The trading price of our common stock also may decline in reaction to events that affect other companies in our industry, even if these events do not directly affect us. General political or economic conditions, such as a recession or fluctuations in interest and currency rates, could also cause the trading price of our common stock to decline.

There has been no prior market for our common stock and a public market for our stock may not develop or be sustained, which could make it more difficult for you to sell your stock.

Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering, and the market price might fall below the initial public offering price. The initial public offering price may bear no relationship to the price at which the common stock will trade subsequent to the completion of this offering. The initial public offering price will be determined based on negotiations between us and the representatives of the underwriters, based on factors that may not be indicative of future market performance.

Our executive officers, directors and principal stockholders will have substantial control over our business operations and stockholder actions, and their affiliation with Kinetic Systems could result in conflicts of interest.

After completion of the offering, our executive officers, directors and principal stockholders, in the aggregate, will beneficially own approximately % of the outstanding shares of our common stock, or % if the underwriters fully exercise their over-allotment option. DB Capital Investors, L.P., or DB Capital, one of our 5% or greater stockholders, has appointed Messrs. Austrian, Ayres, Mandaric, Schiff and Virtue to our board of directors, with Messrs. Ayres, Schiff and Virtue being affiliated with DB Capital. Behrman Capital III, L.P., or Behrman Capital, one of our 5% or greater stockholders, has appointed Messrs. Behrman, Chiate and Matthes to our board of directors, each of whom is affiliated with Behrman Capital. Gryphon Partners II, L.P., or Gryphon Partners, one of our 5% or greater stockholders, has appointed Mr. Andrews to our board of directors, who is affiliated with Gryphon Partners. As a result, Messrs. Austrian and Mandaric, in addition to an independent director to be appointed to our board of directors following the completion of this offering, will be our only directors who are not one of our employees or affiliated with one of our 5% or greater stockholders.

If our executive officers, directors and principal stockholders act together, they will have control over our business, policies and affairs. This voting control will enable them, among other things, to:


	•	elect our entire board of directors and, as a result, control matters requiring board approval, such as the appointment of management; and

	•	control matters submitted to a stockholder vote, including amendments to our certificate of incorporation, mergers and consolidations with third parties and the sale of all or substantially all of our assets.

In addition, these persons own substantially all of the Kinetic Systems companies, which could result in conflicts of interest. For example, they will have the power to alter the terms of our separation agreements with the Kinetic Systems companies and us. The Kinetic Systems companies may pursue business opportunities that may be of interest to us or these persons may interpret indemnification obligations among the Kinetic Systems companies and us in a manner adverse to us. The interests of our executive officers, directors and principal stockholders may differ from your interests or the interests of other stockholders. Investors in this offering will likely not be able to affect the outcome of any stockholder vote so long as our executive officers, directors and principal stockholders control a majority of our common stock.


	*Future sales of shares by existing stockholders could cause our stock price to decline.*

If our existing stockholders sell, or are perceived to sell, substantial amounts of our common stock in the public market following this offering, the trading price of our common stock could decline. Based on shares outstanding as of June 30, 2002, upon completion of this offering, we will have outstanding approximately shares of common stock. Of these shares, all of the shares of common stock sold in this offering will be freely tradable, without restriction, in the public market. After the lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus, an additional 113,371,206 shares will be eligible for sale in the public market, 95,577,193 of which are held by directors, executive officers and other affiliates, and are subject to volume limitations under Rule 144 of the Securities Act and various vesting agreements. In addition, all of the shares subject to options held by our employees, vested options held by employees of Kinetic Systems, options to purchase our common stock to be issued in substitution for restricted stock and warrants outstanding as of June 30, 2002 and the 7,500,000 shares reserved for future issuance under our 2002 Equity Incentive Plan and the 8,333,333 shares of our common stock issuable in certain circumstances after August 30, 2002 under an outstanding promissory note will become eligible for sale in the public market to the extent permitted by the provisions of applicable vesting agreements, conversion provisions, the lock-up agreements and Rules 144 and 701 under the Securities Act. Of the shares subject to outstanding options, approximately 2.0 million shares held by non-senior management personnel of Celerity and the Kinetic Systems companies are not subject to lock-up agreements and will be freely tradeable upon exercise. Morgan Stanley, on behalf of the underwriters, may also, in its sole discretion, permit our officers, directors and current

stockholders to sell shares prior to the expiration of the lock-up agreements. See “Shares Eligible for Future Sale” for more information regarding shares of our common stock that may be sold by existing stockholders after the closing of this offering.

You will experience immediate and substantial dilution in the net tangible book value of the shares you purchase in this offering.

The initial public offering price of our common stock will be substantially higher than the book value per share of the outstanding common stock after this offering. Therefore, based on an assumed initial public offering price of $ per share, if you purchase our common stock in this offering, you will suffer immediate and substantial dilution of approximately $ per share. If outstanding options and warrants to purchase our common stock are exercised, you will experience additional dilution.

Provisions of our certificate of incorporation and bylaws or Delaware law may discourage, delay or prevent a
change of control of our company or changes in our management and therefore depress the trading price of our
common stock.

Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could discourage, delay or prevent a change in control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:


	•	establish a classified board of directors so that not all members of our board may be elected at one time;

	•	authorize the issuance of “blank check” preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt;

	•	eliminate the ability of our stockholders to call special meetings of stockholders;

	•	eliminate cumulative voting in the election of directors, which would allow less than a majority of our stockholders to elect director candidates; and

	•	establish advance notice requirements for nominations for election to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law may discourage, delay or prevent a change in control of our company. For a further description of these anti-takeover provisions, see “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws.”

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under the captions “Prospectus Summary,” “Risk Factors,” “Our Business Separation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative or plural of these words and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, include, among other things, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business and the markets in which we operate. These statements are only predictions based on our current expectations and projections about future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled “Risk Factors.” You should specifically consider the numerous risks outlined under “Risk Factors.” We are under no duty to update any forward-looking statement after the date of this prospectus to conform these statements to actual future results.

OUR BUSINESS SEPARATION

Overview

Current Structure. We were incorporated in 1999 to facilitate the acquisition of KGI from USFilter, which was then a subsidiary of Vivendi, S.A., in the 2000 Buy-Out. In connection with and following the 2000 Buy-Out we acquired, and have subsequently expanded, two groups of companies that operate different businesses: (1) gas and chemical delivery process module design and manufacturing for OEMs and IC manufacturers; and (2) turnkey process systems and operating services for electronics, biotechnology and pharmaceutical manufacturers. Our process module business is conducted through our operating subsidiary KFS. The turnkey process systems business is conducted through the Kinetic Systems companies. The following diagram illustrates our corporate structure before the completion of this offering.

(CELEBRITY STOCKHOLDERS FLOW CHART)

The following table indicates the sources of funds for the 2000 Buy-Out and the uses of funds in that transaction (in thousands):


Sources of Funds:
	Equity	$	275,000
	Term Loan		150,000
	Subordinated Debt		70,000
	Cash on Balance Sheet		15,000

		$	510,000

Uses of Funds:
	USFilter	$	254,000
	USFilter Intercompany Debt Obligation		229,973
	Expenses and Fees		26,027

		$	510,000

In addition, we issued junior notes with an aggregate principal amount of $50.0 million to USFilter, bringing the total consideration paid to $304.0 million.

To effect this separation, we will undertake the following steps concurrently with the closing of this offering:



	1.	Kinetics Group will distribute all of its shares of the Kinetic Systems companies to Celerity;


	2.	Celerity will then distribute these shares to our existing stockholders in the form of a stock dividend; and


	3.	Kinetics Group will merge into Celerity, with Celerity succeeding to all the assets and liabilities of Kinetics Group by operation of law, including all right, title and interest in a $150.0 million note payable by Kinetics Systems, which we refer to as the separation note.

As a result of these steps, Celerity will directly own Kinetics Fluid Systems as shown in the following diagram.

(KINETICS LLC MEMBERS FLOW CHART)

assume all tax liabilities associated with the business separation and indemnify us for any tax-related liability or loss that we might incur as a result of the separation.

Agreements Related to our Business Separation

As part of our business separation, we will be entering into the following agreements with the Kinetic Systems companies:


	•	A separation agreement will govern the separation of the Kinetic Systems companies from our business, and provides that we and the Kinetic Systems companies will indemnify each other for specific liabilities;

	•	A management services agreement under which the Kinetic Systems companies and we will provide certain administrative and corporate support services to one another on an interim or transitional basis following the completion of the offering;

	•	A tax sharing agreement allocating responsibilities for tax matters among the Kinetic Systems companies and us, including indemnification obligations resulting from the business separation and for other specific tax liabilities;

	•	A trademark license agreement under which we will license some of our trademarks to the Kinetic Systems companies;

	•	A confidential disclosure agreement under which each of the Kinetic Systems companies and we will agree to hold certain information confidential for either five years or indefinitely, depending upon the sensitivity of the information; and

	•	An employee matters agreement under which we allocate among us and each of the Kinetic Systems companies the responsibilities relating to benefit plans for our current and former employees.

For a more complete description of these agreements, please see “Related Party Transactions— Agreements Related to Our Business Separation.”

Treatment of Outstanding Options and Warrants

In connection with the separation of the Kinetic Systems companies from our company, employees of the Kinetic Systems companies will be entitled to exercise their options to purchase shares of our common stock that are vested as of the date of the completion of this offering until the option grants expire under their original terms, which is ten years from the date of grant. In order to preserve the intrinsic value of outstanding vested stock options held by Kinetic Systems employees, we will adjust the number of stock options by dividing the number of shares purchasable under these outstanding vested options by a conversion ratio determined on the first trading day of our common stock on The Nasdaq National Market and adjust the exercise price by multiplying the original exercise price per share of each vested option by the same ratio. This conversion ratio will be determined by dividing the closing price of our common stock on The Nasdaq National Market on the first trading day by the sum of the closing price plus the per share value of the shares of the Kinetic Systems companies distributed to our stockholders. The exercise price of, and number of shares subject to, all vested and unvested outstanding stock options held by employees who will remain with Celerity following the completion of our business separation will be adjusted according to the same formula in the same manner as described above. All stock options held by employees of Kinetic Systems that are unvested as of the date of the completion of this offering will be converted into unvested stock options of Kinetic Systems.

Assuming a closing price for our common stock on The Nasdaq National Market on the first trading day of $ per share, outstanding options will be adjusted as follows:



	•	the 4,883,734 shares of common stock subject to options outstanding at June 30, 2002 awarded to our employees under our 2000 Stock Option Plan would convert into options to purchase shares of our common stock, each having an exercise price of $ per share;



	•	the 2,541,024 shares of common stock subject to options awarded to employees of Kinetic Systems under our 2000 Stock Option Plan that were vested as of June 30, 2002 would convert into options to purchase shares of our common stock, each having an exercise price of $ per share; and



	•	the exercise price of the 5,135,424 shares of common stock subject to options issued under our 2002 Stock Option Plan B in substitution for the shares of restricted stock awarded under our 2000 Deferred Stock Plan will adjust from $3.00 per share to $ per share. However, the number of shares subject to these options will not adjust.

Pursuant to the terms of outstanding warrants to purchase 3,324,891 shares of our common stock, we will divide the number of shares subject to these outstanding warrants by a ratio equal to (1) the overall value of our company prior to the distribution less (2) the value of the shares of the Kinetic Systems companies distributed to our stockholders, divided by the overall value of our company prior to the distribution, and multiply the exercise price per share of the warrant by the same ratio. Assuming a closing price for our common stock on The Nasdaq National Market on the first trading day of $ per share, these warrants to purchase 3,324,891 shares of common stock, each having an exercise price of $.01 per share, will convert into warrants to purchase shares of our common stock, each having an exercise price of $ .

The exercise price of, and number of shares subject to, warrants to purchase 4,737,308 shares of common stock held by USFilter, each having an exercise price of $3.00 per share, will not adjust as a result of our business separation. USFilter cannot exercise these warrants prior to August 30, 2002. We will use a portion of the net proceeds to us from this offering to repay outstanding notes held by USFilter, including the convertible note, and upon this repayment, the warrants held by USFilter will expire pursuant to their terms.

See “Management—Employee Benefit Plans and Option Grants” and “Description of Capital Stock” for further detail regarding the treatment of outstanding stock options and warrants.

USE OF PROCEEDS

We estimate that our net proceeds from this offering will be approximately $ million, at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

The principal purposes of this offering are to repay outstanding debt, obtain additional capital, establish a public market for our common stock and facilitate our future access to public capital markets. We intend to use approximately $172.3 million from this offering, and $150.0 million to be paid to us by KSI in satisfaction of the separation note, to repay approximately $322.3 million in outstanding debt, including accrued interest through June 30, 2002 and prepayment premiums. Of this debt, $31.1 million will be repaid at the completion of this offering to Deutsche Bank AG, an affiliate of DB Capital, one of our 5% or greater stockholders. In addition, of the debt to be repaid, $13.1 million will be repaid upon maturity in December 2002. Our total debt is comprised of the following (in thousands):


									Accrued
									Interest
									and
					Carrying Value		Face		Prepayment
Debt Instrument	Interest Rate		Maturity Date		at June 30, 2002		Value		Premiums		Total

Term Loan		LIBOR plus 4.00%		December 31, 2005	$	111,375	$	111,375	$	566	$	111,941
Revolving Line of Credit		LIBOR plus 3.50%		February 28, 2006		60,300		60,300		209		60,509
12.50% Senior Notes		12.50%		August 25, 2006		62,431		70,000		4,959		74,959
11.75% Junior Notes		11.75%		August 30, 2006		44,168		50,000		10,885		60,885
Other						12,974		13,638		346		13,984

Total					$	291,248	$	305,313	$	16,965	$	322,278

We anticipate using the balance of the net proceeds to us from this offering for general corporate purposes and working capital requirements. We may also use a portion of these net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. Currently, there are no commitments or agreements regarding any such investments or acquisitions. Pending their ultimate use, we intend to invest the net proceeds to us from this offering in short-term, interest-bearing, investment grade securities.

Other than the repayment of the $172.3 million in debt and the payment of related expenses, the amount and timing of how we actually spend the net proceeds to us from this offering may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in the section entitled “Risk Factors.” Therefore, we will have broad discretion in the way we use the net proceeds.

DIVIDEND POLICY

Other than as described in the section entitled “Our Business Separation,” we have never declared or paid any dividends on our capital stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will depend on our results of operations, financial condition, contractual and legal restrictions and other factors the board deems relevant.

CAPITALIZATION

The following table shows our capitalization as of June 30, 2002. Our capitalization is presented (1) on an actual basis, (2) on a pro forma for preferred stock conversion basis to reflect the automatic conversion of our outstanding shares of our Series A preferred stock into 25,652,051 shares of our common stock upon the closing of this offering and (3) on a pro forma as adjusted basis to reflect the sale of shares of our common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the use of approximately $172.3 million in net proceeds from the offering, and $150.0 million to be paid to us under the separation note, to repay approximately $322.3 million in outstanding debt, including accrued interest through June 30, 2002 and prepayment premiums, following the completion of this offering.



		June 30, 2002

					Pro Forma
					For Preferred			Pro Forma
		Actual			Stock Conversion			As Adjusted


		(unaudited)
		(in thousands, except share and
		per share data)
Total debt		$	291,248		$	291,248		$
Redeemable convertible preferred stock, $.01 par value; 50,000,000 shares authorized, 25,652,051 shares issued and outstanding, actual; 50,000,000 shares authorized, no shares issued and outstanding pro forma; 5,000,000 shares authorized, no shares issued and outstanding, pro forma as adjusted			93,305			—
Stockholders’ equity:
Common stock, $.01 par value; 250,000,000 shares authorized, 93,664,508 shares issued and outstanding, actual, 119,316,559 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted			937			1,193
Additional paid-in capital			127,445			220,494
Advances to Kinetic Systems			(76,744	)		(76,744	)
Stockholder note receivable			(4,000	)		(4,000	)
Deferred stock-based compensation			(2,422	)		(2,422	)
Accumulated deficit			(92,243	)		(92,243	)
Accumulated other comprehensive loss			(2,863	)		(2,863	)

	Total stockholders’ equity (deficit)		(49,890	)		43,415

	Total capitalization	$	334,663		$	334,663		$

The number of shares of our common stock shown as issued and outstanding in the table above excludes:


	•	8,333,333 shares of common stock issuable upon conversion of a $25.0 million note held by USFilter, which will become convertible into our common stock in certain circumstances after August 30, 2002;


	•	8,062,199 shares of common stock subject to warrants outstanding at June 30, 2002, having a weighted average exercise price of $1.77 per share;



	•	4,883,734 shares of common stock subject to options outstanding at June 30, 2002, awarded to our employees under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share;



	•	6,267,637 shares of common stock subject to options awarded to employees of Kinetic Systems under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share, 2,541,024 of which were vested as of June 30, 2002. All stock options held by employees of Kinetic Systems that are unvested as of the date of the completion of this offering will be converted into unvested stock options of Kinetic Systems;



	•	4,279,520 shares of restricted stock outstanding at June 30, 2002 awarded under our 2000 Deferred Stock Plan issued to 14 individuals. On July 1, 2002, we converted these shares into options under our 2002 Stock Option Plan B to purchase an aggregate of 5,135,424 shares of our common stock, each having an exercise price of $3.00 per share; and


	•	7,500,000 shares of common stock available for issuance under our 2002 Equity Incentive Plan.

Please read the capitalization table together with the sections of this prospectus entitled “Selected Combined and Consolidated Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

DILUTION

Our pro forma net tangible book value as of June 30, 2002 was approximately $ million, or $ per share of our common stock. Our pro forma net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on June 30, 2002 and reflects the automatic conversion of our outstanding shares of Series A preferred stock into 25,652,051 shares of our common stock upon the completion of this offering.

Without taking into account any changes in pro forma net tangible book value after June 30, 2002, other than to give effect to the sale of shares of our common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2002 would have been approximately $ million, or $ per share of our common stock. This amount represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors purchasing shares in this offering. The following table illustrates the dilution in pro forma net tangible book value per share to new investors.


Assumed initial public offering price per share				$
	Pro forma net tangible book value per share as of June 30, 2002	(0.76	)
	Increase per share attributable to new investors

Pro forma net tangible book value per share after this offering

Dilution in pro forma net tangible book value per share to new investors				$

The following table summarizes, as of June 30, 2002 on the pro forma basis described above, the number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In order to give effect to our business separation, the total consideration paid to us, and the average price per share paid to us, by existing stockholders has been calculated by multiplying the aggregate consideration paid for our common stock by our existing stockholders by a fraction. The numerator of this fraction is $ , the assumed initial public offering price per share, and the denominator is the sum of $ plus the per share value of the shares of the Kinetic Systems companies distributed to our stockholders.



						Total
		Shares Purchased				Consideration
										Average Price
		Number	Percent			Amount	Percent			Per Share

Existing stockholders					%	$			%	$
New investors

	Total			100.0	%			100.0	%

The above information excludes:


	•	8,333,333 shares of common stock issuable upon conversion of a $25.0 million note held by USFilter, which will become convertible into our common stock in certain circumstances after August 30, 2002;


	•	8,062,199 shares of common stock subject to warrants outstanding at June 30, 2002, having a weighted average exercise price of $1.77 per share;



	•	4,883,734 shares of common stock subject to options outstanding at June 30, 2002 awarded to our employees under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share;



	•	6,267,637 shares of common stock subject to options outstanding at June 30, 2002 awarded to employees of Kinetic Systems under our 2000 Stock Option Plan, each having an exercise price of $3.00 per share, 2,541,024 of which were vested as of June 30, 2002. All stock options held by employees of Kinetic Systems that are unvested as of the date of the completion of this offering will be converted into unvested stock options of Kinetic Systems;



	•	4,279,520 shares of restricted stock outstanding at June 30, 2002 awarded under our 2000 Deferred Stock Plan issued to 14 individuals. On July 1, 2002, we converted these shares into options under our 2002 Stock Option Plan B to purchase an aggregate of 5,135,424 shares of our common stock, each having an exercise price of $3.00 per share; and


	•	7,500,000 shares of common stock available for issuance under our 2002 Equity Incentive Plan.

If all of the options and warrants to purchase our common stock outstanding at June 30, 2002, including the options to purchase shares of our common stock issued under our 2002 Stock Option Plan B on July 1, 2002 were exercised, the pro forma net tangible book value as of June 30, 2002 would have been $ million and the pro forma net tangible book value would have been $ per share, causing dilution to new investors of $ .

SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA

The selected combined and consolidated financial data should be read in conjunction with, and is qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined and consolidated financial statements and the related notes appearing elsewhere in this prospectus. The combined and consolidated statement of operations data for each of the periods in the three years ended December 31, 2001 and the consolidated balance sheet data as of December 31, 2000 and 2001 are derived from our audited combined and consolidated financial statements appearing elsewhere in this prospectus. The combined and consolidated statement of operations data for the year ended December 31, 1999 is derived by combining the statement of operations data for the period January 1, 1999 through April 28, 1999 with the data for the period from April 29, 1999 through December 31, 1999. The combined and consolidated statement of operations data for the year ended December 31, 2000 is derived by combining the statement of operations data for the period from January 1, 2000 through August 30, 2000 with the data for the period from August 31, 2000 through December 31, 2000. The combined statements of operations data for the years ended December 31, 1997 and 1998, and the combined balance sheet data as of December 31, 1997, are derived from our unaudited consolidated financial statements not appearing in this prospectus. The combined balance sheet data as of December 31, 1998 and 1999 is derived from our audited consolidated financial statements not appearing in this prospectus. The consolidated statements of operations data for the six months ended June 30, 2001 and 2002, and the consolidated balance sheet data as of June 30, 2002, are derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included, in our opinion, all adjustments, consisting only of normal and recurring adjustments, that we consider necessary for a fair presentation of the financial information set forth in those statements. The historical results are not necessarily indicative of the results to be expected in any future period, and the results for the six months ended June 30, 2002 are not necessarily indicative of results to be expected for the full year.

The information for the years ended December 31, 1999 and 2000 presented below has been combined to present more meaningful information on a comparative annual basis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” for a description of acquisitions during the periods presented below that may impact period to period comparability of the data presented, and see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of other items or events that may impact period to period comparability.


								Jan. 1,			Apr. 29,			Jan. 1,			Aug. 31,
								1999			1999			2000			2000						Six Months Ended
		Year Ended			Year Ended			Through			Through			Through			Through			Year Ended			June 30,
		Dec. 31,			Dec. 31,			Apr. 28,			Dec. 31,			Aug. 30,			Dec. 31,			Dec. 31,
		1997			1998			1999			1999			2000			2000			2001			2001			2002


								(in thousands, except per share data)
Combined and Consolidated Statements of Operations Data:
Revenues		$	4,926		$	3,385		$	31,196		$	169,932		$	294,221		$	192,353		$	194,691		$	136,715		$	91,175
Cost of goods sold			3,666			3,687			23,534			152,653			233,852			159,569			172,812			118,670			75,626

Gross margin			1,260			(302	)		7,662			17,279			60,369			32,784			21,879			18,045			15,549
Operating expenses:
	Selling, general and administrative		1,058			1,576			8,556			16,743			21,931			11,012			35,948			16,577			20,140
	Research and development		—			—			1,819			6,104			5,296			2,932			8,909			4,736			3,922
	Amortization of goodwill and other intangible assets		—			—			1,724			5,186			6,890			4,482			15,735			7,841			1,318
	Depreciation		1			82			241			1,705			1,619			1,040			3,256			1,318			2,048
	Unusual charges		—			—			—			7,202			—			9,348			—			—			—

Income (loss) from operations			201			(1,960	)		(4,678	)		(19,661	)		24,633			3,970			(41,969	)		(12,427	)		(11,879	)
Interest expense			—			(3	)		(54	)		(81	)		(771	)		(12,402	)		(41,798	)		(18,518	)		(15,002	)
Interest income from Kinetic Systems			—			—			—			—			—			6,814			21,234			8,628			8,227
Other income (expense), net			(115	)		(124	)		(197	)		1,556			44			982			(2,389	)		(499	)		(865	)

Income (loss) before taxes			86			(2,087	)		(4,929	)		(18,186	)		23,906			(636	)		(64,922	)		(22,816	)		(19,519	)
Provision for income taxes			79			—			131			151			8,760			732			126			45			53
Deemed non-cash dividend			—			—			—			—			—			—			—			—			(6,255	)

Net income (loss) applicable to common stockholders		$	7		$	(2,087	)	$	(5,060	)	$	(18,337	)	$	15,146		$	(1,368	)	$	(65,048	)	$	(22,861	)	$	(25,827	)

Net loss per share; basic and diluted																	$	(0.01	)	$	(0.70	)	$	(0.25	)	$	(0.28	)
Shares used in computation of basic and diluted net loss per share																		92,109			93,128			93,128			93,665



								Total for			Total for						Six Months Ended
		Year Ended			Year Ended			Year Ended			Year Ended			Year Ended			June 30,
		Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,			Dec. 31,
		1997			1998			1999			2000			2001			2001			2002


		(in thousands, except per share data)
Combined and Consolidated Statements of Operations Data:
Revenues		$	4,926		$	3,385		$	201,128		$	486,574		$	194,691		$	136,715		$	91,175
Cost of goods sold			3,666			3,687			176,187			393,421			172,812			118,670			75,626

Gross margin			1,260			(302	)		24,941			93,153			21,879			18,045			15,549
Operating expenses:
	Selling, general and administrative		1,058			1,576			25,299			32,943			35,948			16,577			20,140
	Research and development		—			—			7,923			8,228			8,909			4,736			3,922
	Amortization of goodwill and other intangible assets		—			—			6,910			11,372			15,735			7,841			1,318
	Depreciation		1			82			1,946			2,659			3,256			1,318			2,048
	Unusual charges		—			—			7,202			9,348			—			—			—

Income (loss) from operations			201			(1,960	)		(24,339	)		28,603			(41,969	)		(12,427	)		(11,879	)
Interest expense			—			(3	)		(135	)		(13,173	)		(41,798	)		(18,518	)		(15,002	)
Interest income from Kinetic Systems			—			—			—			6,814			21,234			8,628			8,227
Other income (expense), net			(115	)		(124	)		1,359			1,026			(2,389	)		(499	)		(865	)

Income (loss) before taxes			86			(2,087	)		(23,115	)		23,270			(64,922	)		(22,816	)		(19,519	)
Provision for income taxes			79			—			282			9,492			126			45			53
Deemed non-cash dividend			—			—			—			—			—			—			(6,255	)

Net income (loss) applicable to common stockholders		$	7		$	(2,087	)	$	(23,397	)	$	13,778		$	(65,048	)	$	(22,861	)	$	(25,827	)

Net loss per share; basic and diluted														$	(0.70	)	$	(0.25	)	$	(0.28	)
Shares used in computation of basic and diluted net loss per share															93,128			93,128			93,665



	As of December 31,												As of
													June 30,
	1997		1998			1999		2000		2001			2002


	(in thousands)
Combined and Consolidated Balance Sheet Data:
Cash and cash equivalents	$	286	$	926		$	1,133	$	8,337	$	34,841		$	21,393
Working capital (deficit)		499		(3,347	)		23,724		41,441		(79,882	)		(109,330	)
Total assets		3,103		68,841			216,416		405,952		371,846			401,619
Long-term debt, less current portion		—		23,191			13,138		273,421		—			—
Preferred stock		—		—			—		—		58,216			93,305
Total stockholders’ equity (deficit)		1,119		31,029			120,034		39,878		(17,715	)		(49,890	)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and operating results should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors including those discussed under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leader in the design and production of high performance gas and chemical delivery process modules that are integral to manufacturing semiconductors. Our proprietary flow technology enables us to deliver highly configurable solutions to our customers, which principally consist of manufacturers of semiconductor capital equipment that is used by IC manufacturers.

We currently conduct our operations in two distinct businesses. We conduct our gas and chemical delivery process module business through KFS, which we will retain as our sole operating subsidiary following the completion of this offering. We also deliver turn-key, high-purity process systems and operating services to the electronics, pharmaceuticals, and biotechnology industries through the Kinetic Systems companies. Prior to this offering, we and the Kinetic Systems companies will execute a separation agreement that will provide for our business separation upon completion of this offering. Under this agreement, we will distribute all the shares of the Kinetic Systems companies to our existing stockholders. KGI will merge into Celerity, and Celerity will remain a holding company whose only operating subsidiary will be KFS, which, in turn, will own, directly and indirectly, other subsidiaries.

Based on our experience in delivering turn-key, high-purity process systems and operating services to the semiconductor industry, in 1998, we initiated a strategy to capitalize on the trend towards increased outsourcing by OEMs. As part of our strategy to expand our breadth of products and services, we made a number of acquisitions:


	•	In December 1998, we acquired Insync Systems, Inc., a designer and manufacturer of gas delivery modules and related subassemblies for OEMs;


	•	In January 1999, we purchased Unit Instruments, Inc., a designer and manufacturer of mass flow controllers;



	•	In June 1999, we entered into an asset purchase agreement with Applied Materials to transfer key personnel and purchase raw materials, work-in-process and test equipment, and entered into a supply agreement for outsourced manufacturing of their gas modules;


	•	In July 1999, we acquired e-Flow, Inc., a designer and manufacturer of gas delivery modules to OEMs;

	•	In February 2001, we acquired Marchi Associates, Inc., a designer and manufacturer of specialty temperature sensors and heaters for OEMs; and

	•	In May 2002, we acquired Poly Concepts, Inc., a designer and manufacturer of chemical delivery modules.

In May 2002, we entered into a new supply agreement with Applied Materials for the design and production of gas delivery modules for their equipment. Under this agreement, we are obligated to provide price reductions and further reduce manufacturing cycle times, as well as to make other advances in the efficiency of our manufacturing processes. In addition, this new supply agreement does not require that Applied Materials purchase any amount of gas delivery process modules or other products from us. Since this agreement effectively replaces the 1999 supply agreement that we entered into with Applied Materials, we do not expect that this agreement itself will have a material effect on our operating results or financial position. Rather, we believe the amount of our revenues from Applied Materials will be affected primarily by sales of their products incorporating our modules as well as by our effectiveness in responding to the needs of Applied

Materials. On the basis of our experience with Applied Materials, and our expectation of our ability to achieve further production and procurement efficiencies, we believe that we will be able to satisfy our commitments under the contract.

Our international operations are based in Asia and Ireland. Our operations in Asia consist of customer service centers, sales, application engineering, light manufacturing and customer support activities. Our operations in Ireland consist of customer service centers and the manufacturing of mass flow controllers and gas delivery modules. At the present time, international operations contribute less than 7% to total revenues.

Because our products serve the highly cyclical semiconductor industry, our business is subject to demand fluctuations that have resulted in significant variations in revenues, expenses and results of operations for the periods presented. Fluctuations are likely to continue in future periods. We believe that sales to a limited number of customers will continue to account for most of our revenues. We generally have limited backlog and therefore we rely upon orders that are booked and shipped in the same quarter for a majority of our revenues.

Basis of Presentation

Our financial statements, on a consolidated basis, present our financial position and results of operations. They do not include the financial position or results of operations of the Kinetic Systems companies.

From January 1998 through April 1999, KGI was a subsidiary of USFilter. In April 1999, Vivendi, S.A., a French water and telecommunications conglomerate, acquired USFilter. The acquisition of USFilter by Vivendi was accounted for under the purchase method of accounting. We performed an analysis to determine the fair value of the assets acquired by Vivendi at the acquisition date of April 28, 1999, and determined that it approximated the then carrying value of the assets acquired.

We were formed by management and a group of outside investors in October 1999 to facilitate the acquisition of KGI from Vivendi in a purchase transaction that closed in August 2000, which we refer to as the 2000 Buy-Out. The purchase accounting adjustments related to the 2000 Buy-Out have been reflected in the consolidated financial statements included in this prospectus.

Our consolidated financial statements in this prospectus include the assets, liabilities, operating results and cash flows of our business after giving effect to our business separation and do not include the assets, liabilities, operating results and cash flows of the Kinetic Systems companies. These statements have been prepared using KGI’s basis in the assets and liabilities and the historical results of operations for periods prior to August 2000. Periods subsequent to August 2000 have been prepared using our basis in the assets and liabilities acquired on August 2000, as a result of the 2000 Buy-Out. As part of our business separation, KSI will pay to us $150.0 million under a note owed to us that we refer to as the separation note. Our consolidated financial statements for the periods subsequent to the 2000 Buy-Out include as interest income the interest on this note. The consolidated financial information included in this prospectus may not necessarily reflect the consolidated financial position, operating results, changes in stockholders’ equity, and cash flows of Celerity in the future or what they would have been had we been a separate, stand-alone entity during the periods presented.

We will repay all of our outstanding debt with the net proceeds from this offering and the proceeds from KSI’s repayment of the separation note. Concurrent with this offering, KSI will borrow $150.0 million under a new senior credit facility and use those borrowings for repayment of the separation note. We will have no obligations or guarantees with respect to this senior credit facility and our assets will not collateralize this debt.

Fiscal Year

We have a 52 or 53-week fiscal year which ends on the Friday nearest to the last day in December. Our fiscal year ended December 31, 1999 had 53 weeks. The fiscal years ended December 29, 2000 and December 28, 2001 each had 52 weeks. For purposes of financial statement presentation, each fiscal quarter end is described as ending the 30th or 31st depending on the calendar month end date and each fiscal year is described as having ended December 31st.

Revenues

We recognize revenues when we ship a product and title has passed to the customer, provided no further performance obligations exist, the fee is fixed or determinable and collectibility is reasonably assured, and, in some cases, upon customer acceptance. We recognize service revenues at the time we provide the service.

Cost of Goods Sold

Cost of goods sold consists primarily of manufacturing materials, payroll and related overhead, warranty costs and inventory reserve. Cost of goods sold also includes nonrecurring engineering costs reimbursed by our customers. We order materials based on backlog and forecasted customer orders.

Operating Expenses

Selling, General and Administrative. Selling, general and administrative expenses include expenses related to sales, marketing and administrative activities. Such expenses include payroll and related benefits, travel, professional fees, rent, overhead and other costs. We expect that selling, general and administrative expenses will continue to increase in future periods.

Research and Development. Research and development expenses include expenses related to research, product development and sustaining engineering. Such expenses include payroll and related overhead, outside services and material costs. All research and development costs are expensed as incurred and may fluctuate from period to period based on composition of costs. We plan to increase our investment in research and development activities to develop new technologies and applications for current and new markets.

Stock-Based Compensation. In connection with the grant of stock options to employees in the six months ended June 30, 2002, we recorded an aggregate of $2.8 million in deferred stock-based compensation. These options are considered compensatory because the fair value of our stock determined for financial reporting purposes is greater than the fair value determined by the board of directors on the date of the grant. As of June 30, 2002, we had an aggregate of $2.4 million of deferred stock-based compensation remaining to be amortized. We anticipate that we will record additional stock-based compensation expense related to options granted after June 30, 2002. We are amortizing the deferred stock-based compensation on an accelerated basis over the vesting period of the related options, which is generally four years. The amount of stock-based compensation amortization recognized in future periods could decrease if options for which accrued but unvested compensation has been recorded are forfeited.

In July 2002, we granted 5,135,424 shares to participants under the 2002 Stock Option Plan B. We anticipate recording approximately $10.0 to $12.0 million of deferred compensation with respect to these options, which will be charged ratably to compensation expense over the five-year cliff vesting period. However, the options will vest in full, and we will recognize the entire amount of the deferred compensation immediately, if DB Capital achieves a stated internal rate of return, as described in “Management — Employee Benefit Plans and Option Grants — 2002 Stock Option Plan B.”

Results of Operations

The following table presents our historical operating results for the periods presented as a percentage of revenues. The combined and consolidated statement of operations data for the year ended December 31, 1999 is derived by combining the statement of operations data for the period January 1, 1999 through April 28, 1999 with the data for the period from April 29, 1999 through December 31, 1999. The combined and consolidated statement of operations data for the year ended December 31, 2000 is derived by combining the statement of operations data for the period from January 1, 2000 through August 30, 2000 with the data for the period from August 31, 2000 through December 31, 2000:



																							Six Months
																							Ended
		January 1,			April 29,						January 1,			August 31,
		1999			1999			Total for			2000			2000			Total for
		through			through			Year Ended			through			through			Year Ended			Year Ended			June 30,
		April 28,			December 31,			December 31,			August 30,			December 31,			December 31,			December 31,
		1999			1999			1999			2000			2000			2000			2001			2001			2002

Revenues			93.2	%		99.1	%		98.2	%		98.7	%		99.1	%		98.9	%		98.1	%		98.7	%		98.3	%
Revenues from Kinetic Systems			6.8			0.9			1.8			1.3			0.9			1.1			1.9			1.3			1.7

			100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0
Cost of goods sold			75.4			89.8			87.6			79.5			83.0			80.9			88.8			86.8			82.9

Gross margin			24.6			10.2			12.4			20.5			17.0			19.1			11.2			13.2			17.1
Operating expenses:
	Selling, general and administrative		27.4			9.9			12.6			7.5			5.7			6.8			18.5			12.1			22.1
	Research and development		5.8			3.6			3.9			1.8			1.5			1.7			4.6			3.5			4.3
	Amortization of goodwill and other intangible assets		5.5			3.1			3.4			2.3			2.3			2.3			8.1			5.7			1.4
	Depreciation		0.8			1.0			1.0			0.6			0.5			0.5			1.7			1.0			2.2
	Unusual charges		0.0			4.2			3.6			0.0			4.9			1.9			0.0			0.0			0.0

Income (loss) from operations			(14.9	)		(11.6	)		(12.1	)		8.3			2.1			5.9			(21.6	)		(9.1	)		(13.0	)
Interest expense			(0.2	)		0.0			(0.1	)		(0.3	)		(5.9	)		(2.7	)		(21.5	)		(13.5	)		(16.5	)
Interest income from Kinetic Systems			0.0			0.0			—			0.0			3.5			1.4			10.9			6.3			9.0
Other income (expense), net			(0.8	)		0.9			0.7			(0.2	)		(0.1	)		0.2			(1.2	)		(0.4	)		(0.9	)

Income (loss) before income taxes			(15.7	)		(10.7	)		(11.5	)		8.1			(0.4	)		4.8			(33.3	)		(16.7	)		(21.4	)

Provision for income taxes			0.4			0.1			0.1			3.0			0.4			2.0			0.1			—			0.1

Net income (loss)			(16.1	)%		(10.8	)%		(11.6	)%		5.1	%		(0.8	)%		2.8	%		(33.4	)%		(16.7	)%		(21.5	)%


	*Six Months Ended June 30, 2002 and June 30, 2001*

Revenues. Revenues for the six months ended June 30, 2002 were $91.2 million compared with $136.7 million for the six months ended June 30, 2001, a decrease of $45.5 million or 33.3%. The decrease in revenues resulted from the global slowdown in demand for semiconductor capital equipment which commenced in 2001 and continued through the three months ended March 31, 2002, which caused a decline in demand for our products from OEMs and IC manufacturing customers. The impact of this slowdown resulted in substantially lower shipments of products. Applied Materials accounted for 72% of our revenues for the six months ended June 30, 2002 and 64% for the six months ended June 30, 2001.

Gross Margin. Gross margin as a percentage of revenues for the six months ended June 30, 2002 was 17.0% compared with 13.2% of revenues for the six months ended June 30, 2001. The increase in gross margin percentage was primarily due to a favorable shift in product mix and supply chain cost savings, offset by an inventory charge of $3.5 million taken in the three months ended March 31, 2002 for excess and obsolete inventory.

Selling, General and Administrative. Selling, general and administrative expenses for the six months ended June 30, 2002 were $20.1 million, or 22.1% of revenues, compared with $16.6 million, or 12.1% of revenues, for the six months ended June 30, 2001. The increase related primarily to incremental sales and marketing costs as we focused our efforts on the transition to modular solutions, as well as adding personnel to strengthen our global customer support. Additionally, expenses increased by approximately $400,000 due to our acquisition of Poly Concepts and by approximately $350,000 due to the recognition of deferred stock compensation.

Research and Development. Research and development expenses for the six months ended June 30, 2002 were $3.9 million, or 4.3% of revenues, compared with $4.7 million, or 3.5% of revenues, for the six months ended June 30, 2001. This decrease in spending was primarily a result of delays in specific research and development initiatives.

Amortization of Goodwill and Other Intangible Assets. Amortization expense for the six months ended June 30, 2002 was $1.3 million compared with $7.8 million for the six months ended June 30, 2001. This decrease was attributable to our adoption of SFAS 142 effective January 2002.

Depreciation. Depreciation expense for the six months ended June 30, 2002 was $2.0 million compared with $1.3 million for the six months ended June 30, 2001. This increase was primarily due to capital expenditures for the expansion of our management information systems.

Interest Expense. Interest expense for the six months ended June 30, 2002 was $15.0 million compared with $18.5 million for the six months ended June 30, 2001. The decrease was attributable to the principal payments on debt as well as the revaluation of the put feature and the warrants associated with the junior notes issued in connection with the 2000 Buy-Out.

Interest Income from Kinetic Systems. Interest income from the Kinetic Systems separation note for the six months ended June 30, 2002 was $8.2 million compared with $8.6 million for the six months ended June 30, 2001.

Other Income (Expense). Other income (expense), net for the six months ended June 30, 2002 was an expense of $865,000 compared with an expense of $499,000 for the six months ended June 30, 2001. The increase for the six months ended June 30, 2002 was primarily attributable to losses recorded based on our equity investment in Kinetics Japan KK.

Provision for Income Taxes. The provisions for income taxes for the six months ended June 30, 2002 and the six months ended June 30, 2001 were not material.

Deemed Non-cash Dividend. In April 2002, we sold approximately 2.5 million shares of Series A preferred stock to new and existing investors for a total purchase price of $7.8 million. We recorded a $6.3 million non-cash dividend in the six months ended June 30, 2002 as a result of the beneficial conversion feature in the Series A preferred stock due to the difference between the deemed fair value at the date of issuance and the actual issuance price.

Years Ended December 31, 2001 and 2000

Revenues. Revenues for the year ended December 31, 2001 were $194.7 million compared with $486.6 million for the year ended December 31, 2000, a decrease of $291.9 million, or 60.0%. The decrease in revenues resulted from the global slowdown in demand for semiconductor capital equipment during 2001, which caused a significant decline in demand for our products from our OEM and IC manufacturing customers. The impact of this slowdown resulted in substantially lower shipments of products. Applied

Materials accounted for 64% of our revenues for the year ended December 31, 2001 and 78% for the year ended December 31, 2000.

Gross Margin. Gross margin as a percentage of revenues for the year ended December 31, 2001 was 11.2% compared with 19.1% of revenues for the year ended December 31, 2000. The decrease in gross margin percentage was primarily due to the overall industry downturn in 2001, which led to the under-utilization of manufacturing capacity. The decrease was also attributable to a $2.8 million charge to correctly value our inventory at the lower of cost or market and approximately $600,000 in severance costs.

Selling, General and Administrative. Selling, general and administrative expenses, for the year ended December 31, 2001 were $35.9 million, or 18.5% of revenues, compared with $32.9 million, or 6.8% of revenues, for the year ended December 31, 2000. The increase in spending was primarily related to severance and lease termination costs associated with our efforts to reduce expenses, our February 2001 acquisition of Marchi Associates, and increased sales and marketing costs associated with the introduction of new products.

Research and Development. Research and development expenses for the year ended December 31, 2001 were $8.9 million, or 4.6% of revenues, compared with $8.2 million, or 1.7% of revenues, for the year ended December 31, 2000. The increase in spending was primarily due to research and development costs associated with the introduction of our MultiFlo flow control technology.

Amortization of Goodwill and Other Intangible Assets. Amortization expense for the year ended December 31, 2001 was $15.7 million compared with $11.4 million for the year ended December 31, 2000. This increase was attributable to the amortization of goodwill and other intangibles arising from the acquisition of Marchi Associates as well as a change in the basis of these assets due to the 2000 Buy-Out.

Depreciation. Depreciation expense for the year ended December 31, 2001 was $3.3 million compared with $2.7 million for the year ended December 31, 2000. This increase was primarily attributable to the acquisition of Marchi Associates.

Interest Expense. Interest expense for the year ended December 31, 2001 was $41.8 million compared with $13.2 million for the year ended December 31, 2000. The increase was primarily due to incurring a full year of interest expense on the debt associated with the 2000 Buy-Out as well as a revaluation of the warrants and put options issued in connection with the junior notes.

Interest Income from Kinetic Systems. Interest income from Kinetic Systems for the year ended December 31, 2001 was $21.2 million compared with $6.8 million for the year ended December 31, 2000. The increase reflects a full year of interest income on the separation note.

Other Income (Expense). Other income (expense), net for the year ended December 31, 2001 was an expense of $2.4 million compared with income of $1.0 million for the year ended December 31, 2000. The increase for the year ended December 31, 2001 was primarily attributable to losses on our equity investment in Kinetics Japan KK. Other income in 2000 was attributable to a gain on a lease termination.

Provision for Income Taxes. The provision for income taxes for the year ended December 31, 2001 was $126,000 compared with $9.5 million for the year ended December 31, 2000. The income tax provision for the year ended December 31, 2001 was comprised of miscellaneous state and foreign income taxes resulting from taxable earnings in separate taxing jurisdictions. The provision for the year ended December 31, 2000 was comprised of federal, state and foreign taxes which reflected the impact of nondeductible goodwill amortization offset by the reduction in the valuation allowance. The provision for the year ended December 31, 2001 was lower than the year ended December 31, 2000 principally due to decreased taxable income in the period.

Years Ended December 31, 2000 and 1999

Revenues. Revenues for the year ended December 31, 2000 were $486.6 million compared with $201.1 million for the year ended December 31, 1999, an increase of $285.5 million, or 142.0%. The increase in revenues was due to strong worldwide demand for semiconductor capital equipment as well as our entry into

a supply agreement with Applied Materials in July 1999. Applied Materials accounted for 78% of our revenues for the year ended December 31, 2000 and 66% for the year ended December 31, 1999.

Gross Margin. Gross margin as a percentage of revenues for the year ended December 31, 2000 was 19.1% compared with 12.4% for the year ended December 31, 1999. This increase in gross margin as a percentage of revenues resulted primarily from manufacturing efficiencies associated with increased production volumes, supply chain cost savings and favorable shifts in product mix. In addition, gross margin for the year ended December 31, 1999 was adversely affected by start-up manufacturing costs associated with the Applied Materials supply agreement.

Selling, General and Administrative. Selling, general and administrative expenses for the year ended December 31, 2000 were $32.9 million, or 6.8% of revenues, compared with $25.3 million, or 12.6% of revenues, for the year ended December 31, 1999. The increase in spending was due to a full year of expenses related to e-Flow, Inc. which we acquired in July 1999, and additional infrastructure costs needed to support the growth in our business.

Research and Development. Research and development expenses for the year ended December 31, 2000 were $8.2 million, or 1.7% of revenues, compared with $7.9 million, or 3.9% of revenues, for the year ended December 31, 1999. The increase in spending was due to additional staffing, materials and equipment costs.

Amortization of Goodwill and Other Intangible Assets. Amortization expense for the year ended December 31, 2000 was $11.4 million compared with $6.9 million for the year ended December 31, 1999. This increase reflects the amortization of goodwill and other intangibles associated with the e-Flow acquisition as well as the amortization incurred on incremental intangibles allocated to us related to the 2000 Buy-Out.

Depreciation. Depreciation expense for the year ended December 31, 2000 was $2.7 million compared with $1.9 million for the year ended December 31, 1999. This increase is due to additional depreciable assets acquired in connection with the acquisitions completed in 1999 as well as capital expenditures.

Unusual Charges. Unusual charges for the year ended December 31, 2000 were $9.3 million and $7.2 million for the year ended December 31, 1999. For the year ended December 31, 2000, we incurred a charge for in-process research and development costs associated with the 2000 Buy-Out. For the year ended December 31, 1999, we incurred a charge for start-up costs associated with the Applied Materials supply agreement under which we became a preferred outsourced manufacturer for gas delivery modules for their capital equipment. The amount of acquired in-process research and development expense was determined by identifying research projects for which technological feasibility had not been established and for which no alternative future uses existed. The only significant in-process project was related to the development of MultiFlo II, a digital mass flow controller and its underlying components. These components ranged from 15-80% complete. At the time of the 2000 Buy-Out, the project was scheduled to be completed in 2001. The project was analyzed to determine the complexity, technological innovations included, state of completion, cost and time to complete development, expected life cycle of the project and any alternative future use or current technological feasibility.

The fair value of the in-process research and development was determined using the income approach, which discounts expected future cash flows from projects under development to their net present value. Additionally, management considered an appraisal when estimating fair value of the in-process MultiFlo II project. The discount rate used to establish the present value of the excess cash flows was based on our overall weighted, risk-adjusted, average cost of capital of 20.4%. The estimated remaining costs associated with MultiFlo II were approximately $1.0 million. The project was completed as scheduled.

In 1999 we incurred a $7.2 million one-time charge related to startup activities associated with the asset purchase agreement with Applied Materials for outsourced manufacturing of gas delivery modules. The purchase agreement called for the transfer of key personnel and the purchase of raw material, work-in-process and test equipment. The one-time startup charge was primarily related to data conversion, engineering, training and employee relocation, travel expenses and other organizational costs related to us commencing a new operation.

Interest Expense. Interest expense for the year ended December 31, 2000 was $13.2 million. Interest expense for the year ended December 31, 1999 was immaterial. The increase for the year ended December 31, 2000 was the result of debt incurred to finance the 2000 Buy-Out.

Interest Income from Kinetic Systems. Interest income from the Kinetic Systems separation note for the year ended December 31, 2000 was $6.8 million. There was no interest income from the Kinetic Systems separation note for the year ended December 31, 1999.

Other Income (Expense). Other income (expense), net was consistent for the years ended December 31, 2000 and 1999.

Provision for Income Taxes. The provision for income taxes for the year ended December 31, 2000 was $9.5 million compared with $282,000 for the year ended December 31, 1999. The provision for the year ended December 31, 2000 was comprised of federal, state and foreign taxes which reflect the impact of nondeductible goodwill amortization offset by the use of the valuation allowance. The income tax provision for the year ended December 31, 1999 was comprised of miscellaneous state and foreign income taxes resulting form taxable earnings in separate taxing jurisdictions. The provision for the year ended December 31, 2000 was higher than the year ended December 31, 1999 principally due to increased taxable income during the period.

Quarterly Results of Operations

We have experienced, and expect to continue to experience, significant fluctuations in our quarterly results. Our expense levels are based, in part, on our expectations of future revenues. The following table presents our unaudited quarterly results of operations for the ten quarters ended June 30, 2002. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. Our operating results for any quarter are not necessarily indicative of future performance.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a description of items or events that may impact the period to period comparability of the operating results in the following table.



		Three Months Ended

		Mar. 31,			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,
		2000			2000			2000			2000			2001			2001			2001			2001			2002			2002


		(unaudited)

		(in thousands, except per share data)
Revenues		$	95,122		$	113,484		$	136,148		$	136,335		$	88,316		$	46,632		$	27,697		$	28,415		$	32,085		$	57,508
Revenues from Kinetic Systems			906			1,313			1,832			1,434			479			1,288			1,220			644			1,158			424

			96,028			114,797			137,980			137,769			88,795			47,920			28,917			29,059			33,243			57,932
Cost of goods sold			73,238			92,737			111,848			115,598			73,906			44,764			24,833			29,309			31,592			44,034

Gross margin			22,790			22,060			26,132			22,171			14,889			3,156			4,084			(250	)		1,651			13,898
Operating expenses:
	Selling, general and administrative		8,616			8,246			8,074			8,007			8,436			8,141			10,772			8,599			10,190			9,950
	Research and development		1,471			2,313			2,272			2,172			2,284			2,452			2,106			2,067			1,813			2,109
	Amortization of goodwill and other intangible assets		2,094			2,094			4,229			2,955			3,852			3,989			3,928			3,966			637			681
	Depreciation		485			653			759			762			556			762			1,072			866			1,008			1,040
	Unusual charges		—			—			9,348			—			—			—			—			—			—			—

Income (loss) from operations			10,124			8,754			1,450			8,275			(239	)		(12,188	)		(13,794	)		(15,748	)		(11,997	)		118
Interest expense			(759	)		(2	)		(2,973	)		(9,439	)		(9,469	)		(9,049	)		(11,582	)		(11,698	)		(6,619	)		(8,383	)
Interest income from Kinetic Systems			—			—			1,844			4,970			4,586			4,042			5,729			6,877			3,468			4,759
Other income (expense), net			(101	)		47			1,096			(16	)		(506	)		7			(24	)		(1,866	)		(1,142	)		277

Income (loss) before income taxes			9,264			8,799			1,417			3,790			(5,628	)		(17,188	)		(19,671	)		(22,435	)		(16,290	)		(3,229	)



	Three Months Ended

	Mar. 31,		June 30,		Sept. 30,		Dec. 31,		Mar. 31,			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,
	2000		2000		2000		2000		2001			2001			2001			2001			2002			2002


	(unaudited)

	(in thousands, except per share data)
Provision for income taxes		4,112		4,198		371		811		11			34			39			42			37			16
Deemed non-cash dividend		—		—		—		—		—			—			—			—			—			(6,255	)

Net income (loss) applicable to common stockholders	$	5,152	$	4,601	$	1,046	$	2,979	$	(5,639	)	$	(17,222	)	$	(19,710	)	$	(22,477	)	$	(16,327	)	$	(9,500	)

Net income (loss) per share, basic and diluted		—		—		—	$	0.03	$	(0.06	)	$	(0.19	)	$	(0.21	)	$	(0.24	)	$	(0.18	)	$	(0.10	)

The following table presents our unaudited historical results for the periods indicated as a percentage of revenues:



		Three Months Ended

		Mar. 31,			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,			Sept. 30,			Dec. 31,			Mar. 31,			June 30,
		2000			2000			2000			2000			2001			2001			2001			2001			2002			2002

Revenues			99.1	%		98.9	%		98.7	%		99.0	%		99.5	%		97.3	%		95.8	%		97.8	%		96.5	%		99.3	%
Revenues from Kinetic Systems			0.9			1.1			1.3			1.0			0.5			2.7			4.2			2.2			3.5			0.7

			100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0			100.0
Cost of goods sold			76.3			80.8			81.1			83.9			83.2			93.4			85.9			100.9			95.0			76.0

Gross margin			23.7			19.2			18.9			16.1			16.8			6.6			14.1			(0.9	)		5.0			24.0
Operating expenses:
	Selling, general and administrative		9.0			7.2			5.9			5.8			9.5			17.0			37.3			29.6			30.7			17.2
	Research and development		1.5			2.0			1.6			1.6			2.6			5.1			7.3			7.1			5.5			3.6
	Amortization of goodwill and other intangibles assets		2.2			1.8			3.1			2.1			4.3			8.3			13.6			13.6			1.9			1.2
	Depreciation		0.5			0.6			0.6			0.6			0.6			1.6			3.7			3.0			3.0			1.8
	Unusual charges		—			—			6.8			—			—			—			—			—			—			—

Income (loss) from operations			10.5			7.6			1.1			6.0			(0.3	)		(25.4	)		(47.7	)		(54.2	)		(36.1	)		0.2
Interest expense			(0.8	)		—			(2.2	)		(6.9	)		(10.7	)		(18.9	)		(40.1	)		(40.3	)		(19.9	)		(14.5	)
Interest income from Kinetic Systems			—			—			1.3			3.6			5.2			8.4			19.8			23.7			10.4			8.2
Other income (expense), net			(0.1	)		—			0.8			—			(0.6	)		—			(0.1	)		(6.4	)		(3.4	)		0.5

Income (loss) before income taxes			9.6			7.7			1.0			2.8			(6.3	)		(35.9	)		(68.0	)		(77.2	)		(49.0	)		(5.6	)
Provision for income taxes			4.3			3.7			0.3			0.6			—			—			0.1			0.1			0.1			—
Deemed non-cash dividend			—			—			—			—			—			—			—			—			—			(10.8	)

Net income (loss) applicable to common stockholders			5.3	%		4.0	%		0.8	%		2.2	%		(6.4	)%		(35.9	)%		(68.2	)%		(77.3	)%		(49.1	)%		(16.4	)%

Liquidity and Capital Resources

Historically, our overall capital requirements, as well as those of the Kinetic Systems companies, were managed on a centralized basis, including management of cash and debt. Prior to August 31, 2000, KGI retained all cash receipts associated with our business and those of the Kinetic Systems companies and provided funds to cover disbursements. Subsequent to August 30, 2000, we retained all cash receipts associated with the Kinetic Systems companies and we provided the financing for their operations.

The Kinetic Systems companies have agreed to pay us $150.0 million upon the closing of this offering under the separation note. Substantially all of our outstanding debt and accrued interest will be repaid from the net proceeds of this offering and the funds received from Kinetic Systems’ payment of the separation note.

Cash from operations for the six months ended June 30, 2002 reflected a net use of cash of $4.4 million compared with a net use of cash of $13.4 million for the six months ended June 30, 2001. In the six months ended June 30, 2002, our net use of cash from operations resulted from the net loss from operations, which was

largely offset by noncash charges included in our net loss and working capital reductions primarily associated with accounts payable. Net use of cash from operations during the six months ended June 30, 2001 represented our net loss from operations, offset by non-cash charges as well as reductions in working capital primarily associated with receivables and inventories.

Cash used in operations was $9.6 million and $58.7 million for the years ended December 31, 2001 and 1999, respectively. For the year ended December 31, 2000, cash provided by operations was $45.6 million. The increase in cash used in operations in the year ended December 31, 2001 was primarily attributed to the net loss and a reduction in accounts payable, which was partially offset by non-cash charges included in our net loss and reductions in working capital primarily tied to accounts receivable and reductions in inventories. The net cash provided from operations in the year ended December 31, 2000 was the result of net income generated by increased revenue and non-cash charges included in our net income, partially offset by increases in inventory levels greater than the increase in accounts payable. Our use of cash in operations in the year ended December 31, 1999 was attributed to the growth in working capital, primarily accounts receivable and inventory associated the overall growth in the semiconductor industry, and our net loss, which included unusual charges associated with the start-up of the supply agreement with Applied Materials, partially offset by an increase in accounts payable.

Cash used in investing activities was $9.3 million, $32.9 million and $136.3 million in the six months ended June 30, 2002 and the years ended December 31, 2001 and 2000, respectively. Cash provided by investing activities was $619,000 for the year ended December 31, 1999. Investments for the six months ended June 30, 2002 included the use of cash as partial consideration for the purchase of Poly Concepts, Inc., net of cash acquired, of $7.1 million. Investments in the year ended December 31, 2001 included the purchase of Marchi Associates, net of cash acquired, for $27.1 million. Investments in the year ended December 31, 2000 primarily represented cash flow used for the 2000 Buy-Out. Capital expenditures were $2.2 million, $4.7 million, $16.7 million and $6.0 million in the six months ended June 30, 2002 and the years ended December 31, 2001, 2000, and 1999 respectively.

Cash provided by financing activities was $498,000, $68.8 million, $97.8 million and $58.6 million for the six months ended June 30, 2002 and the years ended December 31, 2001, 2000 and 1999, respectively. Cash provided in the six months ended June 30, 2002 consisted of proceeds from the issuance of preferred stock and borrowings on the revolving line of credit, offset by principal payments on the term loan and advances to the Kinetic Systems companies. Cash provided by financing activities in 2001 consisted primarily of proceeds from the issuance of preferred stock and borrowings under our revolving line of credit, which exceeded net principal payments we made on our term debt. Cash provided by financing activities in 2000 consisted primarily of long term debt incurred and proceeds from the sale of common stock to finance the 2000 Buy-Out, offset by funds we allocated to Kinetic Systems. Cash provided by financing activities in 1999 consisted primarily of cash provided by, and businesses contributed by, our predecessor parent company.

At the time of the 2000 Buy-Out, we entered into a $110.0 million revolving line of credit, which was reduced to $95.0 million in December 2001. This line of credit bears interest at a rate similar to LIBOR plus 3.5%. The facility is secured by a security interest in the assets of KGI and guarantors. Borrowings under this facility at June 30, 2002, December 31, 2001 and 2000 and were $60.3 million, $45.3 million and $20.0 million, respectively.

We lease facilities from a related party and third-party owners and equipment from third-party owners under noncancelable operating leases. Future minimum payments under noncancelable operating leases with terms greater than one year as of December 31, 2001 are as follows (in thousands):


		Related		Third
		Parties		Parties		Total

December 31,
	2002	$	360	$	3,944	$	4,304
	2003		360		3,801		4,161
	2004		360		3,673		4,033
	2005		180		3,099		3,279
	2006		—		1,914		1,914
Thereafter			—		938		938

Total minimum lease payments		$	1,260	$	17,369	$	18,629

We believe our net proceeds from this offering will be sufficient to meet our anticipated cash needs for at least the next 12 months. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancement to existing products, the costs to ensure access to adequate manufacturing capacity, and the continuing market acceptance of our products. To the extent that funds generated by this offering are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to potential investments in, or acquisitions of, complementary businesses, products or technologies, we may enter into these types of arrangements in the future, which could also require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all.

Recent Accounting Pronouncements

In July 2001, the FASB issued Statement No. 141, “Business Combinations” (“SFAS 141”). SFAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method.

In July 2001, the FASB issued Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), which requires the discontinuation of goodwill amortization. SFAS 142 is required to be applied starting with fiscal years beginning after December 15, 2001. We adopted SFAS 142 effective January 1, 2002 and discontinued amortizing goodwill and other indefinite lived intangibles.

In August 2001, the FASB issued Statement No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. We are in the process of assessing the effect of adopting SFAS 143, which will be effective for 2003.

In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations— Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” (“APB 30”), for the disposal of a segment of a business. SFAS 144 also amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. We adopted SFAS 144 on January 1, 2002 and the impact of adoption was not material to our financial position or results of operations.

In April 2002, the FASB issued Statement No. 145, “Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”), which will require gains

and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Accordingly, gains or losses from extinguishments of debt for fiscal years beginning after May 15, 2002 shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the provisions of APB 30. We do not expect the adoption of SFAS 145 to have a material effect on its consolidated financial position or consolidated results of operations.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition. We recognize revenues in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB 101A and 101B. SAB 101 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the collectibility of those fees. If we applied different assumptions and reached different estimates, the amount of our reported revenue would change accordingly. Should changes in conditions cause us to reach different conclusions for future transactions, revenue recognized in future periods could be adversely affected.

Valuation of Accounts Receivable. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. If we used different factors in developing our allowance for doubtful accounts, the amount of the allowance would change, with corresponding changes to our reported selling, general and administrative expense. While our credit losses have historically been within our expectations and the allowance established, we might not continue to experience the same credit loss rates that we have in the past.

Our accounts receivable are concentrated in relatively few customers. Therefore, a significant change in the liquidity or financial position of, or a significant dispute over payment with, any one customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts.

Inventory Valuation. We state our inventories at the lower of cost or market. The cost of our inventory is determined on a first-in, first-out basis. In addition, we write down inventories for estimated obsolescence or unmarketable inventories equal to the difference between the cost of inventories and the estimated market value based upon assumptions about future demand and market conditions. Demand is generated by customer purchase orders and forecasts and is compared to inventory levels on hand and on order to determine impairment levels. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Warranty Reserve. We provide for the estimated cost of product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. We must exercise considerable judgment in estimating the expected failure rates, a process based on historical experience of similar products as well as various other assumptions that we believe to be reasonable under the circumstances. If we employed different assumptions the amount of the warranty reserve would be different, which would have a corresponding impact on our reported cost of sales. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Long-Lived Assets. The carrying value of our property and equipment reflects estimates, assumptions and judgments relative to capitalized costs, useful lives, utilization and salvage values. We evaluate the

carrying value of our property and equipment and our goodwill and other intangible assets when events or changes in circumstances indicate that the carrying value of such assets may be impaired and, if appropriate, revalue the asset and record an impairment charge. Asset impairment evaluations are, by nature, highly subjective.

The estimates, assumptions and judgments we use in the application of our property and equipment and asset impairment policies reflect both historical experience and expectations regarding future industry conditions and operations. The use of different estimates, assumptions and judgments, especially those involving the useful lives of our property and equipment and expectations regarding future industry conditions and operations, would likely result in materially different carrying values of assets and results of operations.

Accounting for Income Taxes. We account for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. A valuation allowance is recorded to reduce deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and 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 be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income or reduce loss and increase stockholders’ equity in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Financial Instruments. We have issued some financial instruments that require continuous re-valuation to market, including warrants and puts issued with debt. These instruments are valued using standard valuation formulas with assumptions about volatility, probability of prepayment and other matters. We have not changed our methods of calculating these fair values or developing the underlying assumptions. If our assumptions are different than actual results, the impact on the calculations and market values could be significant.

Quantitative and Qualitative Disclosure of Market Risks

Credit Risk. We are potentially subject to concentrations of credit risk, principally in accounts receivable as historically we have relied on a limited number of customers for a substantial portion of our revenues. We perform ongoing credit evaluations of our customers and we generally do not require collateral. Our major customers are large, well-established semiconductor OEMs and IC manufacturers that have historically paid their accounts receivables balances with us.

Foreign Currency Exchange Risk. Our revenues and expenses, except in Ireland, Singapore and South Korea, are denominated in U.S. dollars. Revenues denominated in foreign currency as a percentage of total revenues for the twelve months ended December 31, 2000 and 2001 were 2.7% and 5.2%, respectively. For the six months ended June 30, 2002, such revenues were 6.7% of total revenues. Expenses denominated in foreign currency as a percentage of total expense for the twelve months ended December 31, 2000 and 2001 and six months ended June 30, 2002 were 2.2%, 4.7% and 7.2%, respectively. As a result, we have relatively little exposure to currency exchange risks and foreign exchange losses have been minimal to date. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if we believe our foreign currency exposure has increased, we may consider entering into hedging transactions to help mitigate that risk.

We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in the foreign exchange rates as of June 30, 2002. This analysis demonstrated that such movement would have an immaterial impact on our financial position and results of operations and cash flows.

Interest Rate Risk. We use derivative financial instruments consisting solely of interest rate swap contracts. Our objective in managing our exposure to changes in interest rates, on our variable rate debt, is to limit the impact of these changes on earnings and cash flow and to lower our overall borrowing costs.

At June 30, 2002, we had $171.7 million of variable rate debt outstanding. We currently have one interest rate swap contract with a notional amount of $75.0 million, which fixes a portion of our variable rate debt to a fixed interest rate for approximately one year. Upon the completion of this offering, substantially all of our debt will be repaid and the swap agreement will be settled. We performed a sensitivity analysis assuming a hypothetical 10% adverse movement in the floating interest rate on the interest rate sensitive instruments described above and, as of June 30, 2002, determined that such movement would have an immaterial impact on our financial position and results of operations and cash flows.

BUSINESS

Overview

We are a leader in the design and production of high performance gas and chemical delivery process modules that are integral to manufacturing semiconductors. Our proprietary flow control technology enables us to deliver highly flexible and configurable solutions to our customers, which principally consist of manufacturers of semiconductor capital equipment that is used by integrated circuit, or IC, manufacturers.

Historically, these semiconductor original equipment manufacturers, or OEMs, designed, manufactured and integrated the majority of the elements used in their capital equipment products. Increasingly, OEMs are outsourcing the design and manufacturing of elements of their products to a small number of preferred suppliers. These elements, referred to as process modules, include gas delivery, chemical blending delivery, laser sources, power management and wafer handling. We believe the primary driver of growth in outsourcing is the desire of OEMs to leverage the expertise and resources of module suppliers, enabling OEMs to focus on providing their customers with even better solutions.

Industry Background

Overall growth in the semiconductor industry is driven by the global demand for electronic products. The dual trends of cost reduction and innovation continue to drive the rapidly growing use of ICs in a broad set of products and applications, ranging from traditional uses in computers and disk drives to newer applications within automobiles and medical appliances.

As ICs become even more widely used, Gartner Dataquest estimates that worldwide sales will grow from approximately $155 billion in 2001 to $245 billion in 2004. Semiconductor industry growth, the transition to new technologies and the increasing complexity of manufacturing ICs drive semiconductor capital equipment spending. According to Gartner Dataquest, this spending is projected to grow from approximately $24 billion in 2001 to $41 billion in 2004.

New Technology Contributes to Increasing Demand for Semiconductor Capital Equipment

Currently three major technology transitions in IC manufacturing are converging. We believe these transitions, in addition to the need for additional manufacturing capacity, will play an important role in driving increased demand for semiconductor capital equipment over the next several years. These technology transitions, each of which requires new manufacturing and process steps and equipment, are:

Movement to Smaller Geometries. Smaller semiconductor geometries enable IC manufacturers to improve the performance and processing speed of ICs. Geometries on advanced ICs are moving from .18 micron to .13 micron, and are expected to move to .10 micron and below in the near future.

Volume Production on 300 Millimeter Diameter Wafers. Leading semiconductor manufacturers are implementing large scale production on 300 millimeter diameter wafers in order to increase productivity and reduce costs, as compared to 200 millimeter diameter wafers.

Introduction of New Materials. Changes in materials and processes, such as copper for interconnects, and new insulating materials, such as low-k dielectrics, are being used to achieve higher speed and performance.


	*Gas and Chemical Delivery Modules are Critical to Manufacturing Integrated Circuits*

The fabrication of advanced ICs continues to increase in complexity, typically requiring in excess of 300 process steps today. These steps are performed on a wafer, generally made of silicon, and certain of the steps are repeated numerous times. All of these steps are performed using semiconductor capital equipment, which generally includes four to five major modules. Steps used to deposit and etch, or remove, insulating and conductive layers on a wafer typically employ specialty gases, while steps used to clean, strip and polish a wafer typically require specialty chemicals. Precise blending and delivery of these gases and chemicals is essential to achieving acceptable yields in the IC manufacturing process.

To ensure the integrity and performance of these process steps, IC manufacturing requires sophisticated gas and chemical delivery modules. A typical deposition or etch process, which is performed in a process chamber, may use from three to twelve different gases, with each gas delivered at varying flow rates and pressures uniquely suited to the requirements of the process. The most critical technology in gas delivery modules is the mass flow controller, which automatically regulates the precise flow of gas into the process chamber. Traditionally, each mass flow controller has been designed for a specific gas and flow rate and has required factory calibration. This has created the need for hundreds of unique parts that must be used in an IC fabrication facility, or fab.

A typical cleaning, stripping or polishing process step, which is performed in a chemical bath or on a polishing platform, uses from three to ten different chemicals with each chemical delivered in precise quantities and concentrations, tailored to each process. In order to improve process control, IC manufacturers have begun to adopt new chemical processes that require chemical blending at their point of use.


	*A Significant Shift to Outsourcing is Occurring Among OEMs*

Increasingly, OEMs are outsourcing the design and manufacturing of elements of their products to a small number of preferred suppliers in order to improve their manufacturing efficiencies and product solutions. This enables OEMs to focus on providing IC manufacturers with even better semiconductor equipment at lower costs. Process modules that are being outsourced include gas delivery, chemical delivery, laser sources, power management and wafer handling. Because of the critical role that module suppliers now play, OEMs require them to:

Deliver Configurable Modules. Since each semiconductor manufacturer has its own approach to making semiconductors, OEMs provide equipment configured to each customer’s requirements. Gas delivery modules have historically been one of the most challenging modules for OEMs to standardize because of their complexity and the need for custom configuration. This high degree of configuration, combined with increasingly complex manufacturing processes, means that OEMs are faced with long development and production cycle times as well as high design, manufacturing and inventory expenses. OEMs, as a result, are looking to preferred suppliers that can provide solutions using highly configurable modules with standard options that can be selected and integrated late in the assembly and test process. This improves capital utilization and also increases the OEMs’ flexibility in both managing inventories and meeting changing customer specifications.

Provide Specification and Design Expertise. OEMs and IC manufacturers require module suppliers to have extensive knowledge of the semiconductor fabrication process as well as comprehensive design and engineering expertise. This expertise is critical to the seamless integration of process modules into semiconductor equipment and of that equipment into the fab. It is also critical for ensuring the proper functioning of the equipment throughout its operating life since these modules are used across a variety of applications. The modules must be easily integrated and have the flexibility to be rapidly reconfigured as process requirements change over the life of the equipment.

Manage Supply Chain Logistics. OEMs are looking to module suppliers to help them to reduce their inventories and management demands as well as to use capital more efficiently. A number of OEMs require these suppliers to make design and specification decisions in order to shorten manufacturing cycle times, enhance flexibility and reduce the number of suppliers with which they must interact. In addition, there is an

increasing use of online inventory management, including order fulfillment and tracking, to increase efficiency in the supply chain.

Provide Local Support Around the World. OEMs require that module suppliers have a presence close to their facilities in order to maximize supply chain efficiencies. In addition, module suppliers need to provide application engineering, sales, service and spare parts close to fabs around the world.

We believe that a small group of preferred module suppliers that can meet the requirements of both OEMs and IC manufacturers will win the largest market share for their products.

Our Solution

We are a leader in the design and production of high performance gas and chemical delivery process modules that are integral to manufacturing semiconductors. We also design and manufacture advanced mass flow controllers that enable us to substantially improve the performance of gas delivery modules using our proprietary gas flow technology. Our chemical delivery modules incorporate our proprietary control technology to automatically control the chemical composition and flow rates of the many chemicals used in the IC manufacturing process. Our products benefit customers in several important ways:

MultiFlo Technology Increases Manufacturing Flexibility and Equipment Utilization. Our MultiFlo mass flow controllers incorporate software with sophisticated algorithms that enable easy configuration for any one of a number of gases and flow rates. This proprietary technology allows for flexible configuration and reconfiguration of gas and flow rates without removing the mass flow controller from the module. In contrast, conventional mass flow controllers must be removed and recalibrated by a trained technician using specialty gases and instruments. Our MultiFlo flow control technology significantly reduces our manufacturing cycle time for gas delivery modules. We estimate that nine of our MultiFlo mass flow controllers address approximately 85% of all the gas delivery applications in a typical fab, eliminating the need for hundreds of different custom mass flow controllers. This enables OEMs and IC manufacturers to cost effectively maintain the inventory needed to rapidly replace parts and significantly reduce equipment downtime. For these reasons, several of the world’s leading OEMs and semiconductor manufacturers have selected MultiFlo technology as the default standard on a number of their semiconductor capital equipment platforms for 200 millimeter and 300 millimeter diameter wafers.

Our Modules Provide Increased Performance and Lower Costs. We have substantially improved the gas and chemical delivery systems used in semiconductor capital equipment by using our advanced technology and engineering expertise to provide OEMs with a modular solution. Our gas modules, in particular, are highly configurable with standard options that can be selected and integrated late in the assembly and test cycle. Our OEM customers benefit from the ability to use our modules interchangeably across multiple product platforms and integrate them easily into their equipment. This substantially lowers their costs while enabling them to deliver a higher performance product to their customers.

Design Expertise Enables Us to Satisfy Customer Needs. Our team of research scientists, product development personnel, manufacturing specialists, and hardware and software engineers are all focused on making advancements in flow control and fluid delivery technology. We have close relationships with OEMs and IC manufacturers, which provide us with an understanding of their needs and technology requirements. This enables us to align our development plans with our customers’ technology road maps. Our customers recognize us as experts capable of assisting them in the design of their gas and chemical delivery requirements and the selection of module components for their new semiconductor equipment.

Our Logistics and Supply Chain Management Lowers Costs for Our Customers. Through the course of our module manufacturing process, our OEM customers often modify their module configurations in response to IC manufacturers’ changing requirements. In order to rapidly respond to these needs, we have integrated our engineering change control system with our manufacturing resource planning system. This allows us to better manage our manufacturing and procurement process along with the configuration demands of individual modules. As a result, we can better meet our customers’ needs by substantially reducing cycle times from

order to delivery. We also significantly reduce the number of suppliers that our OEM customers must manage, which in turn reduces their costs and management demands, as well as improves their capital utilization.

Local Support Around the World Helps Maintain Equipment Up-Time. We have built a global service and support organization capable of meeting the needs of both OEMs and IC manufacturers at their facilities worldwide. We have over 75 application and customer support engineers located strategically around the world. By delivering support locally to OEMs and IC manufacturers, we are able to quickly assist them in solving problems and returning their equipment to operation in shorter periods of time than they could previously.

Our Strategy

We are committed to being the leading supplier of high performance gas and chemical delivery process modules to the semiconductor industry. We also intend to expand into new semiconductor modules and enter adjacent markets over time. Our strong competitive position comes from delivering what we believe to be the highest performance, most cost-effective product offerings in the markets that we serve. The key elements of our strategy are to:

Capitalize on Our Leading Technology to Increase Market Share. We intend to capitalize on our leadership in flow control technology to secure design wins for our products in each new generation of semiconductor capital equipment. In addition to pursuing our existing relationships with OEMs to create these opportunities, we intend to leverage our direct relationships with IC manufacturers to increase their use of our products. We also plan to maintain our commitment to research and development in flow control technology to continue to introduce innovative products for gas and chemical delivery.

Lead the Transition to Modular Solutions. As OEMs continue to outsource the design and manufacturing of elements of their products to a small number of preferred suppliers, we are committed to leading the transition to the use of outsourced process modules. We are already capitalizing on this trend by providing a range of gas and chemical delivery modules for the new semiconductor capital equipment required to process 300 millimeter diameter wafers. We intend to further strengthen and refine our ability to provide a complete gas and chemical delivery solution as OEMs continue to transition more of the responsibility for module design, integration, manufacturing and service to preferred suppliers.

Continue Reshaping the Supply Chain. With our responsibility for module design and manufacturing, we expect to have the opportunity to further reduce costs by proactively managing our supply chain. We also intend to continue to make significant investments in logistics and supply chain management tools as well as enterprise systems. This will increase our manufacturing efficiency while further reducing manufacturing cycle time from order to delivery.

Expand into New Process Modules and Adjacent Markets. We intend to leverage our experience and track record in delivering process modules to OEMs, our technology leadership, our manufacturing operations skills and our global supply chain management capabilities to offer modules for additional elements in semiconductor capital equipment. We also believe there are significant market opportunities in related electronics and advanced technology markets, including micro-electromechanical systems, or MEMS, and biotechnology capital equipment. We intend to evaluate and selectively pursue opportunities to either acquire companies or technologies or enter into strategic alliances that will enhance or expand our business opportunities.

Products and Technology

To ensure the integrity and performance of the manufacturing process, semiconductor device manufacturers require sophisticated measurement and control of the numerous specialty gases and chemicals used in the IC manufacturing process. Our products are utilized in many of the key steps used in the IC manufacturing process, including ion implantation, physical vapor deposition, or PVD, etching, rapid thermal processing and wet processing such as electro-copper plating, or ECP, chemical mechanical polishing, or CMP, and wafer cleaning.

Our products consist of:

Gas Delivery Modules. We design and manufacture process modules that precisely measure and control the delivery of high-purity process gases for semiconductor equipment. Generally, these modules are provided as a combination of gas sticks. Each gas stick is configured for specific gases and flow rates or ranges and is comprised of an MFC and up to six different commodity components. These modules typically come packaged in an enclosure with an integrated electronic control system and proprietary software.

Chemical Blending and Delivery Modules. We provide point-of-use slurry blending modules for CMP processes using advanced slurries and additives to achieve the process specifications for particle distribution and chemistry. We also provide chemical analysis and titration modules that analyze and rebalance the process chemistries that are used in the ECP process to maintain and extend the life of bath chemistries. Our chemical blending and delivery modules are designed taking into account customer-specific process requirements.

Mass Flow Controllers. Our MultiFlo mass flow controllers can be easily configured for any one of a number of gases and flow rates through our proprietary software. These mass flow controllers are the critical instrument on the gas stick that measures and controls gas flow to the process chamber. These products, which are marketed under the brand name Unit Instruments, have been selected as a default standard by several of the leading OEMs because of their high-degree of accuracy and repeatability, superior flow stability and configurability.

As process chambers cycle from step to step in the IC manufacturing process, flow changes commonly cause pressure surges that can create flow instability. Our FloGuard technology in our mass flow controllers is designed to precisely maintain flow control and output stability even during pressure surges, and eliminates the need for an upstream pressure regulator and related instruments. Incorporating our proprietary MultiFlo and FloGuard technology in our gas delivery modules provides better performance and reliability, while reducing IC manufacturing cost by increasing the efficient use of process gases.

Temperature Instruments. We design and manufacture specialty temperature sensors and heaters, which are incorporated in semiconductor manufacturing equipment. Our products are used for testing, monitoring and controlling temperature levels during the IC manufacturing process. Our products are typically custom engineered for OEMs during the initial equipment research and development phase.

Other Products. We design and manufacture process modules and instruments that precisely measure and control the delivery of high-purity process gases and chemicals used in the manufacturing of a variety of electronic and industrial products. Our Unit Process Flow Products line is specifically designed for flow and pressure control of gases and chemicals used in the manufacturing of flat panel displays, fiber optics, fuel cells and MEMS devices, as well as in some industrial vacuum, environmental and analytical applications.

Manufacturing

We are a preferred module supplier to many leading semiconductor OEMs. In order to meet the strict requirements of our customers for quality and timely delivery we have established global manufacturing operations that enable us to provide gas and chemical delivery process modules on a just-in-time basis, in most cases without regard to order size or changes in specifications. All of our manufacturing processes are based on a quality business system that starts in the sales cycle and continues through customer service and support. We operate clean room manufacturing facilities in the United States in Texas, California and Oregon as well as in Ireland and South Korea. Each of our manufacturing facilities is ISO 9001 certified, except for our facility in Oregon that we acquired in connection with our acquisition of Poly Concepts. Each of our service facilities is ISO 9002 certified, except for our recently opened facility in Singapore. We are in the process of obtaining ISO certification for these facilities.

In order to manage customer change requests we use a software configuration tool to automate the engineering design and redesign processes. This tool works directly with our manufacturing resource planning system in order to streamline the procurement, inventory management and manufacturing processes. We also

use consignment material stocking programs in order to better manage changing customer requirements. These approaches enable us to significantly reduce our inventory levels and maintain flexibility.

As one of the largest manufacturers of process modules, we are helping to lead the integration of our industry’s supply chain. We believe our close relationships with key suppliers enables us to receive a level of supplier support that substantially strengthens our competitive advantage. We have also developed an Internet-based system that provides our suppliers with a daily report of their delivery performance and product quality. This results in closer communication with our suppliers and reduces the amount of time we need to spend on inspecting products and managing returns.

We have received service and quality awards from both key customers and independent quality organizations for our performance and quality business processes.

Customers

We market and sell our products principally to OEMs and IC manufacturers. We also market and sell our products to equipment manufacturers in a variety of other industries, including flat panel displays, fiber optics, fuel cells and MEMS devices, as well as certain industrial vacuum, environmental and analytical applications.

Semiconductor Customers. Sales to semiconductor OEMs represented substantially all of our revenues for 1999, 2000 and 2001 and the six months ended June 30, 2002, respectively. We anticipate that sales of our products to the semiconductor industry will continue to account for most of our revenue for the foreseeable future.

Our top five OEM customers by revenues for the twelve months ended June 30, 2002, were:


	Applied Materials, Inc.

ASML Holding N.V.

Axcelis Technologies, Inc.

Lam Research Corporation

Novellus Systems, Inc.

These five OEM customers accounted for 75%, 88%, 73% and 78% of our revenues for 1999, 2000, 2001 and the six months ended June 30, 2002, respectively. Sales to Applied Materials represented 66%, 78%, 64% and 72% of our revenues for 1999, 2000 and 2001 and the six months ended June 30, 2002, respectively.

Flat Panel Display Customers. We sell our products to flat panel display capital equipment manufacturers. Flat panel display manufacturing has fabrication processes similar to those used in manufacturing ICs.

Other Customers. We sell our products to equipment manufacturers and producers of end products in several industrial markets. Our products are used in a variety of analytical, scientific and medical equipment and in advanced technology capital equipment for the manufacturing of fiber optic cables and MEMS devices. In addition, they are used in the PVD processes used by data storage equipment manufacturers and in the production of optical and thin-film layers used on a variety of products.

Sales and Support

Our products are sold primarily through a direct salesforce to customers in the United States, Europe and Asia. We believe providing local, responsive service and support helps to reduce equipment downtime. For this reason, we have developed a regional service and support infrastructure through our service centers and authorized representatives located in the United States in Arizona, Texas and Virginia, as well as internationally in Germany, Ireland, Japan, the People’s Republic of China, Singapore, South Korea and Taiwan, to provide OEMs and IC manufacturers with service and support 24 hours a day, seven days a week. We believe that strong IC manufacturer satisfaction increases industry acceptance of, and standardization around, our technology and products.

We also offer our products through a network of manufacturer representatives, who each bring specific industry expertise and established customer relationships. This provides us with broad geographical coverage of process industries, such as agriculture and petrochemicals.

Research and Development

Our industry continues to experience rapid technological change, requiring us to frequently introduce new products and features. We have made, and expect to continue to make, investments in technology and product development. As of June 30, 2002, we employed more than 100 engineers and scientists engaged in technology and product development. Our technological expertise is demonstrated in our process modules, which incorporate high-precision mechanical engineering, mechanical, thermal and magnetic modeling and electronics and software engineering. Through collaboration with OEMs and IC manufacturers, we work to anticipate changes in technology requirements, the marketplace and emerging industry standards to efficiently focus our research and development efforts.

Research and development expenses were $7.9 million in the year ended December 31, 1999, $8.2 million in the year ended December 31, 2000, $8.9 million in the year ended December 31, 2001 and $3.9 million in the six months ended June 30, 2002. We continue to invest in product development to maintain our technological and market leadership. Areas of focus include new products for 300 millimeter platforms and integrated point-of-use solutions for ECP, chemical blending and replenishment, slurry blending and delivery and wet cleaning applications. We perform our research and development engineering activities principally at our facilities in Milpitas, Redwood City and Yorba Linda, California, Austin, Texas and Tualatin, Oregon.

Competition

Our industry is highly competitive and rapidly evolving. We compete with a number of foreign and domestic suppliers. Our competitors are primarily public companies that compete against us either in high-purity instruments or the design and manufacturing of semiconductor capital equipment process modules. The largest subsystem and components suppliers have focused their efforts primarily on other elements of the semiconductor capital equipment outsourcing market, namely laser sources, power management and wafer handling, and have not competed with us in the gas and chemical delivery module market. These suppliers could seek to enter our markets in the future. When we compete for new business at OEMs that have not yet outsourced their gas and chemical delivery systems, we face competition from both process module suppliers as well as the OEM’s internal engineering group. Some of our current and future competitors may have greater financial and other resources than we do.

The primary competitive factors in our industry are flow control technology, quality, price, service and historical customer relationships. We provide our customers with:


	•	advanced flow control technology;

	•	high performance modular solutions;

	•	design expertise;

	•	collaborative product development;

	•	high product quality and reliability;

	•	reduced inventory requirements;

	•	flexible product delivery; and

	•	global support.

We believe these capabilities provide us with the ability to compete favorably in the gas and chemical delivery process module markets.

Employees

As of June 30, 2002, we had 1,006 full-time employees, 95 of whom were engaged in research and development, 54 in sales and marketing, 43 in sustaining and application engineering, 37 in customer service and support, 112 in finance and administration and 665 in operations. As of June 30, 2002, none of our employees were represented by a labor union, and we have not experienced any work stoppages. We consider our relations with our employees to be good.

Facilities

Our corporate headquarters is a 94,100 square foot facility in Milpitas, California that we occupy under a lease that will expire in 2005. We lease additional facilities with a collective total of approximately 343,100 square feet in Arizona, California, Oregon, Texas, Virginia, Ireland, Singapore and South Korea, all under leases with expiration dates ranging from 2003 to 2008; and own one facility totaling 7,500 square feet in Ireland. We maintain engineering and manufacturing operations in our California, Texas, Oregon, Ireland and South Korea locations, and sales and customer support centers in all of our locations. We believe we have adequate facilities to meet our currently anticipated requirements and that suitable or substitute facilities will be available if required.

The following table provides the total square footage, the nature of the operations and the total square footage of cleanroom space at each facility we lease or own. This table aggregates facilities by site for ease of presentation.

Functions

Total

Manufacturing and/or

Square

Engineering/

Service Facilities

Feet

R&D

Manufacturing

Service

Cleanroom

Austin, Texas

142,400

23,200

Milpitas, California

94,100

17,000

Yorba Linda, California

82,800

13,900

Tualatin, Oregon

76,600

20,000

Redwood City, California

16,100

—

Dublin, Ireland

10,300

1,000

Sungham City, South Korea

6,400

1,100

Mesa, Arizona

6,100

900

Richmond, Virginia

4,200

500

Singapore

3,100

400

Richardson, Texas

2,600

500

444,700

78,500

Intellectual Property

Our success depends, in part, upon our ability to maintain and protect our proprietary technology and to conduct our business without infringing the proprietary rights of others. We rely on patent, copyright, trademark and trade secret protection, as well as contractual restrictions, in the United States and in other countries to protect our proprietary rights in our products and our business.

As of June 30, 2002, we had 31 patents in the United States and 38 patents in other countries. These patents expire at various years through 2021. No patents that we consider significant expire during the next five years. In addition, as of June 30, 2002, we had 29 patent application pending worldwide, including 13 United States applications, 14 foreign national stage applications and two Patent Cooperation Treaty applications. We do not know whether our current patent applications, or any future patent applications that we may file, will result in a patent being issued with the scope of the claims we seek, or at all, or whether any patents we may receive will be challenged or invalidated. Even if additional patents are issued, our patents might not provide sufficiently broad coverage to protect our proprietary rights or to avoid a third party claim against one or more of our products or technologies.

We have a number of trademarks that we consider important to our business, including MultiFlo, FloGuard and Unit Instruments. These trademarks are protected by registration in the United States and other countries in which we market our products.

We routinely require our employees, customers, suppliers and potential business partners to enter into confidentiality and non-disclosure agreements before we disclose to them any sensitive or proprietary information regarding our products, technology, or business plans. We require employees to assign to our company proprietary information, inventions and other intellectual property they create, modify or improve.

Legal protections afford only limited protection for our proprietary rights. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Others might independently develop similar or competing technologies or methods or design around our patents. In addition, leading companies in the semiconductor industry have extensive patent portfolios and other intellectual property with respect to semiconductor technology. In the future, we might receive claims that we are infringing intellectual property rights of others or that our patents or other intellectual property rights are invalid.

We have invested significant time and resources in our technology, and we may be required to enforce our intellectual property rights against one or more third parties. In the future, litigation may be necessary to defend against claims of infringement or invalidity, to determine the validity and scope of our proprietary rights or those of others, to enforce our intellectual property rights or to protect our trade secrets. Intellectual property litigation is expensive and time consuming and could divert management’s attention from running our business. If an infringement claim against us resulted in a ruling adverse to us, we could be required to pay substantial damages, cease the use or sale of infringing products and expend significant resources to develop non-infringing technology, discontinue the use of certain technology or obtain a license to the technology. We cannot predict whether a license agreement would be available, or whether the terms and conditions would be acceptable to us. In addition, many of our customer contracts contain provisions that require us to indemnify our customers for third party intellectual property infringement claims, which would increase the cost to us of an adverse ruling in such a claim. Adverse determinations could also prevent us from licensing our technologies and methods to others.

Governmental Regulation

Our operations are subject to federal, state and local regulatory requirements and foreign laws, relating to environmental, waste management and health and safety matters, including measures relating to the release, use, storage, treatment, transportation, discharge, disposal and remediation of contaminants, hazardous substances and wastes, as well as practices and procedures applicable to the construction and operation of our plants. We cannot assure you that we will not incur material costs and liabilities or that our past or future operations will not result in exposure to injury or claims of injury by employees or the public. Although some risk of costs and liabilities related to these matters is inherent in our business, as with many similar businesses, we believe that our business is operated in substantial compliance with applicable regulations. However, new, modified or more stringent requirements or enforcement policies could be adopted, which could adversely affect us.

Legal Proceedings

At the current time, we are not a party to any pending legal proceeding that we believe to be material.

MANAGEMENT

Executive Officers and Directors

Our executive officers and directors, their ages as of June 30, 2002, and their positions as of the completion of this offering, are as follows:


Name	Age		Position

David J. Shimmon		43	Chief Executive Officer and Chairman
Daniel C. Rubin		39	President and Vice Chairman
John R. Ferron		37	Chief Financial Officer
Albert (Hong Chuan) Ooi		47	Senior Vice President, Global Operations
Joseph W. Foster		38	Senior Vice President, Customer Interface and Marketing
R. David Andrews		40	Director
Neil R. Austrian		62	Director
Charles Ayres		42	Director
Grant G. Behrman		48	Director
Gregory J. Chiate		31	Director
Milan Mandaric		63	Director
William M. Matthes		42	Director
Frank L. Schiff		42	Director
Ted Virtue		41	Director

David J. Shimmon has served as our Chief Executive Officer since October 1999, as one of our directors since August 2000 and as the Chairman of our board of directors since October 2000. Since March 1996, Mr. Shimmon has also served as President and Chief Executive Officer of KGI and its predecessor entities. From October 1998 to August 2000, Mr. Shimmon also served as President and Chief Operating Officer of USFilter. From January 1998 to October 1998, Mr. Shimmon served as President of USFilter’s Industrial Products and Services Group. Mr. Shimmon joined Kinetic Systems in 1990 as an Executive Vice President.

Daniel C. Rubin has served as President of KFS since August 2001. Upon completion of this offering, Mr. Rubin will be elected as Vice Chairman of our board of directors. Mr. Rubin joined Kinetic Systems in October 1989 and has held several positions, including President of the Electronics Division of KGI, with responsibility for KFS and the process systems equipment manufacturing operations of KSI, from March 1998 to July 2001 and Vice President, Sales and Marketing of KGI from January 1994 to February 1998.

John R. Ferron has served as our Chief Financial Officer since February 2000. From February 1998 to February 2000, Mr. Ferron served as Senior Finance Director and Division Controller of Compaq Computer Corporation, a computer manufacturer. From July 1996 to February 1998, Mr. Ferron served as Vice President of Finance and Division Controller of Litton Industries, Inc., a provider of defense and commercial electronics technology, components and materials for government and commercial customers.

Albert (Hong Chuan) Ooi has served as the Senior Vice President, Global Operations of KFS since September 2000. From May 1997 to August 2000, Mr. Ooi served as Vice President, Santa Clara Manufacturing of 3Com Corporation, a provider of networking products and solutions.

Joseph W. Foster has served as the Senior Vice President, Customer Interface and Marketing of KFS since January 1999. From April 1996 to December 1998, Mr. Foster served as Vice President of Insync Systems, Inc., a provider of gas delivery design and subassembly manufacturing.

R. David Andrews has served as one of our directors since January 2002. Since April 1995, Mr. Andrews has served as President and Managing Partner of Gryphon Investors, Inc., a private equity investment firm. Mr. Andrews also serves on the boards of directors of several private companies.

Neil R. Austrian has served as one of our directors since July 2001. Mr. Austrian has been a private investor since January 2000. From March 1991 to December 1999, Mr. Austrian served as President and Chief Operating Officer for the National Football League, a professional football organization. Mr. Austrian is a member of the advisory board of DB Capital Partners, Inc. He also participates in a co-investment plan that receives an economic interest in DB Capital investments, including Celerity. Mr. Austrian also serves on the boards of directors of Office Depot, Inc., a supplier of office products and services, and REFAC Technology Development Corporation, an intellectual property management consulting firm.

Charles Ayres has served as one of our directors since August 2000. From June 1999 to the present, Mr. Ayres has served as a Managing Director of DB Capital Partners, Inc., a private equity investment firm. From September 1991 to March 1999, Mr. Ayres served as a Partner of McCown DeLeeuw & Co., a private equity investment firm. Mr. Ayres also serves on the board of directors of Strayer Education, Inc., an education services holding company.

Grant G. Behrman has served as one of our directors since August 2000. From February 1991 to the present, Mr. Behrman has been a founding managing partner of a private equity investment firm, Behrman Capital, which is comprised of various affiliated entities, including Behrman Capital III L.P. Mr. Behrman is a managing member of Behrman Brothers III L.L.C., which is the sole general partner of Behrman Capital III L.P. Mr. Behrman also serves on the board of directors of The Management Network Group, Inc., a provider of management consulting services, and several private companies.

Gregory J. Chiate has served as one of our directors since August 2000. From July 1999 to the present, Mr. Chiate has served as Vice President of Behrman Capital III L.P., a private equity investment firm. From January 1995 to June 1999, Mr. Chiate served as Vice President of BT Capital Partners, Inc., a private equity investment firm.

Milan Mandaric has served as one of our directors since August 2000. Mr. Mandaric is a private investor. Since October 1989, Mr. Mandaric has also served as Chairman and Chief Executive Officer of MM Holdings International, a private equity investment firm. From 1994 to November 1997, Mr. Mandaric was Chairman and Chief Executive Officer of Elexsys International, Inc., a printed circuit board and backpanel manufacturer. Previously, he was founder, Chairman and President of Sanmina Corporation, a leading independent supplier of backpanel assemblies, printed circuit board fabrication and contract assembly. Mr. Mandaric is a limited partner of Behrman Capital. Mr. Mandaric is also an adviser of Behrman Capital and from time to time assists Behrman Capital in connection with identifying and making investments and co-invests with Behrman Capital. Mr. Mandaric has not received any salary or other fees from Behrman Capital.

William M. Matthes has served as one of our directors since August 2000. From April 1996 to the present, Mr. Matthes has served as a partner of Behrman Capital, a private equity investment firm. Mr. Matthes was promoted to Managing Partner of Behrman Capital in January 1999. Mr. Matthes is a managing member of Behrman Brothers III, L.L.C., which is the sole general partner of Behrman Capital III L.P. Mr. Matthes also serves on the boards of directors of The Management Network Group, Inc., a provider of management consulting services, and several private companies.

Frank L. Schiff has served as one of our directors since May 2001. From October 1999 to the present, Mr. Schiff has served as a Managing Director of DB Capital Partners, Inc., a private equity investment firm. From January 1992 to September 1999, Mr. Schiff was a partner at White & Case, L.L.P.

Ted Virtue has served as one of our directors since May 2001. From June 1999 to the present, Mr. Virtue has served as Chairman and Chief Executive Officer of DB Capital Partners, Inc., a private equity investment firm. In 1990, Mr. Virtue joined Bankers Trust Co., a financial services company, and served as President of the investment banking division of BT Alex Brown, Inc. from 1997 to 1999 and President of Deutsche Bank Alex Brown from June 1999 to December 1999.

Board Composition

Our board of directors currently consists of eleven members. Messrs. Andrews, Chiate, Matthes and Virtue will resign from our board of directors upon and subject to the completion of this offering. In addition,

following the completion of this offering, we will appoint an additional independent director to our board of directors. As a result, our board of directors will consist of eight members upon completion of this offering, which will be divided into three classes of directors who will serve in staggered three-year terms. The class I directors, initially Messrs. and , will have terms that will expire at our 2003 annual meeting of stockholders. The class II directors, initially Messrs. , and , will have terms that will expire at our 2004 annual meeting of stockholders. The class III directors, initially Messrs. , and , will have terms that will expire at our 2005 annual meeting of stockholders. As a result, only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing on our board of directors for the remainder of their terms. This classification of our board may make it more difficult for a third party to acquire, or may discourage a third party from acquiring, control of our company.

There are no family relationships among any of our directors or executive officers.

Board Committees

Our board of directors has established two standing committees: the audit committee and the compensation committee.

Our audit committee will consist of Messrs. Austrian, Mandaric and an independent director to be appointed to our board of directors upon the completion of this offering. The audit committee reviews and evaluates our financial statements, accounting practices and our internal audit and control functions, makes recommendations to our board regarding the selection of our independent auditors and reviews the results and scope of the audit and other services provided by our independent auditors.

Our compensation committee will consist of Messrs. Behrman, Mandaric and Schiff. The compensation committee reviews and makes recommendations to our board concerning the compensation and benefits of our officers and directors, administers our stock option and employee benefits plans and reviews general policy relating to compensation and benefits.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee at any time has been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee. Our full board of directors made all compensation decisions prior to the creation of our compensation committee.

Director Compensation

Effective upon the completion of this offering, our non-employee directors who are not affiliated with one of our 10% stockholders will receive $50,000 in annual compensation for their services as one of our directors. Messrs. Austrian and Mandaric, along with the independent director who will be appointed to our board of directors following completion of this offering, will receive this compensation. Our other directors will not receive cash compensation for their services as directors. All of our directors are reimbursed for their reasonable expenses in attending board and board committee meetings. The following directors have been granted options to purchase shares of our common stock under our 2000 Stock Option Plan or 2002 Stock Option Plan B or awards of stock under our 2000 Deferred Stock Plan:


	•	In May 2002, we granted Mr. Austrian an option under our 2000 Stock Option Plan to purchase 50,000 shares of our common stock at an exercise price of $3.00 per share.

	•	In March 2002, we granted Mr. Austrian an option under our 2000 Stock Option Plan to purchase 50,000 shares of our common stock at an exercise price of $3.00 per share.

	•	In October 2000, we granted Mr. Mandaric an option under our 2000 Stock Option Plan to purchase 579,520 shares of our common stock at an exercise price of $3.00 per share.


	•	In August 2001, we awarded Mr. Mandaric 579,520 shares of our common stock under our 2000 Deferred Stock Plan. In July 2002, we converted these shares into an option under our 2002 Stock Option Plan B to purchase 695,424 shares of our common stock at an exercise price of $3.00 per share.

Each director will be eligible to participate in our 2002 Equity Incentive Plan. Under this plan, option grants to directors who are not our employees, employees of a parent or subsidiary of ours or affiliated with one of our 10% or greater stockholders will be automatic and non-discretionary. Each non-employee director who is not affiliated with one of our 10% stockholders who becomes a member of our board of directors on or after the date of this offering will be granted an option to purchase 50,000 shares of our common stock as of the date that director joins the board. Immediately after each annual meeting of our stockholders, each non-employee director who is not affiliated with one of our 10% stockholders will be granted an option to purchase 20,000 shares of our common stock, provided, that the director is a member of our board of directors on that date and has served continuously as a member of the board of directors for a period of at least twelve months since the last option grant to the director. If less than twelve months have passed, then the number of shares subject to the option granted will be equal to 20,000 multiplied by a fraction, the numerator of which is the number of days that have elapsed since the last option grant to that director and the denominator of which is 365 days.

Each option will have an exercise price equal to the fair market value of our common stock on the date of grant. The options will have ten-year terms and will terminate three months after the date the director ceases to be a director or consultant or twelve months if the termination is due to death or disability. All options granted to non-employee directors not affiliated with one of our 10% stockholders who first became members of our board of directors after the date of this offering will vest over a four-year period, with 25% of the shares vesting on the first anniversary of the date of grant and 2.08333% of the shares vesting monthly thereafter. In the event of our dissolution or liquidation or a change in control transaction, options granted to our non-employee directors not affiliated with one of our 10% stockholders under the plan will become 100% vested and exercisable in full.

Executive Compensation

The following table presents information regarding the compensation awarded to, earned by or paid to our chief executive officer and each of our four other most highly compensated executive officers during the year ended December 31, 2001. We refer to these five executive officers as our named executive officers. We have excluded information for Kurt Gilson, the President and Chief Operating Officer of KSI, and Julien Frost, East Region President of KSI, who were both one of our four most highly compensated executive officers during the year ended December 31, 2001, as they will not be employed by us following our business separation that will occur concurrent with the completion of this offering. The compensation table excludes other compensation in the form of perquisites and other personal benefits to a named executive officer where that compensation constituted less than 10% of the named executive officer’s total annual salary and bonus in the year ended December 31, 2001.

Summary Compensation Table



						Long-Term
						Compensation
						Awards⁽¹⁾
		Annual
		Compensation				Restricted		Securities
						Stock		Underlying
Name and Principal Positions		Salary		Bonus		Awards⁽²⁾		Options

David J. Shimmon
	Chief Executive Officer and Chairman	$	500,000	$	600,000	$	—		134,000
Daniel C. Rubin
	President and Vice Chairman		282,000		275,970		—		—
John R. Ferron
	Chief Financial Officer		225,000		158,900		—		—

Long-Term

Compensation

Awards⁽¹⁾

Annual

Compensation

Restricted

Securities

Stock

Underlying

Name and Principal Positions

Salary

Bonus

Awards⁽²⁾

Options

Albert (Hong Chuan) Ooi

Senior Vice President, Global Operations

214,120

45,750

150,000

⁽³⁾

20,000

Joseph W. Foster

Senior Vice President, Customer Interface and Marketing

180,000

20,250

—


⁽¹⁾	See “—Employee Benefit Plans and Option Grants” for a description of the adjustment of the exercise price of, and number of shares subject to, outstanding options that will occur in connection with our business separation.


⁽²⁾	See “—Employee Benefit Plans and Option Grants— 2000 Deferred Stock Plan” for a description of the conversion of these deferred stock awards into options under our 2002 Stock Option Plan B that occurred on July 1, 2002.


⁽³⁾	Represents an award of 50,000 shares of our common stock under our 2000 Deferred Stock Plan having a fair market value of $3.00 per share as of December 31, 2001, as determined by our board of directors.

Option Grants in 2001

The following table presents information regarding grants of stock options to acquire shares of our common stock during the year ended December 31, 2001 to our named executive officers. All of the options listed on the following table expire ten years from the date of grant and were granted at an exercise price equal to the fair market value of our common stock as determined by our board of directors on the date of grant. The percentage of total options granted to employees in the year ended December 31, 2001 is based on options to purchase a total of 828,600 shares of our common stock granted in 2001.

Individual Grants

Potential Realizable

Value At Assumed

Number of

% of Total

Annual Rates of Stock

Securities

Options

Price Appreciation for

Underlying

Granted to

Exercise

Option Term

Options

Employees

Price

Expiration

Name

Granted⁽¹⁾

in 2001

Per Share

Date

10%

David J. Shimmon

Chief Executive Officer and

Chairman

134,000

16.2

3.00

6/15/2011

Daniel C. Rubin

President and Vice Chairman

—

John R. Ferron

Chief Financial Officer

—

Albert (Hong Chuan) Ooi

Senior Vice President,

Global Operations

20,000

2.4

3.00

7/1/2011

Joseph W. Foster

Senior Vice President,

Customer Interface and Marketing

—


⁽¹⁾	See “—Employee Benefit Plans and Option Grants” for a description of the adjustment of the exercise price of, and number of shares subject to, outstanding options that will occur in connection with our business separation.

Potential realizable values are calculated by:


	•	multiplying the number of shares of our common stock subject to a given option by the assumed initial public offering price of $ per share;


	•	assuming that the aggregate stock value derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire ten-year term of the option; and

	•	subtracting from that result the total option exercise price.

The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not represent our estimate or projection of future stock price growth.

In addition, in May 2002, we granted options to purchase 21,150 shares of our common stock to Mr. Rubin and 18,000 shares of our common stock to Mr. Ferron, each having an exercise price of $3.00 per share. Each of these options were fully vested upon grant.

Unexercised Stock Options and Option Values

The following table presents the number of shares of our common stock subject to unexercised options held by our named executive officers at December 31, 2001 and the value of the unexercised options that are in-the-money. Such value is calculated based on the difference between an assumed initial public offering price of $ per share and the exercise price for the shares underlying the option, multiplied by the number of shares underlying the option. None of the named executive officers exercised any options to purchase our common stock in 2001.

Number of Securities

Value of Unexercised

Underlying Unexercised

In-The-Money

Options at

December 31, 2001⁽¹⁾

December 31, 2001

Name

Exercisable

Unexercisable

Exercisable

Unexercisable

David J. Shimmon
Chief Executive Officer and Chairman

629,833

1,204,167

Daniel C. Rubin
President and Vice Chairman

160,416

389,584

John R. Ferron
Chief Financial Officer

43,750

106,250

Albert (Hong Chuan) Ooi
Senior Vice President, Global Operations

20,416

69,584

Joseph W. Foster
Senior Vice President, Customer Interface and Marketing

26,250

63,750


⁽¹⁾	See “—Employee Benefit Plans and Option Grants” for a description of the adjustment of the exercise price of, and number of shares subject to, outstanding options that will occur in connection with our business separation.

Employment Agreements and Change of Control Arrangements

We entered into an employment offer letter on January 25, 2000 with John R. Ferron, our Chief Financial Officer. This letter established Mr. Ferron’s initial base salary at $225,000 per year and provided for a hiring bonus of $50,000. We also agreed to loan Mr. Ferron $250,000 to assist him in purchasing a home and agreed to provide for reimbursement of his relocation expenses.

We entered into an employment offer letter on August 1, 2000 with Albert (Hong Chuan) Ooi, our Senior Vice President, Global Operations. This letter established Mr. Ooi’s initial annual base salary at $210,000 per year and provided for a hiring bonus of $30,000. On October 24, 2000, we granted Mr. Ooi an option to purchase 70,000 shares of our common stock at an exercise price of $3.00 per share. Of these shares, 17,500 shares vested on October 24, 2001 and the remainder vests ratably over a 36-month period. Pursuant to this offer letter, on October 6, 2000, Mr. Ooi purchased 49,993 shares of our common stock and we loaned

Mr. Ooi $200,000 in cash to purchase 66,667 shares of our common stock from DB Capital, all of which remains outstanding. This loan is secured by a stock pledge and security agreement in connection with this purchase of our common stock. This loan accrues interest at a rate of 6.0% and is due upon the earlier of the transfer or sale by Mr. Ooi of the shares, the occurrence of a transaction as a result of which a public market exists for Mr. Ooi’s shares or any securities for which the shares have been exchanged, the termination of Mr. Ooi’s employment and October 5, 2006.

Employee Benefit Plans and Option Grants

2000 Stock Option Plan

We have historically granted options to purchase our common stock under our 2000 Stock Option Plan. Our board of directors adopted our 2000 Stock Option Plan in October 2000. As of June 30, 2002, there were outstanding options to purchase a total of 11,151,371 shares of our common stock under this plan, and 862,787 shares remained available for future grants. Options granted under our incentive option plan are subject to terms substantially similar to those described below with respect to options to be granted under our 2002 Equity Incentive Plan. This plan will terminate immediately prior to the completion of this offering, and no further options will be granted under this plan. However, the termination of this plan will not affect any outstanding options, which will remain outstanding until they are exercised, terminate or expire.

In order to preserve the intrinsic value of outstanding stock options held by our employees, we will adjust the number of stock options by dividing the number of shares purchasable under these outstanding options by a conversion ratio determined on the first trading day of our common stock on The Nasdaq National Market and adjust the exercise price by multiplying the original exercise price per share of each option by the same ratio. This conversion ratio will be determined by dividing the closing price of our common stock on The Nasdaq National Market on the first trading day by the sum of the closing price plus the per share value of the shares of the Kinetic Systems companies distributed to our stockholders.

As of June 30, 2002, we had outstanding options to purchase 4,883,734 shares of our common stock held by employees who will remain with Celerity following the completion of our business separation, each with an exercise price of $3.00 per share. Assuming a closing price for our common stock on The Nasdaq National Market on the first trading day of $ per share, these options would convert into options to purchase shares of our common stock, each with an exercise price of $ per share.

In the event of a change in control of Celerity, our compensation committee may, in its discretion, provide that options then outstanding under the 2000 Stock Option Plan will be accelerated and become immediately exercisable. The plan also gives the compensation committee discretion, in the event of such a change in control transaction, to substitute for shares of our common stock subject to options outstanding under the plan shares or other securities of the surviving or successor corporation, or another corporate party to the transaction, with approximately the same value, or to cash out outstanding options based upon the highest value of the consideration received for our common stock in such transaction, or, if higher, the highest fair market value of our common stock during the 30 business days immediately prior to the closing or expiration date of such transaction, reduced by the option exercise price of the options cashed out. The compensation committee may also provide that any options subject to any such acceleration, adjustment or conversion cannot be exercised after such a change in control transaction.

Treatment of Options Held by Kinetic Systems’ Employees

exercise price by multiplying the original exercise price per share of each vested option by the same ratio. This conversion ratio will be determined by dividing the closing price of our common stock on The Nasdaq National Market on the first trading day by the sum of the closing price plus the per share value of the shares of the Kinetic Systems companies distributed to our stockholders. All stock options held by employees of Kinetic Systems that are unvested as of the date of the completion of this offering will be converted into unvested stock options of Kinetic Systems.

We had outstanding options to purchase 2,541,024 shares of our common stock held by employees of the Kinetic Systems companies that were vested as of June 30, 2002, each with an exercise price of $3.00 per share. Assuming a closing price for our common stock on The Nasdaq National Market on the first trading day of $ per share, these vested options would convert into options to purchase shares of our common stock, each with an exercise price of $ per share. By way of example, if one of our employees holds options to purchase 1,000 shares of our common stock with an exercise price of $3.00 per share, this option would be converted into an option to purchase shares at an exercise price of $ per share.

2000 Deferred Stock Plan

Our board of directors adopted our 2000 Deferred Stock Plan in October 2000. As of June 30, 2002, we had outstanding 4,279,520 shares of our common stock issued under this plan to 14 individuals, and 66,879 shares remained available for future grants. The holders of these shares may not transfer, vote or exercise any other rights with respect to these shares until the occurrence of a transaction or series of transactions pursuant to which DB Capital, one of our stockholders, receives at least an aggregate of $100 million in cash proceeds from the sale of our capital stock with an internal rate of return of at least 30% if the transaction or transactions occur prior to August 30, 2005, or an internal rate of return of at least 25% if the transaction or transactions occur after August 30, 2005.

On July 1, 2002, we converted these shares of restricted stock into options to purchase an aggregate of 5,135,424 shares of our common stock, each having an exercise price of $3.00 per share.

2002 Stock Option Plan B

Our board of directors adopted the 2002 Stock Option Plan B in June 2002 in order to provide stock option awards in substitution for awards of our common stock under our 2000 Deferred Stock Plan that were converted on July 1, 2002. We have reserved 5,250,000 shares for issuance under the 2002 Stock Option Plan B. On July 1, 2002, we issued options to purchase 5,135,424 shares of our common stock under this plan.

The following table sets forth the number of shares subject to options granted under the 2002 Stock Option Plan B to our executive officers and directors:


		Shares Subject
Name		to Options

David J. Shimmon
	Chief Executive Officer and Chairman		1,740,000
Daniel C. Rubin
	President and Vice Chairman		1,020,000
John R. Ferron
	Chief Financial Officer		240,000
Albert (Hong Chuan) Ooi
	Senior Vice President, Global Operations		60,000
Joseph W. Foster
	Senior Vice President, Customer Interface and Marketing		150,000
Milan Mandaric
	Director		695,424

Each option has a strike price of $3.00 per share and will not vest until the fifth anniversary of the date of grant, at which time they will fully vest. The vesting of these options will accelerate in full upon the occurrence of a transaction or series of transactions pursuant to which DB Capital, one of our 5% or greater stockholders, receives an aggregate of at least $100 million in cash proceeds from the sale of our capital stock and/or the sale of Kinetic Systems’ capital stock with an internal rate of return of at least 30% if the transaction or transactions occur on or prior to August 30, 2005, or an internal rate of return of at least 25% if the transaction or transactions occur after August 30, 2005. All other terms of options issued under the 2002 Stock Option Plan B will be substantially similar to those described below with respect to options to be granted under our 2002 Equity Incentive Plan. The exercise price of the stock options issued under our 2002 Stock Option Plan B will be adjusted as a result of our business separation in the same manner as described in “— 2000 Stock Option Plan.”

2002 Equity Incentive Plan

In 2002, our board of directors adopted and our stockholders approved our 2002 Equity Incentive Plan. The 2002 Equity Incentive Plan will become effective on the date of this prospectus. The 2002 Equity Incentive Plan authorizes the award of options, restricted stock and stock bonuses.

The 2002 Equity Incentive Plan will be administered by the compensation committee of our board of directors, each member of which is an outside director as defined under applicable federal tax laws. Our compensation committee will have the authority to interpret this plan and any agreement entered into under the plan, grant awards and make all other determinations for the administration of the plan.

Our 2002 Equity Incentive Plan provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. The incentive stock options may be granted only to our employees or employees of any of our subsidiaries. The nonqualified stock options, and all awards other than incentive stock options, may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. However, consultants, independent contractors and advisors are only eligible to receive awards if they render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant.

The maximum term of the options granted under our 2002 Equity Incentive Plan is ten years. The awards granted under this plan may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee. Our compensation committee may allow exceptions to this restriction for awards that are not incentive stock options. Options granted under our 2002 Equity Incentive Plan generally expire three months after the termination of the optionee’s service to us or to a parent or subsidiary of ours, or 12 months if the termination is due to death or disability. In the event an optionee’s service to us or to a parent or subsidiary of ours is terminated for cause, such optionee’s options shall expire on the optionee’s termination date. In the event of a liquidation, dissolution or change in control transaction, except for options granted to non-employee directors, our compensation committee may, in its discretion, provide that options then outstanding under the 2002 Equity Incentive Plan will be accelerated and become immediately exercisable. The plan also gives the compensation committee discretion, in the event of such a change in control transaction, to substitute, for shares of our common stock subject to options outstanding under the plan, shares or other securities of the surviving or successor corporation, or another corporate party to the transaction, with approximately the same value, or to cash out outstanding options based upon the highest value of the consideration received for our common stock in such transaction, or, if higher, the highest fair market value of our common stock during the 30 business days immediately prior to the closing or expiration date of such transaction, reduced by the option exercise price of the options cashed out. The compensation committee may also provide that any options subject to any such acceleration, adjustment or conversion cannot be exercised after such a change in control transaction.

We have reserved 7,500,000 shares of our common stock for issuance under the 2002 Equity Incentive Plan. In addition, any shares issued under our 2000 Stock Option Plan that are forfeited or repurchased by us, or that are issuable upon exercise of options granted pursuant to the 2000 Stock Option Plan that expire or become unexercisable for any reason without having been exercised in full, will no longer be available for grant and issuance under the 2000 Stock Option Plan, but will be available for grant and issuance under the 2002 Equity Incentive Plan. The number of shares reserved issuance under the plan will increase automatically on January 1 of each year starting in 2003 by an amount equal to 1% of our total outstanding shares as of the immediately preceding December 31, provided that no more than 50,000,000 shares shall be issued as incentive stock options.

Shares available for grant and issuance under our 2002 Equity Incentive Plan include:


	•	shares of our common stock issuable upon exercise of an option granted under this plan that is terminated or cancelled before the option is exercised;

	•	shares of our common stock issued upon exercise of any option granted under this plan that we repurchase at the original purchase price;

	•	shares of our common stock subject to awards granted under this plan that are forfeited or that we repurchase at the original issue price; and

	•	shares of our common stock subject to stock bonuses granted under this plan that otherwise terminate without shares being issued.

During any calendar year, no person will be eligible to receive more than 2,000,000 shares, or 3,000,000 shares in the case of a new employee, under the 2002 Equity Incentive Plan. The 2002 Equity Incentive Plan will terminate in June 2012, unless it is terminated earlier by our board of directors.

401(k) Plan

We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code that includes a cash or deferred arrangement under Section 401(k) of the Internal Revenue Code. Employees who are at least 18 years old are generally eligible to participate and may enter the 401(k) Plan as of their date of hire. Participants may make pre-tax salary deferral contributions to the plan of up to 16% of their eligible compensation, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. We make matching contributions to the 401(k) Plan generally equal to 50% of each participant’s pre-tax salary deferrals that do not exceed 7% of the participant’s eligible compensation paid into the 401(k) Plan for the plan year. Contributions by the participants or us to the plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, would generally be deductible by us when made. Contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives.

Indemnification of Directors and Officers and Limitation of Liability

Our certificate of incorporation eliminates the personal liability of a director for monetary damages resulting from any breach of his fiduciary duty as a director to the fullest extent permitted by law. The Delaware General Corporation Law does not permit a provision in a corporation’s certificate of incorporation that would eliminate this liability for:


	•	for any breach of the director’s duty of loyalty to us or our stockholders;

	•	for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;


	•	for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

	•	for any transaction from which the director derived an improper personal benefit.

While these provisions provide directors with protection from awards for monetary damages or breaches of their duty of care, they do not eliminate this duty. Accordingly, these provisions will have no effect on the availability of equitable remedies, such as an injunction or rescission, based on a director’s breach of his or her duty of care. The provisions described above apply to an officer of a corporation only if he or she is a director of the corporation and is acting in his capacity as director, and do not apply to the officers of the corporation who are not directors.

Our bylaws provide that:


	•	we shall indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions where indemnification is not permitted by applicable law;

	•	we shall advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and

	•	the rights conferred in the bylaws are not exclusive.

In addition to the indemnification required in our certificate of incorporation and bylaws, before the completion of this offering, we intend to enter into indemnification agreements with each of our directors and executive officers. These agreements will provide for the indemnification of our directors and executive officers for all expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were our agents. We also intend to obtain directors’ and officers’ insurance to cover our directors, officers and some of our employees for liabilities, including liabilities under securities laws. We believe that these indemnification provisions and agreements and this insurance are necessary to attract and retain qualified directors and executive officers.

The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification by us is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

RELATED PARTY TRANSACTIONS

Since our inception, we have not been a party to, and we have no plans to be a party to, any transaction or series of similar transactions in which the amount involved exceeded or will exceed $60,000 and in which any current director, executive officer, holder of more than 5% of our common stock or entities affiliated with them had or will have an interest, other than as described under “Management” and in the transactions described below.

2000 Buy-Out

In August 2000, as part of the 2000 Buy-Out, we acquired KGI. In the 2000 Buy-Out, we paid $304.0 million in cash, issued $120.0 million in notes, assumed certain indebtedness and provided certain guarantees related to the acquired companies and issued warrants to USFilter. In connection with this transaction we paid DB Capital and Behrman Capital equity placement fees of $9.0 million and $4.5 million, respectively. As part of the 2000 Buy-Out, we entered into several transactions with related parties.

The following table indicates the sources of funds for the 2000 Buy-Out and the uses of funds in that transaction (in thousands):


Sources of Funds:
	Equity	$	275,000
	Term Loan		150,000
	Subordinated Debt		70,000
	Cash on Balance Sheet		15,000

		$	510,000

Uses of Funds:
	USFilter	$	254,000
	USFilter Intercompany Debt Obligation		229,973
	Expenses and Fees		26,027

		$	510,000

In addition, we issued junior notes with an aggregate principal amount of $50.0 million to USFilter, bringing the total consideration paid to $304.0 million.

Secured Credit Agreements. In connection with the 2000 Buy-Out, we executed certain credit agreements arranged by Bankers Trust, Inc., an affiliate of DB Capital, under which KGI obtained a secured term loan of $150.0 million and a secured revolving line of credit of up to approximately $110.0 million from a syndicate of banks and lending institutions. The revolving line of credit was subsequently reduced to $95.0 million. KGI’s obligations under the term loan and the revolving credit facility are guaranteed by us and some of our subsidiaries and secured by a security interest in substantially all of the assets of KGI and each of the guarantors granted to the lenders. In connection with these credit agreements, we paid Bankers Trust, Inc., an affiliate of DB Capital, arrangement and debt syndication fees of $3.2 million. Among the lenders was Deutsche Bank AG, Cayman Islands Branch, an affiliate of DB Capital, which agreed to lend us up to an aggregate of $210.0 million under the term loan and revolving credit facility. DB Capital holds more than 5% of our common stock. In addition, Messrs. Ayres, Schiff and Virtue, each of whom is one of our directors, are affiliated with DB Capital.

Senior Subordinated Promissory Notes and Warrants. In connection with the secured credit agreements, we entered into a securities purchase agreement with certain investors, pursuant to which we issued an aggregate of $70.0 million of senior subordinated promissory notes and warrants to purchase up to an aggregate of 3,324,891 shares of our common stock at an exercise price of $.01 per share. In connection with these notes, we paid Deutsche Bank Securities, Inc., an affiliate of DB Capital, a mezzanine placement fee of $2.1 million. Of the senior subordinated promissory notes and warrants issued, Deutsche Bank Securities, Inc., an affiliate of DB Capital, was issued a promissory note in the amount of $12.5 million and warrants to purchase 593,731 shares of our common stock at an exercise price of $.01 per share.

Issuance of Common Stock. In August 2000, we entered into a subscription agreement with a number of investors. Under the subscription agreement, we issued an aggregate of 91,666,667 shares of common stock at $3.00 per share, for an aggregate purchase price of $275 million. The following table summarizes the purchases of our common stock under the subscription agreement by our executive officers, directors and holders of more than 5% of our common stock:


Purchaser		Shares of Common Stock		Total Purchase Price

DB Capital			49,216,667	$	147,650,000
Behrman Capital			25,000,000		75,000,000
State Treasurer of the State of Michigan			6,666,667		20,000,000
David J. Shimmon
	Chief Executive Officer and Chairman		1,333,333		4,000,000
Deutsche Bank Securities, Inc.			416,667		1,250,000
Milan Mandaric
	Director		5,000,000		15,000,000

Sale of Common Stock by DB Capital. In connection with the 2000 Buy-Out, DB Capital sold shares of our common stock to certain of our employees at a price of $3.00 per share. The following table summarizes the purchases of our common stock from DB Capital by our executive officers, directors and holders of more than 5% of our common stock:


Purchaser		Shares of Common Stock		Total Purchase Price

Daniel C. Rubin
	President and Vice Chairman		166,660	$	499,980
Albert (Hong Chuan) Ooi
	Senior Vice President, Global Operations		116,660		349,980
Joseph W. Foster
	Senior Vice President, Customer Interface and Marketing		83,330		249,990
John R. Ferron
	Chief Financial Officer		80,000		240,000

Acquisition of Marchi Associates

In September 1999, Magnolia Tree, LLC, an entity owned by David J. Shimmon, our Chairman and Chief Executive Officer, acquired all of the outstanding stock of Marchi Associates, Inc. from James E. Hawthorne, as Trustee of the James and Roberta Hawthorne Family Trust U/T/A dated as of August 31, 1999, for $21.0 million in cash. In May 2000, Magnolia Tree sold 25% of Marchi Associates to the Hawthorne Family Trust for $6.75 million. James E. Hawthorne was an executive of Marchi Associates at the time of each transaction. In February 2001, we acquired all of the stock of Marchi Associates for an aggregate of $27.3 million. Of that amount, $20.25 million was paid to Magnolia Tree for its 75% interest in Marchi Associates. In connection with the acquisition, Magnolia Tree agreed to purchase 4,000,000 shares of our common stock from DB Capital for $12.0 million. We acquired Marchi Associates, a designer and manufacturer of specialty temperature sensors for OEMs, in order to expand the range of products that we offer to our customers. The value of Marchi Associates was determined by a special committee of our board of directors, with the assistance of independent consultants, and was based on the value of comparable companies and projections of Marchi Associates’ financial and operating performance.

Subsequent Issuances of our Capital Stock


	*Sales of Common Stock and Related Loans*

In June 2001, we sold 1,333,333 shares of our common stock to Mr. Shimmon for an aggregate purchase price of $4.0 million. Mr. Shimmon paid for the entire purchase of these shares with a promissory note in the principal amount of $4.0 million, with interest compounded semi-annually at an annual rate of 5%. The note is

secured by 2,666,667 shares our common stock, and becomes due and payable on the earlier of the transfer or sale by Mr. Shimmon of the shares, any bankruptcy proceeding with respect to Mr. Shimmon, any merger, consolidation or similar corporate reorganization which results in the sale of a substantial portion of our assets and June 4, 2008.

In October 2000, we loaned Mr. Ooi, our Senior Vice President, Global Operations, $200,000 in cash in connection with his purchase of 66,667 shares of our common stock from DB Capital. This loan is secured by a stock pledge and security agreement in connection with this purchase of our common stock. This loan accrues interest at an annual rate of 6.0% and is due upon the earlier of the transfer or sale by Mr. Ooi of the shares, the occurrence of a transaction as a result of which a public market exists for Mr. Ooi’s shares or any securities for which the shares have been exchanged, the termination of Mr. Ooi’s employment and October 5, 2006.

Awards of Common Stock Under Our 2000 Deferred Stock Plan

The following table presents information regarding awards of our common stock under our 2000 Deferred Stock Plan to the executive officers named in the Summary Compensation table above.


Name	Number of Shares⁽¹⁾		Date of Issuance

David J. Shimmon Chief Executive Officer and Chairman		1,450,000		10/24/2000
Daniel C. Rubin President and Vice Chairman		850,000		10/24/2000
John R. Ferron Chief Financial Officer		200,000		10/24/2000
Albert (Hong Chuan) Ooi Senior Vice President, Global Operations		50,000		11/9/2001
Joseph W. Foster Senior Vice President, Customer Interface and Marketing		125,000		10/24/2000


⁽¹⁾	See “—Employee Benefit Plans and Option Grants— 2000 Deferred Stock Plan” for a description of the conversion of these deferred stock awards into options under our 2002 Stock Option Plan B that occurred on July 1, 2002.

The holders of these shares may not transfer, vote or exercise any other rights with respect to these shares until the occurrence of a transaction or series of transaction under which DB Capital receives at least $100 million in cash proceeds from the sale of our capital stock with an internal rate of return of at least 30% if the transaction or transactions occur prior to August 30, 2005, or an internal rate of return of at least 25% if the transaction occurs after August 30, 2005.


	*Series A Stock Financing*

In December 2001 and in April 2002, we sold an aggregate of 22,171,039 shares of our Series A preferred stock to eight investors for an aggregate purchase price of $69.0 million. Each share of Series A preferred stock is convertible into one share of our common stock. Some of the investors paid $3.16 per share, while other investors paid $3.00 per share. However, we immediately rebated, as an arrangement fee, $0.16 per share to the investors who paid $3.16 per share. The investors in the Series A preferred stock financing included the following 5% stockholders:


	Shares of
Purchaser	Series A Preferred Stock		Total Purchase Price

Entities affiliated with Gryphon Partners		10,980,897	$	34,699,637
DB Capital		3,128,044		9,384,133
Behrman Capital		2,587,621		8,176,882

In connection with an amended and restated shareholders agreement executed in connection with the Series A financing, Behrman Capital, DB Capital and Gryphon Partners, each of which own more than 5% of our common stock, along with other holders of our securities, including the State Treasurer of the State of Michigan and Messrs. Shimmon, Rubin, Ferron, Ooi and Foster, agreed to restrictions on the transfer of their shares and received certain demand, piggyback and incidental registration rights. The amended and restated shareholders agreement also grants DB Capital the right to appoint five of our directors, Behrman Capital the right to appoint three directors and Gryphon Partners the right to appoint one director. Messrs. Austrian, Ayres, Mandaric, Schiff and Virtue were appointed to our board of directors by DB Capital, Messrs. Behrman, Chiate and Matthes were appointed to our board of directors by Behrman Capital and Mr. Andrews was appointed to our board of directors by Gryphon Partners pursuant to the terms of the amended and restated shareholders agreement. These rights, other than the registration rights, expire on completion of this offering.

Agreements Related to our Business Separation

As part of our business separation, as described in more detail in the section entitled “Our Business Separation,” we will be entering into several agreements with the Kinetic Systems companies. Upon the completion of this offering, we and the Kinetic Systems companies will become separate entities. The agreements, set forth in more detail below, will facilitate our business separation.


	*Separation Agreement*

The respective businesses and the related assets and liabilities of the Kinetic Systems companies are owned by those respective corporations and their subsidiaries as set forth in the separation agreement. The separation agreement will govern the separation of the Kinetic Systems companies from our business. Except as expressly set forth in the separation agreement or in another related agreement, none of the parties made any representation or warranty as to the business, assets or liabilities transferred or retained as part of the business separation, as to any consents or approvals required in connection therewith, as to the value of any of the assets transferred, as to the absence of any defenses or freedom from counterclaim with respect to any claim of any party, or as to the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset transferred. Except as otherwise expressly set forth in the separation agreement or in any other document relating to the business separation, all assets were transferred on an “as is,” “where is” basis, and each party agreed to bear the economic and legal risks that the conveyance is insufficient to vest in the transferee good and marketable title, free and clear of any security interest.

Releases and Indemnification. The separation agreement provides for a full and complete release and discharge as of the completion of this offering of all liabilities existing or arising from all acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed on or prior to such date, among the Kinetic Systems companies and us, including any contractual arrangements or arrangements existing or alleged to exist among the Kinetic Systems companies and us on or before such date, except as expressly set forth in the separation agreement. We have agreed to indemnify, defend and hold harmless the Kinetic Systems companies and their subsidiaries and directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing from and against any and all liabilities relating to, arising out of or resulting from:


	•	the failure of us or any other person to pay, perform or otherwise promptly discharge any of our liabilities or any of our contracts in accordance with its terms; and

	•	breach by us of the separation agreement or any of the related agreements.

The Kinetic Systems companies have agreed to indemnify, defend and hold harmless us, each of our subsidiaries, and each of our directors, officers and employees and each of the heirs, executors, successors and assigns of any of the foregoing from and against any and all liabilities relating to, arising out of or resulting from:


	•	the failure of the Kinetic Systems companies or any other person to pay, perform or otherwise promptly discharge their respective liabilities or obligations of their contracts; and


	•	any breach by the Kinetic Systems companies of the separation agreement or any of the related agreements.

Non-Solicitation of Employees. During the one-year period following the completion of this offering, no party may solicit or make an offer for the employment or consulting services of any employee of another party, or interfere with or disrupt another party’s relationship with any of its employees.

Dispute Resolution. The separation agreement contains provisions that govern the resolution of disputes, controversies or claims that may arise among the Kinetic Systems companies and us as a result of our business separation. These provisions contemplate that efforts will be made to resolve disputes, controversies and claims by escalation of the matter to senior management or other mutually agreed representatives of the parties. If the matter is not resolved within a period of 90 days, either party may elect to submit the unresolved matter for mediation by a mutually acceptable mediator. Pending the outcome of any mediation, any party may apply to seek injunctive relief in court so as to maintain the status quo until such time as the mediation is concluded or the controversy is otherwise resolved. In the event that any dispute, controversy or claim is, or is reasonably likely to be, in excess of $10 million, subject to certain conditions, any party may submit such dispute, controversy or claim to a court of competent jurisdiction and the mediation provisions contained in the separation agreement will not apply.


	*Management Services Agreement*

Under the management services agreement, we will agree with the Kinetic Systems companies to provide certain administrative and corporate support services to one another on an interim or transitional basis following the initial public offering. Services to be provided under the management services agreement include:



	•	tax;



	•	risk management and insurance; and



	•	legal.

Specified charges for such services are generally intended to allow the service provider to recover the fully allocated direct costs of providing the services, plus all out-of-pocket costs and expenses. Each party must provide any such services through the same or similarly qualified personnel and the same or similar facilities as we have in the past, but the selection of personnel to perform the various services shall be within the sole discretion of the service provider. No party is required to increase the volume or quality of the services provided beyond the level at which such services were performed in the past. In addition, any party may elect to provide services through a third-party service provider for service charges equal to that party’s third-party costs and expenses, plus all direct costs. The management services agreement has a one-year term, although the parties may agree that individual services be provided for a shorter or longer term. Any party receiving services may terminate the management services agreement with respect to one or more of the services provided to it under the agreement upon giving at least 30 days’ prior written notice to the other parties.

Tax Sharing Agreement

Effective as of August 31, 2000, for federal income tax purposes, we were the parent of the affiliated group which included the ownership interest in KGI and its subsidiaries. We and the Kinetic Systems companies entered into a tax sharing agreement which provides for the allocation of tax liability, the allocation of indemnification obligations and the resolution of disputes among the parties.

Allocation of Tax Liability. The tax sharing agreement allocates among us and the Kinetic Systems companies the responsibilities, liabilities and benefits relating to taxes paid or payable. The tax sharing agreement sets forth the method that we and the Kinetic Systems companies will use in preparing and filing tax returns for the periods before and after our restructuring. For periods that begin before our business separation, each of us and the Kinetic Systems companies will allocate tax liabilities for U.S. federal income tax and, when necessary, other consolidated, combined, unitary or group taxes, using the separate taxable

income method set forth in section 1552(a)(1) of the Internal Revenue Code of 1986, as amended. For any taxes computed on a separate company basis for any period, each of us and the Kinetic Systems companies will be separately responsible for our respective separate company taxes for such periods. For taxes attributable to periods that begin after our separation and that are determined on a consolidated, combined, unitary or group basis, each of us and the Kinetic Systems companies will be solely responsible for our respective tax liabilities determined on such consolidated, combined, unitary or group basis.

Indemnification Obligations. Each of us and the Kinetic Systems companies has agreed to indemnify and hold each other harmless from and against any tax liability or related cost allocated to us or the Kinetic Systems companies under the tax sharing agreement. The Kinetic Systems companies have also agreed to indemnify us and hold us harmless from and against any tax liability that results from the distribution of the Kinetic Systems companies and from the 2000 Buy-Out.

Disputes and Contesting of Taxes. Each of us and the Kinetic Systems companies has the sole authority to contest any claim by a taxing authority that arises from an examination of a tax return which includes only that party or its subsidiaries. KSI, named in the tax sharing agreement as representative of us and the Kinetic Systems companies will have the sole authority to contest any claim by any taxing authority arising from an examination of any tax return for a period that begins before our business separation. We and the Kinetic Systems companies have agreed to negotiate at the executive level to resolve any disputes that may arise among us under the tax sharing agreement. However, if the dispute is not resolved within 30 days of the first executive negotiation, then the dispute shall be submitted to binding arbitration.

Trademark License Agreement

Under the trademark license agreement, we have agreed to grant the Kinetic Systems companies a non-transferable, perpetual, worldwide, royalty-free license to use certain of our trademarks. The Kinetic Systems companies have agreed to usage limitations and have agreed to grant us the right to use the trademarks for a transition period of one year. In addition, we have agreed to grant the Kinetic Systems companies an option to purchase the licensed trademarks from us for $100. If the Kinetic Systems companies violate the terms of usage while they are licensing the trademarks, we may terminate the trademark license agreement.


	*Confidential Disclosure Agreement*

Under the confidential disclosure agreement, each of the Kinetic Systems companies and us will agree, subject to limited exceptions, to hold certain information confidential for either three years or indefinitely, depending upon the sensitivity of the information. This agreement lasts until the parties mutually agree to terminate the confidential disclosure agreement.


	*Employee Matters Agreement*

The employee matters agreement allocates assets, liabilities and responsibilities relating to our current and former employees and their participation in benefits plans, including deferred compensation, insurance, health and 401(k) plans, and stock plans that we currently sponsor and maintain. We intend to continue such benefits plans for our eligible employees following the offering. All eligible employees of the Kinetic Systems companies will continue to participate in our benefits plans until KSI establishes its own benefit plans, which will occur by December 1, 2002. Our ongoing benefit plans will not provide benefits that overlap those provided under the corresponding KSI benefit plan. Each benefit plan will provide that all service, compensation and other benefit determinations that were recognized under our corresponding benefit plan will be taken into account under the KSI benefit plans. Assets relating to the employee liabilities have been or will be transferred to KSI or their related plans and trusts from trusts and other funding vehicles associated with our benefits plans. In connection with the establishment of our benefit plans and the related transfer of assets from us to KSI, we may provide to KSI, and KSI may provide to us, transitional services related to the organization and implementation of our benefit plans. See “Employee Benefit Plans and Options Grants — 2000 Stock Option Plan — Treatment of Options Held by Kinetic Systems’ Employees” for a description of

the treatment of our stock options held by our employees and the employees of the Kinetic Systems companies.

Debt Repayment

Concurrent with the closing of this offering, we will repay substantially all of our debt. See “Our Business Separation.” Of this debt, $31.1 million will be repaid to Deutsche Bank AG, an affiliate of DB Capital.

Loans to Executive Officers

In addition to the loans described above under “—Sales of Common Stock and Related Loans,” we have issued the following loans to our executive officers:

In February 2000, in connection with the purchase of a home, KGI loaned John R. Ferron, our Chief Financial Officer, $250,000 under a promissory note with an annual interest rate of 8.00%. Outstanding principal and accrued interest under the note is due and payable upon the earlier of 180 days following the termination of Mr. Ferron’s employment for cause and December 31, 2005.

In December 2000, in connection with an investment, we loaned Daniel C. Rubin, our President and Vice Chairman, $75,000 under a promissory note with an annual interest rate of 8.00%. Mr. Rubin repaid $50,000 of this loan in June 2001. In June 2002, the remaining $25,000 of the promissory note plus accrued interest was repaid. In addition, in June 2002, in connection with a personal investment, we loaned Mr. Rubin $250,000 under a new promissory note with an annual interest rate of 8.00%, which is secured by Mr. Rubin’s residence. Outstanding principal and accrued interest under the note is due and payable on June 13, 2003.

Employment Arrangements

Some of our officers have accepted offer letters from us that provide for salary, equity incentives and other benefits. For a description of these offer letters, please see “Employment Agreements and Change of Control Agreements.”

Sales to Kinetic Systems

During the course of our operations, we sell products to the Kinetic Systems companies. The amounts of these sales are separately reflected on our statements of operations appearing elsewhere in this prospectus. The terms of those transactions were determined between related parties and may differ from terms that would have occurred between unrelated parties.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table presents information regarding the beneficial ownership of our outstanding common stock as of June 30, 2002 for the following stockholders:


	•	each stockholder known by us to be the beneficial owner of more than 5% of our common stock;

	•	each of our directors;

	•	each of our named executive officers;

	•	all of our directors and executive officers as a group; and

	•	each selling stockholder.

The percentage of beneficial ownership for the following table is based on 119,316,559 shares of our common stock outstanding as of June 30, 2002, and assumes the automatic conversion of all outstanding shares of our preferred stock into 25,652,051 shares of our common stock, which will occur upon the completion of this offering. The percentage of beneficial ownership after the offering is based on shares of our common stock issued in connection with this offering.

Beneficial ownership is determined under the rules and regulations of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days of June 30, 2002 through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules and regulations of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has exercised options or warrants into shares of our common stock.

To our knowledge, except under community property laws or as otherwise noted, the persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned. Unless otherwise indicated, each stockholder listed below maintains a mailing address of c/o Celerity Group, Inc., 1463 Centre Pointe Drive, Milpitas, California 95035.



	Shares Beneficially						Shares Beneficially
	Owned						Owned
	Prior to the Offering						After the Offering
						Number of
Name of Beneficial Owner	Number		Percent			Shares Offered	Number	Percent

5% Stockholders
DB Capital⁽¹⁾		44,939,504		37.7	%
Behrman Capital⁽²⁾		27,587,621		23.1
Gryphon Partners II, L.P.⁽³⁾		10,980,897		9.2
State Treasurer of the State of Michigan⁽⁴⁾		6,666,667		5.6
Executive Officers and Directors
David J. Shimmon⁽⁵⁾		7,557,061		6.3
Daniel C. Rubin⁽⁶⁾		439,893		*
John R. Ferron⁽⁷⁾		166,750		*
Albert (Hong Chuan) Ooi⁽⁸⁾		154,160		*
Joseph W. Foster⁽⁹⁾		124,580		*
R. David Andrews⁽¹⁰⁾		10,980,897		9.2
Neil R. Austrian		—		—
Charles Ayres⁽¹¹⁾		44,939,504		37.7
Grant G. Behrman⁽¹²⁾		27,587,621		23.1
Gregory J. Chiate⁽¹³⁾		27,587,621		23.1
Milan Mandaric⁽¹⁴⁾		5,265,613		4.4
William M. Matthes⁽¹⁵⁾		27,587,621		23.1

Shares Beneficially

Owned

Prior to the Offering

After the Offering

Number of

Name of Beneficial Owner

Number

Percent

Shares Offered

Number

Percent

Frank L. Schiff⁽¹⁶⁾

44,939,504

37.7

Ted Virtue⁽¹⁷⁾

44,939,504

37.7

All executive officers and directors as a group (14 persons)⁽¹⁸⁾

97,216,079

80.4


*	Represents beneficial ownership of less than 1%.



	⁽¹⁾	Includes 44,903,130 shares of our common stock held by DB Capital Investors, L.P. and 15,000 shares of our common stock held by DB Structured Products. Also includes a warrant to purchase 21,374 shares of our common stock held by DB Structured Products, which warrant is immediately exercisable. DB Structured Products is an affiliate of DB Capital Investors, L.P. The warrant to purchase 21,374 shares of our common stock will become exercisable as to shares of our common stock upon completion of this offering as a result of the adjustment that will occur pursuant to the terms of the warrant as a result of our business separation. DB Capital Investors, L.P. disclaims beneficial ownership of the shares owned by DB Structured Products. DB Capital’s position in Celerity is held by the Corporate Investments division of Deutsche Bank AG, which is under the overall direction of senior management of Deutsche Bank. All major decisions regarding investments held by Deutsche Bank are governed by its internal guidelines, which typically require the approval of more than one individual, including the senior officers of DB Capital, in order to take any action with respect thereto. The address of DB Capital Investors, L.P. is 31 W. 52nd Street, 26th Floor, New York, New York 10019.



	⁽²⁾	Represents 27,354,503 common shares held by Behrman Capital III L.P. and 233,118 common shares held by Strategic Entrepreneur Fund III L.P. Messrs. Behrman and Matthes are managing members of Behrman Brothers III L.L.C., a limited liability company that is the sole general partner of Behrman Capital III, L.P., and are general partners of Strategic Entrepreneur Fund III L.P. Mr. Chiate is a member of Behrman Brothers III L.L.C. and a limited partner of Strategic Entrepreneur Fund III L.P. In such capacities, each of Messrs. Behrman, Chiate and Matthes may be deemed to beneficially own any shares owned by those entities, but disclaims any such beneficial ownership. As managing members of Behrman Brothers III L.L.C., Messrs. Behrman and Matthes have voting and investment control over the shares of our common stock held by Behrman Capital III L.P. The address of Behrman Capital III L.P. is Four Embarcadero Center, Suite 3640, San Francisco, California 94111.



	⁽³⁾	Includes 10,259,277 shares held by Gryphon Partners II, L.P. and 721,620 shares held by Gryphon Partners II-A, L.P. Voting and investment control over these shares is held by an investment committee consisting of R. David Andrews, Kurt Kaull, Will Lynn, Nicolas Orum and Jeffrey Ott. The address of Gryphon Partners II, L.P. is One Embarcadero Center, Suite 2750, San Francisco, California 94111.



	⁽⁴⁾	Douglas B. Roberts, the State Treasurer of the State of Michigan, Roy A. Pantilla, the Deputy Director, Bureau of Investments, and Thomas L. Hofragel, Administrator, Alternative Investments Division, have voting and investment control over these shares. The address of the State Treasurer of the State of Michigan is Department of Treasury, 250 Coolidge Road, Suite 400, East Lansing, Michigan 48823.



	⁽⁵⁾	Includes 3,977,229 shares of our common stock held by Magnolia Tree, LLC, which is wholly owned by Mr. Shimmon. Also includes options to purchase 913,166 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation.



	⁽⁶⁾	Includes options to purchase 273,233 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation.



	⁽⁷⁾	Includes options to purchase 86,750 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation.



	⁽⁸⁾	Includes options to purchase 37,500 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation.



	⁽⁹⁾	Includes options to purchase 41,250 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation.


⁽¹⁰⁾	Includes 10,259,277 shares held by Gryphon Partners II, L.P. and 721,620 shares held by Gryphon Partners II-A, L.P. Mr. Andrews disclaims beneficial ownership of the shares held by Gryphon Partners II, L.P. and Gryphon Partners II-A, L.P., except to the extent of his pecuniary interest in these shares.


⁽¹¹⁾	Represents 44,939,504 shares held by DB Capital Investors, L.P. and its affiliates. Mr. Ayres disclaims beneficial ownership of the shares held by DB Capital Investors, L.P. and its affiliates, except to the extent of his pecuniary interest in these shares.


⁽¹²⁾	Represents 27,354,503 common shares held by Behrman Capital III L.P. and 233,118 common shares held by Strategic Entrepreneur Fund III L.P. Mr. Behrman is a managing member of Behrman Brothers III L.L.C., a limited liability company that is the sole general partner of Behrman Capital III L.P., and is a general partner of Strategic Entrepreneur Fund III L.P. In such capacity, Mr. Behrman may be deemed to beneficially own any shares owned by those entities, but disclaims any such beneficial ownership.

⁽¹³⁾	Represents 27,354,503 common shares held by Behrman Capital III L.P. and 233,118 common shares held by Strategic Entrepreneur Fund III L.P. Mr. Chiate is a member of Behrman Brothers III L.L.C., a limited liability company that is the sole general partner of Behrman Capital III L.P., and a limited partner of Strategic Entrepreneur Fund III L.P. In such capacity, Mr. Chiate may be deemed to beneficially own any shares owned by those entities, but disclaims any such beneficial ownership.


⁽¹⁴⁾	Includes 5,000,000 shares of our common stock held by the 1999 Milan Mandaric Revocable Trust. Also includes options to purchase 265,613 shares of our common stock exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our business separation. Mr. Mandaric is a limited partner of Behrman Capital Partners III L.P. In such capacity, Mr. Mandaric disclaims beneficial ownership of any shares owned by Behrman Capital III L.P.


⁽¹⁵⁾	Represents 27,354,503 common shares held by Behrman Capital III L.P. and 233,118 common shares held by Strategic Entrepreneur Fund III L.P. Mr. Matthes is a managing member of Behrman Brothers III L.L.C., a limited liability company that is the sole general partner of Behrman Capital III L.P., and is a general partner of Strategic Entrepreneur Fund III L.P. In such capacity, Mr. Matthes may be deemed to beneficially own any shares owned by those entities, but disclaims any such beneficial ownership.


⁽¹⁶⁾	Represents 44,939,504 shares held by DB Capital Investors, L.P. and its affiliates. Mr. Schiff disclaims beneficial ownership of the shares held by DB Capital Investors, L.P. and its affiliates, except to the extent of his pecuniary interest in these shares.



⁽¹⁷⁾	Represents 44,954,504 shares held by DB Capital Investors, L.P. and its affiliates. Mr. Virtue disclaims beneficial ownership of the shares held by DB Capital Investors, L.P. and its affiliates, except to the extent of his pecuniary interest in these shares.

⁽¹⁸⁾

Includes options to purchase an aggregate of 1,617,512 shares of our common stock that are exercisable within 60 days of June 30, 2002. These options will become exercisable as to shares of our common stock upon completion of this offering, based upon an assumed initial public offering price of $ per share, as a result of the adjustment that will occur with respect to outstanding options in connection with our corporate restructuring. Also includes a warrant to purchase 21,374 shares of our common stock that is immediately exercisable. This warrant will become exercisable as to shares of our common stock upon completion of this offering as a result of the adjustment that will occur pursuant to the terms of the warrant as a result of our business separation.

DESCRIPTION OF CAPITAL STOCK

General

Immediately following the closing of this offering, our authorized capital stock will consist of 250,000,000 shares of common stock, $.01 par value per share, and 5,000,000 shares of undesignated preferred stock, $.01 par value per share.

Common Stock


	*Dividend Rights*

Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available at the times and in the amounts that our board of directors may determine from time to time.


	*Voting Rights*

Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election. In addition, our certificate of incorporation and bylaws require the approval of two-thirds, rather than a majority, of the shares entitled to vote for some matters. For a description of these matters, see “—Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws” below.


	*No Preemptive, Conversion or Redemption Rights*

Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption.


	*Right to Receive Liquidation Distributions*

Upon a liquidation, dissolution or winding-up of our company, the holders of common stock are entitled to share in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be issued in this offering, when paid for, will be fully paid and nonassessable.

Preferred Stock

Following the completion of this offering, our board of directors will be authorized, subject to limitations imposed by Delaware law, to issue up to a total of 5,000,000 shares of preferred stock in one or more series, without stockholder approval. Our board is authorized to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our board can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders.

The board may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Celerity and might harm the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

Warrants to purchase 8,062,199 shares of our common stock were outstanding at June 30, 2002, having a weighted average exercise price of $1.77 per share. Of these outstanding warrants, warrants to purchase 4,737,308 shares of our common stock held by USFilter may not be exercised prior to August 30, 2002. In the event that this offering occurs prior to August 30, 2002, we will use a portion of the proceeds from the offering to repay the outstanding notes held by USFilter and the warrants held by USFilter will expire according to their terms.

In connection with the dividend of shares of the Kinetic Systems companies to our stockholders concurrently with the completion of this offering, pursuant to the terms of the outstanding warrants held by several investors to purchase 3,324,891 shares of common stock, each having an exercise price of $0.01 per share, we will divide the number of shares subject to these outstanding warrants by a ratio equal to (1) the overall value of our company prior to the distribution less (2) the value of the shares of the Kinetic Systems companies distributed to our stockholders, divided by the overall value of our company prior to the distribution, and multiply the exercise price per share of the warrant by the same ratio. Assuming a closing price for our common stock on the Nasdaq National Market on the first trading day of $ per share, the warrants held by several investors to purchase 3,324,891 shares of common stock, each having an exercise price of $.01 per share of, will convert into warrants to purchase shares of our common stock, each having an exercise price of $ . The exercise price of, and the number of shares subject to, the warrants held by USFilter will not adjust as a result of our corporate restructuring.

Convertible Note

We have issued a $25.0 million convertible junior subordinated note to USFilter. If we elect to repay all or part of the principal amount due under this note at any time after August 30, 2002, then for 30 days following the receipt of notice by USFilter of our intention to make this payment, USFilter will have the option to convert the note into 8,333,333 share of our common stock. In the event that we complete this offering prior to August 30, 2002, we will use a portion of the net proceeds from the offering to repay this note and the note will no longer be convertible into shares of our common stock.

Registration Rights

Upon the completion of this offering, holders of substantially all of the shares of our common stock and all warrants to purchase shares of our common stock outstanding as of March 31, 2002 will have registration rights. Those stockholders will have the right to require us to register their shares with the SEC so that those shares may be publicly resold or to include their shares in registration statements that we file, as set forth in further detail below.

Demand Registration. 180 days after the effective date of this registration statement, each of DB Capital and Behrman Capital may make two requests that we register all or a portion of shares held by their respective affiliates. Two years after the completion of this offering, (1) warrantholders who hold a majority of the shares of common stock issued or issuable upon conversion of the warrants may request that we register their shares of common stock issuable upon the exercise of such warrants and (2) the holders of a majority of shares of common stock issued or issuable upon conversion of our Series A preferred stock may make two requests that we register their shares of stock. In the case of any demand registration, holders of shares that have registration rights may elect to have all or a portion of their shares registered. We are required to file up to seven registration statements under this right, however we are not required to comply with any more than one demand registration request in any twelve-month period. The underwriters of any underwritten public offering made upon an exercise of these demand rights will have the right to limit the number of shares to be included in that registration statement. We may postpone any demand registration for a period not to exceed 180 days. However, we may postpone a demand registration only once during any twelve-month period.

Incidental Registration. If we register any additional securities after our initial public offering in a registration that does not include any demand registrations and such registration statement is not on Form S-4

or Form S-8, then holders of shares that have registration rights may elect to have all or a portion of their shares included in our registration statement. However, we may terminate for any reason any registration of securities that included securities being registered pursuant to their incidental registration rights.

Expenses of Registration. We will pay all expenses related to any demand or incidental registration, including all registration and filing fees, printing fees, fees for one counsel for the selling stockholders and other fees.

Expiration of Registration Rights. The demand registration rights for each stockholder and warrant holder, except DB Capital and Berhman Capital, expire if such stockholder can sell all of its shares under Rule 144 free of the volume restrictions of the rule.

Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws

The provisions of Delaware law, our certificate of incorporation and our bylaws may have the effect of delaying, deferring or discouraging another party from acquiring control of us.


	*Delaware Law*

We will be subject to Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents some Delaware corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of more than 10% of a corporation’s assets, with any “interested stockholder,” which is defined to mean any stockholder who owns 15% or more of the corporation’s outstanding voting stock, or with any affiliates and associates of the stockholder, for three years following the date that the stockholder became an “interested stockholder” unless:


	•	the transaction is approved by the board before the interested stockholder attained that status;

	•	upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or

	•	the business combination is approved by the board and authorized at a meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder.

A Delaware corporation may opt out of this provision either in its original certificate of incorporation or in an amendment to its certificate of incorporation or bylaws approved by its stockholders. However, we have not opted out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us.


	*Charter and Bylaws*

Following the completion of this offering, our certificate of incorporation and bylaws will provide that:


	•	the approval of holders of two-thirds of the shares entitled to vote at an election of directors will be required to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

	•	our board of directors will be expressly authorized to make, alter or repeal our bylaws;


	•	stockholders may not call special meetings of the stockholders or, unless as otherwise provided by law, fill vacancies on the board;


	•	our board of directors will be divided into three classes serving staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms;

	•	our board of directors will be authorized to issue preferred stock without stockholder approval;


	•	directors may only be removed for cause by the holders of two-thirds of the shares entitled to vote at an election of directors; and

	•	we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is .

Listing

We have applied for listing our common stock on the Nasdaq National Market under the trading symbol “CLRT.”

SHARES ELIGIBLE FOR FUTURE SALE

Before this offering, there has not been a public market for our common stock. Future sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options and warrants, in the public markets after this offering could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares currently outstanding will be available for sale immediately after this offering due to contractual and legal restrictions on resale. Nevertheless, future sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options and warrants, in the public market after the restrictions lapse, or the possibility of the sales, could cause the prevailing market price of our common stock to fall or impair our ability to raise equity capital in the future.

Upon completion of this offering, we will have outstanding shares of our common stock, or shares if the underwriters’ over-allotment option is exercised in full, assuming that there are no exercises of outstanding options or warrants after June 30, 2002. Of these shares, all of the shares sold in this offering will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act. For purposes of Rule 144, an “affiliate” of an issuer is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the issuer. Shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an exemption from registration, including the exemption under Rule 144 of the Securities Act described below. The remaining 119,316,559 shares of our common stock held by existing stockholders are “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act. These rules are summarized below. Subject to the lock-up agreements described below and the provisions of Rule 144 and Rule 701, these restricted securities will be available for sale in the public market as follows:


Number of Shares		Date

No shares		On the date of this prospectus
113,371,206 shares		181 days after the date of this prospectus
5,945,353 shares		Various dates between 181 days after the date of this prospectus and one year from the date of this prospectus

Lock-Up Agreements

Stockholders holding substantially all of our outstanding shares of common stock have agreed, subject to limited exceptions, not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any of their shares of our common stock or any securities convertible into or exercisable or exchangeable for shares of our common stock; or enter into any swap or other arrangement that transfers to another, in whole or in part, any economic consequences of ownership of our common stock during the period ending 180 days after the date of this prospectus without the prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the underwriters.

Rule 144

In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year from the later of the date those shares of common stock were acquired from us or from an affiliate of ours would be entitled to sell, within any three-month period, a number of shares that is not more than the greater of:


	•	1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or


	•	the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks before a notice of the sale on Form 144 is filed.

Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us.

Rule 144(k)

In addition, under Rule 144(k), a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years from the later of the date these shares of our common stock were acquired from us or from an affiliate of ours, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up agreements, those shares may be sold immediately upon the completion of this offering.

Rule 701

Any employee, officer or director of, or consultant to us who purchased his shares under a written compensatory plan or contract may be entitled to sell his shares in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without having to comply with the holding period, public information, volume, limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, all shares issued under Rule 701 that are subject to lock-up agreements will only become eligible for sale when the 180-day lock-up agreements expire.

Stock Options

Based on options granted as of June 30, 2002, including the options awarded under our 2002 Stock Option Plan B in July 2002, we intend to file a registration statement on Form S-8 under the Securities Act covering 20,060,182 shares of our common stock subject to options outstanding or reserved for issuance under our 2000 Stock Option Plan, 2002 Equity Incentive Plan and 2002 Stock Option Plan B, and shares of our common stock issued upon exercise of options by employees. We expect to file this registration statement as soon as practicable after this offering. However, none of the shares registered on Form S-8 that are subject to the 180-day lock-up agreements will be eligible for resale until the expiration of the lock-up period. Approximately 2.0 million shares of our common stock issuable upon exercise of options held by non-senior management personnel of Celerity and KSI that were outstanding as of June 30, 2002, are not subject to lock-up agreements.

Warrants

As of June 30, 2002, we had outstanding warrants to purchase 8,062,199 shares of our common stock. Shares issued upon net exercise of these warrants following the completion of this offering will be immediately salable. The holders of these warrants also have registration rights, as discussed below. However, all shares subject to these warrants are subject to lock-up agreements and will only become eligible for sale when the 180-day lock-up agreements expire.

Registration Rights

Upon completion of this offering, the holders of substantially all of the shares of our common stock and all warrants to purchase shares of our common stock outstanding as of June 30, 2002 may demand that we register their shares under the Securities Act or, if we file another registration statement under the Securities Act, they may elect to include their shares in such registration. If these shares are registered, they will be freely tradable without restriction under the Securities Act. For additional information, see “Description of Capital Stock—Registration Rights.”

UNDERWRITERS

Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Deutsche Bank Securities, Inc., Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc. and UBS Warburg LLC are acting as representatives, have each agreed to purchase, and we and the selling stockholders have agreed to sell to them, severally, the number of shares indicated below:


		Number of
Name		Shares

Deutsche Bank Securities, Inc.
Morgan Stanley & Co. Incorporated
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Lehman Brothers Inc.
UBS Warburg LLC

	Total

As Joint Book-Running Managers acting on behalf of the underwriting syndicate, Morgan Stanley and Deutsche Bank Securities will be responsible for recording a list of potential investors that have expressed an interest in purchasing common stock as part of this offering. The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

The underwriters initially propose to offer part of the shares of common stock directly to the public at the initial public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the initial public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.

The selling stockholders have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters’ option is exercised in full, the total price to the public would be $ and the total underwriters’ discounts and commissions would be $ .

The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares offered by them.

We have applied for the listing of our common stock on The Nasdaq National Market under the trading symbol CLRT.

We, each of our directors and executive officers, the selling stockholders and certain of our other stockholders have agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus:


	•	offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock; or

	•	enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock,

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise.

The restrictions described in the immediately preceding paragraph do not apply to:


	•	the sale of any shares of common stock to the underwriters;

	•	transactions relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares;

	•	the grant by us of options to purchase common stock pursuant to the employee benefit plans described in the prospectus;

	•	the issuance by us of shares of common stock upon the exercise of an option or a warrant or the conversion of a security outstanding on the date of this prospectus described in this prospectus;

	•	approximately 2.0 million shares of our common stock issuable upon the exercise of options held by non-senior management personnel of Celerity and KSI;

	•	the issuance by us of common stock or securities convertible into common stock in connection with mergers or acquisitions of securities, businesses, property or assets, provided that the aggregate number of shares of common stock issued or issuable upon conversion does not exceed 25% of the shares sold in this offering;

	•	the transfer of shares of common stock or other securities by gift;

	•	the distribution of shares of common stock or other securities to partners, members, affiliates, stockholders, or trustees or custodians of the stockholder’s assets;

	•	the transfer to a trust for the benefit of the stockholder or the stockholder’s immediate family; or

	•	the transfer by will or intestacy to the stockholder’s legal representative or heir.

provided that in the case of each of the last five transactions, each donee, distributee, transferee and recipient agrees to be subject to the restrictions described in the immediately preceding paragraph.

In order to facilitate this offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. In

addition, to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in this offering, if the syndicate repurchases previously distributed common stock to cover syndicate short positions or to stabilize the price of the common stock. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities, and may end any of these activities at any time.

A prospectus in electronic format may be made available on the web sites maintained by one or more underwriters. The underwriters may agree to allocate a number of shares to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the lead manager to underwriters that may make Internet distributions on the same basis as other allocations. Other than the prospectus in electronic format, the information on any of these websites and any other information contained on a website maintained by an underwriter or syndicate member is not part of this prospectus.

Certain entities affiliated with Deutsche Bank Securities, Inc., one of the underwriters of this offering, beneficially own more than 10% of our debt and more than 10% of our equity securities. Under the provisions of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, when an NASD member such as Deutsche Bank Securities, Inc. distributes securities of a company in which it owns more than 10% of the Company’s debt securities or equity securities, the public offering price of the securities can be no higher than that recommended by the “qualified independent underwriter,” as such term is defined in Rule 2720. In accordance with such requirements, Morgan Stanley & Co. Incorporated has agreed to serve as a “qualified independent underwriter” and will conduct due diligence and will recommended a maximum price for the shares.

From time to time, certain of the underwriters have provided, and continue to provide, investment banking and other services to us and certain existing stockholders for which they receive customary fees and commissions.

The underwriting agreement provides that we and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act.

At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares offered by this prospectus to our employees, officers, directors, customers, business associates and related persons selected by us. We will pay all fees and disbursements of counsel incurred by the underwriters in connection with offering the shares to such persons. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares, which are not so purchased, will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus.

Pricing of the Offering

Prior to this offering, there has been no public market for the common stock. The initial public offering price will be determined by negotiations between us and the representatives. Among the factors to be considered in determining the initial public offering price will be our future prospects and those of our industry in general; our sales, earnings and certain other financial and operating information in recent periods; and the price-earnings ratios, price-sales ratios and market prices of securities and certain financial and operating information of companies engaged in activities similar to ours.

LEGAL MATTERS

Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the issuance of the shares of common stock offered by this prospectus. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California will pass upon legal matters for the underwriters.

EXPERTS

Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 2001 and 2000, and for the year ended December 31, 2001, the period from August 31, 2000 to December 31, 2000, the period from January 1, 2000 to August 30, 2000, the period from April 29, 1999 to December 31, 1999, and for the period from January 1, 1999 to April 28, 1999, as set forth in their report. We’ve included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP’s report given on their authority as experts in accounting and auditing.

The financial statements of Poly Concepts, Inc. as of December 31, 2001 and 2000 and for the years ended December 31, 2000 and 2001 included in this prospectus have been so included in reliance on the report of Perkins & Company, P.C., independent public accountants, appearing elsewhere herein.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement or the exhibits. Statements made in this prospectus regarding the contents of any contract, agreement or other document are only summaries. With respect to each contract, agreement or other document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at the public reference facility of the Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.

You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference room. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent auditors, and to make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements.

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

INDEX TO FINANCIAL STATEMENTS

CELERITY GROUP, INC.


Index to Unaudited Pro Forma Condensed Combining Financial Statements
Unaudited Pro Forma Condensed Combining Financial Statements			F-2
Unaudited Pro Forma Condensed Combining Statement of Operations			F-3
Notes to Unaudited Pro Forma Condensed Combining Financial Statements			F-5
Index to Audited Consolidated Financial Statements
Report of Independent Auditors			F-6
Consolidated Balance Sheets			F-7
Combined and Consolidated Statements of Operations			F-8
Combined and Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit)			F-9
Combined and Consolidated Statements of Cash Flows			F-11
Notes to Combined and Consolidated Financial Statements			F-13
Index to Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)			F-38
Condensed Consolidated Statements of Operations (Unaudited)			F-39
Condensed Consolidated Statements of Cash Flows (Unaudited)			F-40
Notes to Condensed Consolidated Financial Statements (Unaudited)			F-41
POLY CONCEPTS, INC.
Index to Audited Financial Statements
Report of Independent Auditors			F-48
Balance Sheets			F-49
Statements of Income			F-50
Statements of Stockholders’ Equity			F-51
Statements of Cash Flows			F-52
Notes to Financial Statements			F-53
Index to Unaudited Financial Statements
Balance Sheets (Unaudited)			F-58
Statements of Income (Unaudited)			F-59
Statements of Cash Flows (Unaudited)			F-60
Notes to Financial Statements (Unaudited)			F-61

F-1

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS

On May 3, 2002, Celerity acquired Poly Concepts, Inc. (“Poly Concepts”). The results of Poly Concepts will be included in the consolidated financial statements subsequent to the acquisition. The acquisition was accounted for using the purchase method of accounting. The acquisition included the purchase of all the outstanding shares of common stock of Poly Concepts in exchange for a cash payment of $9.6 million and 3.5 million shares of the Company’s Series A Redeemable Convertible Preferred stock valued at $21.4 million. Transaction costs related to the purchase were approximately $0.1 million resulting in an aggregate purchase price of $31.1 million. For the purposes of preparing pro forma financial statements, the Company has allocated $27.9 million to goodwill. Celerity adopted Statement of Financial Accounting, Standards No. 142 effective January 1, 2002 and accordingly no amortization expense was recorded for the six months ended June 30, 2002.

The accompanying pro forma financial statements are presented in accordance with Article 11 of Regulation S-X. To prepare the pro forma unaudited condensed combining statements of operations, the Company’s statements of operations for the year ended December 31, 2001 has been combined with the statement of operations of Poly Concepts for the same period, and the Company’s statement of operations for the six months ended June 30, 2002 has been combined with the statement of operations of Poly Concepts for the period from January 1, 2002 through May 2, 2002. This method of combining the companies is only for presentation of pro forma unaudited condensed combining financial statements. The unaudited pro forma condensed combining financial statements are subject to a number of estimates, assumptions and uncertainties and do not purport to reflect the results of operations that would have occurred had this acquisition taken place on the date indicated nor do they purport to reflect results of operations that will occur in the future. The unaudited pro forma condensed combining financial statements should be read in conjunction with the historical financial statements of the Company and Poly Concepts.

F-2

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS

(In thousands, except for per share data)



		Year Ended December 31, 2001

		Celerity			Poly Concepts,			Pro Forma					Pro Forma
		Group, Inc.			Inc.			Adjustments			Notes		Combined

Revenues		$	194,691		$	21,314		$	—				$	216,005
Cost of goods sold			172,812			13,084			—					185,896

	Gross margin		21,879			8,230			—					30,109
Operating expenses:
	Selling, general and administrative		35,948			3,895			—					39,843
	Research and development		8,909			—			—					8,909
	Amortization		15,735			—			1,967			A		17,702
	Depreciation		3,256			299			—					3,555

Income (loss) from operations			(41,969	)		4,036			(1,967	)				(39,900	)
Other income (expense)			(22,953	)		(73	)		—					(23,026	)

Net income (loss) before income tax (benefit) expense			(64,922	)		3,963			(1,967	)				(62,926	)
Provision (benefit) for income taxes			126			1,527			(1,251	)		B		402

	Net income (loss)	$	(65,048	)	$	2,436		$	(716	)			$	(63,328	)

Net loss per share; basic and diluted		$	(0.70	)									$	(0.68	)

Shares used in computation of basic and diluted net loss per share			93,128											93,128

F-3

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS

(in thousands, except for per share data)


			Six Months Ended			Four Months Ended								Six Months Ended
			June 30, 2002			May 2, 2002								June 30, 2002

			Celerity			Poly Concepts,			Pro Forma					Pro Forma
			Group, Inc.			Inc.			Adjustments			Notes		Combined

Revenues			$	91,175		$	3,730							$	94,905
Cost of goods sold				75,626			2,304								77,930

		Gross profit		15,549			1,426			—					16,975
Operating expenses:
	Selling, general and administrative			20,140			820								20,960
	Research and development			3,922			—								3,922
	Depreciation			2,048			77								2,125
	Amortization			1,318			—								1,318

				27,428			897			—					28,325
Income (loss) from operations				(11,879	)		529			—					(11,350	)
Other income (expense)				(7,640	)		(29	)							(7,669	)

Net loss before income tax (benefit) expense				(19,519	)		500			—					(19,019	)
Provision for income taxes				53			138			(138	)		B		53

Net loss				(19,572	)		362			138					(19,072	)
Series A convertible preferred stock deemed non-cash dividend				6,255			—			—					6,255

			$	(25,827	)	$	362		$	138				$	(25,327	)

Basic and diluted net loss per share			$	(0.28	)									$	(0.27	)

Shares used in computation of basic and diluted net loss per share				93,665											93,665

F-4

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS

(In thousands)

The following pro forma adjustments have been made to the pro forma condensed combining financial statements:


A.	To reflect amortization of goodwill for the year ended December 31, 2001.


B.	Adjustment to income tax accounts to reflect Celerity’s tax status.

F-5

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders of Celerity Group, Inc. (formerly known as Kinetics Holdings Corporation)

We have audited the accompanying consolidated balance sheets of Celerity Group, Inc. (formerly known as Kinetics Holdings Corporation) as of December 31, 2001 and 2000, and the related combined and consolidated statements of operations, redeemable convertible preferred stock and stockholders’ equity (deficit), and cash flows for the year ended December 31, 2001, the period from August 31, 2000 to December 31, 2000, the periods from January 1, 2000 to August 30, 2000 and from April 29, 1999 to December 31, 1999 and for the period from January 1, 1999 to April 28, 1999. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 financial position of Celerity Group, Inc. (formerly Kinetics Holdings Corporation) at December 31, 2001 and 2000, and the combined and consolidated results of its operations and its cash flows for the year ended December 31, 2001, the period from August 31, 2000 to December 31, 2000, the periods from January 1, 2000 to August 30, 2000 and from April 29, 1999 to December 31, 1999 and for the period from January 1, 1999 to April 28, 1999, in conformity with accounting principles generally accepted in the United States.

Ernst & Young LLP

San Jose, California

May 23, 2002, except as to the fifth paragraph of Note 1 and Note 21, as to which the date is August , 2002

The foregoing report is in the form that will be signed upon the execution of the Separation Agreement and related agreements as described in the fifth paragraph of Note 1 and Note 21 to the financial statements.

/s/ Ernst & Young LLP

San Jose, California

July 16, 2002

F-6

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)



		December 31,
		2000			2001

Assets
Current assets:
	Cash and cash equivalents	$	8,337		$	34,841
	Accounts receivable, net of allowance for doubtful accounts of $3,178 in 2000 and $1,828 in 2001		42,116			8,135
	Inventories		69,873			41,218
	Deferred income taxes		3,570			—
	Prepaid expenses and other current assets		636			1,053
	Note receivable – Kinetic Systems		—			150,000

Total current assets			124,532			235,247
Property and equipment, net			23,637			22,226
Note receivable – Kinetic Systems			150,000			—
Goodwill, net			49,635			68,184
Intangible assets, net			48,489			37,570
Other assets			9,659			8,619

Total assets		$	405,952		$	371,846

Liabilities, redeemable convertible preferred stock and stockholders’ equity
Current liabilities:
	Accounts payable	$	49,933		$	8,400
	Accrued expenses		16,154			16,695
	Income taxes payable		4,302			105
	Current maturities of long-term debt		10,973			287,806
	Other current liabilities		1,729			2,123

Total current liabilities			83,091			315,129
Other liabilities			9,562			16,216
Long-term debt			273,421			—
Commitments and contingencies
Series A Redeemable Convertible Preferred stock, par value $.01 per share, 25,652 shares designated; 19,707 shares issued and outstanding (liquidation preference of $62,274 at December 31, 2001)			—			58,216
Stockholders’ equity:
	Common stock, par value $.01 per share, 250,000 shares authorized; 92,412 shares and 93,665 shares issued and outstanding in 2000 and 2001		924			937
	Additional paid-in-capital		120,935			124,680
	Advances to Kinetic Systems or Predecessor Parent		(79,565	)		(68,856	)
	Stockholder note receivable		—			(4,000	)
	Accumulated deficit		(1,368	)		(66,416	)
	Accumulated other comprehensive loss		(1,048	)		(4,060	)

Total stockholders’ equity (deficit)			39,878			(17,715	)

Total liabilities and stockholders’ equity		$	405,952		$	371,846

See accompanying notes.

F-7

CELERITY GROUP, INC.

(formerly Kinetics Holdings Corporation)

COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)


		January 1,		April 29,		January 1,		August 31,
		1999		1999		2000		2000
		Through		Through		Through		Through		Year Ended
		April 28,		December 31,		August 30,		December 31,		December 31,
		1999		1999		2000		2000		2001

Revenues		$	29,081	$	168,484	$	290,512	$	190,577	$	191,060
Revenues from Kinetic Systems			2,115		1,448		3,709		1,776		3,631

			31,196		169,932		294,221		192,353		194,691
Cost of goods sold			23,534		152,653		233,852		159,569		172,812

Gross margin			7,662		17,279		60,369		32,784		21,879
Operating expenses:
	Selling, general, and administrative		8,556		16,743		21,931		11,012		35,948
	Research and development		1,819		6,104		5,296		2,932		8,909
	Amortization of goodwill and other intangible assets		1,724		5,186		6,890		4,482		15,735
	Depreciation

CELERITY GROUP INC S-1/A