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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/ X / ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-16244
VEECO INSTRUMENTS INC.
(REGISTRANT)
DELAWARE 11-2989601
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
TERMINAL DRIVE 11803
PLAINVIEW, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(516) 349-8300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No --
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by references in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 19, 1999 as
reported on the Nasdaq National Market, was approximately $542,237,000. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded from this computation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
At March 19, 1999, the Registrant had outstanding 15,890,795 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14 , 1999 are incorporated by reference into Part
III of this Form 10-K Report.
PART I
ITEM 1. BUSINESS.
THE COMPANY
Veeco is a leader in the design, manufacture, marketing and servicing of a broad
line of precision metrology and process equipment used to measure, test and
manufacture microelectronic products for the data storage and semiconductor
industries. Veeco's precision metrology equipment is primarily used to measure
critical dimensions on thin film magnetic heads (TFMHs) and semiconductor
devices. The Company's process equipment is primarily used to etch and deposit
materials in the manufacture of TFMHs.
Demand for Veeco's products has been driven by the increasing miniaturization of
microelectronic components; the need for manufacturers to meet reduced
time-to-market schedules while ensuring the quality of those components; and, in
the data storage industry, the introduction of new magnetoresistive (MR) and
giant magnetoresistive (GMR) TFMHs which require additional manufacturing steps
and the ability to conduct critical measurements for quality control and other
purposes during the manufacturing process. The ability of Veeco's products to
deposit precise thin films, precisely etch sub-micron patterns and make critical
surface measurements in these components enables manufacturers to improve yields
and quality in the fabrication of advanced microelectronic devices, such as
TFMHs and semiconductor devices.
Veeco sells its products worldwide to many leading manufacturers in the data
storage, semiconductor and other industries, as well as research and development
centers and universities. Customers include IBM, Seagate, Read-Rite, Siemens,
Lawrence Livermore National Laboratory, TDK and Storage Technology.
RECENT DEVELOPMENTS
On February 2, 1999, the Company completed a public offering, pursuant to which
1,000,000 shares of Common Stock, par value $.01 per share, were issued and sold
by the Company for $52.00 per share, less underwriting discounts and commissions
of $2.34 per share. The Company expects to use the net proceeds of the offering
(approximately $49 million) for capital expenditures including additional clean
manufacturing areas and expanded customer application laboratories and for
working capital and general corporate purposes, including potential
acquisitions. In addition, as part of the public offering, certain stockholders
of the Company sold 2,575,000 shares of Common Stock. The Company did not
receive any of the proceeds from the sale of shares by the selling stockholders.
On May 29, 1998, the Company merged with Digital Instruments, Inc., of Santa
Barbara, California ("Digital"). Under the merger agreement, Digital
shareholders received 5,583,725 shares of Veeco common stock. The merger has
been accounted for as a pooling of interests and, accordingly, historical data
has been restated to include Digital data.
INDUSTRY BACKGROUND
TFMHs and semiconductor devices are fabricated by performing a complex series of
process steps on aluminum oxide-titanium carbide substrates or silicon wafers.
The three primary categories of wafer processing steps are deposition,
photolithography and etching. Similarly, the production of TFMHs includes many
steps of patterning, etch and deposition. Each of these steps is typically
repeated several times during the fabrication process to create multi-layered
structures. The resulting semiconductor device or TFMH consists of many
intricate patterns on circuits. Depending upon the specific design of any given
integrated circuit, a variety of film thickness and a number of layers and film
types will be used to achieve desired performance characteristics. Continued
demand for smaller, faster and less expensive microelectronic components,
particularly in the computer industry, has led to increasing miniaturization.
This increasing miniaturization of microelectronic components, including TFMHs
and semiconductor devices, has resulted in an increased number of manufacturing
steps which require greater use of precise etching and deposition equipment. In
addition, metrology systems are used throughout the manufacturing process in
order to improve yields by monitoring process accuracy, product quality,
repeatability and by measuring critical dimensions and other physical features
such as film thickness, line width, step height, sidewall angle and surface
roughness.
The market for microelectronic components (including disk drives, TFMHs and
semiconductor devices) has grown rapidly in recent years, driven by corporate
and consumer use of data storage intensive products such as networked personal
computers (PCs), Windows NT client servers and the Internet, among others. Veeco
believes that annual unit growth in PCs, hard disk drives and MR/GMR heads has
been since 1997 in the 10%-15% range, 12%-17% range and 20%-25% range,
respectively, and will continue to grow at such rates until 2001. While the
Company believes that the PC market is the primary driver of disk drive unit
growth, disk drives are also increasingly being used for emerging applications
such as television set-top boxes, video-on-demand systems, and small electronic
devices such as digital cameras and personal digital assistants.
TRENDS IN THE DATA STORAGE INDUSTRY.--In order to satisfy market demand for
devices with greater storage capacity, the data storage industry has responded
with new head designs incorporating the higher areal densities required to store
more data. The capacity of disk drives is largely determined by the capability
of the magnetic recording heads, which read and write signals onto hard disks.
According to data storage industry sources, areal densities have been increasing
since 1990 at approximately a 60% annual rate and are expected to continue to do
so until at least 2005. With more storage capacity requiring multiple disks per
drive, magnetic head production is growing faster than the overall disk drive
industry. Prior to 1998, most magnetic heads being produced were inductive, but
new designs utilize MR and GMR heads, which allow for higher areal densities.
Inductive heads were limited to areal densities of approximately 1-2 gigabits
per square inch (Gbits/in2), while MR heads allow for 5 Gbits/in2 and GMR heads
are expected to allow for 50 Gbits/in2 by the year 2005.
The Company believes that substantial investment is being made in GMR technology
and that the industry is transitioning from producing approximately 30 million
GMR heads in 1998 to
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producing nearly 100 million GMR heads in 1999, 375 million in 2000 and 775
million in 2001. In addition, the conversion to smaller sized heads (i.e.,
"pico," "femto" vs. the "nano" designs currently in production) requires tighter
dimensional tolerance control.
As a result of the increased miniaturization of microelectronic components, the
data storage industry has recently experienced a trend toward the expanded use
of in-line metrology products for yield improvement and integrated test programs
in the production of TFMHs and hard disks. Since the new heads are more
sensitive and more complicated to manufacture, there is a greater need for 100%
testing of critical process steps. In addition, such testing allows
manufacturers to ramp up production more quickly and improve yields on these
next generation heads.
TRENDS IN THE SEMICONDUCTOR INDUSTRY.--Current semiconductor industry technology
trends include smaller feature sizes (sub-.25 micron line widths), larger
substrates (i.e., the transition to 300mm wafers) and the increased use of
metrology in the manufacturing process. The semiconductor industry is also
undergoing trends related to advanced interconnect and chemical mechanical
polishing (CMP) technologies. Semiconductor manufacturers use metrology tools in
their wafer fabrication facilities to detect any process deviations as early in
the manufacturing process as possible. These tools are critical for yield
enhancement resulting in cost reduction.
VEECO'S PRODUCTS
Veeco offers three primary product lines: metrology, process equipment and
industrial measurement. Historical contribution to net sales by each of these
product lines is shown below for the years indicated:
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------------------------------------------
(DOLLARS IN MILLIONS)
Metrology $126.2 $112.8 $92.1
% OF NET SALES 61.0% 52.0% 55.8%
Process Equipment $60.9 $84.5 $53.2
% OF NET SALES 29.5% 39.0% 32.2%
Industrial Measurement $19.7 $19.4 $19.8
% OF NET SALES 9.5% 9.0% 12.0%
See note 8 of Consolidated Financial Statements of the Company for additional
information regarding the Company's reportable segments.
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METROLOGY EQUIPMENT
Veeco's metrology product line includes atomic force/scanning probe microscopes,
optical interferometers and stylus profilers. These products offer a broad range
of solutions to customers in the data storage and semiconductor industries, as
well as versatile tools for use by research and development centers and
universities.
ATOMIC FORCE/SCANNING PROBE MICROSCOPES (AFM/SPMS)
In May 1998, Veeco merged with Digital, a leader in AFM/SPM technology. By
merging with Digital, Veeco complemented its existing family of metrology
products by adding next generation AFM/SPM technology capable of resolving and
imaging nanometer-level dimensional variations and surface properties. Over
time, the feature sizes in integrated circuits and magnetoresistive elements of
data storage devices have decreased. Today, the smallest feature sizes on
integrated circuits are on the order of 250 nanometers. Plans are in place to
fabricate integrated circuits with feature sizes as small as 180 and then 130
nanometers within the next few years.
The Atomic Force Microscope "feels" the sample surface directly using a probe
consisting of a very sharp tip mounted on a microscopic spring arm (a
cantilever). The interaction of the probe with the surface is detected by
measuring deflections of the cantilever with an optical beam system. AFMs permit
resolution at the molecular level. Digital developed some of the first AFMs used
in commercial applications and most of the SPMs manufactured and sold by Digital
are AFMs. SPMs, and particularly AFMs, can directly measure both lateral and
vertical shapes with nanometer resolution and with direct 3D capability. In
contrast, light-based instruments, including interferometric and confocal
microscopes, have limited lateral resolution for measurements of less than half
the wavelength of light, or less than about 250 nanometers. Digital's AFM
products utilize its patented TappingMode technology, achieving the high
resolution and stability previously obtainable only through destructive physical
contact with the sample surface while employing a light touch previously
achievable only through the less stable non-contact mode.
In addition to topography, AFMs can also directly measure magnetic field (such
as magnetic bits on a hard disk); electric field; hardness (such as thin film
integrity); electric charge density (such as dopant concentrations in
semiconductors); temperature (such as temperature distribution in disk drive
recording head elements); and various chemical properties (such as the
difference in binding preference among biological molecules). AFMs make these
measurements on almost any surface; in air, vacuum or under fluids; and with
minimal sample preparation.
Veeco produces a broad range of AFM/SPM products designed for data storage,
semiconductor, and other industrial and research applications. These products
include the NANOSCOPE DIMENSION SERIES SPMS, NANOSCOPE SPMS AND BIOSCOPE SPMS.
The BIOSCOPE SPMS are specifically designed for biological sciences. Veeco's
high-end DIMENSION 9000 SPM, the first of which was shipped in May 1998, meets
clean room specifications for full
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wafer fab compatibility. Veeco believes this product is well suited for on-line
integrated circuit and data storage processing applications, because it is
available with tip evaluation and automated tip exchange. Selling prices of
these products range from $40,000 to $700,000.
From July 1993 through December 1998, Veeco was the exclusive worldwide sales
and marketing representative to market, sell and service the IBM-manufactured
SXM Workstation AFM to customers in the semiconductor and data storage
industries. Following the merger with Digital, which provided Veeco with access
to Digital's AFM/SPM technology and products, Veeco entered into an agreement
with IBM in December 1998 pursuant to which Veeco's exclusive rights were
terminated. The parties continue to maintain a non-exclusive business
relationship with respect to the SXM Workstation, pursuant to which Veeco may
market and sell product units previously purchased by Veeco and IBM will
continue to provide replacement parts to Veeco to enable Veeco to satisfy its
warranty obligations to its customers. IBM continues to be a major customer of
each of Veeco's product lines. See "Customers."
OPTICAL INTERFEROMETRY PRODUCTS
Substantially all of Veeco's optical instruments, produced by Wyko Corporation
("Wyko"), are designed to make non-contact surface measurements using
interferometry technology. These instruments employ either white light or laser
sources to measure surface roughness and shape by creating interference patterns
from the optical path difference between the test surface and a reference
surface. Using a combination of phase shifting interferometry (PSI) and vertical
scanning interferometry (VSI), these instruments are designed to rapidly and
precisely measure and characterize a range of surface sizes and shapes. Selling
prices for optical interferometry instruments range from approximately $90,000
to $170,000.
Veeco's major optical products include the NT2000, the SP3000 and the HD-SERIES
optical profilers. The NT2000 product line measures surface roughness, heights
and shapes. The WYKO SP3000, for advanced packaging applications, measures
surface height, bump volume and diameter and bump coplanarity on silicon wafers
and ceramic substrates. Wyko's HD-SERIES instruments are a line of
microstructure measurement equipment used by manufacturers of mass memory
components including manufacturers of heads, disks, drives and suspensions.
HD-SERIES instruments are used for research and development, production control,
process improvement, final parts inspection, incoming parts inspection, and
field failure analysis.
During 1998, Veeco received multiple orders for WYKO HD2100 and HD3300 in-line
measurement tools from leading data storage manufacturers for advanced MR and
GMR thin film head production, including IBM, Seagate and Read-Rite, to be used
for 100% in-line testing of TFMHs. The latest model, the HD3300, is a
production-configured optical profiler that repeatably measures both pole-tip
recession and air-bearing surface flatness on either nano- or pico-series TFMHs
in one pass. The HD3300 system, with its smaller footprint, allows TFMH
manufacturers to further monitor and refine their manufacturing processes for
next-generation higher areal densities. The system's increased speed and
reliability allow 100% in-line production testing of thin film magnetic sliders,
providing a means for
5
improving head yields with a corresponding rapid payback of the customer's
investment in the system.
STYLUS PROFILERS
Stylus profilers are used to produce cross-sectional representations and/or
quantitative measurements, which are displayed on a video monitor. Veeco's
stylus profiler systems utilize a precision translation stage which creates
relative motion between the sample and a diamond tipped stylus. As the sample
moves under the stylus, surface variations cause vertical translation of the
stylus, which is tracked and measured. Stylus profilers are widely used for
height, width, pitch and roughness measurements of features on semiconductor
devices, magnetic and optical storage media (e.g., hard drives), flat panel
displays, and hybrid circuits. Veeco believes that its stylus profiler products
are recognized for their accuracy, repeatability, ease of use and technology
features, and are designed to meet a range of industry specifications and
customer requirements. Each of Veeco's stylus profilers incorporates a
proprietary software package to assist in data collection, analysis and
interpretation. Stylus profilers have selling prices in the range of
approximately $30,000 to $300,000, depending upon product specifications,
materials handling capability and specific applications.
PROCESS EQUIPMENT
Veeco's process equipment product line includes etch and deposition systems,
primarily for data storage applications. Veeco's deposition products include ion
beam deposition (IBD) systems, diamond-like carbon (DLC) deposition systems and
physical vapor deposition (PVD) systems. Veeco offers ion beam etch/IBD/PVD
technologies in a single cluster tool to provide data storage customers a total
solution for the manufacture of next generation MR/GMR TFMHs. Selling prices of
Veeco process equipment products range from approximately $650,000 to
$3,000,000.
ETCH SYSTEMS
Veeco develops and produces ion beam etch systems, sold under the MICROETCH
brand name. These systems etch precise, complex features for use primarily by
data storage and semiconductor manufacturers in the fabrication of discrete and
integrated microelectronic devices such as TFMHs. Veeco believes that it holds
the leadership position in the overall market for ion beam etching systems
utilized for production of TFMHs.
Ion beam etching permits precise sub-micron low temperature etching of a wide
variety of materials, including many which cannot be etched by other processes,
and has emerged as a leading fabrication process in the TFMH data storage
industry for both circuit patterning and micromachining. This technology is
utilized in multiple steps of the advanced TFMH fabrication process. In
addition, as the demand for integrated circuits and microsensors with sub-micron
features grows, Veeco believes the demand for ion beam etching systems will
increase. Each process equipment product is available as a single loadlock
system or in an automated (multi-chamber) cluster tool configuration. These
systems provide flexibility and
6
throughput by either permitting the etch process to occur in up to three
parallel chambers or by combining with ion beam deposition or physical vapor
deposition.
DEPOSITION SYSTEMS
ION BEAM DEPOSITION SYSTEMS. IBD-350 ion beam deposition systems utilize an ion
beam to deposit thin films and may be mated to Veeco's Cluster System platform
to allow either parallel or sequential etch/deposition processes. The IBD-350
deposits high purity thin film layers and provides maximum uniformity and
repeatability.
DIAMOND-LIKE CARBON DEPOSITION SYSTEMS. Veeco's DLC-350V diamond-like carbon
deposition system has been developed to deposit protective coatings on advanced
TFMHs. The system consists of a single cassette vacuum loadlock and a high
vacuum processing chamber with two ion beam sources.
PHYSICAL VAPOR DEPOSITION SYSTEMS. Veeco's PVD Cymetra systems are available in
either a planetary or static configuration which can be used to deposit films in
several ways. The planetary configuration produces films with a high degree of
uniformity, repeatability and process control. Multiple targets of different
materials are provided in a single chamber to permit deposition of a stack of
films. The PVD Cymetra systems are also available in static configurations.
These consist of individual chambers dedicated to a single target material.
IBE/IBD/PVD CLUSTER TOOLS. Veeco's cluster tool format allows for combinations
of etch and deposition modules to address the challenging manufacturing
requirements of MR/GMR TFMHs.
INDUSTRIAL MEASUREMENT EQUIPMENT
Veeco's industrial measurement products include X-Ray fluorescence thickness
measurement systems as well as leak detection/vacuum equipment. These products
have applications in a wide range of industries including electronic, aerospace,
transportation and semiconductor. Selling prices for industrial measurement
products range from approximately $20,000 to $1,700,000.
X-RAY FLUORESCENCE THICKNESS MEASUREMENT SYSTEMS
Veeco believes that its X-Ray Fluorescence (XRF) systems incorporate an advanced
technology for non-destructive thickness and composition measurement of plated
parts, providing high accuracy and precision on a cost-effective basis. As
industries increase their emphasis on tighter process control manufacturing
specifications (e.g., ISO 9000), XRF technology has become important due to its
speed, repeatability, accuracy and non-destructive measurement capability. Due
to increased miniaturization of components in the microelectronics industry and
the increased need for on-line production testing, Veeco believes that the XRF
market will grow and that XRF technology will be brought into new applications,
such as microelectronic, data storage and metal finishing electrical corrosion
resistant coatings. Veeco's XRF products incorporate Veeco's XPert software
package, which
7
operates in a Microsoft Windows environment and offers features including
advanced user-friendly interface and sophisticated statistical data analysis.
LEAK DETECTION/VACUUM EQUIPMENT
For over 50 years, Veeco (and its predecessors) have produced mass spectrometry
leak detection equipment used for the non-destructive precise identification of
the size and location of leaks in sealed components. Leak detectors are used in
a broad range of electronic, aerospace and transportation products, with
applications in the production of automotive airbags, semiconductor devices, air
conditioning and refrigeration components, chemical valves, medical devices such
as pacemakers, and fiber optic cable production. Veeco also produces vacuum
systems, including vacuum pumping stations and gauges, which are sold primarily
to industrial customers.
SERVICE AND SALES
Veeco recognizes that its customer service organization is a significant factor
in the Company's success. The Company provides service and support on a
warranty, service contract or an individual service-call basis. Veeco also
offers enhanced warranty coverage and services, including preventative
maintenance plans, on-call and on-site service plans and other comprehensive
service arrangements, product and application training, consultation services
and a 24-hour hotline service for certain products. The Company believes that
offering seven-day per week, 24-hour per day worldwide support to its customers
creates stronger relationships with customers and provides a significant
competitive advantage. Approximately 14.8% of Veeco's net sales for the year
ended December 31, 1998 constituted revenues from service and support and the
sale of spare parts and components. These results are included in Veeco's
process equipment, metrology and industrial measurement sales.
Veeco sells its products worldwide through 19 strategically located sales and
service facilities, including nine in the U.S., five in Europe, three in Asia
Pacific, and two in Japan. In 1997 and 1998, Veeco expanded its direct worldwide
sales and service support organization to focus on combined field service and
customer support for all Veeco process equipment and metrology products. As of
December 31, 1998, Veeco employed 102 sales and marketing representatives and
118 field service representatives.
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CUSTOMERS
Veeco sells its products to many of the world's major data storage and
semiconductor manufacturers, and to customers in other industries, research
centers and universities. For the year ended December 31, 1998, 55% of Veeco's
sales were to data storage customers, 20% to semiconductor customers and 25% to
others. During this period, sales to Veeco's top three customers, IBM, Read-Rite
and Seagate, accounted for approximately 35% of total sales.
Veeco's major customers include:
Alps Read-Rite
AMD Samsung
Applied Magnetics/DAS Devices Seagate
Headway Technologies Seiko
Hewlett Packard Sharp
Hitachi Siemens
Hutchinson Technology Silmag
Ibiden SONY
IBM Storage Technology
Intel Texas Instruments
Lawrence Livermore National Laboratory TDK
Quantum Toshiba
RESEARCH AND DEVELOPMENT
Veeco believes that continued and timely development of new products and
enhancements to existing products are necessary to maintain its competitive
position. Veeco utilizes information supplied by its distributors and customers
to design and develop new products and product enhancements and to reduce
time-to-market for these products.
Veeco's research and development programs are organized by product line; new
products have been introduced into each of Veeco's product lines in each of
1998, 1997 and 1996. During the last two years, Veeco has introduced new ion
beam deposition, diamond-like carbon coating and physical vapor deposition
systems, Digital has introduced new AFM/SPM products and Wyko has introduced
several new production-oriented interferometry products.
In addition, Veeco has leveraged technology on a company-wide basis to develop
new products. In 1998, Veeco's AFM and stylus profiler research teams
collaborated in the development of the Vx-series Atomic Force Profiler.
Veeco's research and development expenses were approximately $27.4 million,
$24.5 million and $17.7 million, or approximately 13.2%, 11.3% and 10.7% of net
sales, for each of the years ended December 31, 1998, 1997 and 1996,
respectively. These expenses consisted primarily of salaries, project material
and other product development and enhancement costs.
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MANUFACTURING
The Company's principal manufacturing activities, which consist of design,
assembly and test operations, take place at its Plainview, New York
headquarters, where ion beam systems are produced, in Orangeburg, New York,
where its PVD systems are produced, in Ronkonkoma, New York, where its XRF and
leak detection/vacuum equipment product lines are produced, in Santa Barbara,
California, where the stylus surface metrology system product line is produced
and in Tucson, Arizona, where interferometry products are produced.
The Company's manufacturing and research and development functions have been
organized by product line. The Company believes that this organizational
structure allows each product line manager to more closely monitor the products
for which he is responsible, resulting in more efficient sales, marketing,
manufacturing and research and development. The Company seeks to emphasize
customer responsiveness, customer service, high quality products and a more
interactive management style. By implementing these management philosophies, the
Company believes that it has increased its competitiveness and positioned itself
for future growth.
Certain of the components and sub-assemblies included in the Company's products
are obtained from a single source or a limited group of suppliers. Although the
Company does not believe it is dependent upon any supplier of the components and
sub-assemblies referred to in the previous sentence as a sole source or limited
source for any critical components, the inability of the Company to develop
alternative sources, if required, or an inability to meet a demand or a
prolonged interruption in supply or a significant increase in the price of one
or more components could adversely affect the Company's operating results.
BACKLOG
The Company's backlog consists generally of product orders for which a purchase
order has been received and which are scheduled for shipment within twelve
months. Because a large percentage of the Company's orders require products to
be shipped in the same quarter in which the order was received, and due to
possible changes in delivery schedules, cancellations of orders and delays in
shipment, the Company does not believe that the level of backlog at any point in
time is an accurate indicator of the Company's performance.
COMPETITION
In each of the markets that it serves, Veeco faces substantial competition from
established competitors some of which have greater financial, engineering,
manufacturing and marketing resources than Veeco. In addition, to a lesser
extent many of Veeco's product lines face competition from alternative
technologies, some of which are more established than those used by Veeco in its
products. Significant marketing factors for metrology and process equipment
tools include system performance, accuracy, repeatability, ease of use,
reliability, cost of ownership, and technical service and support. Veeco
believes it competes favorably on
10
the basis of these factors in each of Veeco's served markets for such products.
None of Veeco's competitors competes with Veeco across all of Veeco's product
lines.
Veeco competes with metrology product manufacturers such as Hitachi, KLA-Tencor,
Thermo-Microscopes, ADE Corporation and Zygo Corporation. Veeco competes with
process equipment manufacturers such as Commonwealth Scientific Corporation,
Hitachi, Nordiko, CVC and Balzers. Veeco competes with industrial measurement
product manufacturers such as Kevex, CMI International, Fischer, Varian
Associates, Leybold and Alcatel.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
Veeco's success depends in part on its proprietary technology. Although Veeco
attempts to protect its intellectual property rights through patents,
copyrights, trade secrets and other measures, there can be no assurance that
Veeco will be able to protect its technology adequately or that competitors will
not be able to develop similar technology independently.
Veeco has more than 75 patents and over 10 exclusive and non-exclusive licenses
to patents owned by others covering its various products which Veeco believes
provide it with a competitive advantage. Veeco has a policy of seeking patents
when appropriate on inventions concerning new products and improvements as part
of its ongoing research, development and manufacturing activities. Veeco
believes that there are no patents which are critical to its operations, and
that the success of its business depends primarily on the technical expertise,
innovation, creativity and marketing and distribution ability of its employees.
Veeco also relies upon trade secret protection for its confidential and
propriety information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Veeco's trade secrets or disclose such
technology or that Veeco can meaningfully protect its trade secrets. In
addition, the Company cannot be certain that it will not be sued by third
parties alleging that the Company has infringed their patents or other
intellectual property rights. If any third party sues Veeco, the Company's
business, results of operations or financial condition could be materially
adversely affected.
Following the merger with Digital, in September 1998, Veeco and IBM entered into
a cross license agreement providing for the grant by Veeco to IBM and the grant
by IBM to Veeco of the non-exclusive right to make, use or sell SPM products
utilizing technology covered by certain patents held by Veeco and IBM,
respectively. The agreement terminates in August 2003. The cross license
agreement replaces a prior patent license agreement between IBM and Digital.
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ENVIRONMENTAL MATTERS
In October 1993, the California Regional Water Quality Control Board, Central
Coast Region (the "RWQCB") issued a Cleanup and Abatement Order ("CAO") for the
site (the "Site") of a facility which was leased by a predecessor ("Old Sloan")
of Sloan Technology Corp., a subsidiary of the Company ("Sloan") in Santa
Barbara, California. to be discharged into waters of the State at the Site where
The CAO declared that Lambda Electronics Inc. ("Lambda"), the Company and
certain other parties had caused nor permitted certain hazardous waste they
create, or threaten to create, a condition of nuisance. (The Company is named as
a "discharger" in the CAO because it acquired the assets and liabilities of Old
Sloan pursuant to the acquisition of the equipment group of a predecessor of the
Company (the "Acquisition"); in addition, the Company may be required to
indemnify Lambda for obligations incurred by Lambda as a result of Old Sloan's
operations.)
In compliance with the CAO, the Company submitted a corrective action plan for
remediating contaminated soils at the Site, by excavating them, spreading them,
tilling them, and then refilling the excavated areas with these soils. The RWQCB
approved this corrective action plan on June 6, 1994 and on November 29, 1994,
the Santa Barbara County Air Pollution Control District exempted the corrective
action activities from the District's air permit requirements. The soil
remediation was completed in September 1995. The Company is currently performing
post soil remediation groundwater monitoring.
Reports prepared by consultants hired by the Company and by owners of the Site
indicate elevated levels of certain contaminants in samples of groundwater
underneath the Site. Pursuant to the CAO, in September 1998 the Company began
implementation of a groundwater remediation plan approved by the RWQCB, which
includes both air "sparging" to remove volatile contaminants from Site
groundwater and soil and monthly monitoring of groundwater. The goal of this
remedial effort is to reduce contaminant concentrations in Site groundwater to
drinking water standards approved by the U.S. Environmental Protection Agency
and the RWQCB, or to demonstrate that any residual contamination is migrating to
Site groundwater from off-Site sources. The Company has been sampling the
groundwater each month since September. The December samples did not show any
contaminants above laboratory detection limits. Consistent with the remediation
plan, the remediation system has been temporarily shut down; the Company is
continuing groundwater sampling. If contaminants remain below RWQCB standards in
subsequent sampling, the Company will ask the RWQCB to close the CAO case.
Alternatively, if there is a "rebound" in contaminant levels, the Company will
restart the remedial system and operate it until concentrations are again
reduced below RWQCB standards. The Company's consultants believe that, if there
are two episodes of contaminant elimination and rebound, this will be a strong
indication that contamination is migrating to the Company's monitor wells from
off-Site sources. At such a point, the Company would conclude that its remedial
obligation had been fulfilled, and it would apply to the RWQCB for closure of
the CAO case.
The Company cannot at this time estimate the extent of its and Lambda's
remaining remedial liability at the Site since that will depend upon both the
success of the groundwater
12
remediation and the Company's ability to demonstrate to the RWQCB that any
remaining contamination in Site groundwater is migrating onto the Site from
other sources.
Pursuant to the Acquisition, the Company is required to pay, and has paid for
each of the past seven years, up to $15,000 per year of the expenses incurred in
connection with the operation of certain equipment used in connection with the
monitoring and remediation of certain environmental contamination at the
Company's Plainview, New York facility. The Company may under certain
circumstances also be obligated to pay up to an additional $250,000 in
connection with the implementation of a comprehensive plan of environmental
remediation at the Plainview facility; pursuant to the terms of the Acquisition,
Lambda (as well as its corporate parent, Unitech, and certain of Lambda's
subsidiaries) are required to pay all other costs and expenses relating to any
such plan of environmental remediation. Because no such comprehensive plan of
remediation has been required to date, the Company is not in a position to
estimate more precisely what any actual liability might be.
The Company is aware that petroleum hydrocarbon contamination has been detected
in the soil at the site of the facility leased by its Sloan subsidiary in Santa
Barbara, California (the "Sloan Building"). For 18 months after the Acquisition,
the Company owned all of the outstanding capital stock of a company which held
title to the Sloan Building, and a leasehold in the property on which the Sloan
Building is located. In July 1991, the capital stock of such company was
transferred to Lambda, pursuant to provisions in the agreement relating to the
Acquisition. Although there appears to be no evidence that the petroleum
constituents found in the soil are associated with any activities of Sloan at
the Sloan Building, under Federal and California environmental statutes, current
"owners and operators" and "owners and operators" at the time of disposal of
hazardous substances may be deemed liable for removal and remediation of
contamination at a facility. In connection with the Acquisition, Lambda and
Unitech plc agreed to indemnify the Company for liabilities incurred by the
Company which arise from the environmental contamination at the site, and any
costs and expenses relating to the remediation thereof.
The former headquarters of Digital, located at 112 Robin Hill Road, Santa
Barbara, California (the "Robin Hill Site"), which was acquired in connection
with the Company's merger with Digital in May 1998, was purchased by Robin Hill
Properties, Inc. ("Robin Hill") from Raytheon Company ("Raytheon") in November
1997. At the time of such purchase, Robin Hill was an affiliate of Digital. In
connection with the Company's merger with Digital, Robin Hill became a
wholly-owned subsidiary of the Company. In 1994-95, Raytheon had carried out an
environmental site assessment of its Hollister Avenue Campus, which included the
Robin Hill Site, through one of its subsidiaries, Raytheon Engineers &
Constructors, Inc. The assessment found quantities of certain volatile organic
compounds, principally trichloroethene and benzene, above the applicable
California maximum concentration levels, in aquifers lying approximately 40-50
feet below the northeast and southeast corners and along the northern boundary
of the Robin Hill Site, as well as the same and other compounds in deep and
shallow aquifers and in the soil of certain portions of the rest of the Raytheon
Hollister Avenue Campus. Raytheon reported the findings of the assessment to the
RWQCB and proposed for the Robin Hill Site that possible off-site sources of the
compounds found under the site be investigated and for the rest of the Raytheon
Hollister Avenue Campus that a study
13
to determine feasibility and applicability of remediation of this part of the
Campus be carried out by Raytheon. In response, the RWQCB suggested additional
testing at the Robin Hill Site and acquiesced in Raytheon's proposed study of
the rest of the Raytheon Hollister Avenue Campus. The Company understands that
the RWQCB has not as yet ordered an investigation of off-site sources of the
compounds found under the Robin Hill Site, nor has it suggested remediation of
the site.
It was a condition of Robin Hill's purchase of the Robin Hill Site that Raytheon
carry out additional testing at the site, including drilling and sampling
additional monitoring wells, sampling the soil and resampling the existing
monitoring wells. This testing was conducted by Raytheon Engineers &
Constructors, working under the surveillance of Robin Hill's environmental
consultant, PHR Environmental Consultants, Inc. The testing confirmed the
findings of the earlier assessment at the northeast and southeast corners of the
site, although at somewhat different levels (higher levels of TCP in the
southeast corner and lower levels in the northeast corner), but did not find
these chemicals above maximum concentration levels at the other tested portions
of the site. In light of these findings, Robin Hill agreed to proceed with the
purchase of the site. The Company understands that Raytheon intends to report
these findings to the RWQCB.
Under federal and California environmental statutes, current "owners and
operators" of a contaminated site, such as Robin Hill and Veeco, may be deemed
liable for remediating such contamination. The agreement under which the
purchase was consummated provides Robin Hill and its successors with full
indemnification from Raytheon against further costs of investigating the Robin
Hill Site and of remediating hazardous substances released upon or under the
site before the purchase, as well as continued migration on and under the site
of identified contaminants. Under the agreement, Raytheon is responsible for the
conduct of discussions with governmental agencies, including the RWQCB, relative
to investigations and remediation of the Robin Hill Site.
EMPLOYEES
At December 31, 1998, the Company had approximately 767 employees, comprised of
205 in manufacturing and testing, 102 in sales and marketing, 118 in service and
support, 247 in engineering, research and development, and 95 in general
administration and finance. The success of the Company's future operations
depends in large part on the Company's ability to recruit and retain engineers,
technicians and other highly-skilled professionals who are in considerable
demand. There can be no assurance that the Company will be successful in
retaining or recruiting key personnel. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage, slowdown or strike. The Company considers its employee relations to be
good.
None of the Company's senior management or key employees is subject to an
employment agreement; in addition, none of such individuals is subject to an
agreement not to compete with the Company.
14
ITEM 2. PROPERTIES.
The Company's corporate headquarters and manufacturing and research and
development facilities for process equipment systems are located in an 80,000
square foot building in Plainview, New York, which is owned by the Company.
The Company also manufactures and designs products in six other sites in the
United States, which include a 100,000 square foot facility in Orangeburg,
New York, which was sold in January 1999 as part of the Company's 1998 plan
of reorganization, a 100,000 square foot facility in Tucson, Arizona, owned
by the Company, a 40,000 square foot facility in Ronkonkoma, New York, leased
by the Company, a 25,000 square foot facility in Santa Barbara, California,
leased by the Company (the Company is currently marketing this building for
sublease as part of the Company's 1998 plan of reorganization), a 100,000
square foot facility in Santa Barbara, California, owned by the Company and
an 11,000 square foot facility in San Jose, California, leased by the
Company. The Tucson facility is subject to a mortgage, which at December 31,
1998, had an outstanding balance of $2,447,000. The Santa Barbara facility is
subject to a mortgage, which at December 31, 1998 had an outstanding balance
of $6,700,000. The Ronkonkoma and Santa Barbara leases expire in 2003.
The Company also leases facilities located in Tustin, California and Chadds
Ford, Pennsylvania for use as sales and service centers for certain of its
products. Subsidiaries of the Company lease space for use as sales and
service centers in Dourdan, France; Munchen, Germany; Manheim, Germany;
Cambridge, England; Watford, England; Beijing, China; Hsinchu, Taiwan; Osaka,
Japan; Tokyo, Japan and Penang, Malaysia. The Company believes its facilities
are adequate to meet its current needs. Certain levels of environmental
contamination have been detected at the Plainview, New York and Santa
Barbara, California facilities of the Company. See "Business - Environmental
Matters."
ITEM 3. LEGAL PROCEEDINGS.
See "Business--Environmental Matters" for a description of certain environmental
matters involving the Company. Except as described therein, there are no
material legal proceedings involving the Company or any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is quoted on the NASDAQ National Market under the symbol
"VECO". The 1998 and 1997 high and low closing prices are as follows:
1998 1997
-------------------------- --------------------------
HIGH LOW HIGH LOW
--------------------------------------- ------------ ------------- ------------ ------------
First Quarter $37.19 $20.38 $31.38 $21.88
Second Quarter 42.13 22.94 41.50 25.75
Third Quarter 35.00 22.13 72.50 38.50
Fourth Quarter 54.38 21.63 59.50 19.19
On March 19, 1999, the closing price for the Company's Common Stock on the
NASDAQ National Market was $44.375. As of March 19, 1999, the Company had
approximately 226 shareholders of record.
In May, 1998, in connection with the Digital merger, the Company issued to the
former stockholders of Digital a total of 5,583,725 shares of Common Stock. The
securities were issued without registration under the Securities Act of 1933
pursuant to Section 4(2) thereof. See "Business- Recent Developments."
In July 1997, in connection with the acquisition of Wyko, in exchange for all of
the outstanding capital stock of Wyko, the Company issued to the former
stockholders of Wyko a total of 2,863,810 shares of Common Stock and to former
option holders of Wyko options to purchase 136,190 shares of Common Stock. The
securities were issued without registration under the Securities Act of 1933
pursuant to Section 4(2) thereof. Options to purchase 30,547 shares of Common
Stock were issued with an exercise price of $2.20 per share, options to purchase
10,182 shares of Common Stock were issued with an exercise price of $2.18 per
share and options to purchase 95,461 shares of Common Stock were issued with an
exercise price of $1.27 per share.
The Company has not paid dividends on the Common Stock. The Company intends to
retain future earnings, if any, for the development of its business and,
therefore, does not anticipate that the Board of Directors will declare or pay
any dividends on the Common Stock in the foreseeable future. In addition, the
provisions of the Company's current credit facility limits the Company's ability
to pay dividends. The Board of Directors will determine future dividend policy
based on the Company's results of operations, financial condition, capital
requirements and other circumstances.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this Form 10-K.
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
1998 1997 1996 1995 1994
-------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Net sales $ 206,838 $ 216,728 $ 165,059 $ 123,976 $ 84,959
Cost of sales 111,778 110,680 83,521 61,693 45,359
-------------------------------------------------------------------------
Gross profit 95,060 106,048 81,538 62,283 39,600
Costs and expenses 68,527 65,954 48,045 38,774 28,352
Merger and reorganization expenses 7,500 (1) 2,250(2) -- -- --
Write-off of purchased in-process technology -- 4,200 -- -- --
Legal fees and claims related to litigation -- -- -- -- 2,051
-------------------------------------------------------------------------
Operating income 19,033 33,644 33,493 23,509 9,197
Interest expense (income), net 888 7 (345) 179 2,901
-------------------------------------------------------------------------
Income before income taxes and
extraordinary item 18,145 33,637 33,838 23,330 6,296
Income tax provision (benefit) 5,444 7,610 6,941 2,497 (584)
-------------------------------------------------------------------------
Income before extraordinary item 12,701 26,027 26,897 20,833 6,880
Extraordinary (loss), net of $355 tax benefit -- -- -- -- (679)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income $12,701 $26,027 $26,897 $20,833 $6,201
=========================================================================
EARNINGS PER SHARE:
Income before extraordinary item per common
share $.87 $1.81 $1.89 $1.52 $.65
Extraordinary (loss) per common share -- -- -- -- (.06)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net income per common share $.87 $1.81 $1.89 $1.52 $.59
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted income before extraordinary item per
common share $.85 $1.75 $1.86 $1.48 $.62
Diluted extraordinary (loss) per common share
-- -- -- -- (.06)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Diluted net income per common share $.85 $1.75 $1.86 $1.48 $.56
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PRO FORMA PRESENTATION (3):
Income before income taxes and extraordinary
item $18,145 $33,637 $33,838 $23,330 $6,296
Pro forma income tax provision 6,898 12,817 12,963 7,054 1,926
-------------------------------------------------------------------------
Pro forma income before extraordinary item 11,247 20,820 20,875 16,276 4,370
Extraordinary (loss), net of $355 tax benefit -- -- -- -- (679)
-------------------------------------------------------------------------
Pro forma net income $ 11,247 $ 20,820 $ 20,875 $ 16,276 $ 3,691
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Pro forma net income per common share $.77 $1.45 $1.46 $1.18 $.35
Pro forma diluted net income per common share
$.76 $1.40 $1.44 $1.16 $.33
Weighted average shares outstanding 14,627 14,392 14,251 13,750 10,579
Diluted weighted average shares outstanding 14,887 14,908 14,490 14,068 11,056
17
AS OF DECEMBER 31,
1998 1997 1996 1995 1994
------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents $ 23,492 $ 20,444 $ 26,322 $ 20,862 $ 5,610
Working capital 85,526 68,778 61,994 49,324 25,543
Excess of cost over net assets acquired, net 4,187 4,318 4,448 4,579 4,710
Total assets 172,837 159,631 113,339 93,248 62,643
Long-term debt (including current
installments) 17,147 17,356 10,669 10,766 2,839
Shareholders' equity 113,224 93,758 71,569 58,448 40,910
(1) Merger expenses related to the Digital merger were comprised of
transaction fees and expenses of $3.3 million and a $1.6 million non-cash
compensation charge related to stock issued in accordance with a
pre-existing agreement with a key Digital employee. Reorganization
expenses consisted of $.5 million for termination benefit costs, $.7
million for an estimated loss on a future sublease of an abandoned office
and manufacturing facility, $.9 million for write-downs of long-lived
assets held for sale or disposal, and $.5 million for other costs. See
Note 2 to the Consolidated Financial Statements.
(2) During 1997, the Company recorded a $2.3 million charge for merger
related fees consisting of investment banking, legal and other
transaction costs in connection with the merger with Wyko.
(3) Pro forma net income and pro forma earnings per share present income
taxes as if Digital, which was merged with the Company in May 1998 in a
transaction accounted for as a pooling of interests, had been a "C"
corporation for all periods presented and, therefore, subject to federal
income taxes at the corporation level. Prior to the merger, Digital had
elected "S" corporation status for income tax purposes and, therefore,
was not subject to federal income taxes.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Veeco is a leader in the design, manufacture, marketing and servicing of a broad
line of precision metrology and process equipment used to measure, test and
manufacture microelectronic products for the data storage and semiconductor
industries. Precision metrology equipment is primarily used to measure critical
dimensions on thin film magnetic heads (TFMHs) and semiconductor devices.
Process equipment is primarily used to etch and deposit materials in the
manufacture of TFMHs.
18
During the last several years, Veeco has increasingly emphasized its metrology
product line, which accounted for $126.2 million or 61.0% of its net sales for
the year ended December 31, 1998. This emphasis was demonstrated by the mergers
with Wyko in July 1997 and Digital in May 1998. These mergers resulted in a
broadening of the metrology product line by adding the optical interferometry
products manufactured by Wyko and atomic force/scanning probe microscopes
manufactured by Digital to the stylus profiler products manufactured by Veeco.
Veeco's net sales for 1998 included $102.5 million attributable to sales of Wyko
and Digital products. Veeco's consolidated financial condition and results of
operations have been retroactively restated to reflect Veeco's mergers with Wyko
and Digital, which have been accounted for as poolings of interests.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the relationship (in
percentages) of selected items of Veeco's consolidated statements of income to
its total net sales:
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 54.0 51.1 50.6
-------------------------------------------
Gross profit 46.0 48.9 49.4
Operating expenses:
Research and development 13.2 11.3 10.7
Selling, general and administrative 20.3 19.2 18.0
Other-net (.3) -- 0.4
Merger and reorganization expenses 3.6 1.0 --
Write-off of purchased in-process technology -- 1.9 --
-------------------------------------------
Total operating expenses 36.8 33.4 29.1
-------------------------------------------
Operating income 9.2 15.5 20.3
Interest expense (income), net 0.4 0.0 (0.2)
-------------------------------------------
Income before income taxes 8.8 15.5 20.5
Income tax provision 2.7 3.5 4.2
-------------------------------------------
-------------------------------------------
Net income 6.1% 12.0% 16.3%
-------------------------------------------
-------------------------------------------
19
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales were $206.8 million for the year ended December 31, 1998, representing
a decrease of $9.9 million or 4.6%, when compared to the year ended December 31,
1997. The decrease in sales reflects a 27.9% decrease in process equipment sales
partially offset by an 11.9% increase in metrology sales. Sales in the U.S.,
Europe, Japan and Asia Pacific, respectively, accounted for 48.8%, 19.0%, 16.8%
and 10.4%, respectively, of the Company's net sales for the year ended December
31, 1998. Sales in the U.S. decreased approximately 18.2%, while international
sales included a 79.3% increase in Europe, a 16.8% increase in Japan and a 43.8%
decrease in Asia Pacific from the comparable 1997 period. The decrease in U.S.
sales principally reflects reduced process equipment sales to data storage
customers. The increase in sales in Europe and in Japan principally reflects
increased process equipment sales to data storage customers along with increased
metrology sales for data storage and semiconductor applications. The decrease in
sales in Asia Pacific principally reflects a decrease in sales of all product
lines resulting from the economic downturn in that region. The Company believes
that there will continue to be quarter to quarter variations in the geographic
concentration of sales.
Metrology sales of $126.2 million for the year ended December 31, 1998 increased
by $13.4 million or 11.9% over the comparable 1997 period principally reflecting
increased purchases of metrology products for in-line inspection of critical
steps in data storage applications. Process equipment sales of $60.9 million for
the year ended December 31, 1998, decreased by $23.6 million or 27.9% from the
comparable 1997 period, as sales of ion beam etch products declined, partially
offset by increased sales of new deposition products associated with the
transition to magnetoresistive (MR) and giant magnetoresistive (GMR) thin film
magnetic heads (TFMHs). Ion beam etch sales continue to be negatively affected
by excess capacity in the data storage industry. Industrial measurement sales
for the year ended December 31, 1998, of $19.7 million increased 1.5% over the
comparable 1997 period.
Veeco received $221.4 million of orders for the year ended December 31, 1998,
representing a 1.3% increase from $218.6 million of orders in the comparable
1997 period. Metrology orders increased 12.4% to $131.4 million reflecting
increased purchases of in-line metrology products for production applications
such as PTR (pole tip recession) measurements for new MR and GMR thin film
magnetic heads. Process equipment orders decreased 7.3% to $71.7 million as a
result of a reduction in orders of ion beam etch products, reflecting weak data
storage market conditions, including industry-wide overcapacity. Industrial
measurement orders decreased 25.1% to $18.3 million as a result of a reduction
in orders of industrial leak detection equipment. The book-to-bill ratio for the
year ended December 31, 1998 was 1.07 to 1.
Gross profit for the year ended December 31, 1998 of $95.1 million represents a
decrease of $11.0 million from the comparable 1997 period. Gross profit as a
percentage of net sales decreased to 46.0% for 1998 from 48.9% for 1997,
principally due to a decrease in gross margin for the process equipment product
line. This decline resulted from lower sales volume,
20
increased field support, warranty, facility and information system costs and the
increase in sales of new deposition products with lower initial gross margins
than established ion beam etch products. The metrology product line experienced
higher field service and warranty costs as it expanded sales of production
related inspection tools to data storage customers at a variety of international
locations.
Research and development expense for the year ended December 31, 1998 of $27.4
million increased by $2.9 million or 11.9% over the comparable period of 1997,
as the Company continues to invest in new product development in each of its
product lines with particular emphasis on in-line inspection tools in the
metrology product line and deposition tools for its process equipment line.
Selling, general and administrative expenses of $42.0 million for the year ended
December 31, 1998 remained relatively flat when compared to 1997.
As described in Note 2 to the Company's Consolidated Financial Statements, for
the year ended December 31, 1998, the Company recorded a $7.5 million pre-tax
charge for merger and reorganization expenses principally related to the merger
with Digital during such period. During the year ended December 31, 1997, the
Company recorded a $4.2 million write-off for the fair values of acquired
in-process engineering and development projects that had not reached
technological feasibility and have no future alternative uses and a $2.3 million
charge related to the merger with Wyko.
Income taxes for the year ended December 31, 1998 amounted to $5.4 million or
30% of income before income taxes as compared to $7.6 million or 23% of income
before income taxes for the same period of 1997. These effective tax rates
reflect Digital's "S" Corporation status for five months in 1998 (through the
merger date) compared to a full year in 1997. As an "S" Corporation, Digital was
not subject to federal income taxes at the corporation level.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales were $216.7 million for the year ended December 31, 1997 representing
an increase of approximately $51.7 million or 31.3%, when compared to the year
ended December 31, 1996. The increase reflects growth in Veeco's process
equipment and metrology product lines. Sales in the U.S. increased approximately
54.2%, while international sales included a 27.3% increase in Asia Pacific, a
5.2% increase in Europe and a 4.5% decrease in Japan.
Sales of metrology products increased by 22.5% to approximately $112.8 million
in 1997 compared to 1996 principally as a result of increased sales of Wyko
optical interferometers, Dektak stylus profilers and scatterometers, atomic
force microscopes and Digital SPM systems. Sales of Wyko optical interferometers
increased by 81%, reflecting increased acceptance by the semiconductor industry
of non-contact optical measurement for advanced packaging. Sales of Dektak
stylus profilers and scatterometers increased by 21% reflecting acceptance of
new product introductions in the data storage and semiconductor industries.
Atomic force microscope sales increased 15% reflecting increased demand for
advanced semiconductor applications. Nano Scope Dimension SPM systems sales
increased by
21
approximately 16%, partially offset by a decrease in sales of Digital's other
product groups. Sales of process equipment increased by 59% to approximately
$84.5 million in 1997 compared to 1996, driven principally by increased demand
from the data storage industry for equipment used in the production of MR and
GMR heads for high density hard drives. Of this increase, approximately 39% was
due to growth in volume, with the balance of the increase due to a shift in
customer demand to multi-process modules with increased automation which
resulted in an approximately 47% higher average selling price of a system. Sales
of industrial measurement products were approximately $19.4 million in 1997,
which remained relatively flat when compared to 1996.
Veeco received approximately $218.6 million of orders in 1997 compared to
approximately $186.1 million in 1996, reflecting both the increased demand for
high density hard drives and the continued industry transition to the next
generation MR thin film magnetic heads as well as increased semiconductor
industry investment in advanced products. The book-to-bill ratio was 1.01 to 1
for the year ended December 31, 1997.
Gross profit increased to approximately $106.0 million, or 48.9% of net sales
for 1997, compared to $81.5 million or 49.4% of net sales for 1996. This
decrease in gross margin is principally attributable to a decrease in gross
margin in Digital's scanning probe/atomic force microscopes from 57.4% in 1996
to 56.2% in 1997.
Research and development expense increased by approximately $6.8 million to
approximately $24.5 million, or 11.3% of net sales in 1997 compared to
approximately $17.7 million or 10.7% of sales in 1996, due to increased R&D
investment in process equipment and metrology. Increased R&D investment was made
in process equipment in physical vapor deposition (PVD) and in ion beam
deposition. In metrology, increased investments were made in Wyko optical
interferometer products for both data storage and semiconductor market products
along with investments in Dektak stylus profilers for the semiconductor, data
storage and flat panel display markets and investments in Digital products for
integrated circuit and data storage applications.
Selling, general and administrative expenses increased by approximately $11.9
million to 19.2% of net sales in 1997 from 18.0% for 1996. Selling expense
increased $9.0 million, principally due to higher sales commissions resulting
from higher sales volume, increased compensation and travel expense as a result
of additional sales and service personnel required to support Veeco's growth and
an increase in advertising and marketing to support new products.
Operating expenses in 1997 include merger costs incurred in connection with the
merger with Wyko Corporation of approximately $2.3 million, consisting of
investment banking, legal and other transaction costs. Operating expenses in
1997 also include the effect of a $4.2 million charge representing the write-off
of the fair values of in-process engineering and development projects that had
not reached technological feasibility and have no future alternative uses.
Income taxes amounted to $7.6 million or 22.6% of income before income taxes for
1997 as compared to $6.9 million or 20.5% of income before income taxes for
1996. The principal
22
reason for the low effective tax rate when compared to the statutory income tax
rate is due to Digital's "S" Corporation status. As an "S" Corporation, Digital
was not subject to federal income taxes at the corporation level.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $10.8 million in 1998 compared to $18.1
million in 1997 and $23.4 million in 1996. Cash provided by operations in 1998
resulted from (i) net income plus non-cash charges for depreciation and
amortization, and certain merger and reorganization charges of $20.9 million
plus (ii) increases of accrued expenses and other current liabilities, and other
net operating assets and liabilities of $1.8 million and $1.1 million,
respectively, and a decrease in accounts receivable of $2.7 million. These items
were partially offset by an increase in inventories and a provision for deferred
income taxes of $8.8 million and $1.1 million, respectively, as well as a
decrease in accounts payable of $5.8 million. The increase in inventories is
attributable to an increase in inventory at the Company's domestic manufacturing
and international sales locations to support new product introductions. Cash
from operations in 1997 resulted from (i) net income plus non-cash charges for
depreciation and amortization and the write-off of purchased in-process
technology of $32.4 million plus (ii) increases of accounts payable, accrued
expenses and other current liabilities, and other net operating assets and
liabilities of $8.7 million, $4.5 million and $.6 million, respectively. These
items were partially offset by increases in accounts receivable, inventories and
a provision for deferred income taxes of $12.8 million, $13.6 million and $1.7
million, respectively. The increases in accounts receivable, inventories,
accounts payable and accrued expenses are attributable to the increased 1997
sales volume. Cash from operations in 1996 resulted from (i) net income plus
non-cash charges for depreciation and amortization of $28.9 million plus (ii)
increases of accounts payable, accrued expenses and other current liabilities,
and other net operating assets and liabilities of $2.9 million, $4.1 million and
$1.2 million, respectively. These items were partially offset by increases in
accounts receivable, inventories and deferred income taxes of $4.2 million, $8.7
million and $0.9 million, respectively. The increases in accounts receivable,
inventories, accounts payable and accrued expenses are attributable to the
increased 1996 sales volume.
Net cash used in investing activities in 1998 totaled $8.1 million compared to
$25.4 million in 1997 and $4.1 million in 1996. Veeco made capital expenditures
of $8.1 million in 1998, compared to $21.0 million in the comparable 1997
period. Capital expenditures in 1998 were principally for engineering and
application lab equipment. Cash used for investing activities in 1997 primarily
related to the PVD acquisition ($4.4 million) and capital expenditures ($21.0
million). Capital expenditures in 1997 included the purchase of a 100,000 square
foot building in California for $9.7 million for the Company's metrology
business, as well as for manufacturing facilities, laboratory and test equipment
and business system upgrades. Cash used in investing activities in 1996 was for
capital expenditures.
Net cash provided by financing activities totaled $1.4 million in 1998 compared
to $1.6 million in 1997 and a use of cash of $14.0 million in 1996. The
generation of cash in 1998 resulted from proceeds from stock issuances partially
offset by distributions to former
23
Digital shareholders of $2.0 million. The generation of cash in 1997 resulted
from proceeds from the sale of Common Stock and proceeds from long-term debt
offset by distributions to former Digital shareholders of $10.0 million. Cash
used in 1996 principally resulted from distributions of $14.0 million to former
Digital shareholders.
On February 2, 1999, the Company completed a public offering, pursuant to which
1,000,000 shares of Common Stock, par value $.01 per share, were issued and sold
for $52.00 per share, less underwriting discounts and commissions of $2.34 per
share. The Company expects to use the net proceeds of the offering
(approximately $49.0 million) for capital expenditures including clean
manufacturing areas and expanded customer application laboratories and for
working capital and general corporate purposes, including potential
acquisitions.
The Company has an unsecured $40.0 million Credit Facility (the "Credit
Facility") which may be used for working capital, acquisitions and general
corporate purposes. The Credit Facility bears interest at the prime rate of the
lending banks, but is adjustable to a maximum rate of 1/4% above the prime rate
in the event the Company's ratio of debt to cash flow exceeds a defined ratio. A
LIBOR-based interest rate option is also provided. As of December 31, 1998 there
were no amounts outstanding under the Credit Facility.
The Company will be required to repay promissory notes owed to former
stockholders of Digital in the aggregate principal amount of $8,000,000 when
they become due in March 2000. The notes bear interest at an annual rate of
7.21%.
The Company believes that existing cash balances together with cash generated
from operations and amounts available under the Credit Facility will be
sufficient to meet the Company's projected working capital and other cash flow
requirements through 1999.
YEAR 2000
The Year 2000 Issue is the result of computer programs using two digits rather
than four to define the applicable year. Any of the Company's computer programs
or hardware or other equipment that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company has determined that it needs to modify
or replace portions of its business systems' software and certain hardware so
that those systems will properly utilize dates beyond December 31, 1999. The
Company presently believes that with modifications or replacements of its
business systems existing software and certain hardware, the Company's computer
programs should be able to continue to operate effectively after December 31,
1999. However, if such modifications and replacements are not made, or are not
completed in a timely manner, the Year 2000 Issue could have a material impact
on the operations of the Company. Furthermore, in addition to its own systems,
the Company relies directly and indirectly on external systems of its customers,
24
suppliers, creditors, financial organizations, utilities providers and
governmental agencies (collectively, "Third Parties").
The Company is utilizing both internal and external resources to resolve the
Year 2000 Issue following a phased approach which is comprised of inventory and
assessment, planning and renovation, testing and implementation. The following
describes the Company's efforts to identify and address its and applicable Third
Party Year 2000 Issues with respect to a) the Company's information technology
(IT) and non-IT systems, including facilities and infrastructure, b) the
Company's products and c) the Company's suppliers:
a) The Company's IT and non-IT systems including facilities and
infrastructure:
In 1997, the Company completed the installation of a new business
system for its process equipment and industrial product lines which has
been certified by the vendor as Year 2000 compliant. The Company
recently completed its assessment and testing of its business systems
for its metrology business lines. Based upon such assessment and
testing, along with installing vendor upgrades and relying upon
compliance statements received from its software and hardware vendors,
the Company believes its metrology business systems will properly
utilize dates beyond December 31, 1999. Furthermore, the Company is in
the process of installing a new business system for its sales and
service offices in Europe that the vendor has certified is Year 2000
compliant.
The Company recently completed its inventory and assessment of its
desktop systems and laptops. The Company currently uses standard "off
the shelf" vendor-supplied software on its desktop systems and laptops.
Based upon this assessment, the Company is not aware of any business
critical remediation that is required and believes that its business
critical desktop systems and laptops will properly utilize dates beyond
December 31, 1999.
The Company is in the process of assessing its Year 2000 risk with
respect to telephone and communications systems, utility systems and
building security systems. Formal inquiries were sent to Third Parties
in December 1998 inquiring as to such Third Parties' Year 2000
readiness. The Company anticipates completing its assessment before
June 30, 1999.
b) The Company's products:
The Company has recently completed its inventory and assessment of its
products' Year 2000 readiness utilizing testing guidelines prepared by
Sematech, a consortium of suppliers to worldwide semiconductor
manufacturers. The Company plans to comply with Sematech's guidelines
for Year 2000 compliance for its metrology and process equipment lines.
The Company's new products are designed to be Year 2000 ready; however,
some of the Company's older products will require upgrades for Year
2000 readiness. The Company intends to provide upgrades for certain of
25
such products, some of which will be provided to customers without
charge. Notwithstanding such efforts, any failure of the Company's
products to perform, including system malfunctions due to the onset of
Year 2000, could result in claims against the Company which could have
a material adverse effect on the Company's business, results of
operations or financial condition. In such event, the Company's
customers could choose to convert to other Year 2000 ready products in
order to avoid such malfunctions, which could have a material adverse
effect on the Company's business, financial condition or results of
operations.
c) The Company's suppliers:
The Company is in the process of assessing its significant suppliers
and subcontractors regarding the status of their Year 2000 readiness.
To date, the Company is not aware of any Year 2000 issue that would
materially impact the Company's business, financial condition or
results of operations. However, the Company has no means of ensuring
that suppliers or subcontractors will be Year 2000 ready. The inability
of suppliers or subcontractors to complete their Year 2000 resolution
process in a timely fashion could materially impact the Company. The
Company is unable to determine the effect of non-compliance by
suppliers or subcontractors.
The Company will utilize both internal and external resources to reprogram or
replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
$400,000 to $750,000 and is being funded through operating cash flows. To
date, the Company has incurred approximately $250,000 of which $100,000 has
been expensed and $150,000 has been capitalized, related to all phases of the
Year 2000 project. Of the total remaining project costs, approximately
$100,000 to $250,000 is attributable to the purchase of new software and
operating equipment which will be capitalized. The remaining $50,000 to
$250,000 relates to repair of hardware and software and external consultant
costs and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
the Company does not successfully complete any additional phases, the Company's
ability to do business with its suppliers and customers may be disrupted. In
addition, there can be no assurance that the systems of Third Parties with which
the Company interacts will not suffer from Year 2000 problems, or that such
problems would not have a material adverse effect on the Company's business,
financial condition or results of operations. In particular, Year 2000 problems
that have been or may in the future be identified with respect to the IT and
Non-IT systems of Third Parties having widespread national and international
interactions with persons and entities generally (for example, certain IT and
Non-IT systems of governmental agencies, utilities and information and financial
networks) could have a material adverse impact on the Company's financial
condition or results of operations.
The Company does not currently have any contingency plans and has not yet
determined its
26
most reasonably likely worst case scenario with respect to the Year 2000 Issue.
The Company currently is in the process of reviewing its Year 2000 compliance
plans to determine what contingency plans, if any, are appropriate. There can be
no assurance that such measures will prevent the occurrence of Year 2000
problems, which could have a material adverse effect upon the Company's
business, results of operations or financial condition.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Certain information provided by the Company, statements made by its employees or
information included in its filings with the Securities and Exchange Commission
may contain statements which are "forward-looking statements" which involve
risks and uncertainties. The following risk factors should be considered by
shareholders of and by potential investors in the Company.
DEPENDENCE ON MICROELECTRONICS INDUSTRY; CYCLICALITY OF DATA STORAGE AND
SEMICONDUCTOR INDUSTRIES. Veeco's business depends in large part upon the
capital expenditures of data storage and semiconductor manufacturers which
accounted for the following percentages of the Company's net sales for the
periods indicated:
YEAR ENDED DECEMBER 31,
1998 1997 1996
-------------------------------------------
Data Storage 54.9% 53.2% 45.5%
Semiconductor 19.5% 19.8% 23.0%
The data storage and semiconductor industries have been characterized by
cyclicality. These industries have experienced significant economic downturns at
various times in the last decade, characterized by diminished product demand,
accelerated erosion of average selling prices and production overcapacity.
Recently, the data storage and semiconductor industries have experienced
inventory oversupply and poor operating results and, as a result, Veeco's sales
to data storage and semiconductor customers were weaker in 1998 than in 1997.
27
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Veeco's quarterly results have
fluctuated significantly in the past and we expect this trend to continue.
Factors which affect quarterly results include:
- specific economic conditions in the data storage and semiconductor
industries
- the timing of significant orders
- shipment delays
- specific feature requests by customers
- the introduction of new products by Veeco and its competitors
- production and quality problems
- changes in the cost of materials
- disruption in sources of supply
- seasonal patterns of capital spending by
customers
- a downturn in the market for personal computers or other products
incorporating data storage technology and semiconductors
- market acceptance of Veeco's systems and Veeco's customers' products
Many of these factors are beyond Veeco's control. If Veeco's net sales levels in
a particular quarter do not meet expectations, Veeco's operating results will be
adversely affected, which may have an adverse impact on the Company's Common
Stock price.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The data
storage and semiconductor manufacturing industries are subject to rapid
technological change and new product introductions and enhancements. Veeco's
ability to remain competitive will depend in part upon the Company's ability to
develop in a timely and cost effective manner new and enhanced systems at
competitive prices and to accurately predict technology transitions. In
addition, new product introductions or enhancements by Veeco's competitors could
cause a decline in sales or loss of market acceptance of Veeco's existing
products. Increased competitive pressure could also lead to intensified price
competition resulting in lower margins, which could materially and adversely
affect the Company's business, financial condition and results of operations.
The Company's success in developing, introducing and selling new and enhanced
systems depends upon a variety of factors, including:
- Veeco's product offerings
- timely and efficient completion of product design and development
- timely and efficient implementation of manufacturing processes
- effective sales, service and marketing
- product performance in the field
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
products under development and the equipment required to produce such products.
Veeco cannot be certain that the Company will be successful in selecting,
developing, manufacturing and marketing new products or in enhancing existing
products.
28
LIMITED SALES BACKLOG. Veeco's backlog at the beginning of a quarter typically
does not include all sales required to achieve Veeco's sales objective for that
quarter. Moreover, all customer purchase orders are subject to cancellation or
rescheduling by the customer, generally with limited or no penalties. Therefore,
backlog at any particular date is not necessarily representative of actual sales
for any succeeding period. The Company's net sales and operating results for a
quarter may depend upon orders obtained for systems to be shipped in the same
quarter that the order is received. In addition, Veeco derives a substantial
portion of its net sales in any fiscal period from the sale of a relatively
small number of high-priced systems. As a result, the timing of recognition of
revenue for a single transaction could have a material adverse effect on Veeco's
sales and operating results. Veeco's business and financial results for a
particular period could be materially and adversely affected if an anticipated
order for even one system is not received in time to permit shipping during the
period.
HIGHLY COMPETITIVE INDUSTRY. The data storage and semiconductor capital
equipment industries are intensely competitive. Established companies, both
domestic and foreign, compete with each of Veeco's product lines. Many of
Veeco's competitors have greater financial, engineering, manufacturing and
marketing resources than the Company. A substantial investment is required by
customers to install and integrate capital equipment into a production line. As
a result, once a manufacturer has selected a particular vendor's capital
equipment, Veeco believes that the manufacturer generally relies upon that
equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
vendor. Accordingly, if a particular customer selects a competitor's capital
equipment, the Company expects to experience difficulty in selling to that
customer for a significant period of time. The Company believes that Veeco's
ability to compete successfully depends on a number of factors both within and
outside of Veeco's control, including:
- price
- product quality
- breadth of product line
- system performance
- cost of ownership
- global technical service and support
- success in developing or otherwise introducing new products
Veeco cannot be certain that it will be able to compete successfully in the
future.
29
DEPENDENCE ON PRINCIPAL CUSTOMERS; INDUSTRY CONCENTRATION. Veeco relies on
Veeco's principal customers for a significant portion of Veeco's sales. Veeco's
principal customers include International Business Machines Corporation ("IBM"),
Seagate Technology, Inc. ("Seagate") and Read-Rite Corp. ("Read-Rite"). The
following table sets forth the percentage of Veeco's net sales to such principal
customers for the periods indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-----------------------------------------------
IBM 17.4% 5.9% 4.1%
Seagate 10.6% 13.9% 10.5%
Read-Rite 7.1% 11.0% 10.6%
Next five top customers 10.9% 11.8% 7.8%
If the Company lost a major customer, or a significant portion of Veeco's sales
to any major customer, it could adversely affect Veeco's results of operations.
Veeco's ability to increase sales in the future will depend in part upon Veeco's
ability to obtain orders from new customers. The Company cannot be certain that
it will be able to do so. In addition, a relatively small number of large
manufacturers, many of whom are Veeco's customers, dominate the data storage
industry and, to a lesser extent, the semiconductor industry. If any of these
large manufacturers discontinues its relationship with Veeco or suffers economic
setbacks, Veeco's results of operations could be materially and adversely
affected.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
MARKET RISK
The principal market risks (i.e. the risk of loss arising from adverse changes
in market rates and prices) to which the Company is exposed are:
- interest rates on debt and short-term investment portfolios
- foreign exchange rates, generating translation and transaction gains and
losses
INTEREST RATES
Veeco centrally manages its debt and investment portfolios considering
investment opportunities and risks, tax consequences and overall financing
strategies. Veeco's investment portfolios consist of cash equivalents;
accordingly, the carrying amounts approximate market value. It is the Company's
practice to hold these investments to maturity. Assuming year-end 1998 variable
debt and investment levels, a one-point change in interest rates would not have
a material impact on net interest expense.
30
FOREIGN OPERATIONS
Operating in international markets sometimes involves exposure to volatile
movements in currency exchange rates. The economic impact of currency
exchange rate movements on Veeco is complex becuase such changes are often
linked to variability in real growth, inflation, interest rates, governmental
actions and other factors. These changes, if material, can cause the Company
to adjust its financing and operating strategies. Consequently, isolating the
effect of changes in currency does not incorporate these other important
economic factors.
Vecco's net sales to foreign customers represented approximately 51.2% of
Veeco's total net sales in 1998, 43.2% in 1997 and 51.7% in 1996. The Company
expects net sales to foreign customers will continue to represent a large
percentage of Veeco's total net sales. Veeco's net sales denominated in
foreign currencies represented approximately 12.9% of Veeco's total net sales
in 1998, 6.3% in 1997 and 7.3% in 1996. The Company generally has not engaged
in foreign currency hedging transactions. The aggregate foreign exchange
gains and (losses) included in determining consolidated results of operations
were $774,000, ($34,000), and $(153,000) in 1998, 1997, and 1996,
respectively.
Changes in currency exchange rates that would have been the largest impact on
translating Vecco's internaional operating profit include the German mark and
Japanese yen. The Company estimates that a 10% change in foreign exchange
rates would impact reported operating profit by less than $2.5 million. The
Company believes that this quantitative measure has inherent limitations
because, as discussed in the first paragraph of this section, it does not
take into account any governmental actions or changes in either customer
purchasing patters or our financing and operating strategics.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are listed in the Index to Consolidated
Financial Statements and Financial Statement Schedule filed as part of this Form
10-K.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of fiscal
1998 and 1997. This information is unaudited, has been prepared on a basis
consistent with the Company's audited financial statements and, in the opinion
of the Company's management, reflects all adjustments (consisting only of normal
recurring adjustments) that the Company considers necessary for a fair
presentation of this information in accordance with generally accepted
accounting principles. Such quarterly results are not necessarily indicative of
future results of operations and should be read in conjunction with the audited
financial statements of the Company and the notes thereto.
31
QUARTERLY STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE DATA):
FISCAL 1998 FISCAL 1997
Q1* Q2 Q3 Q4 YEAR Q1* Q2 Q3 Q4 YEAR
- ------------------------------------------------------------------------ --------------------------------------------------
Net sales $53,659 $51,147 $50,539 $51,493 $206,838 $ 49,210 $54,547 $55,195 $57,776 $216,728
Cost of sales 29,518 27,048 27,317 27,895 111,778 25,216 27,379 28,234 29,851 110,680
-------------------------------------------------- --------------------------------------------------
Gross profit 24,141 24,099 23,222 23,598 95,060 23,994 27,168 26,961 27,925 106,048
Cost and expenses 16,502 18,165 16,882 16,978 68,527 14,081 15,865 16,028 19,980 65,954
Merger and
reorganization
expenses -- 7,500 -- -- 7,500 -- -- 2,250 -- 2,250
Write-off of
purchased
in-process -- -- -- -- -- -- 4,200 -- -- 4,200
technology
-------------------------------------------------- --------------------------------------------------
Operating income
(loss) 7,639 (1,566) 6,340 6,620 19,033 9,913 7,103 8,683 7,945 33,644
Interest expense
(income) 198 267 283 140 888 55 75 (209) 86 7
-------------------------------------------------- --------------------------------------------------
Income (loss) before
income taxes 7,441 (1,833) 6,057 6,480 18,145 9,858 7,028 8,892 7,859 33,637
Income tax provision
(benefit) 1,733 (51) 1,817 1,945 5,444 2,557 1,363 2,007 1,683 7,610
-------------------------------------------------- --------------------------------------------------
Net income (loss) $ 5,708 $(1,782) $ 4,240 $ 4,535 $ 12,701 $ 7,301 $ 5,665 $ 6,885 $ 6,176 $ 26,027
-------------------------------------------------- --------------------------------------------------
-------------------------------------------------- --------------------------------------------------
Net income (loss)
per common share $ .39 $ (0.12) $ .29 $ .31 $ .87 $ .51 $ .39 $ .48 $ .43 $ 1.81
Diluted net income
(loss) per common
share $ .39 $ (0.12) $ .29 $ .30 $ .85 $ .50 $ .38 $ .46 $ .41 $ 1.75
PRO FORMA
PRESENTATION:
Income (loss) before
income taxes $ 7,441 $(1,833) $ 6,057 $ 6,480 $ 18,145 $ 9,858 $ 7,028 $ 8,892 $ 7,859 $ 33,637
Pro forma income tax
provision (benefit) 2,836 (678) 2,241 2,499 6,898 3,792 2,709 3,350 2,966 12,817
-------- ---------- --------- -------- ---------- -------- -------- -------- ----------- ---------
Pro forma net income
(loss) $ 4,605 $(1,155) $ 3,816 $ 3,981 $ 11,247 $ 6,066 $ 4,319 $ 5,542 $ 4,893 $ 20,820
-------------------------------------------------- --------------------------------------------------
-------------------------------------------------- --------------------------------------------------
Pro forma net income
(loss) per common
share $ .32 $ (.08) $ .26 $ .27 $ .77 $ .42 $ .30 $ .38 $ .34 $ 1.45
Pro forma diluted net
income (loss) per
common share $ .31 $ (.08) $ .26 $ .26 $ .76 $ .41 $.29 $ .37 $ .33 $ 1.40
Weighted average
shares outstanding 14,510 14,566 14,654 14,774 14,627 14,308 14,352 14,432 14,458 14,392
Diluted weighted
average shares
outstanding 14,733 14,827 14,860 15,125 14,887 14,734 14,848 15,049 14,981 14,908
*Restated from previously filed Form 10-Q for the quarter ended March 31, 1998
due to the Digital merger.
32
A variety of factors influence the level of the Company's net sales in a
particular quarter including economic conditions in the semiconductor, data
storage and flat panel display industries, the timing of significant orders,
shipment delays, specific feature requests by customers, the introduction of new
products by the Company and its competitors, production and quality problems,
changes in material costs, disruption in sources of supply, seasonal patterns of
capital spending by customers, and other factors, many of which are beyond the
Company's control. In addition, the Company derives a substantial portion of its
revenues from the sale of products which have an average selling price in excess
of $750,000. As a result, the timing of recognition of revenue from a single
transaction could have a significant impact on the Company's net sales and
operating results in any given quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
33
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning directors and executive
officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning security ownership of each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, of each director of the Company and all executive
officers and directors as a group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning certain relationships and
related transactions.
34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) The Registrant's financial statements together with a separate
table of contents are annexed hereto.
(2) The financial statement schedule is listed in the separate table of
contents annexed hereto.
(3) Exhibits:
EXHIBIT
Number Exhibit
2.1 Agreement and Plan of Merger among Veeco Instruments Inc., Digital
Instruments, Inc. and its Security holders dated February 28, 1998.
(8).
2.2 Agreement and Plan of Merger among Veeco Instruments Inc., Veeco
Acquisition Corp. and Wyko Corporation and its Security holders dated
April 28, 1997. (6)
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. (7)
3.2 Form of Amended and Restated By-Laws of the Company. (1)
4.1 Form of Certificate for Common Stock. (1)
10.5 Distributor Agreement, dated as of December 15, 1974 between Sloan
Technology Corporation and ULVAC Corporation. (2)
10.6 Amendment to Distributor Agreement, dated March 11, 1993, by and
between Sloan Technology Corporation and ULVAC Japan, Ltd.(2)
10.7 Exclusive Sales Agreement, dated as of July 1, 1993, between Seiko
Instruments and the Company. (2)
10.8 Exclusive Sales Agreement, dated as of July 1, 1993, between the
Company and Seiko Instruments. (2)
10.9 Distributor Agreement, dated March 5, 1993, between the Company and
Seiko Instruments.(2)
10.11 Letter Agreement, dated November 22, 1993 between the Company and John
F. Rein, Jr. (1)
35
10.12 First Amendment and Restatement of Stock Option Agreement dated as of
October 13, 1994 between the Company and John F. Rein, Jr. (1)
10.13 Agreement dated as of February 7, 1994, effective as of December 31,
1993, between the Company and Robert Oates, together with Amendment No.
1 thereto dated as of October 13, 1994. (1)
10.15 Veeco Instruments Inc. 1994 Stock Option Plan for Outside Directors.
(1)
10.19 Letter Agreement dated January 16, 1995 between the Company and John
Kiernan. (3)
10.20 Amended and Restated Veeco Instruments Inc. Employees' Stock Option
Plan. (4)
10.21 Veeco Instruments Inc. Employees Stock Purchase Plan. (4)
10.24 Lease dated July 1, 1993 and lease renewal dated February 26, 1996
between Lambda (Santa Barbara) Inc., a California Corporation, and
Veeco Instruments Inc., a Delaware Corporation. (5)
10.25 Credit Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (5)
10.26 Security Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (5)
10.27 Guarantee Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (5)
10.28 Guarantor's Security Agreement dated July 31, 1996 among Sloan
Technology Corporation, Fleet Bank N.A. and The Chase Manhattan Bank.
(5)
10.29 The Pledge Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (5)
10.30 The Patent and Trademark Security Agreement dated July 31, 1996 among
the Registrant, Fleet Bank N.A. and The Chase Manhattan Bank. (5)
10.32 Lease Extension dated as of November 1, 1997 by and between J. Anthony
Wilson and Veeco Instruments Inc. (9)
10.33 Letter Agreement, dated December 2, 1997 between Veeco Instruments Inc.
and Dr. Donald Kania. (9)
10.34 Amendment No. 2 to credit agreement, dated January 31, 1999 between
Veeco Instruments, Inc. and Fleet Bank N.A. and the Chase Manhattan
Bank.*
36
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Ernst & Young LLP. *
27.1 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1998.*
27.2 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1997 (Restated).*
*FILED HEREWITH
(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-85184) and incorporated
herein by reference.
(2) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-85184) and incorporated
herein by reference; confidential treatment granted.
(3) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(4) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-93958) and incorporated
herein by reference.
(5) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and incorporated herein
by reference.
(6) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein
by reference.
(7) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein
by reference.
(8) Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 9, 1998.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated
herein by reference.
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K on January 11, 1999 which
included the Registrant's consolidated financial statements
and related financial data, retroactively restated to reflect
the Registrant's mergers with Wyko Corporation in
37
July 1997 and Digital Instruments, Inc. in May 1998, which
were accounted for as pooling of interests transactions.
The Registrant filed a Form 8-K on January 22, 1999 reporting
the Registrant's unaudited sales and orders for the quarter
and year ended December 31, 1998, and reference was made to
the press release dated January 21, 1999, announcing such
information.
(c) Exhibits: See Index to Exhibits.
(d) Consolidated Financial Statement Schedule.
SCHEDULE II.--VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or notes thereto.
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VEECO INSTRUMENTS INC.
By:
/s/ Edward H. Braun
-----------------------------------------------
Edward H. Braun
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Edward H. Braun Director, Chairman, Chief Executive Officer and March 26, 1999
- ---------------------------------------------
Edward H. Braun President (principal executive officer)
/s/ Richard A. D'Amore Director March 26, 1999
- ---------------------------------------------
Richard A. D'Amore
/s/ Joel A. Elftmann Director March 26, 1999
- ---------------------------------------------
Joel A. Elftmann
/s/ Virgil Elings, Ph.D. Director March 26, 1999
- ---------------------------------------------
Virgil Elings, Ph.D.
39
SIGNATURES TITLE DATE
---------- ----- ----
/s/ Heinz K. Fridrich Director March 26, 1999
- ---------------------------------------------
Heinz K. Fridrich
/s/ John A. Gurley Director March 26, 1999
- ---------------------------------------------
John A. Gurley
/s/ Dr. Paul R. Low Director March 26, 1999
- ---------------------------------------------
Dr. Paul R. Low
/s/ Roger D. McDaniel Director March 26, 1999
- ---------------------------------------------
Roger D. McDaniel
/s/ Irwin H. Pfister Director March 26, 1999
- ---------------------------------------------
Irwin H. Pfister
/s/ Walter J. Scherr Director March 26, 1999
- ---------------------------------------------
Walter J. Scherr
/s/ John F. Rein, Jr. Vice President-Finance, Chief Financial Officer, March 26, 1999
- ---------------------------------------------Treasurer and Secretary (principal financial officer)
John F. Rein, Jr.
/s/ John P. Kiernan Vice President-Corporate Controller (principal March 26, 1999
- ---------------------------------------------accounting officer)
John P. Kiernan
40
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
Report of Independent Auditors.................................................................. F- 2
Consolidated Balance Sheets at December 31, 1998 and 1997....................................... F- 3
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996.............................................................. F- 4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996.............................................. F- 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.............................................................. F- 6
Notes to Consolidated Financial Statements...................................................... F- 7
Schedule II--Valuation and Qualifying Accounts.................................................. S- 1
F-1
Report of Independent Auditors
To the Shareholders and the Board of Directors
Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheets of Veeco
Instruments Inc. and Subsidiaries ("Veeco" or the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule in the
accompanying Index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the financial statements of Digital Instruments, Inc. and Affiliates
("Digital"), which merged with Veeco in May 1998, which statements reflect total
assets constituting 20% as of December 31, 1997, and total revenues constituting
23% in 1997 and 30% in 1996 of the consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, in so far as it relates to data included for Digital, is based solely
on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors for 1996
and 1997, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Veeco
Instruments Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
February 8, 1999
F-2
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(DOLLARS IN THOUSANDS)
DECEMBER 31,
1998 1997
-----------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 23,492 $ 20,444
Accounts receivable, less allowance for doubtful accounts of $1,725
in 1998 and $1,005 in 1997 43,018 44,927
Inventories 53,324 44,825
Prepaid expenses and other current assets 1,388 1,695
Deferred income taxes 5,910 4,602
-----------------------------------
Total current assets 127,132 116,493
Property, plant and equipment at cost, net 37,204 33,344
Excess of cost over net assets acquired, less accumulated amortization
of $1,171 in 1998 and $1,040 in 1997 4,187 4,318
Other assets, net 4,314 5,476
-----------------------------------
Total assets $ 172,837 $ 159,631
-----------------------------------
-----------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities:
Accounts payable $ 15,624 $ 21,360
Accrued expenses 24,549 22,146
Income taxes payable 1,226 3,999
Current portion of long-term debt 207 210
-----------------------------------
Total current liabilities 41,606 47,715
Deferred income taxes 925 702
Long-term debt 8,940 9,146
Notes payable to former Digital shareholders 8,000 8,000
Other liabilities 142 310
Shareholders' equity:
Preferred stock, 500,000 shares authorized; no shares issued and
outstanding - -
Common stock, 25,000,000 shares authorized; 14,841,030 and 14,475,719
shares issued and outstanding in 1998 and 1997, respectively
148 145
Additional paid-in capital 62,810 54,474
Retained earnings 49,806 39,105
Cumulative translation adjustment 460 34
-----------------------------------
Total shareholders' equity 113,224 93,758
-----------------------------------
Total liabilities and shareholders' equity $ 172,837 $ 159,631
-----------------------------------
-----------------------------------
SEE ACCOMPANYING NOTES.
F-3
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Income
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1998 1997 1996
-----------------------------------------------------
Net sales $ 206,838 $ 216,728 $ 165,059
Cost of sales 111,778 110,680 83,521
-----------------------------------------------------
Gross profit 95,060 106,048 81,538
Costs and expenses:
Research and development expense 27,374 24,470 17,702
Selling, general and administrative expense 41,951 41,591 29,712
Other--net (798) (107) 631
Merger and reorganization expenses 7,500 2,250 -
Write-off of purchased in-process technology
- 4,200 -
-----------------------------------------------------
76,027 72,404 48,045
-----------------------------------------------------
Operating income 19,033 33,644 33,493
Interest expense (income), net 888 7 (345)
-----------------------------------------------------
Income before income taxes 18,145 33,637 33,838
Income tax provision 5,444 7,610 6,941
-----------------------------------------------------
Net income $ 12,701 $ 26,027 $ 26,897
-----------------------------------------------------
-----------------------------------------------------
Earnings per share:
Net income per common share $.87 $1.81 $1.89
Diluted net income per common share $.85 $1.75 $1.86
Pro forma income tax presentation:
Income before income taxes $18,145 $33,637 $33,838
Pro forma income tax provision 6,898 12,817 12,963
-----------------------------------------------------
-----------------------------------------------------
Pro forma net income $11,247 $20,820 $20,875
-----------------------------------------------------
-----------------------------------------------------
Pro forma earnings per share:
Pro forma net income per common share $.77 $1.45 $1.46
Pro forma diluted net income per
common share $.76 $1.40 $1.44
Weighted average shares outstanding 14,627 14,392 14,251
Diluted weighted average shares outstanding 14,887 14,908 14,490
SEE ACCOMPANYING NOTES.
F-4
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(DOLLARS IN THOUSANDS)
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN RETAINED TRANSLATION COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
-------------------------------------------------------------------------- ----------------
Balance at December 31, 1995 14,234,749 $ 143 $47,398 $ 10,181 $ 769 $58,491
Exercise of stock options and
stock issuances under 48,807 - 285 - - 285
stock purchase plan
Translation adjustment - - - - (104) (104) $ (104)
Net income - - - 26,897 - 26,897 26,897
Distributions to former
shareholders of Digital - - - (14,000) - (14,000)
-------------------------------------------------------------------------- ----------------
Balance at December 31, 1996 14,283,556 143 47,683 23,078 665 71,569 $ 26,793
----------------
----------------
Exercise of stock options and
stock issuances under stock 192,163 2 2,068 - - 2,070
purchase plan
Translation adjustment - - - - (631) (631) $ (631)
Stock option income tax benefit - - 1,790 - - 1,790
Sale of stock 2,933 2,933
Net income - - - 26,027 - 26,027 26,027
Distributions to former
shareholders of Digital - - - (10,000) - (10,000)
-------------------------------------------------------------------------- ----------------
Balance at December 31, 1997 14,475,719 145 54,474 39,105 34 93,758 $ 25,396
----------------
----------------
Exercise of stock options and
stock issuances under stock 365,311 3 3,562 - - 3,565
purchase plan
Translation adjustment - - - - 426 426 $ 426
Stock option income tax benefit - - 3,189 - - 3,189
Non-cash compensation charge - - 1,585 - - 1,585
Net income - - - 12,701 - 12,701 12,701
Distributions to former
shareholders of Digital - - - (2,000) - (2,000)
-------------------------------------------------------------------------- ----------------
Balance at December 31, 1998 14,841,030 $ 148 $62,810 $ 49,806 $ 460 $113,224 $ 13,127
-------------------------------------------------------------------------- ----------------
-------------------------------------------------------------------------- ----------------
SEE ACCOMPANYING NOTES.
F-5
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
1998 1997 1996
----------------------------------------------
OPERATING ACTIVITIES
Net income $ 12,701 $ 26,027 $ 26,897
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,703 2,215 2,041
Deferred income taxes (1,085) (1,709) (895)
Non-cash merger and reorganization expenses 3,544 - -
Write-off of purchased in-process technology - 4,200 -
Changes in operating assets and liabilities:
Accounts receivable 2,695 (12,805) (4,205)
Inventories (8,836) (13,633) (8,684)
Accounts payable (5,823) 8,694 2,901
Accrued expenses and other current liabilities 1,847 4,483 4,086
Other, net 1,073 638 1,229
----------------------------------------------
Net cash provided by operating activities 10,819 18,110 23,370
----------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (8,138) (21,047) (4,067)
Net assets of business acquired - (4,375) -
----------------------------------------------
Net cash used in investing activities (8,138) (25,422) (4,067)
----------------------------------------------
FINANCING ACTIVITIES
Proceeds from stock issuance 3,565 5,003 285
Proceeds from long-term debt - 6,800 -
Distributions to former shareholders of Digital (2,000) (10,000) (14,000)
Other (209) (160) (289)
----------------------------------------------
Net cash provided by (used in) financing activities 1,356 1,643 (14,004)
----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents
(989) (209) 161
----------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,048 (5,878) 5,460
Cash and cash equivalents at beginning of year 20,444 26,322 20,862
----------------------------------------------
Cash and cash equivalents at end of year $ 23,492 $ 20,444 $ 26,322
----------------------------------------------
----------------------------------------------
SEE ACCOMPANYING NOTES.
F-6
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Veeco Instruments Inc. ("Veeco" or the "Company") designs, manufactures, markets
and services a broad line of precision metrology and process equipment used to
measure, test and manufacture microelectronic products for the data storage and
semiconductor industries. Veeco's precision metrology equipment is primarily
used to measure critical dimensions on thin film magnetic heads and
semiconductor devices. The Company's process equipment is primarily used to etch
and deposit materials in the manufacture of thin film magnetic heads. Veeco
sells its products worldwide to many of the leading manufacturers in the data
storage, semiconductor and other industries, as well as research and development
centers and universities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Veeco and its
subsidiaries. Intercompany items and transactions have been eliminated in
consolidation.
REVENUE
Revenue is recognized when title passes to the customer, generally upon
shipment. Service and maintenance contract revenues are recorded as deferred
income, which is included in other accrued expenses, and recognized as income on
a straight-line basis over the service period of the related contract. The
Company provides for (1) the estimated costs of fulfilling its installation
obligations and (2) warranty costs at the time the related revenue is recorded.
F-7
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH FLOWS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Interest paid during 1998,
1997 and 1996 was approximately $1,415,000, $1,103,000 and $734,000,
respectively. Income taxes paid in 1998, 1997 and 1996 was approximately
$4,683,000, $5,370,000 and $6,706,000, respectively.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market.
DEPRECIABLE ASSETS
Depreciation and amortization are generally computed by the straight-line method
and are charged against income over the estimated useful lives of depreciable
assets.
INTANGIBLE ASSETS
Excess of cost of investment over net assets acquired is being amortized on a
straight-line basis over 40 years. Other intangible assets, included within
other assets on the balance sheet, consists principally of purchased technology,
patents, software licenses and deferred finance costs of $2,095,000 and
$3,663,000, which are net of accumulated amortization of $1,423,000 and
$1,501,000 at December 31, 1998 and 1997, respectively. Other intangible assets
are amortized over periods ranging from 3 to 17 years.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental compliance costs include ongoing maintenance, monitoring and
similar costs. Such costs are expensed as incurred. Environmental remediation
costs are accrued when environmental assessments and/or remedial efforts are
probable and the cost can be reasonably estimated.
F-8
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN OPERATIONS
Foreign currency denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing at the balance sheet date. Resulting
translation adjustments due to fluctuations in the exchange rates are recorded
as a separate component of shareholders' equity. Income and expense items are
translated at the average exchange rates during the respective periods.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and include
expenses for development of new technology and the transition of the technology
into new products or services.
ADVERTISING AND PROMOTIONAL EXPENSE
The cost of advertising is expensed as of the first showing. The Company
incurred $3,988,000, $4,668,000 and $3,307,000 in advertising costs during 1998,
1997 and 1996, respectively.
STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is set equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value due to their short maturities.
F-9
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair values of the Company's debt, including current maturities, are
estimated using discounted cash flow analyses, based on the estimated current
incremental borrowing rates for similar types of securities. The carrying amount
of the Company's debt at December 31, 1998 and 1997 approximates fair value.
EARNINGS PER SHARE
Basic and diluted earnings per share is calculated in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the requirements of SFAS No. 128.
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
1998 1997 1996
------------------------------------------------------
(IN THOUSANDS)
Weighted average shares outstanding 14,627 14,392 14,251
Dilutive effect of stock options 260 516 239
------------------------------------------------------
------------------------------------------------------
Diluted weighted average shares outstanding
14,887 14,908 14,490
------------------------------------------------------
------------------------------------------------------
RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform with the 1998 presentation.
F-10
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION
On May 29, 1998, Veeco merged with Digital Instruments, Inc. ("Digital"), a
leader in scanning probe/atomic force microscopy (SPM/AFM). Under the merger,
Digital shareholders received 5,583,725 shares of Veeco Common Stock. The merger
was accounted for as a pooling of interests and, accordingly, historical
financial data has been restated to include Digital data. Merger expenses were
comprised of transaction fees and expenses of $3,300,000 and a $1,585,000
non-cash compensation charge related to stock issued in accordance with a
pre-existing agreement with a key Digital employee. Reorganization expenses,
principally related to the Digital Merger, consisted of $509,000 for severance
costs, $750,000 for an estimated loss on a future sublease of an abandoned
office and manufacturing facility, $887,000 for write-downs of long-lived assets
held for sale or disposal and $469,000 for other costs. The Company implemented
its reorganization plan in an effort to integrate Digital into the Company,
consolidate manufacturing facilities, terminate its marketing and distribution
agreements for a Metrology product which competed directly with Digital, and
reduce other operating expenses. The severance costs covered 13 management and
manufacturing employees located in Santa Barbara, California, and Plainview and
Orangeburg, New York in the Metrology and Process Equipment segments,
respectively. Termination benefits paid during 1998 approximated $300,000. The
sublease loss covered an office and manufacturing facility in Santa Barbara,
California. Charges associated with the sublease loss will be paid over the
remaining life of the lease. The write-down of long-lived assets, to estimated
net realizable value, related primarily to three SXM atomic force microscopes
previously used for demonstration and testing purposes in Veeco's Metrology
segment.
The Company owns 50% of Digital Instruments GmbH, a German company, which
exclusively distributed Digital's products in Germany and Eastern Europe through
September 30, 1998. The Company accounts for its investment in Digital
Instruments GmbH under the equity method of accounting. Prior to the merger,
Digital had elected "S" Corporation status for income tax purposes and therefore
was not subject to federal income taxes at the corporation level. As a result of
the merger, Digital's "S" Corporation election was terminated. Pro forma net
income and pro forma net income per share as shown in the accompanying
Consolidated Statements of Income reflects income taxes for Digital as if it had
been a "C" Corporation for all periods presented.
F-11
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
On July 25, 1997, a wholly-owned subsidiary of Veeco merged into Wyko
Corporation ("Wyko") of Tucson, Arizona, a leading supplier of optical
interferometric measurement systems for the data storage and semiconductor
industries. Under the merger, Wyko shareholders received 2,863,810 shares of
Veeco Common Stock and holders of options to acquire Wyko common stock received
options to acquire an aggregate of 136,190 shares of Veeco Common Stock. The
merger was accounted for as a pooling of interests transaction. Merger expenses
of approximately $2,250,000 pertaining to investment banking, legal fees and
other one-time transaction costs were charged to operating expenses during the
year ended December 31, 1997.
The following table displays the revenues and net income of the separate
companies for the periods preceding the business combinations and the amounts
after the mergers through December 31, 1998:
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------------- --------------- ---------------
Revenues:
Veeco (pre-mergers) $ 56,363 $ 71,211 $ 96,832
Wyko - 18,285 18,210
Digital 22,667 51,320 50,017
Veeco (post-mergers) 127,808 75,912 -
---------------- --------------- ---------------
Combined $ 206,838 $ 216,728 $ 165,059
---------------- --------------- ---------------
---------------- --------------- ---------------
Net income:
Veeco (pre-mergers) $ 188 $ 2,723 $ 8,038
Wyko - 3,472 2,797
Digital 4,242 13,744 16,062
Veeco (post-mergers) 8,271 6,088 -
---------------- --------------- ---------------
Combined $ 12,701 $ 26,027 $ 26,897
---------------- --------------- ---------------
---------------- --------------- ---------------
F-12
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
On April 10, 1997, Veeco acquired from Materials Research Corporation,
certain assets of the Physical Vapor Deposition data storage business for
cash of $4,375,000 plus the assumption of certain liabilities. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, the purchase price was allocated to the net assets acquired
based on their estimated fair values as determined by an independent
appraisal, including $4,200,000 allocated to in-process engineering and
development projects. The associated projects had not reached technological
feasibility and had no alternative future uses and thus the amounts allocated
to such projects were expensed as of the date of acquisition.
3. BALANCE SHEET INFORMATION
DECEMBER 31,
1998 1997
--------------------------------------
(IN THOUSANDS)
Inventories:
Raw materials $ 28,202 $ 25,277
Work in process 12,652 8,528
Finished goods 12,470 11,020
--------------------------------------
$ 53,324 $ 44,825
--------------------------------------
--------------------------------------
DECEMBER 31, ESTIMATED
1998 1997 USEFUL LIVES
---------------------------------------------------------
(IN THOUSANDS)
Property, plant and equipment:
Land $ 5,166 $ 5,166
Buildings and improvements 18,382 19,543 10-39 years
Machinery and equipment 27,686 19,708 3-7 years
Leasehold improvements 1,831 516 3-7 years
--------------------------------------
53,065 44,933
Less accumulated depreciation and
amortization 15,861 11,589
--------------------------------------
$ 37,204 $ 33,344
--------------------------------------
--------------------------------------
F-13
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. BALANCE SHEET INFORMATION (CONTINUED)
DECEMBER 31,
1998 1997
---------------------------------------
(IN THOUSANDS)
Accrued expenses:
Litigation reserve $ 1,500 $ 1,500
Payroll and related benefits 5,090 5,713
Taxes, other than income 4,019 1,996
Deferred service contract revenue 738 594
Customer deposits and advanced billings 2,292 2,262
Installation and warranty 6,119 4,638
Other 4,791 5,443
--------------------------------------
$ 24,549 $ 22,146
--------------------------------------
--------------------------------------
4. LONG-TERM DEBT
The Company has an unsecured credit facility, as amended on January 31, 1999
(the "Credit Facility"), which may be used for working capital, acquisitions and
general corporate purposes. The Credit Facility provides the Company with up to
$40 million of availability. The Credit Facility's interest rate is the prime
rate of the lending banks, but is adjustable to a maximum rate of 1/4% above the
prime rate in the event the Company's ratio of debt to cash flow exceeds a
defined ratio. A LIBOR based interest rate option is also provided. The Credit
Facility expires December 31, 2001, but under certain conditions is convertible
into a term loan, which would amortize quarterly through December 31, 2005.
The Credit Facility contains certain restrictive covenants, which among other
things, impose limitations with respect to incurrence of certain additional
indebtedness, payments of dividends, long-term leases, investments, mergers,
consolidations and specified sales of assets. The Company is also required to
satisfy certain financial tests.
As of December 31, 1998 and 1997, no borrowings were outstanding under the
Company's Credit Facility.
F-14
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. LONG-TERM DEBT (CONTINUED)
In April 1995, the stockholders of Digital received distributions in the amount
of $8,000,000 in the form of unsecured promissory notes, bearing interest at
7.21 percent per annum with interest due quarterly and principal due on or
before March 31, 2000. Interest relating to these notes approximated $577,000
for each of the years ended 1998, 1997 and 1996.
Long-term debt consists of two mortgage notes payable, each secured by the land
and building subject to the respective mortgage. One mortgage note payable bears
interest at a rate of 8.5% and matures on October 14, 2002. The other mortgage
note payable bears interest at rate of 7.75% for the first five years with a
final payment due in December 2007. At the end of five years, the interest rate
will change each year based on the bank's index rate plus 1.75%.
This note payable is being amortized over 25 years with a balloon payment due at
the end of ten years. Long-term debt matures as follows:
(IN THOUSANDS)
1999 $ 207
2000 245
2001 267
2002 2,181
2003 136
Thereafter 6,111
-------------------
9,147
Less current portion 207
-------------------
$ 8,940
-------------------
-------------------
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS
Net income and earnings per share determined on a pro forma basis as if the
Company had accounted for its stock options granted subsequent to December 31,
1994 under the fair value method estimated at the date of grant using a
Black-Scholes option pricing model follows:
F-15
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
DECEMBER 31,
1998 1997 1996
----------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Pro forma net income $ 9,032 $ 24,784 $ 26,399
Pro forma net income per share $ .62 $ 1.72 $ 1.85
Pro forma diluted net income per share $ .62 $ 1.67 $ 1.83
FIXED OPTION PLANS
The Company has two fixed option plans. The Veeco Instruments Inc. Amended and
Restated 1992 Employees' Stock Option Plan (the "Stock Option Plan") provides
for the grant to officers and key employees of up to 2,126,787 options (104,671
options available for future grants as of December 31, 1998) to purchase shares
of Common Stock of the Company. Stock options granted pursuant to the Stock
Option Plan become exercisable over a three-year period following the grant date
and expire after ten years. The Veeco Instruments Inc. 1994 Stock Option Plan
for Outside Directors, as amended (the "Directors' Option Plan"), provides for
the automatic grant of stock options to each member of the Board of Directors of
the Company who is not an employee of the Company. The Directors' Option Plan
provides for the grant of up to 115,000 options (15,003 options available for
future grants as of December 31, 1998) to purchase shares of Common Stock of the
Company. Such options granted are exercisable immediately and expire after ten
years. In connection with the merger with Wyko, holders of the then outstanding
Wyko stock options received options to purchase an aggregate of 136,190 shares
of Veeco Common Stock.
The fair values of the options issued under the two plans at the date of grant
were estimated with the following weighted-average assumptions for 1998, 1997
and 1996: risk-free interest rate of 5.5%, 6.3% and 6.3%, respectively, no
dividend yield, volatility factor of the expected market price of the Company's
Common Stock of 59%, 50% and 50%, respectively, and a weighted-average expected
life of the option of four years.
F-16
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
A summary of the Company's stock option plans as of December 31, 1996, 1997 and
1998, and changes during the years ended on those
dates is presented below:
1996 1997 1998
---------------------------------------------------------------------------
OPTION WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES PRICE SHARES EXERCISE SHARES EXERCISE
(000) PER SHARE (000) PRICE (000) PRICE
----------------------------------------------------------------------------
Outstanding at beginning of year 606 $ 8.85 658 $ 9.44 1,154 $ 22.64
Granted 175 13.68 681 32.22 1,037 24.49
Exercised (32) 2.68 (165) 9.76 (336) 8.86
Forfeited (91) 13.67 (20) 21.60 (168) 29.61
----------------------------------------------------------------------------
Outstanding at end of year 658 $ 9.44 1,154 $ 22.64 1,687 $ 25.46
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Options exercisable at year-end 324 $ 5.72 330 $ 9.25 346 $ 24.42
Weighted-average fair value of
options granted during the year $ 6.24 $ 14.83 $ 12.36
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ---------------------------------
NUMBER NUMBER
OUTSTANDING OUTSTANDING
AT DECEMBER WEIGHTED-AVERAGE AT DECEMBER
RANGE OF 31, 1998 REMAINING WEIGHTED-AVERAGE 31, 1998 WEIGHTED-AVERAGE
EXERCISE PRICE (000'S) CONTRACTUAL LIFE EXERCISE PRICE (000'S) EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------
$ 0.69 2 3.8 $ 0.69 2 $ 0.69
2.18 8 1.5 2.18 8 2.18
4.50 18 5.6 4.50 18 4.50
9.50 - 13.38 75 6.7 12.41 65 12.61
14.50 - 21.63 88 7.6 16.35 39 16.32
22.00 - 32.41 1,318 9.1 25.33 144 25.54
33.06 - 47.44 169 8.8 39.19 67 39.10
50.25 - 57.25 9 8.6 51.81 3 51.81
---------------------------------------------------------------------------------------
0.69 - 57.25 1,687 8.8 $25.46 346 $ 24.42
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
F-17
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the Veeco Instruments Inc. Employee Stock Purchase Plan (the "Plan"), the
Company is authorized to issue up to 250,000 shares of Common Stock to its
full-time domestic employees, nearly all of whom are eligible to participate.
Under the terms of the Plan, employees can choose each year to have up to 6% of
their annual base earnings withheld to purchase the Company's Common Stock. The
purchase price of the stock is 85% of the lower of its beginning-of-year or
end-of-year market price. Under the Plan, the Company issued 29,352 shares,
12,996 shares and 14,278 shares to employees in 1998, 1997 and 1996,
respectively. The fair value of the employees' purchase rights were estimated
using the following assumptions for 1998, 1997 and 1996, respectively: no
dividend yield for all years; an expected life of one year for all years;
expected volatility of 59%, 70% and 70%; and risk-free interest rates of 5.3%,
5.3%, and 5.2%. The weighted-average fair value of those purchase rights granted
in 1998, 1997 and 1996 was $8.79, $6.58 and $5.20, respectively.
As of December 31, 1998, the Company has reserved 1,806,796 and 176,898 shares
of Common Stock for issuance upon exercise of stock options and issuance of
shares pursuant to the Plan, respectively.
PREFERRED STOCK
The Board of Directors has authority under the Company's current Amended and
Restated Certificate of Incorporation to issue shares of preferred stock with
voting and economic rights to be determined by the Board or Directors.
F-18
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
DECEMBER 31,
1998 1997
----------------------------------
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation $ 925 $ 702
Deferred tax assets:
Inventory valuation 2,861 2,247
Foreign net operating loss carryforwards 246 1,084
Warranty and installation 2,380 1,878
Other 669 387
----------------------------------
Total deferred tax assets 6,156 5,596
Valuation allowance (246) (994)
----------------------------------
Net deferred tax assets 5,910 4,602
----------------------------------
----------------------------------
Net deferred taxes $ 4,985 $ 3,900
----------------------------------
----------------------------------
For financial reporting purposes, income (loss) before income taxes consists of:
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------------------------
(IN THOUSANDS)
Domestic $16,130 $33,654 $34,135
Foreign 2,015 (17) (297)
------------------------------------------------------------
------------------------------------------------------------
$18,145 $33,637 $33,838
------------------------------------------------------------
------------------------------------------------------------
F-19
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
Significant components of the provision (benefit) for income taxes are presented
below:
YEAR ENDED DECEMBER 31,
1998 1997 1996
------------------------------------------------------
(IN THOUSANDS)
Current:
Federal $ 4,436 $ 7,371 $ 6,442
Foreign 546 306 129
State 1,547 1,642 1,542
Utilization of research tax credits - - (277)
------------------------------------------------------
6,529 9,319 7,836
Deferred:
Federal (968) (1,517) (795)
Foreign 90 - -
State (207) (192) (100)
------------------------------------------------------
------------------------------------------------------
(1,085) (1,709) (895)
------------------------------------------------------
------------------------------------------------------
$ 5,444 $ 7,610 $ 6,941
------------------------------------------------------
------------------------------------------------------
F-20
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (CONTINUED)
The following is a reconciliation of the income tax expense computed using the
federal statutory rate to the Company's actual income tax expense:
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------------------
(IN THOUSANDS)
Tax at U.S. statutory rates $ 6,351 $ 11,773 $ 11,843
State income taxes (net of federal benefit) 817 925 856
Goodwill amortization 46 46 46
Nondeductible merger expenses 1,164 700 -
Other nondeductible expenses 140 116 52
Operating losses not currently realizable 14 335 225
Income of "S" Corporation not subject to
federal corporation tax (1,513) (4,875) (5,728)
Operating losses currently realizable (168) (13) -
Research and development tax credit (796) (619) (184)
Benefit of foreign sales corporation (457) (479) (173)
Other (154) (299) 4
-------------------------------------------------------
$ 5,444 $ 7,610 $ 6,941
-------------------------------------------------------
-------------------------------------------------------
One of the Company's foreign subsidiaries has net operating loss carryforwards
for foreign tax purposes of approximately $500,000 at December 31, 1998, which
expire in the year 2002.
F-21
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
MINIMUM LEASE COMMITMENTS
Minimum lease commitments as of December 31, 1998 for property and equipment
under operating lease agreements (exclusive of renewal options) are payable as
follows:
(IN THOUSANDS)
1999 $ 1,572
2000 1,301
2001 1,042
2002 986
2003 625
Thereafter 190
-------------------
$ 5,716
-------------------
-------------------
Rent charged to operations amounted to $1,702,000, $1,979,000 and $1,408,000 in
1998, 1997 and 1996, respectively. In addition, the Company is obligated under
the leases for certain other expenses, including real estate taxes and
insurance.
ROYALTIES
The Company has arrangements with a number of third parties to use patents in
accordance with license agreements. Royalties and license fees expensed under
these agreements approximated $275,000, $716,000 and $986,000 in 1998, 1997 and
1996, respectively.
ENVIRONMENTAL REMEDIATION
In compliance with a Cleanup and Abatement Order ("CAO") issued by the
California Regional Water Quality Control Board, Central Coast Region (the
"RWQCB"), the Company, in September 1995, completed soil remediation of a
site which was leased by a predecessor of the Company.
F-22
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The cost of the soil remediation was approximately $35,000. The Company is
currently performing post-soil remediation groundwater monitoring at the site.
Reports prepared by consultants indicate certain contaminants in samples of
groundwater from underneath the site. Pursuant to the CAO, in September 1998,
the Company began implementation of a groundwater remediation plan approved by
the RWQCB. The Company cannot at this time estimate the extent of its remaining
remedial liability at the site since that will depend upon both the success of
the groundwater remediation and the Company's ability to demonstrate to the
RWQCB that any remaining contamination in site groundwater is migrating onto the
site from other sources.
The Company may, under certain circumstances, be obligated to pay up to $250,000
in connection with the implementation of a comprehensive plan of environmental
remediation at its Plainview, New York facility. The Company has been
indemnified for any liabilities it may incur in excess of $250,000 with respect
to any such remediation. No comprehensive plan has been required to date.
Despite such indemnification, the Company does not believe that any material
loss or expense is probable in connection with any remediation plan that may be
proposed.
The Company is aware that petroleum hydrocarbon contamination has been detected
in the soil at the site of a facility leased by the Company in Santa Barbara,
California. The Company has been indemnified for any liabilities it may incur
which arise from environmental contamination at the site. Despite such
indemnification, the Company does not believe that any material loss or expense
is probable in connection with any such liabilities.
The former owner of the land and building in which Digital's operating
facilities and offices are located has disclosed that there are hazardous
substances present in the ground under the building. Management believes that
the comprehensive indemnification clause that is part of the purchase contract
provides adequate protection against any environmental issues that may arise.
F-23
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
LITIGATION
The Company is a defendant in several litigation matters. The ultimate outcome
of these matters cannot be determined at this time; however, management believes
that settlements, if any, and litigation costs, will not have a material impact
on the Company's consolidated financial position, results of operations or cash
flows.
RELATED PARTY TRANSACTION
Balances and transactions with Digital GmbH that are reflected in the
accompanying consolidated financial statements are as follows:
1998 1997 1996
-------------------------------------------------
(IN THOUSANDS)
Accounts receivable $ - $ 1,788 $ 922
Sales 4,337 3,025 3,461
The Company makes purchases of inventory from a company, which is owned
partially by an individual who is also employed by the Company. Payments to this
related company in 1998, 1997 and 1996 were approximately $4,883,000, $3,120,000
and $2,937,000, respectively.
CONCENTRATION OF CREDIT RISK
The Company's business depends in large part upon the capital expenditures of
data storage and semiconductor manufacturers which accounted for the following
percentages of the Company's net sales:
DECEMBER 31
1998 1997 1996
-------------------------------------------------------
Data storage 54.9% 53.2% 45.5%
Semiconductor 19.5% 19.8% 23.0%
F-24
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
Sales to one customer accounted for approximately 17%, 6% and 4%, sales to
another customer accounted for approximately 11%, 14% and 11% and sales to
another customer accounted for approximately 7%, 11% and 11% of the Company's
net sales during the years ended December 31, 1998, 1997 and 1996, respectively.
Each of the Company's segments sell to these major customers. At December 31,
1998 and 1997, accounts receivable due from three customers represented 38% and
24% of aggregate accounts receivable, respectively.
The Company manufactures and sells its products to companies in different
geographic locations. The Company performs periodic credit evaluations of its
customers' financial condition, generally does not require collateral, and where
appropriate, requires that letters of credit be provided on foreign sales.
Receivables generally are due within 30-60 days. The Company's net accounts
receivable are concentrated in the following geographic locations:
DECEMBER 31,
1998 1997
---------------------------------------
United States $ 17,858 $ 22,131
Europe 11,711 8,856
Far East 11,776 12,738
Other 1,673 1,202
---------------------------------------
$ 43,018 $ 44,927
---------------------------------------
---------------------------------------
F-25
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. FOREIGN OPERATIONS, GEOGRAPHIC AREA AND PRODUCT SEGMENT INFORMATION
Revenue and long-lived assets related to operations in the United States and
other foreign countries as of and for the years ended December 31, 1998, 1997
and 1996 are as follows:
NET SALES TO
UNAFFILIATED CUSTOMERS LONG-LIVED ASSETS
------------------------------------------ -------------------------------------------
1998 1997 1996 1998 1997 1996
------------- -------------- ------------- -------------- ------------- --------------
United States $ 199,263 $ 212,288 $ 160,290 $ 41,024 $ 37,547 $ 17,834
Foreign Countries 39,103 13,698 12,129 367 115 120
Eliminations (31,528) (9,258) (7,360) - - -
------------- -------------- ------------- -------------- ------------- --------------
$ 206,838 $ 216,728 $ 165,059 $ 41,391 $ 37,662 $ 17,954
------------- -------------- ------------- -------------- ------------- --------------
------------- -------------- ------------- -------------- ------------- --------------
The aggregate foreign exchange gains and (losses) included in determining
consolidated results of operations were $774,000, $(34,000), and $(153,000) in
1998, 1997, and 1996, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." As of
January 1, 1998, the Company adopted SFAS No. 131 and retroactively applied it
to January 1, 1996. The adoption of this statement had no impact on the
Company's reported net income or shareholders' equity.
The Company has three reportable segments: metrology, process equipment and
industrial measurement. The Company's metrology product line manufactures and
distributes to customers in the data storage and semiconductor industries, as
well as research and development centers and universities. The Company's process
equipment product line includes etch and deposition systems, primarily for data
storage applications. The Company's industrial measurement products have
applications in a wide range of industries including electronic, aerospace,
transportation and semiconductor.
F-26
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. FOREIGN OPERATIONS, GEOGRAPHIC AREA AND PRODUCT SEGMENT INFORMATION
(CONTINUED)
The Company evaluates performance based on profit or loss from operations before
income taxes. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies. Costs
excluded from segment profit primarily consist of corporate expenses, including
income taxes, as well as other non-recurring charges for purchased in-process
technology, reorganization and asset impairment charges and merger-related
costs. Corporate expenses are comprised primarily of general and administrative
expenses.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes.
The following represents the reportable product segments of the Company:
NET SALES OPERATING INCOME (LOSS) TOTAL ASSETS
1998 1997 1996 1998 1997 1996 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
Metrology $126,160 $112,751 $ 92,107 $26,328 $23,748 $22,446 $ 73,445 $ 68,025 $ 47,136
Process equipment 60,931 84,530 53,198 2,232 19,510 12,562 55,375 52,028 25,325
Industrial measurement 19,747 19,447 19,754 (5) (381) (393) 16,807 13,162 12,765
Unallocated corporate - - - (2,022) (2,783) (1,122) 27,210 26,416 28,113
amount
Merger and reorganization
expenses - - - (7,500) (2,250) - - - -
Write-off of purchased
in-process technology - - - - (4,200) - - - -
---------------------------------------------------------------------------------------------
Total $206,838 $216,728 $165,059 $19,033 $33,644 $33,493 $172,837 $159,631 $113,339
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
F-27
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. FOREIGN OPERATIONS, GEOGRAPHIC AREA AND PRODUCT SEGMENT INFORMATION
(CONTINUED)
OTHER SIGNIFICANT ITEMS
YEAR ENDED DECEMBER 31,
1998 1997 1996
---------------- --------------- ----------------
Depreciation and amortization expense:
Metrology $ 1,674 $ 522 $ 582
Process equipment 2,389 1,320 1,131
Industrial measurement 122 15 1
Unallocated corporate 518 358 327
---------------- --------------- ----------------
Consolidated depreciation and amortization
expense $ 4,703 $ 2,215 $ 2,041
---------------- --------------- ----------------
---------------- --------------- ----------------
Expenditures for long-lived assets:
Metrology $ 1,488 $ 13,216 $ 589
Process equipment 5,907 8,162 3,236
Industrial measurement 65 646 95
Unallocated corporate 678 1,548 147
---------------- --------------- ----------------
Consolidated expenditures for
long-lived assets $ 8,138 $ 23,572 $ 4,067
---------------- --------------- ----------------
---------------- --------------- ----------------
9. DEFINED CONTRIBUTION BENEFIT PLANS
The Company maintains three defined contribution plans under Section 401(k) of
the Internal Revenue Code. Principally all of the Company's domestic full-time
employees are eligible to participate in one of the three plans. Under the
plans, employees may contribute up to a maximum of 15% to 20% of their annual
wages, depending on the plan. Employees are immediately vested in their
contributions. Other than Digital's plan, the plans provide for partial matching
contributions by the Company, which vest over a five-year period. Company
contributions to the plans were $507,000, $296,000 and $205,000 in 1998, 1997
and 1996, respectively.
F-28
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. SUBSEQUENT EVENTS
On February 2, 1999, the Company completed a public offering pursuant to which
1,000,000 shares of Common Stock, par value $.01 per share were issued and sold
for $52.00 per share, less underwriting discounts and commissions of $2.34 per
share. In addition, as part of the public offering, certain stockholders of the
Company sold 2,575,000 shares of Common Stock. The Company did not receive any
of the proceeds from the sale of shares by the selling stockholders.
F-29
Veeco Instruments Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
- -----------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
--------------------------
--------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
GINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
Deducted from asset accounts:
Year ended December 31, 1998:
Allowance for doubtful accounts $ 1,005,000 $ 746,000 $ - $ 26,000 $ 1,725,000
Valuation allowance on net deferred tax assets 994,000 - - 748,000 246,000
------------------------------------------------------------------------------
$ 1,999,000 $ 746,000 $ - $ 774,000 $ 1,971,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Deducted from asset accounts:
Year ended December 31, 1997:
Allowance for doubtful accounts $ 803,000 $ 403,000 $ - $ 201,000 $ 1,005,000
Valuation allowance on net deferred tax assets 795,000 199,000 - - 994,000
------------------------------------------------------------------------------
$ 1,598,000 $ 602,000 $ - $ 201,000 $ 1,999,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------
LDeducted from asset accounts:
Year ended December 31, 1996:
Allowance for doubtful accounts $ 692,000 $ 200,000 $ - $ 89,000 $ 803,000
Valuation allowance on net deferred tax assets 1,913,000 - - 1,118,000 795,000
------------------------------------------------------------------------------
$ 2,605,000 $ 200,000 $ - $ 1,207,000 $ 1,598,000
------------------------------------------------------------------------------
------------------------------------------------------------------------------
INDEX TO EXHIBITS
Exhibit
Number Exhibit
2.1 Agreement and Plan of Merger among Veeco Instruments Inc., Digital
Instruments, Inc. and its Security holders dated February 28, 1998. (8)
2.2 Agreement and Plan of Merger among Veeco Instruments Inc., Veeco
Acquisition Corp. and Wyko Corporation and its Security holders dated
April 28, 1997. (6)
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. (7)
3.2 Form of Amended and Restated By-Laws of the Company. (1)
4.1 Form of Certificate for Common Stock. (1)
10.5 Distributor Agreement, dated as of December 15, 1974 between Sloan
Technology Corporation and ULVAC Corporation. (2)
10.6 Amendment to Distributor Agreement, dated March 11, 1993, by and
between Sloan Technology Corporation and ULVAC Japan, Ltd.(2)
10.7 Exclusive Sales Agreement, dated as of July 1, 1993, between Seiko
Instruments and the Company. (2)
10.8 Exclusive Sales Agreement, dated as of July 1, 1993, between the
Company and Seiko Instruments. (2)
10.9 Distributor Agreement, dated March 5, 1993, between the Company and
Seiko Instruments.(2)
10.11 Letter Agreement, dated November 22, 1993 between the Company and John
F. Rein, Jr. (1)
10.12 First Amendment and Restatement of Stock Option Agreement dated as of
October 13, 1994 between the Company and John F. Rein, Jr. (1)
10.13 Agreement dated as of February 7, 1994, effective as of December 31,
1993, between the Company and Robert Oates, together with Amendment No.
1 thereto dated as of October 13, 1994. (1)
10.15 Veeco Instruments Inc. 1994 Stock Option Plan for Outside Directors.
(1)
10.19 Letter Agreement dated January 16, 1995 between the Company and John
Kiernan. (3)
10.20 Amended and Restated Veeco Instruments Inc. Employees' Stock Option
Plan. (4)
10.21 Veeco Instruments Inc. Employees Stock Purchase Plan. (4)
10.24 Lease dated July 1, 1993 and lease renewal dated February 26, 1996
between Lambda (Santa Barbara) Inc., a California Corporation, and
Veeco Instruments Inc., a Delaware Corporation. (5)
10.25 Credit Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (5)
10.26 Security Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (5)
10.27 Guarantee Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (5)
10.28 Guarantor's Security Agreement dated July 31, 1996 among Sloan
Technology Corporation, Fleet Bank N.A. and The Chase Manhattan Bank.
(5)
10.29 The Pledge Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (5)
10.30 The Patent and Trademark Security Agreement dated July 31, 1996 among
the Registrant, Fleet Bank N.A. and The Chase Manhattan Bank. (5)
10.32 Lease Extension dated as of November 1, 1997 by and between J. Anthony
Wilson and Veeco Instruments Inc. (9)
10.33 Letter Agreement, dated December 2, 1997 between Veeco Instruments Inc.
and Dr. Donald Kania. (9)
10.34 Amendment No. 2 to credit agreement, dated January 31, 1999 between
Veeco Instruments, Inc. and Fleet Bank N.A. and the Chase Manhattan
Bank.*
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Ernst & Young LLP. *
27.1 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1998.*
27.2 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1997 (Restated).*
* Filed herewith.
(1) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-85184) and incorporated
herein by reference.
(2) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-85184) and incorporated
herein by reference; confidential treatment granted.
(3) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(4) Previously filed as an Exhibit to the Registrant's Registration
Statement on Form S-1 (Registration No. 33-93958) and incorporated
herein by reference.
(5) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 and incorporated herein
by reference.
(6) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein
by reference.
(7) Previously filed as an Exhibit to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 and incorporated herein
by reference.
(8) Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 9, 1998.
(9) Previously filed as an Exhibit to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 and incorporated
herein by reference.