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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, 1997
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 2, 1998
as reported on the Nasdaq National Market, was approximately $171,781,000.
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 2, 1998, the Registrant had outstanding 8,963,160 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 28, 1998 are incorporated by reference
into Part III of this Form 10-K Report
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PART I
Item 1. Business.
The Company
Veeco Instruments Inc. ("Veeco" or the "Company") is a leader in the
design, manufacture, marketing and servicing of a broad line of precision
process equipment and process metrology equipment used to manufacture and test
microelectronic products for the data storage and semiconductor industries.
Demand for the Company'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) thin film magnetic heads
(TFMHs) which require additional Veeco process steps. The ability of the
Company'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 semiconductor wafers and TFMHs.
The Company sells its products worldwide to many of the leading data
storage and semiconductor manufacturers, including Seagate Technology, Inc.
("Seagate"), Read-Rite Corp. ("Read-Rite"), IBM Corporation ("IBM"), Applied
Magnetics Corp. ("AMC"), SAE Magnetics ("SAE"), Quantum Corp. ("Quantum") and
Siemens AG ("Siemens"). In addition, the Company sells its products to companies
in the flat panel display and high frequency device industries, as well as to
other industries, research and development centers and universities.
The Company acquired its business operations from a company that was
founded in 1945 under the same name (the "Predecessor"). In August 1989, Edward
H. Braun, the Company's Chairman, Chief Executive Officer and President, who was
then the Executive Vice President and Chief Operating Officer of the
Predecessor, incorporated Veeco Instruments Acquisition Corp. with certain other
members of the Company's senior management for the purpose of acquiring a
substantial portion of the assets used in the Predecessor's industrial equipment
product group business (the "Equipment Group"). In January 1990, Veeco
Instruments Acquisition Corp. completed its acquisition of these assets (the
"Acquisition") for approximately $29,200,000 and the assumption of substantially
all of the liabilities of the Equipment Group relating to such assets. In
connection with the Acquisition, the Predecessor changed its name to "Lambda
Electronics Inc." and Veeco Instruments Acquisition Corp. changed its name to
"Veeco Instruments Inc."
On December 6, 1994, the Company completed an initial public offering
whereby 2,500,000 shares of common stock, par value $.01 per share ("Common
Stock"), were issued and sold at $11.00 per share. The net proceeds were used to
repay the Company's debt and for working capital and other general corporate
purposes.
On July 31, 1995, the Company completed a follow-on offering in which
2,300,000 shares of Common Stock were sold, 800,000 of which were sold by the
Company and 1,500,000 of which were sold by certain selling stockholders, at the
public offering price of $20.00 per share. The net proceeds received by the
Company have been and will be used for working capital and general corporate
purposes, including potential acquisitions.
Recent Developments
On February 28, 1998, the Company signed a definitive merger agreement
with Digital Instruments, Inc. of Santa Barbara, California ("Digital"),
pursuant to which the Company will acquire Digital. Under the merger agreement,
each outstanding share of the capital stock of Digital ("Digital Shares") will
be converted into the right to receive that number of shares of Common Stock as
determined by dividing 5,633,725 by the
<PAGE>
aggregate number of Digital Shares issued and outstanding immediately prior to
the effective time of the merger, upon surrender to the Company of the
certificates representing such Digital Shares. The merger is intended to be
accounted for as a pooling of interests transaction. The consummation of the
merger is subject to a number of conditions, including approval by the Company's
shareholders, concurrence of the Company's independent accountants with
management's conclusion that the merger may be accounted for as a pooling of
interests and receipt of any necessary governmental and third party consents.
The Company expects the transaction to be consummated in the second quarter of
1998.
In July 1997, the Company acquired all of the outstanding capital stock of
Wyko Corporation, an Arizona corporation ("Wyko"), through the merger of Veeco
Acquisition Corp., a wholly-owned subsidiary of the Company formed for the
purpose of the acquisition, into Wyko. Following the consummation of the
acquisition, Wyko became a wholly-owned subsidiary of the Company. Pursuant to
the merger, the former stockholders of Wyko received a total of 2,863,810 shares
of Common Stock, and former optionholders of Wyko received options to purchase
136,190 shares of Common Stock. Wyko designs, manufactures, markets and services
a broad line of high performance, non-contact optical process metrology systems.
The Company believes that the acquisition of Wyko greatly enhances the Company's
process metrology product line by adding products utilizing phase shifting
interferometry ("PSI"), vertical shifting interferometry ("VSI") and other
technologies not previously employed in the Company's process metrology
products. This extension of the Company's product line will enable it to better
serve current customers of the Company's process metrology products and to
attract new customers by offering a broad range of measurement technologies for
yield improvement and integrated test programs.
In April 1997, the Company acquired certain assets of the Media and
Magnetics Applications Division ("MMA") of Materials Research Corporation. Such
assets were previously employed by MMA in developing a line of high performance
physical vapor deposition sputtering equipment (the "PVD Equipment") used in
advanced MR/GMR thin film head and magnetic disk fabrication. The Company
believes that the acquisition of MMA provides the Company's customers with a
wide selection of deposition technologies to address MR/GMR applications. The
PVD Equipment broadens the Company's process and product capability which also
includes Ion Beam Etch, Diamond Like Carbon and Ion Beam Deposition. As a result
of the acquisition, the Company is capable of handling up to twenty-three etch
and deposition process steps required in the fabrication of a typical MR head.
Industry Background
Trends in the Data Storage Industry. The market for disk drives has grown
rapidly in recent years, driven by corporate and consumer use of storage
intensive products such as networked personal computers (PCs), Windows NT,
client servers and the Internet, among others. Disk drive storage capacity,
measured in areal density, is similarly increasing rapidly to satisfy this
market demand.
The capacity of disk drives is largely determined by the capability of the
magnetic recording heads, which read and write signals onto hard disks. With
more storage capacity requiring multiple disks per drive, magnetic head
production is growing faster than the overall disk drive industry. Most magnetic
heads in use have been inductive, but new designs utilize magnetoresistive (MR)
heads and giant magnetoresistive (GMR) heads, which allow the higher areal
densities required to store more data. The manufacture of MR heads is extremely
complex, involving the highly precise layering of magnetic and dielectric
materials.
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Trends in the Semiconductor Industry. Similar to the data storage
industry, the demand for semiconductor devices has increased at a tremendous
pace over the last several years. The long-term growth of microelectronic
products has been driven by the trend toward smaller and faster components,
which requires advances in semiconductor processing and metrology equipment.
Current technology trends include smaller feature sizes (sub-.25 micron
linewidths), larger substrates (i.e.: the transition to 300mm wafers) and the
increased use of metrology in the manufacturing process. Fabrication of these
miniaturized components requires an increasing number of manufacturing process
steps. For example, a typical one megabit DRAM with a smallest feature size of
one micron requires approximately 150 manufacturing steps. In comparison, a 64
megabit DRAM is currently being manufactured in volume with a smallest feature
size of .35 microns using approximately 350 manufacturing steps. The increased
number of manufacturing steps in semiconductor and TFMH fabrication includes
greater use of precise etching and deposition equipment and process metrology
systems to ensure critical process control and product quality. Growth in the
etching, deposition and process metrology markets is driven by end-users'
requirements for greater performance capabilities, and by the increasing
miniaturization of components, which has resulted in a demand for equipment
capable of etching and measuring sub-micron features (i.e. below one micron).
Microelectronics Manufacturing Process. Semiconductor devices (e.g.
integrated circuits) and mass memory storage devices (TFMHs) are fabricated by
performing a complex series of process steps on a silicon substrate or wafer.
The three primary categories of wafer processing steps are deposition,
photolithography and etching. During deposition, layers of conductive or
insulating films are deposited on an unpatterned wafer. During photolithography
(also known as "patterning"), the wafer is covered with light-sensitive material
called photoresist, which is then exposed to light projected in patterns which
form integrated circuit components. During etching (which may be accomplished by
several processes, including ion beam etching), certain areas of the patterned
(metal or insulating) film are removed to leave the desired circuit pattern. Ion
beam etching involves a precisely controlled, highly collimated broad ion beam
removing material from a substrate by physically sputtering any material not
protected by a finely patterned photo resist mask. Ion beam systems are also
increasingly important for the deposition of thin films. Physical vapor
deposition provides a thin film coating process by means of sputtering.
Each of these steps is typically repeated several times during the
fabrication process, with alternating layers of conducting and insulating films
being deposited each time to create a multi-layered structure. Similarly, the
production of thin film magnetic heads includes many steps of patterning, etch
and deposition.
The resulting finished wafer or TFMH consists of many integrated circuits.
Depending on the specific design of a given integrated circuit, a variety of
film thickness and a number of layers and film types will be used to achieve
desired performance characteristics. Process metrology systems are used
repeatedly throughout the fabrication process to monitor process accuracy and
repeatability by measuring critical dimensions and other physical features such
as film thickness, line width, step height, sidewall angle and surface
roughness. In the data storage industry, there has recently been a trend toward
the increased 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 complicated to manufacture, there is a greater need for 100%
testing of critical process steps.
Manufacturers base their purchases of metrology systems on a variety of
criteria, including resolution, accuracy, repeatability, ease of use, total cost
of ownership (which depends upon factors including system cost, throughput,
reliability, operating costs, up-time and service response time), the value of
the data produced and the accuracy and speed with which the measurement
parameter (for example, step height or film thickness) can be determined. In
addition, as metrology systems are incorporated into the production process,
automated features such as cassette-to-cassette wafer handling and pattern
recognition have become
3
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increasingly important, as has the ability of a system to communicate with other
systems within the manufacturing process.
Veeco's Products
Process Equipment
The Company's process equipment product line, which includes ion beam
etching and deposition (deposition includes ion beam deposition (IBD),
diamond-like carbon coating deposition and physical vapor deposition), offers a
broad range of technologically advanced products to customers in the data
storage and semiconductor industries. The Company's process equipment products
are used in the manufacture of microelectronics products including MR/GMR TFMHs.
The Company develops and produces ion beam etching 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. The Company
believes that it holds the leadership position in the overall market for ion
beam etching systems, and believes that it is the leading seller of ion beam
systems utilized for production of thin film magnetic heads.
Ion beam etching permits precise submicron low temperature etching of any
material, including many which cannot be etched by other processes, and has
emerged as a leading fabrication process in the thin film magnetic head data
storage industry for both circuit patterning and micromachining. This technology
is utilized in multiple steps of the advanced thin film magnetic head
fabrication process. In addition, as the demand for integrated circuits and
microsensors with sub-micron features grows, the Company believes the demand for
ion beam etching systems will increase.
The Company's ion beam etching product line has progressed from use
principally in research and development applications to automated systems used
in production. This evolution was driven by the incorporation of features such
as automated wafer handling, advanced substrate cooling technique and
load-locked process control which increases throughput and yield.
Ion beam deposition provides greater control of precise deposition rate,
film morphology and incorporated contaminants than traditional processes used in
the manufacture of semiconductors or data storage devices. Ion beams can be used
two ways to deposit films. Beams can directly deposit material by breaking down
a feed gas and accelerating non-volatile components at the substrate in a
controlled manner (e.g., diamond like carbon coatings for thin film magnetic
head slider coatings); or, a beam can be directed at a material target of the
required element or alloy, and have an ion beam sputtered film precisely
deposited on the substrate (e.g., giant magneto-resistive read elements in thin
film magnetic heads).
The Company's PVD systems provide a thin film coating process by means of
sputtering. PVD systems are used throughout the thin film magnetic head industry
to deposit thin films as well as insulating materials for construction of the
read and write elements for magnetic storage devices.
Sales of process equipment systems were approximately $84,530,000,
$53,198,000 and $33,184,000 and accounted for approximately 51%, 46% and 39% of
the Company's net sales for the years ended December 31, 1997, 1996 and 1995,
respectively.
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The following table summarizes the Company's major products in its process
equipment product line and the principal industries to which it offers such
products:
<TABLE>
<CAPTION>
Veeco Process Equipment Product Offerings
-----------------------------------------
Optical,
Data Semi- Industrial
Product Storage conductor & Research
------- ------- --------- ----------
<S> <C> <C> <C>
Etching Systems:
Microetch Single Substrate Loadlock System............... x x x
Microetch Single Cassette Loadlock System................ x x x
Microetch Cluster System................................. x x x
Deposition Systems:
Ion Beam Deposition System............................... x x x
Diamond Like Carbon Deposition System.................... x x
PVD System............................................... x
</TABLE>
The process equipment product line consists of the following:
Microetch Single Substrate Loadlock System. The RF350 is an Ion Beam etch
system which receives substrates from a single substrate loadlock. Loadlock is a
transfer module from which substrates are moved to the process chamber without
breaking the process chamber vacuum. The RF350 provides submicron, low
temperature, low pressure anisotropic (highly directional) etching of any
material, including many multi-layer films that cannot be etched by known
reactive processes. This system is ideal for R&D environments which do not
require automated handling of multiple substrates for high volume work. These
systems are priced in the range of $600,000 to $700,000.
Microetch Single Cassette Loadlock System. The RF350S is a single cassette
loadlock system which can automatically process a cassette load of substrates
from the loadlock. This system is used in higher volume manufacturing
applications and can handle heavier substrates such as "row bars" which are many
TFMHs grouped onto individual carriers. The RF350 and the RF350S feature an RF
ion source that provides higher etch rates and increased time between
maintenance. These systems are priced in the range of $800,000 to $950,000.
Each Process Equipment product is available as a single loadlock system or
in a Cluster tool configuration. The cluster system has multiple cassette and
multiple process chamber capability. These systems provide flexibility and
throughput by either permitting the etch process to occur in up to three
parallel chambers or by combining ion beam etch with ion beam deposition or
physical vapor deposition. A wide array of process operations is possible
without having to remove the substrate from the high vacuum environment. These
systems have the advantage of single wafer etching for uniformity, repeatability
and process control. The system is targeted at the most advanced thin film head
and semiconductor memory applications. The cluster system uses the Company's
enhanced control system and patented "flow cool" substrate cooling technology.
Sales prices for the Company's Cluster systems range from $1,100,000 to
$3,100,000.
Ion Beam Deposition Systems. IBD-350 ion beam deposition systems utilize
the process module concept of the etching systems, allowing the deposition
module to be mated to the Company's Cluster System platform to allow either
parallel or sequential etch/deposition processes. The IBD-350 offers high purity
thin film layers and maximum uniformity and repeatability. Sales prices for the
Company's Secondary Ion Beam Deposition Systems range from $750,000 to
$2,600,000.
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Diamond-Like Carbon Deposition Systems. The Company'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 load lock and
a high vacuum processing chamber with two ion beam sources. Sales prices of
these systems range from $600,000 to $1,000,000.
Physical Vapor PVD Systems. The Company'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 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 planetary systems range in price from $1,400,000 to
$2,500,000.
The PVD Cymetra systems are also available in static configurations. These
consist of individual chambers dedicated to a single target material. The static
systems range in price from $650,000 to $1,600,000.
Process Metrology Equipment
The Company's process metrology product line, which includes stylus
profilers, non-contact atomic force microscopes, laser based scatterometers and
optical interferometers, offers a broad range of innovative products to
customers in the semiconductor, data storage and flat panel display industries,
as well as in other industries.
Sales of the Company's process metrology equipment were approximately
$61,431,000, $42,090,000 and $34,296,000 and accounted for approximately 37%,
37% and 40% of the Company's net sales for the years ended December 31, 1997,
1996 and 1995, respectively.
The following table summarizes the Company's major products in its process
metrology equipment product line and the principal industries to which it offers
such products:
<TABLE>
<CAPTION>
Veeco Process Metrology Product Offerings
-----------------------------------------
Optical, Industrial,
Data Semi- Flat Panel Research &
Product Storage conductor Display Micro-Machining
------- ------- --------- ------- ---------------
<S> <C> <C> <C> <C>
Dektak Stylus Profilers ......................... X X X
Dektak Flat Panel Display Profilers ............ X
Dektak Atomic Force Microscope .................. X X
Dektak TMS Scatterometers ....................... X X
Wyko NT 2000 Optical Profilers .................. X X
Wyko SP3000 Bump Measurement Profiler System .... X
Wyko HD 2000 Optical Profilers .................. X X
Wyko Macro-Contour Measurement System ........... X X
Wyko SATIS Static Attitude Test Inspection System X X
</TABLE>
Stylus Profilers
The Company's stylus profiler systems are manufactured at its facility in
Santa Barbara, California. The Company's line of stylus profiler systems all
utilize the same principle of operation. A precision translation stage 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. This data is then used to produce
cross-sectional representations and/or a magnified contour map, which is
displayed on a video monitor. Stylus profilers' applications include height,
width, pitch and roughness measurements of features on semiconductor devices,
magnetic and optical storage media (e.g., hard
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drives), flat panel displays, and hybrid circuits. The Company believes that its
stylus profiler products are recognized for their accuracy, repeatability, ease
of use and technology features, as well as features designed for industry
specifications and customer needs. Each of the Company's stylus profilers
incorporates a proprietary software package.
The Company's stylus profiler products include:
Dektak Stylus Profilers. The Dektak line of stylus profilers permits
testing of wafers, hard disks, circuit hybrids, optics and other precision
surfaces. The Series V product line consists of advanced stylus profilers which
incorporate leading edge performance and features such as photo-like 3D
rendering software, a low inertia/low force stylus head, high precision stage
control and positioning, host communication software and mini-environment
compatible design for operation in fully automated manufacturing environments.
The V300SI is a 300mm profiler designed specifically for next generation 300mm
wafer fabs, and is the industry's first 300mm stylus profiler. The Dektak stylus
profilers can sample up to 65,000 points per scan, which is particularly
important for applications such as hard disk substrates and optics analysis. The
Dektak D3 and D3ST models are designed for measuring fine geometries on 150mm
and smaller samples. These systems are used for both thick-film hybrid and thin
film microelectronic applications. Sales prices of the Dektak stylus profilers
range from approximately $30,000 to $300,000.
Dektak Flat Panel Display Profilers. The Dektak OSP Stylus Profilers are
designed to measure deposition thickness and surface roughness during
manufacture of flat panel display (FPDs). In May 1997, the Company introduced
the OSP 1100, an innovative overhead scanning profiler for very large FPD
substrates and assemblies. The OSP 1100 offers the largest sample handling
capability in the industry while providing a smaller footprint and greater
performance than any other comparable tool. These advanced surface profilers are
capable of precise measurements of step heights, line widths and surface texture
of flat panel substrate up to 1100mm x 1100mm. In addition, this product line
offers a cassette-to-cassette wafer handling option and pattern recognition for
fully automated operation. Sales prices of the Dektak OSP Stylus Profilers range
from approximately $100,000 to $300,000.
Non-Contact Atomic Force Microscopes
The Company is IBM's exclusive worldwide sales and marketing
representative to market, sell and service IBM-manufactured SXM Atomic Force
Microscopes to the semiconductor and data storage industries. See "- Strategic
Alliances." The AFM technology used in the products is a variation of a
technique invented by two IBM scientists who shared the Nobel Prize in Physics
in 1986 for their invention.
SXM Atomic Force Microscopes are automated, in-line manufacturing
inspection tools which are capable of non-contact, non-destructive nanometer
scale three dimensional measurement and imaging of sub-micron structures in
ambient conditions. (A nanometer is equal to one-billionth of a meter.) By
scanning a probe tip across a surface at a distance of approximately 30
angstroms or less, extremely precise measurements of sub-microscopic features
can be produced, with resolution down to less than three angstroms or less.
These measurements include height, width, roughness and sidewall angle
characteristics. A "critical dimension" (CD) option permits the user to profile
vertical sidewalls, measure sidewall angles and obtain true width measurements
of sub-micron lines and trenches. Unlike alternative technologies, SXM Atomic
Force Microscopes have the unique ability to make precise three dimensional
measurements without damaging or breaking the wafer, which at the time of
measurement may have a manufacturing cost of between $10,000 and $100,000.
By permitting measurements on features with dimensions as small as 0.18
microns, and on substrates measuring 200 mm or 300 mm, the Company believes that
SXM Atomic Force Microscopes provide the
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precise measurements that data storage and semiconductor manufacturers require
in their current and next generation products. See "-Strategic Alliances."
Sales prices of SXM Atomic Force Microscopes range from approximately
$750,000 to $1,250,000.
Laser-Based Scatterometer
The Company is Schmitt Measurement Systems, Inc.'s ("Schmitt") exclusive
distributor for the Texture Measurement System ("TMS") product line for all
regions of the world excluding Japan. The TMS products are laser based
scatterometers which directly measure microroughness using a technique referred
to as Total Integrated Scatter or T.I.S. The TMS products quickly and repeatably
measure microroughness as small as a few angstroms for applications such as disk
texture for the hard drive industry as well as backside/frontside roughness of
bare silicon wafers. The TMS product line includes the TMS 2000 for hard drive
disks, the TMS 2000W for wafers up to 200mm in diameter and the TMS 3000W for
300mm wafers. In December 1997, the Company introduced the DTM 2000, a high
speed automated disk inspection tool, capable of processing up to 1200
disks/hour. Pricing of these systems ranges from $65,000 to $165,000.
Optical Interferometry Products
The Company's interferometry process metrology products are produced by
Wyko at its facility in Tucson, Arizona.
Substantially all Wyko instruments are designed to make non-contact
surface measurements using interferometry technology. Wyko 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.
Micro-Structure Measurements. Wyko pioneered the use of PSI, developed in
1983, and VSI, developed in 1992, to measure surfaces as smooth as .03
nanometers or as rough as 2 millimeters. Interferometry, coupled with
microcomputers and state of the art software, is a powerful method of rapidly
measuring and characterizing surface microstructure on a variety of surface
types.
Wyko's current principal micro-structure surface measurement equipment
products consist of:
NT 2000. Manufacturers of precision parts and components use the NT 2000
line of microstructure measurement instruments to measure surface roughness,
heights, and shapes. Customers use the Wyko systems because they are
non-contact, offer both areal measurements and high-resolution linear profiles
and provide high-precision, quantitative results with extensive software
analysis.
The NT 2000 incorporates both PSI and VSI to obtain measurement results on
surfaces as smooth as 0.3 nanometers or as rough as 2 millimeters. This
combination of technologies provides the basis for a broad range of applications
in many industries. The semiconductor industry uses these instruments to measure
wafer roughness, CMP polishing pad surfaces and wafer edges.
Manufacturers in semiconductor-related industries use the NT 2000 for
measuring probe card patterns, IC patterns, microsensors, magnetic ink, detector
arrays and micro-machined devices in silicon. As an engineering research and
development instrument, or a failure analysis tool used by quality engineering
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departments, the data generated during measurement may be analyzed by the Wyko
Vision(TM) proprietary software package that includes statistical analysis,
image processing, database options and graphical displays.
Wyko has also developed special packaging and software applications to
extend the NT 2000 technology nationally and internationally to a broad industry
base. Extensions include applications for automotive engine cylinder
measurements and analox roll testing in the print industry. Sales prices of the
NT2000 range from $110,000 to $280,000.
SP3000. For advanced packaging applications, Wyko has developed a
specialized version of the NT 2000 (identified as the SP3000 Bump Measurement
Profiler System) for measuring surface height, bump volume and diameter and bump
coplanarity on silicon wafers and ceramic substrates. This instrument provides
greater accuracy than traditional laser scanning techniques which may miss
peaks, underestimate heights, and are often less determinate in focusing with
coatings. The SP3000 accommodates 4 to 8 inch wafers without any hardware
change. The fully-automated SP3000 integrates a vertical scanning interference
microscope (based on the NT 2000) with precision robotic wafer handling and
Wyko's measurement and analysis software. The SP3000 provides rapid, accurate
and repeatable measurements of surfaces at the bump, die, wafer, substrate and
lot level and reports bump statistics in accordance with pre-configured
computerized instructions on bump location and pass/fail criteria. Measurements
are compared to the customer's drawings, which disclose feature locations to
automatically determine missing, bridged and extra features. Sales prices of the
SP3000 range from $360,000 to $480,000.
HD 2000. The HD 2000 instruments are a line of microstructure measurement
equipment used by manufacturers of mass memory components including
manufacturers of heads, disks, drives and suspensions. Manufacturers of mass
memory components use the HD 2000 to measure surface roughness, heights, and
shape. These customers use the Wyko systems because they are non-contact, fast,
repeatable, and offer both areal measurement and high-resolution linear profiles
and provide high-precision, quantitative results with extension software
analysis specific to this industry. HD 2000 instruments are used for research
and development, production control, process improvement, final parts
inspection, incoming parts inspection, and field failure analysis.
The Wyko proprietary software for the HD 2000 provides a number of
benefits to Wyko customers including immediate feedback on new head design
parameters, reduction in the product design cycle, and a reduction in the time
required to transfer new product designs from engineering to manufacturing.
Sales prices of the HD2000 range from $90,000 to $170,000.
Macro-Contour Measurements. Macro-contour measurement equipment is
designed to obtain measurements of part sizes ranging from less than one inch to
24 inches. Wyko instruments used to measure surface figure are typically of
Fizeau or Twyman-Green interferometry designs and incorporate algorithms for
phase ramping, phase stepping, phase unwrapping, data reduction and analysis.
A primary application for the macro-contour instruments is in the
measurement of hard disk shape in the mass memory market. These instruments
measure the flatness and performance parameters of disks at each stage in the
manufacturing process. Manufacturers use these instruments to measure disks made
of a range of substrates including metals, glass and ceramics.
Wyko macro-contour instruments are used to monitor performance throughout
the production process, including unpolished disk blanks, in-process disks
during polishing, and disks assembled in drives. All macro-contour instruments
include Wyko proprietary software for analyzing shape, runout, velocity and
acceleration. Data may be analyzed graphically in three dimensions,
two-dimensional profiles, and contour plots.
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<PAGE>
Macro-contour measurement equipment is also used in the optics industry to
measure optical surface figure and transmitted wavefront accuracy. Sales prices
of the macro-contour measurement system range from $41,000 to $110,000.
Angle and Distance Measurements. In 1994, Wyko introduced the Static
Attitude Test probe (SAT). In collaboration with its leading customers, Wyko
combined laser triangulation and auto-collimation to produce an instrument to
accurately measure the position and angular orientation of the surface of the
suspensions used in magnetic head production. With the Static Attitude Test
Inspection System ("SATIS"), a sophisticated fixture properly references the
position of the suspension relative to its mounting boss and elevator point
positions. In manual mode, an operator uses a micrometer to set the offset
distance while monitoring the distance on a computer screen. The measurement is
made in less than one fifth of a second. Software provides rapid data analysis.
Sales prices of the SATIS is system range from $55,000 to $100,000.
Industrial Measurement Equipment
The Company'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. Sales of industrial measurement
equipment were approximately $19,447,000, $19,754,000 and $18,345,000 and
accounted for approximately 12%, 17% and 21% of the Company's net sales,
respectively, for the years ended December 31, 1997, 1996 and 1995,
respectively.
X-Ray Fluorescence Thickness Measurement Systems
The Company believes that its 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, the Company believes that the
XRF market will continue to grow and that XRF technology will be brought into
new applications, such as fine-pitch printed circuit board production and the
measurement of multi-layered microelectronic and metal finishing corrosion
resistant coatings. The Company's XRF products incorporate the Company's XPert
software package, which operates in an MS-DOS or Microsoft Windows environment
and offers features including advanced user-friendly interface and sophisticated
statistical data analysis.
The Company's XRF product line includes the following products:
XR Series. The XR Series is an advanced XRF product line designed to
measure plating thickness and composition for the high-end circuit board and
microelectronics interconnect, packaging and data storage applications. The XR
Series has a small diameter beam, automated servo driven staging and laser focus
capability. The software, which operates in the Microsoft Windows environment,
features a real-time video window, a user configurable interface, and point and
shoot sample positioning. Sales prices for the XR Series range from
approximately $30,000 to $175,000.
SEA Series. The SEA Series, produced by Seiko Instruments and marketed in
North America and Europe by the Company, features micro XRF measurement
capabilities for deposition thickness, composition and uniformity of thin film
magnetic pole structures, hard disks and microelectronic devices. It also
provides the ability to analyze the constituent elements of a bulk
sample-elemental analysis. Sales prices of these products range from
approximately $50,000 to $170,000. See "-Strategic Alliances."
10
<PAGE>
Leak Detection/Vacuum Equipment
For over 50 years, the Company (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.
The Company also produces vacuum components, including vacuum pumping stations
and gauges, which are sold primarily to research and university customers.
The Company's leak detection product line includes the following products:
Automatic Portable Leak Detectors. Fully automatic low-cost portable leak
detectors provide gross and fine leak detection for a wide range of
applications, including use in semiconductor cleanrooms. They feature automatic
tuning and calibrating and require minimal operator training. Sales prices of
the portable leak detectors range from approximately $20,000 to $30,000.
Console Leak Detectors. Designed for production use, the Company's line of
console leak detectors feature an automatic monitor display and a unique dual
mass spectrometer for high resolution and accuracy. Sales prices of the console
leak detectors range from approximately $30,000 to $50,000.
ILD-4000 Industrial Leak Detection Systems. The ILD-4000's are industrial
leak detection systems for high production, in-line process testing
applications. Sales prices of the industrial leak detectors range from
approximately $70,000 to $2,000,000.
Magnetic Vacuum Annealing Oven. The MVAO 1000 Magnetic Vacuum Annealing
Oven is designed to heat and magnetically align thin film layers during the
manufacturing process of TFMHs. Sales prices range from $500,000 to $1,500,000.
Strategic Alliances
The Company's overall business strategy includes the formation of
alliances with strategic partners with complementary products or businesses, to
assist the Company in gaining access to new markets, technologies and products.
IBM Agreement. As part of its strategy, The Company is party to agreements
with IBM (as amended, the "IBM Agreement") with respect to the IBM-manufactured
Atomic Force Microscopes ("SXM Products") one of which is in the development
phase. Pursuant to the IBM Agreement, the Company has been appointed exclusive
worldwide sales and marketing representative to market, service and sell the SXM
Products to customers in the semiconductor and data storage industries. With
respect to one type of SXM Product, the IBM Agreement expires in October 1998
and the Company, at its option, may extend the agreement to October 2000. With
respect to the other type of SXM Product, the IBM Agreement expires three years
from the product completion date (which the Company anticipates to be in July
1998) or around July 2001 and the Company, at its option, may extend the
agreement for an additional two years. Pursuant to the IBM Agreement, the
Company has agreed to purchase a minimum number of SXM Products. At December 31,
1997, the Company's aggregate purchase commitment under the IBM Agreement was
approximately $8,000,000.
Pursuant to the IBM Agreement, in the event that IBM (a) discontinues
production of either of the SXM Products, (b) is unable to provide sufficient
production of either of the SXM Products, or (c) fails to
11
<PAGE>
provide required support for either of the SXM Products, IBM has agreed to grant
the Company an exclusive worldwide license to manufacture such SXM Product for
sale to the semiconductor and data storage industries. In such event, the
parties have agreed to negotiate a mutually agreeable royalty and license
agreement.
In the event of such a discontinuance, the Company's ability to
manufacture and distribute the SXM Products on a timely basis could be disrupted
until such time as the Company's production operations for the SXM Products are
established and the parties conclude the royalty and license agreement. IBM is
obligated to ship SXM Products for which orders have been accepted by IBM prior
to the effective date of such discontinuance, and to provide the Company with an
opportunity to purchase additional quantities of SXM Products to meet the
Company's requirements. Under the IBM Agreement, IBM would not be liable for any
lost profits or other consequential damages (including damages based upon
third-party claims) incurred by the Company as a result of IBM's actions (or
inactions) with respect to the IBM Agreement.
Pursuant to the IBM Agreement, IBM may, and has in the past, licensed
intellectual property rights relating to AFM technology to third parties.
Other Strategic Alliances. Since 1968, Ulvac has been the exclusive
distributor of the Company's (and its predecessors) stylus surface profiler
products in Japan and in 1993, Ulvac was appointed as the exclusive distributor
of the SXM Workstation in Japan. The current Distribution Agreement between the
Company and Ulvac was initially entered into on December 15, 1974 and will
remain in effect until either party gives the other 90 days' prior notice of its
intention to terminate such Agreement.
On September 18, 1996, the Company entered into a Distribution Agreement
(the "Schmitt Distribution Agreement") with Schmitt, pursuant to which the
Company was appointed the worldwide exclusive distributor for certain products
of Schmitt (with certain exceptions). Under the Schmitt Distribution Agreement,
the Company will market, sell and service Schmitt's current product line as well
as assist in engineering and automating Schmitt products for volume production
applications. Effective January 1, 1998, the parties entered into a new
agreement with similar terms. The term of the new Schmitt Distribution Agreement
ends on December 31, 1999, and is automatically renewed for consecutive two-year
periods unless either party notifies the other of its intention to terminate the
Agreement six months prior to the expiration of the then current term.
The Company believes that these strategic alliances enable the Company to
continue to access new technologies and introduce innovative products in a
cost-efficient manner and will expand the Company's worldwide customer base.
Future strategic arrangements may take the form of joint ventures or joint
research and development projects, as well as acquisitions or other business
combinations.
Sales and Service
Sales. The Company sells its products worldwide through a combination of
direct (i.e., Veeco-employed) sales representatives and independent
distributors, whose territories do not overlap within a product line. The
Company believes that the size, location and expertise of its sales organization
represents a competitive advantage in the markets it serves. The Company employs
approximately 78 sales professionals in its worldwide sales and marketing
organization, with sales offices located in Tucson, Arizona; San Jose
California; Santa Barbara, California; Santa Clara, California; Tustin,
California; Chelmsford, Massachusetts; Minneapolis, Minnesota; Orangeburg, New
York; Plainview, New York; Ronkonkoma, New York; Dourdan, France; Munich,
Germany; Watford, England; Hong Kong, China; Hsinchu, Taiwan and Tokyo, Japan.
In addition to Ulvac, the Company has entered into exclusive distribution
agreements with several independent distributors throughout the world. None of
these independent distributors accounted for more than 10% of the Company's
sales during the year ended December 31, 1997. See "-Customers."
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<PAGE>
Independent distributors typically carry a full line of the Company's
products within a product line, and some distributors distribute products from
more than one of the Company's product lines. Most distributors also provide
product support and servicing for the Veeco products sold by them.
See Note 8 to the Consolidated Financial Statements for data pertaining to
the Company's net sales to unaffiliated customers by geographic area and for the
Company's United States operations export sales.
Service. The Company recognizes that its customer service organization is
a significant factor in the Company's success. Field service and customer
support are provided on a worldwide basis from eight service centers in the
United States, three in Europe (Dourdan, France; Watford, England; and Munich,
Germany) and six in Asia (Osaka, Japan; Tokyo, Japan; Hong Kong, China; Bangkok,
Thailand; Hsinchu, Taiwan and Penang, Malaysia). In addition, Veeco-authorized
distributors provide service and technical support for the Veeco products they
represent. The large installed base of its process equipment, process metrology
and industrial measurement products combined with the Company's worldwide
support centers and its field service responsiveness provides opportunities for
future sales to new and existing customers.
The Company provides service and support on a warranty, service contract
or on an individual service-call basis. New systems typically carry a one-year
warranty, which includes the replacement of defective parts and associated labor
costs. The Company also offers enhanced warranty coverage and services.
The Company offers several types of service contracts, including
preventive maintenance plans, on-call and on-site service-call plans and other
comprehensive service arrangements, product and application training,
consultation services and a 24-hour hotline service, for certain products.
Approximately 22% of the Company's 1997 net sales were generated from
service and support and the sale of spare parts and components.
Customers
The Company sells its products to many of the world's major data storage,
semiconductor, and flat panel display manufacturers, and to customers in other
industries, research centers and universities. For the year ended December 31,
1997, approximately 65% of the Company's total net sales were to customers in
the data storage industry; approximately 19% were sales to customers in the
semiconductor industry; approximately 2% were sales to customers in the flat
panel display industry; and the remaining approximately 14% of net sales were to
other industry customers and to universities and research centers.
Sales to Seagate, which utilizes products primarily from the Company's
process equipment and process metrology product lines, totaled $29,303,000,
$16,025,000 and $17,369,000 representing 18%, 14% and 20% of the Company's net
sales for the years ended December 31, 1997, 1996 and 1995, respectively.
According to industry reports, Seagate is one of the world's largest disk drive
manufacturers.
Sales to Read-Rite, which utilizes products primarily from the Company's
process equipment and process metrology product lines, totaled $23,076,000,
$16,915,000 and $6,926,000, representing 14%, 15% and 8% of the Company's net
sales for the years ended December 31, 1997, 1996 and 1995, respectively.
Sales to IBM, which utilizes products primarily from the Company's process
equipment and process metrology product lines, totaled $12,165,000, $6,245,000
and $821,000, representing 7.3%, 5.4% and 1.0% of the Company's net sales for
the years ended December 31, 1997, 1996 and 1995, respectively.
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<PAGE>
Excluding sales to Seagate, Read-Rite and IBM, sales to the next five top
customers accounted for 17%, 18% and 21%, in the aggregate, of total net sales
of the Company for the years ended December 31, 1997, 1996 and 1995,
respectively.
End-users of the Company's products in each of the following categories
include:
<TABLE>
<CAPTION>
Flat Panel Micro-machined
Data Storage Semiconductor Display and Optics and Research
------------ ------------- ------- -----------------------
<S> <C> <C> <C>
Applied Magnetics AMD Applied Komatsu 3M
DAS Devices AT & T Casio Computer AMP
Headways Technology CNET/SGS Thomson Dai Nippon Eastman Kodak
Hutchinson Technology Hewlett Packard Print Hughes Missile Systems
IBM Hyundai Dai Nippon Lawrence Livermore
Komag Lucent Technology Screen National Laboratory
Maxtor Micron IBM Japan Lockheed Martin
Mitsumi Mitsubishi Samsung Rockwell
Quantum Motorola Sumitomo Rosemont
Read-Rite NEC Corp. Schott Glass
SAE Magnetics Samsung Toshiba Corp. Siecor
Seagate Siemens Vistakon
Sony Texas Instruments
Storage Technology Toshiba
Yamaha White Oak Semiconductor
</TABLE>
Engineering, Research and Development
The Company believes that continued and timely development of new products
and enhancements to existing products are necessary to maintain its competitive
position and relies on a combination of its own internal expertise and strategic
alliances with other companies to enhance its research and development efforts.
The Company 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. Through its strategic alliances, the Company
has obtained the rights to sell additional products on a timely and cost
efficient basis. See "-Strategic Alliances."
The Company's engineering, research and development programs are organized
by product line; new products have been introduced into each of the Company's
product lines in each of 1997, 1996 and 1995. During 1997, the Company added 11
new products to its product lines: the IBD-350 Ion Beam Deposition System, the
DLC-350V Diamond Like Coating System and Cymetra PVD Physical Vapor Deposition
System to its process equipment product line; the Dektak OSP 1100 Stylus
Profiler, the Dektak SXM-320 Critical Dimension Atomic Force Microscope, the
Dektak DTM 2000 Automated Scatterometer, the Wyko SP3000 Optical Profiler and
the Wyko PTR-2100 Optical Profiler to its process metrology product line; and
the System XR XRF Thickness & Composition Measurement Systems, the System XA XRF
Thickness & Composition Measurement Systems and the MVAO 1000 Magnetic Vacuum
Annealing Oven to its industrial measurement product line.
Engineering research and development expenses of the Company were
approximately $18,436,000, $12,464,000 and $9,157,000, or approximately 11% of
net sales, for each of the years ended December 31, 1997, 1996 and 1995,
respectively. These expenses consisted primarily of salaries, project material
and other product development and enhancement costs.
14
<PAGE>
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. SXM Atomic
Force Microscopes sold by the Company are manufactured by IBM at its Boca Raton,
Florida facility. The laser-based scatterometers sold by the Company are
manufactured by Schmitt in Portland, Oregon.
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 products sold by the Company are obtained from single
sources pursuant to written agreements. The Company relies upon IBM for
manufacture of SXM Atomic Force Microscopes and termination of the Company's
agreement with IBM or other disruptions in the supply of product could have an
adverse effect on the Company's results of operations. In addition, certain of
the components and sub-assemblies included in the Company's other 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 (other than as set forth above), 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
The Company faces substantial competition from established competitors in
each of the markets that it serves, some of which have greater financial,
engineering, manufacturing and marketing resources than the Company. In
addition, to a lesser extent many of the Company's product lines face
competition from alternative technologies, some of which are better established
than those used by the Company in its products. Significant marketing factors
for surface metrology and ion beam systems include system performance, accuracy,
repeatability, ease of use, reliability, cost of ownership, and technical
service and support. The Company believes it competes favorably on the basis of
these factors in each of the Company's served markets for such products. None of
the Company's competitors competes with the Company across the Company's product
lines.
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<PAGE>
The Company's process equipment systems compete with other equipment
system manufacturers such as Commonwealth Scientific Corporation, Hitachi,
Nordiko, CVC and Balders.
In the market for process metrology systems, the Company competes with
system manufacturers such as Digital, Hitachi, Ltd., KLA-Tencor Instruments,
Applied Materials - OPAL and Zygo Corporation.
In the XRF market, the Company competes with other manufacturers of XRF
products, including CMI International and Fischer, Inc. In the leak
detector/vacuum equipment market, the Company competes primarily with Varian
Associates, Inc., Leybold A.G. and Alcatel, NV.
Patents, Trademarks and Other Intellectual Property
The Company's success depends in part on its proprietary technology.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
The Company has more than 50 patents covering its various products which
the Company believes provides it with a competitive advantage. The Company has a
policy of seeking patents when appropriate on inventions concerning new products
and improvements as part of its on-going research, development and manufacturing
activities. The Company believes that there are no patents which are critical to
the Company's operations, and that the success of its business depends primarily
on the technical expertise, innovation, creativity and marketing and
distribution ability of its employees.
The Company 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 the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
The Company is the licensee of certain intellectual property owned by IBM
which is associated with the SXM Workstation, including "SXM," which is a
registered trademark owned by IBM. See "-Strategic Alliances."
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. The CAO declared that Lambda Electronics Inc.
("Lambda"), the Company and certain other parties had caused or permitted
certain hazardous waste to be discharged into waters of the State at the Site
where 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; 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
16
<PAGE>
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. The Company's consultants have recommended that additional
groundwater assessment activities and the preparation of a groundwater
corrective action workplan, as required by the CAO, should await the results of
groundwater testing conducted by other parties near the Site. Until that time,
the Company (with the acquiescence of the RWQCB) is monitoring groundwater
contamination levels at the Site on a semi-annual basis, and is reviewing the
results of third party groundwater assessment and monitoring activities being
conducted in the vicinity of the Site. The Company cannot predict the extent of
groundwater contamination and cannot determine at this time whether any or all
of the groundwater contamination may be attributable to the activities of
neighboring parties. The Company may be held responsible for the costs of
remediating any groundwater contamination under or in the vicinity of the Site
but the Company cannot predict the potential scope of such costs at this time.
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.
Employees
At December 31, 1997, the Company had approximately 595 full time
employees, comprised of 171 in manufacturing and testing, 78 in sales and
marketing, 95 in service and support, 173 in engineering, research and
development, and 78 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.
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<PAGE>
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. However, Mr. Walter Scherr, a
director of the Company, is party to a consulting agreement with the Company.
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 four other sites in the United
States, which include a 100,000 square foot facility in Orangeburg, New York,
owned by the Company, 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 and a 25,000 square foot facility in Santa Barbara, California,
leased by the Company. The Tucson facility is subject to a mortgage, which at
December 31, 1997 had an outstanding balance of $2,563,000. The Ronkonkoma and
Santa Barbara leases expire in 2003.
The Company also leases facilities located in San Jose, California; Santa
Clara, California; Tustin, California; and Chelmsford, Massachusetts 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;
Munich, Germany; Watford, England; Hong Kong, China; Hsinchu, Taiwan and Tokyo,
Japan.
The Company believes that it will be able to either renew the lease for
the Sloan Building on satisfactory terms or find a suitable substitute for such
facility. Based on the foregoing, 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.
Wyko, a subsidiary of the Company, is a defendant in a patent infringement
lawsuit filed in June 1988 in the United States District Court for the District
of Arizona, titled Zygo Corporation v. Wyko Corporation (Number CIV 88-454 TUC
JLQ). The suit alleged that certain Wyko products infringed Zygo's patents, and
sought monetary damages and an injunction. The case was decided adversely to
Wyko in June 1994. Wyko appealed the decision which was partially reversed by a
decision of the Court of Appeals, Zygo Corp. v. Wyko Corp., 79 F.3d 1563 (Fed.
Cir. 1996), with an opinion determining that only certain Wyko products made in
1988 and 1989 infringed a patent. The case has been remanded to the District
Court for a redetermination of damages. Wyko has been ordered to establish and
fund an escrow account in the amount of $1,500,000 until a final decision is
reached. The Company believes this escrow amount exceeds the amount sought in
final recovery by the plaintiff.
See "Business - Environmental Matters" for a description of certain
environmental matters involving the Company. Except as described herein and
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.
18
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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 1997 and 1996 high and low closing prices are as follows:
1997 1996
---------------------------------------------------
High Low High Low
---- --- ---- ---
First Quarter $31.38 $21.88 $15.63 $11.13
Second Quarter 41.50 25.75 19.25 12.50
Third Quarter 72.50 38.50 15.00 9.88
Fourth Quarter 59.50 19.19 22.00 11.38
On March 2, 1998, the closing price for the Company's Common Stock on the
NASDAQ National Market was $32.31. As of March 2, 1998, the Company had
approximately 155 shareholders of record.
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
optionholders 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. See "Business- Recent Developments."
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.
19
<PAGE>
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.
<TABLE>
<CAPTION>
(In thousands, except per share data)
--------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data:
Net sales $165,408 $115,042 $85,825 $60,031 $52,237
Cost of sales 88,177 62,201 44,666 33,674 29,563
--------------------------------------------------------------------------
Gross profit 77,231 52,841 41,159 26,357 22,674
Cost and expenses 51,597 36,166 29,768 21,574 20,863
Merger expenses 2,250 - - - -
Write-off of purchased in-process
technology 4,200 - - - -
Legal fees and claims related to
litigation - - - 2,051 995
--------------------------------------------------------------------------
Operating income 19,184 16,675 11,391 2,732 816
Interest (income) expense, net (525) (798) (152) 2,999 2,667
--------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary item 19,709 17,473 11,543 (267) (1,851)
Income tax provision (benefit) 7,426 6,638 2,306 (708) (20)
--------------------------------------------------------------------------
Income (loss) before extraordinary
item 12,283 10,835 9,237 441 (1,831)
Extraordinary (loss), net of $355
tax benefit - - - (679) -
--------------------------------------------------------------------------
Net income (loss) $12,283 $10,835 $ 9,237 $ (238) $(1,831)
==========================================================================
Earnings per share:
Income (loss) before extraordinary
item $ 1.39 $ 1.25 $ 1.13 $ 0.09 $ (0.39)
Extraordinary (loss) (0.14)
--------------------------------------------------------------------------
Net income (loss) $ 1.39 $ 1.25 $ 1.13 $(0.05) $( 0.39)
==========================================================================
Diluted earnings per share:
Income (loss) before extraordinary
item $ 1.32 $ 1.22 $ 1.09 $ 0.08 $ (0.39)
Extraordinary (loss) (0.12)
--------------------------------------------------------------------------
Net income (loss) $ 1.32 $ 1.22 $ 1.09 $(0.04) $(0.39)
==========================================================================
Weighted average shares
outstanding 8,808 8,667 8,166 4,995 4,738
==========================================================================
Diluted weighted average
shares outstanding 9,324 8,906 8,484 5,472 4,738
==========================================================================
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents $18,505 $23,465 $18,525 $ 3,425 $ 1,534
Working capital 54,386 49,361 39,307 16,683 10,273
Excess of cost over net assets
acquired, net 4,318 4,448 4,579 4,710 4,840
Total assets 127,739 96,797 79,610 50,816 43,221
Long-term debt (including current
installments) 2,563 2,669 2,766 2,839 27,734
Shareholders' equity 81,782 66,270 55,254 31,347 3,094
</TABLE>
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
The following table sets forth, for the periods indicated, the
relationship (in percentages) of selected items of the Company's consolidated
statements of income to its total net sales:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 53.3 54.1 52.0
------------------------------------
Gross profit 46.7 45.9 48.0
Operating expenses
Research and development 11.1 10.8 10.7
Selling, general and administrative 20.1 20.6 23.9
Amortization 0.2 0.2 0.2
Other, net (0.2) (0.2) (0.1)
Merger expenses 1.4 - -
Write-off of purchased in-process technology 2.5 - -
------------------------------------
Total operating expenses 35.1 31.4 34.7
------------------------------------
Operating income 11.6 14.5 13.3
Interest income, net 0.3 0.7 0.1
------------------------------------
Income before income taxes 11.9 15.2 13.4
Income tax provision 4.5 5.8 2.6
------------------------------------
Net income 7.4% 9.4% 10.8%
====================================
</TABLE>
Years Ended December 31, 1997 and 1996
Net sales were $165,408,000 for the year ended December 31, 1997
representing an increase of approximately $50,366,000, or 43.8%, when compared
to the year ended December 31, 1996. The increase reflects growth in the
Company's process equipment and process metrology product lines. Sales in the
U.S.
21
<PAGE>
increased approximately 70%, while international sales included a 24% increase
in Asia Pacific, a 27% increase in Europe and a 4% decrease in Japan.
The Company received approximately $164,000,000 of orders in 1997 compared
to approximately $135,700,000 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 .99 to 1
for the year ended December 31, 1997.
Sales of process equipment increased by 59% to approximately $84,530,000
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 process
metrology products increased by 46% to approximately $61,431,000 in 1997
compared to 1996 principally as a result of increased sales of Wyko optical
interferometers, Dektak stylus profilers and scatterometers and atomic force
microscopes. 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 in the semiconductor and
data storage industries of new product introductions. Atomic force microscope
sales increased 15% reflecting increased demand for advanced semiconductor
applications. Sales of industrial measurement products were approximately
$19,447,000 in 1997 and remained relatively flat compared to 1996.
Gross profit increased to approximately $77,231,000, or 46.7% of net sales
for 1997, compared to $52,841,000, or 45.9% of net sales for 1996. This increase
in gross margin is principally attributable to increased sales of process
equipment and process metrology products which yield higher gross margin than
industrial measurement products.
Research and development expense increased by approximately $5,972,000 to
approximately $18,436,000, or 11.1% of net sales in 1997 compared to
approximately $12,464,000 or 10.8% of sales in 1996, due to increased R&D
investment in process equipment and process metrology. Increased R&D investment
was made in process equipment in PVD and in IBD. In process 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.
Selling, general and administrative expenses increased by approximately
$9,597,000 to 20.1% of net sales in 1997 from 20.6% for 1996. Selling expense
increased $7,103,000, principally comprised of sales commissions related to
higher sales volume, increased compensation and travel expense as a result of
additional sales and service personnel required to support the Company'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 $2,250,000, consisting of
investment banking, legal and other transaction costs. Operating expenses in
1997 also include the effect of a $4,200,000 charge in connection with the
acquisition of the PVD business pertaining to data storage of Materials Research
Corporation representing the write-off of the fair values of in-process
engineering and development projects that have not reached technological
feasibility and have no future alternative uses.
22
<PAGE>
Income taxes amounted to $7,426,000 or 37.7% of income before income taxes
for 1997 as compared to $6,638,000 or 38.0% of income before income taxes for
1996.
Years Ended December 31, 1996 and 1995
Net sales were $115,042,000 for the year ended December 31, 1996
representing an increase of approximately $29,217,000, or 34.0%, for the fiscal
year ended December 31, 1996 as compared to 1995. The increase reflects growth
in all three of the Company's product lines - process equipment, process
metrology and industrial measurement. Sales in the U.S. increased approximately
34%, while international sales included a 50% increase in Asia Pacific and a 59%
increase in Japan and a 2% decrease in Europe.
Sales of process equipment increased by 60.3% to approximately $53,198,000
in 1996 compared to 1995. Of this increase, approximately 55.9% is due to growth
in volume, with the balance of the increase attributable to an approximately
27.7% higher average selling price of a system resulting from a shift in
customer demand to multi-process modules with increased automation. This growth
was principally driven by increased demand for mass memory storage due to the
capacity ramp up in both magnetoresitive and inductive thin film magnetic heads
required in high density hard drives. Sales of process metrology products
increased by 22.7% to approximately $42,090,000 in 1996 compared to 1995
principally as a result of increased sales of Wyko products for mass memory,
semiconductor and microelectronics and SXM Workstations for semiconductor
applications. Sales of industrial measurement products increased by 7.7% to
approximately $19,754,000 in 1996 compared to 1995 as a result of the
introduction of new products in the leak detection product line.
The Company received approximately $135,700,000 of orders in 1996 compared
to approximately $99,300,000 million of orders in 1995 for a 37% increase. This
resulted in a book to bill ratio of 1.18 to 1 for 1996.
Gross profit increased to approximately $52,841,000, or 45.9% of net sales
for 1996, compared to $41,159,000, or 48.0% of net sales for 1995. The decline
in gross margin percentage was principally due to product and geographic mix
changes in process metrology and industrial measurement products lines.
Research and development expense increased by approximately $3,307,000 to
approximately $12,464,000, or 10.8% of net sales in 1996 compared to
approximately $9,157,000 or 10.7% of sales in 1995, as the Company increased its
R&D investment in each of its product lines with particular emphasis in process
equipment.
Selling, general and administrative expenses increased by approximately
$3,323,000 in 1996, but decreased as a percentage of sales to 20.6% for 1996
from 23.9% for 1995. Selling expense increased $2,857,000 principally comprised
of sales commissions related to higher sales volume, as well as increased
compensation and travel expense as a result of additional sales and service
personnel required to support the Company's growth.
Income taxes amounted to $6,638,000 or 38.0% of income before income taxes
for 1996 as compared to $2,306,000 or 20.0% of income before income taxes for
1995. The Company's effective tax rate in 1995 was lower as a result of the
Company recognizing previously unrecognized deferred tax assets.
Liquidity and Capital Resources
The Company generated approximately $6,813,000 of cash from operations in
1997 compared to approximately $8,669,000 and $2,015,000 in 1996 and 1995,
respectively, primarily as a result of (i) net
23
<PAGE>
income in 1997 (plus non-cash charges for depreciation and amortization and the
write-off of purchased in-process technology) of $18,132,000 plus (ii) increases
of accounts payable, accrued expenses and other current liabilities, income
taxes payable and other operating assets and liabilities of $8,267,000,
$573,000, $2,457,000 and $816,000, respectively. These items were partially
offset by an increase in accounts receivable, inventories and deferred income
taxes of $9,533,000, $12,190,000 and $1,709,000, respectively. Accounts
receivable, inventory, and accounts payable increased primarily as a result of
increased volume. Cash from operations in 1996 resulted from (i) net income in
1996 (plus non-cash charges for depreciation and amortization) of $12,704,000
plus (ii) increases of accounts payable, accrued expenses, income taxes payable
and changes in operating assets and liabilities of $2,888,000, $2,791,000,
$508,000 and $929,000, respectively. These items were partially offset by
increases in accounts receivable, inventories and deferred income taxes of
$2,664,000, $7,592,000, and $895,000, respectively. The increases in accounts
receivable, inventories, accounts payable and accrued expenses are attributable
to the increased 1996 sales volume.
Working capital totaled approximately $54,386,000 at December 31, 1997,
compared to approximately $49,361,000 at December 31, 1996.
The Company used $13,481,000 for investing activities in 1997 compared to
$3,883,000 and $1,155,000 in 1996 and 1995, respectively. Cash used for
investing activities in 1997 primarily related to the PVD acquisition
($4,375,000) and capital expenditures ($9,106,000). Capital expenditures in 1997
were principally for manufacturing facilities, laboratory and test equipment and
business system upgrades. Cash used for investing activities in 1996 and 1995
were for capital expenditures. The Company expects capital expenditures in 1998
will remain flat when compared to 1997.
The Company generated $1,917,000 of cash from financing activities in 1997
compared to a use of $7,000 in 1996 and generation of $14,384,000 of cash from
investing activities in 1995. Cash generated in 1997 primarily resulted from the
exercise of stock options.
The Company has a $30,000,000 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 3/4% 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, 1997 there were
no amounts outstanding under the Credit Facility. The Credit Facility is secured
by substantially all of the Company's personal property.
Pursuant to sales and marketing agreements with IBM, the Company has
agreed to purchase a minimum number of IBM-manufactured Atomic Force Microscopes
("SXM Products"), one of which is in the development phase, for sale by the
Company to customers in the semiconductor and data storage industries. As of
December 31, 1997, the Company's aggregate purchase commitment for SXM Products
under these agreements was approximately $8,000,000. See "Business - Strategic
Alliances".
The Company believes that the cash generated from operations, funds
available from the Credit Facility described above and existing cash balances
will be sufficient to meet the Company's projected working capital and other
cash flow requirements through 1998.
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.
24
<PAGE>
Cyclicality of Data Storage and Semiconductor Industries. 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 over-capacity. Recently, the data
storage industry has been plagued by inventory oversupply and poor operating
results and the Company's data storage is anticipating a weak first half of
1998. The Company also sells product to companies located throughout the world.
International markets provide the Company with growth opportunities along with
additional risk. Many Pacific Rim countries are currently experiencing economic
difficulties, which could result in reduced demand for the Company's products
from customers in this area. The Company may experience substantial
period-to-period fluctuations in future operating results due to general
industry conditions or events occurring in the general economy.
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. The
Company's ability to remain competitive will depend in part upon its ability to
develop in a timely and cost effective manner new and enhanced systems at
competitive prices. In addition, new product introductions or enhancements by
the Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Increased competitive pressure
could also lead to intensified price competition resulting in lower margins,
which could materially adversely affect the Company's business, financial
condition and results of operations. The success of the Company in developing,
introducing and selling new and enhanced systems depends upon a variety of
factors, including product selections, timely and efficient completion of
product design and development, timely and efficient implementation of
manufacturing processes, effective sales, service and marketing and 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. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products or
in enhancing existing products.
Limited Sales Backlog. The Company derives a substantial portion of its
sales from the sale of a relatively small number of systems which typically
range in purchase price from approximately $750,000 to $3,500,000. As a result,
the timing of recognition of revenue for a single transaction could have a
material adverse affect on the Company's sales and operating results. The
Company's backlog at the beginning of a quarter typically does not include all
sales required to achieve the Company's sales objective for that quarter.
Moreover, all customer purchase orders are subject to cancellation or
rescheduling by the customer 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 the Company obtaining orders for systems to be shipped in the
same quarter that the order is received. The Company's business and financial
results for a particular period could be materially 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. 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, the Company 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, the Company expects to experience difficulty
in selling to a particular customer for a significant period of time if that
customer selects a competitor's capital equipment. The Company expects its
competitors to continue to develop enhancements to and future generations of
competitive products that may offer improved price or performance features.
New product introductions and enhancements by the Company's competitors could
cause a significant decline in sales or loss of market
25
<PAGE>
acceptance of the Company's systems in addition to intense price competition or
otherwise make the Company's systems or technology obsolete or noncompetitive.
Increased competitive pressure could lead to reduced demand and lower prices for
the Company's products, thereby materially adversely affecting the Company's
operating results. There can be no assurance that the Company will be able to
compete successfully in the future.
Year 2000. The Company has determined that it will need to modify or
replace portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company has
recently installed a new business information system for its process equipment
and industrial measurement product lines, which is year 2000 compliant. The cost
of such system was capitalized. The Company is in the process of assessing the
extent of upgrades or modifications required for its process metrology product
lines. The Company does not believe it has significant exposure to year 2000
with significant suppliers, large customers and financial institutions. The
Company does not expect the cost of the year 2000 initiatives to be material to
the Company's consolidated results of operations or financial position.
Foreign Operations. Approximately 8.3%, 10.5%, and 14.9% of the Company's
net sales for the years ended December 31, 1997, 1996 and 1995, respectively,
were derived from sales denominated in foreign currencies. The effect of foreign
currency exchange rate fluctuations on such revenues is largely offset to the
extent expenses of the Company's international operations are incurred and paid
for in the same currencies as those of its revenues.
The Company has mitigated its exposure to foreign currency transaction
adjustments by substantially offsetting assets denominated in foreign currencies
with foreign currency liabilities. The Company generally has not engaged in
foreign currency hedging transactions. Foreign currency translation adjustments
of $631,000, $104,000 and ($128,000) were charged (credited) to Shareholder's
Equity for the years ended December 31, 1997, 1996 and 1995, respectively. The
aggregate exchange gains and (losses) included in determining consolidated
results of operations were ($34,000), ($153,000), and $100,000 for the years
ended December 31, 1997, 1996 and 1995 respectively.
Dependence on Microelectronics Industry. The Company's business depends in
large part upon the capital expenditures of data storage, semiconductor and flat
panel display manufacturers which accounted for the following percentages of the
Company's net sales:
Years Ended December 31,
1997 1996 1995
------------------------------------------
Data storage 65% 56% 42%
Semiconductor 19 26 32
Flat panel display 2 3 5
The Company cannot predict whether the growth experienced in the
microelectronics industry in the recent past will continue.
26
<PAGE>
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 1997 and 1996. 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.
Quarterly Statements of Income
(In thousands, except for per share data)
<TABLE>
<CAPTION>
Fiscal 1997 Fiscal 1996
---------------------------------------------- -----------------------------------------------
Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $37,754 $41,916 $42,836 $42,902 $165,408 $24,427 $29,850 $28,505 $32,260 $ 115,042
Cost of sales 20,245 21,913 22,644 23,375 88,177 13,074 15,703 15,186 18,238 62,201
---------------------------------------------- -----------------------------------------------
Gross profit 17,509 20,003 20,192 19,527 77,231 11,353 14,147 13,319 14,022 52,841
Costs and
expenses 10,937 12,668 12,783 15,209 51,597 8,047 9,434 9,073 9,612 36,166
Merger expenses -- -- 2,250 -- 2,250 -- -- -- -- --
Write-off of
Purchased in-
process
technology -- 4,200 -- -- 4,200 -- -- -- -- --
---------------------------------------------- -----------------------------------------------
Operating income 6,572 3,135 5,159 4,318 19,184 3,306 4,713 4,246 4,410 16,675
Interest income 89 69 258 109 525 168 126 341 163 798
---------------------------------------------- -----------------------------------------------
Income before
income taxes 6,661 3,204 5,417 4,427 19,709 3,474 4,839 4,587 4,573 17,473
Income tax
provision 2,554 1,229 2,005 1,638 7,426 1,302 1,868 1,729 1,739 6,638
---------------------------------------------- -----------------------------------------------
Net income $ 4,107 $ 1,975 $3,412 $ 2,789 $12,283 $2,172 $ 2,971 $2,858 $2,834 $10,835
============================================== ===============================================
Earnings per
share:
Net income per
common share $.47 $.23 $.39 $.31 $1.39 $.25 $.34 $.33 $.33 $1.25
Diluted net
income per
common share $.45 $.21 $.36 $.30 $1.32 $.24 $.33 $.32 $.32 $1.22
Weighted average
shares
outstanding 8,724 8,768 8,848 8,874 8,808 8,666 8,679 8,686 8,695 8,667
============================================== ===============================================
Diluted weighted
average shares
outstanding 9,150 9,264 9,465 9,397 9,324 8,893 8,958 8,860 8,972 8,906
============================================== ===============================================
</TABLE>
A variety of factors influence the level of the Company's net sales in a
particular quarter, including specific 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
27
<PAGE>
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.
28
<PAGE>
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.
29
<PAGE>
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 Securityholders dated February 28, 1998. (10)
2.2 Agreement and Plan of Merger among Veeco Instruments Inc., Veeco
Acquisition Corp. and Wyko Corporation and its Securityholders dated
April 28, 1997. (7)
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. (8)
3.2 Form of Amended and Restated By-Laws of the Company. (1)
4.1 Form of Certificate for Common Stock. (1)
10.1 Lease, dated July 29, 1991 between Sloan Technology Corporation, a
California corporation, and Sloan Technology Corporation, a Delaware
corporation. (1)
10.2 OEM Agreement for Acquisition of IBM Products, dated July 20, 1993 by
and between IBM and the Company. (2)
10.3 Modification to OEM Agreement for Acquisition of IBM Products, dated
July 20, 1993, by and between IBM and the Company. (2)
10.4 UPA Technology Division, Veeco Instruments Inc. and Roentgenanalytik
Messtechnik GmbH XRF Development Program Agreement, dated December 8,
1992, between Veeco-UPA Technology Division and Roentgenanalytik
Messtechnik GmbH. (2)
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)
30
<PAGE>
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)
10.22 OEM Agreement for acquisition of IBM products, dated October 12, 1995,
between International Business Machines Corporation and Veeco
Instruments Inc. (5)
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. (6)
10.25 Credit Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (6)
10.26 Security Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (6)
10.27 Guarantee Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (6)
10.28 Guarantor's Security Agreement dated July 31, 1996 among Sloan
Technology Corporation, Fleet Bank N.A. and The Chase Manhattan Bank.
(6)
10.29 The Pledge Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (6)
10.30 The Patent and Trademark Security Agreement dated July 31, 1996 among
the Registrant, Fleet Bank N.A. and The Chase Manhattan Bank. (6)
10.31 Attachment 2 to the OEM Agreement for Acquisition of IBM Products
between International Business Machines Corporation and Veeco
Instruments Inc. dated as of May 13, 1997 (confidential treatment has
been granted for certain portions; confidential portions have been
filed separately with the Securities and Exchange Commission). (9)
10.32 Lease Extension dated as of November 1, 1997 by and between J. Anthony
Wilson and Veeco Instruments Inc.*
10.33 Letter Agreement, dated December 2, 1997 between Veeco Instruments Inc.
and Dr. Donald Kania. *
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Ernst & Young LLP. *
31
<PAGE>
27.1 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1997.*
27.2 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1996 (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 September 30, 1995 and incorporated
herein by reference; confidential treatment granted.
(6) 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.
(7) 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.
(8) 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.
(9) Incorporated by reference from the Registrant's Current Report on Form
8-K dated July 2, 1997.
(10) Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 9, 1998.
(b) Reports on Form 8-K.
The Registrant filed a Form 8-K on February 13, 1998 reporting
that the Registrant entered into an agreement in principle with
Digital Instruments Inc., ("Digital"), pursuant to which Digital
agreed to merge with and into the Registrant and reference was
made to the press release dated February 9, 1998 announcing the
execution of such.
The Registrant filed a Form 8-K on March 9, 1998 reporting that
the Registrant signed a definitive merger agreement with Digital
and reference was made to the press release dated March 2, 1998
announcing the execution of such.
(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.
32
<PAGE>
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward H. Braun Chairman, Chief Executive Officer, March 27, 1998
- ------------------------------------ President and Director
Edward H. Braun (principal executive officer)
/s/ John F. Rein, Jr. Vice President-Finance, Chief March 27, 1998
- ------------------------------------ Financial Officer, Secretary and
John F. Rein, Jr. Treasurer
(principal financial officer)
/s/ John P. Kiernan Corporate Controller March 27, 1998
- ------------------------------------ (principal accounting officer)
John P. Kiernan
/s/ Walter J. Scherr Director March 27, 1998
- ------------------------------------
Walter J. Scherr
/s/ Richard A. D'Amore Director March 27, 1998
- ------------------------------------
Richard A. D'Amore
/s/ Paul R. Low Director March 27, 1998
- ------------------------------------
Paul R. Low
/s/ Joel A. Elftmann Director March 27, 1998
- ------------------------------------
Joel A. Elftmann
Director March 27, 1998
- ------------------------------------
James Wyant
</TABLE>
<PAGE>
Form 10-K-Item 14(a)(1) and (2)
Veeco Instruments Inc. and Subsidiaries
Index to Consolidated Financial Statements
and Financial Statement Schedule
The following consolidated financial statements of Veeco Instruments Inc. and
subsidiaries are included in Item 8:
Report of Independent Auditors........................................ F- 2
Consolidated Balance Sheets at December 31, 1997 and 1996............. F- 3
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995.................................... F- 4
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1997, 1996 and 1995.................... F- 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.................................... F- 6
Notes to Consolidated Financial Statements............................ F- 7
The following consolidated financial statement schedule of Veeco Instruments
Inc. and subsidiaries is included in Item 14(a):
Schedule II--Valuation and Qualifying Accounts........................ F-24
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE>
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 as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1997. Our audits
also included the financial statement schedule in the Index at Item 14(a). 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 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 provide a reasonable basis for our opinion.
In our opinion, 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 9, 1998
F-2
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 18,505 $23,465
Accounts and trade notes receivable, less allowance for doubtful
accounts of $755 in 1997 and $553 in 1996 33,265 24,114
Inventories 39,077 25,351
Prepaid expenses and other current assets 1,434 1,229
Deferred income taxes 4,602 2,448
-----------------------------
Total current assets 96,883 76,607
Property, plant and equipment at cost, net 21,455 13,087
Excess of cost over net assets acquired, less accumulated amortization
of $1,040 in 1997 and $910 in 1996 4,318 4,448
Other assets 5,083 2,655
-----------------------------
Total assets $127,739 $96,797
=============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 20,093 $11,875
Accrued expenses 18,290 13,719
Income taxes payable 3,999 1,546
Current portion of long-term debt 115 106
-----------------------------
Total current liabilities 42,497 27,246
Deferred income taxes 702 257
Long-term debt 2,448 2,563
Other liabilities 310 461
Shareholders' equity:
Common stock, 25,000,000 and 9,500,000 shares authorized; 8,891,994 and
8,699,831 shares issued and outstanding at December 31, 1997
and 1996, respectively 89 87
Additional paid-in capital 51,469 47,611
Retained earnings 30,190 17,907
Cumulative translation adjustment 34 665
-----------------------------
Total shareholders' equity 81,782 66,270
-----------------------------
Total liabilities and shareholders' equity $127,739 $96,797
=============================
</TABLE>
See accompanying notes.
F-3
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C>
Net sales $ 165,408 $ 115,042 $ 85,825
Cost of sales 88,177 62,201 44,666
-----------------------------------------------------
Gross profit 77,231 52,841 41,159
Costs and expenses:
Research and development expense 18,436 12,464 9,157
Selling, general and administrative expense 33,319 23,722 20,399
Amortization expense 275 237 202
Other--net (433) (257) 10
Merger expenses 2,250 - -
Write-off of purchased in-process technology 4,200 - -
-----------------------------------------------------
58,047 36,166 29,768
-----------------------------------------------------
Operating income 19,184 16,675 11,391
Interest income, net 525 798 152
-----------------------------------------------------
Income before income taxes 19,709 17,473 11,543
Income tax provision 7,426 6,638 2,306
-----------------------------------------------------
Net income $ 12,283 $ 10,835 $ 9,237
=====================================================
Earnings per share:
Net income per common share $1.39 $1.25 $1.13
Diluted net income per common share $1.32 $1.22 $1.09
Weighted average shares outstanding 8,808,000 8,667,000 8,166,000
Diluted weighted average shares outstanding 9,324,000 8,906,000 8,484,000
</TABLE>
See accompanying notes.
F-4
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional Retained Cumulative
Common Stock Paid-in Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,812,527 $ 79 $32,792 $(2,165) $ 641 $31,347
Exercise of stock options 38,497 - 82 82
Net proceeds from public
offering 800,000 8 14,452 14,460
Translation adjustment 128 128
Net income 9,237 9,237
-------------------------------------------------------------------------
Balance at December 31, 1995 8,651,024 87 47,326 7,072 769 55,254
Exercise of stock options and
stock issuances under
stock purchase plan 48,807 - 285 - - 285
Translation adjustment - - - - (104) (104)
Net income - - - 10,835 - 10,835
-------------------------------------------------------------------------
Balance at December 31, 1996 8,699,831 87 47,611 17,907 665 66,270
Exercise of stock options and
stock issuances under
stock purchase plan 192,163 2 2,068 - - 2,070
Translation adjustment - - - - (631) (631)
Stock option income tax
benefit - - 1,790 - - 1,790
Net income - - - 12,283 - 12,283
-------------------------------------------------------------------------
Balance at December 31, 1997 8,891,994 $ 89 $51,469 $30,190 $ 34 $81,782
=========================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
----------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 12,283 $ 10,835 $ 9,237
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,649 1,869 1,490
Deferred income taxes (1,709) (895) (46)
Write-off of purchased in-process technology 4,200 - -
Changes in operating assets and liabilities:
Accounts receivable (9,533) (2,664) (7,235)
Inventories (12,190) (7,592) (5,250)
Accounts payable 8,267 2,888 1,402
Accrued expenses and other current liabilities 573 2,791 2,779
Income taxes payable 2,457 508 714
Other, net 816 929 (1,076)
----------------------------------------------
Net cash provided by operating activities 6,813 8,669 2,015
----------------------------------------------
Investing activities
Capital expenditures, net (9,106) (3,883) (1,155)
Net assets of business acquired (4,375) - -
----------------------------------------------
Net cash used in investing activities (13,481) (3,883) (1,155)
----------------------------------------------
Financing activities
Net proceeds from public stock offering - - 14,460
Exercise of stock options and issuance of stock under
stock purchase plan 2,070 285 82
Long-term debt repayments (153) (97) (34)
Other - (195) (124)
----------------------------------------------
Net cash provided by (used in) financing activities 1,917 (7) 14,384
----------------------------------------------
Effect of exchange rate changes on cash and cash equivalents (209) 161 (144)
----------------------------------------------
Net (decrease) increase in cash and cash equivalents (4,960) 4,940 15,100
Cash and cash equivalents at beginning of period 23,465 18,525 3,425
----------------------------------------------
Cash and cash equivalents at end of period $ 18,505 $ 23,465 $ 18,525
==============================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997
1. Business Combinations and Basis of Presentation
On July 25, 1997, a wholly-owned subsidiary of Veeco Instruments Inc. ("Veeco"
or the "Company") 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 and, accordingly, historical financial data has been
restated to include Wyko data. 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 combination and the post merger
amounts through December 31, 1997:
Year ended December 31
1997 1996 1995
----------------------------------------
Revenues:
Veeco (pre-merger) $ 71,211 $ 96,832 $72,359
Wyko 18,285 18,210 13,466
Veeco (post-merger) 75,912 - -
----------------------------------------
Combined $165,408 $115,042 $85,825
========================================
Net income:
Veeco (pre-merger) $ 2,723 $ 8,038 $ 6,792
Wyko 3,472 2,797 2,445
Veeco (post-merger) 6,088 - -
----------------------------------------
Combined $ 12,283 $ 10,835 $ 9,237
========================================
On April 10, 1997, Veeco acquired from Materials Research Corporation, certain
assets of the PVD ("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 have been expensed as of the date of
acquisition.
F-7
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies
Organization
Veeco designs, manufactures, markets and services a broad line of precision
process equipment and process metrology systems used to manufacture and test
microelectronic products for the data storage and semiconductor industries. The
company sells its products worldwide to many of the leading semiconductor and
data storage manufacturers. In addition, the Company sells its products to
companies in the flat panel display and high frequency device industries, as
well as to other industries, 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.
Cash Flows
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash equivalents. Interest paid during
1997, 1996 and 1995 was approximately $445,000, $301,000 and, $393,000,
respectively. Income taxes paid in 1997, 1996 and 1995 was approximately
$5,186,000, $6,403,000 and $956,000, respectively.
F-8
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
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. Amortization of equipment recorded under capital lease obligations is
included in depreciation of property, plant and equipment.
Intangible Assets
Excess of cost of investment over net assets of business acquired is being
amortized on a straight-line basis over 40 years. Other intangible assets,
included within other assets on the balance sheet, consisting principally of
purchased technology, patents, software licenses and deferred finance costs of
$3,300,000 and $892,000 at December 31, 1997 and 1996, respectively, are net of
accumulated amortization of $1,025,000 and $577,000. 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.
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.
F-9
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
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 $3,280,000, $2,264,000 and $1,433,000 in advertising costs during 1997,
1996 and 1995, respectively.
Stock Based Compensation
The Company continues to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its stock-based compensation plans. 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
approximates fair value due to their short maturities.
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, 1997 and 1996 approximates fair value.
F-10
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Significant Accounting Policies (continued)
Earnings Per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, "Earnings per Share." Statement No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement No. 128
requirements.
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares
outstanding 8,808,000 8,667,000 8,166,000
Dilutive effect of stock options 516,000 239,000 318,000
----------------------------------------------------------
Diluted weighted average shares
outstanding 9,324,000 8,906,000 8,484,000
==========================================================
</TABLE>
Recent Accounting Pronouncements
In June 1997, the FASB issued Statements No. 130 "Reporting Comprehensive
Income," and No. 131 "Disclosures About Segments of an Enterprise and Related
Information." These statements are effective for fiscal years commencing after
December 15, 1997. The Company will be required to comply with the provisions of
these statements in fiscal 1998. The Company has not assessed the effect that
these new standards will have on its consolidated financial statements and/or
disclosures.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform with the 1997 presentation.
F-11
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Balance Sheet Information
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------
<S> <C> <C>
Inventories:
Raw materials $21,671,000 $11,159,000
Work in process 7,253,000 6,406,000
Finished goods 10,153,000 7,786,000
--------------------------------
$39,077,000 $25,351,000
================================
<CAPTION>
December 31 Estimated
1997 1996 Useful Lives
----------------------------------------------------
<S> <C> <C> <C>
Property, plant and equipment:
Land $ 3,166,000 $ 2,166,000
Buildings and improvements 10,310,000 7,777,000 10-31 years
Machinery and equipment 17,807,000 11,853,000 3-7 years
Leasehold improvements 516,000 150,000 3-7 years
--------------------------------
31,799,000 21,946,000
Less accumulated depreciation and
amortization 10,344,000 8,859,000
--------------------------------
$21,455,000 $13,087,000
================================
<CAPTION>
December 31
1997 1996
--------------------------------
<S> <C> <C>
Accrued expenses:
Litigation reserve $ 1,500,000 $ 1,500,000
Payroll and related benefits 4,096,000 2,632,000
Taxes, other than income 1,971,000 2,289,000
Deferred service contract revenue 594,000 532,000
Customer deposits and advanced billings 2,262,000 3,861,000
Installation and warranty 4,497,000 971,000
Other 3,370,000 1,934,000
--------------------------------
$18,290,000 $13,719,000
================================
</TABLE>
F-12
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt
The Company has a credit facility (the "Credit Facility") which may be used for
working capital, acquisitions and general corporate purposes. The Credit
Facility provides the Company with up to $30 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 3/4% 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 July 31,
1999, but under certain conditions is convertible into a term loan, which would
amortize quarterly through July 31, 2002.
The Credit Facility is secured by substantially all of the Company's personal
property as well as the stock of its domestic subsidiaries. The Credit Facility
also contains certain restrictive covenants, which among other things, impose
limitations with respect to incurrence of certain additional indebtedness,
incurrence of liens, 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, 1997 and 1996, no borrowings were outstanding under the
Company's Credit Facility.
Long-term debt consists of a mortgage note which was refinanced in October 1995.
The note, which bears interest at a rate of 8.5%, matures on October 14, 2002
and is collateralized by a parcel of land and a building. Long-term debt matures
as follows:
1998 $ 115,000
1999 125,000
2000 136,000
2001 149,000
2002 2,038,000
--------------
2,563,000
Less current portion 115,000
--------------
$2,448,000
==============
F-13
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Stock Compensation Plans
Pro forma information regarding net income and earnings per share is determined
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. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
December 31
1997 1996 1995
---------------------------------------------
<S> <C> <C> <C>
Pro forma net income $11,040,000 $10,337,000 $8,889,000
Pro forma diluted earnings per share $ 1.20 $ 1.17 $ 1.06
</TABLE>
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 1,426,787 options (224,546
options available for future grants as of December 31, 1997) 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 (64,003 options available for
future grants as of December 31, 1997) 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 these options at the date of grant was estimated with the
following weighted-average assumptions for 1997, 1996 and 1995: risk-free
interest rate of 6.3%, no dividend yield, volatility factor of the expected
market price of the Company's common stock of 50% and a weighted-average
expected life of the option of four years.
F-14
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Stock Compensation Plans (continued)
A summary of the Company's stock option plans as of December 31, 1995, 1996 and
1997, and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------------------------------------------------
Weighted-
Option Weighted-Average Average
Shares Price Shares Exercise Shares Exercise
(000) Per Share (000) Price (000) Price
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 340 $.69 to $11.00 606 $ 8.85 658 $ 9.44
Granted 314 9.50 to 22.75 175 13.68 681 32.22
Exercised (38) .69 to 4.50 (32) 2.68 (165) 9.76
Forfeited (10) .69 to 13.38 (91) 13.67 (20) 21.60
------------------------------------------------------------------------------
Outstanding at end of year 606 $.69 to $22.75 658 $ 9.44 1,154 $ 22.64
==============================================================================
Options exercisable at year-end 204 $.69 to $13.38 324 $ 5.72 330 $ 9.25
Weighted-average fair value of
options granted during the
year $6.62 $ 6.24 $ 14.83
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------
Number Number
Outstanding at Outstanding at
December 31, Weighted-Average December 31,
Range of 1997 Remaining Weighted-Average 1997 Weighted-Average
Exercise Price (000's) Contractual Life Exercise Price (000's) Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.69 2 4.8 $ 0.69 2 $ 0.69
1.27 95 .5 1.27 95 1.27
2.18 - 3.00 70 8.0 2.54 70 2.54
4.50 19 6.6 4.50 19 4.50
9.50 - 13.38 197 7.6 12.67 91 12.81
14.50 - 21.50 116 8.2 15.13 32 16.66
24.88 - 31.00 426 9.4 27.26 - -
37.63 - 50.25 192 9.7 40.32 21 45.75
57.25 - 57.25 37 9.8 57.25 - -
--------------------------------------------------------------------------------------
0.69 - 57.25 1,154 8.9 $22.64 330 $ 9.25
======================================================================================
</TABLE>
F-15
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. 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 12,996 shares,
14,278 shares and 16,476 shares to employees in 1997, 1996 and 1995,
respectively. The fair value of the employees' purchase rights were estimated
using the following assumptions for 1997, 1996 and 1995, respectively: no
dividend yield for all years; an expected life of one year, one year and six
months; expected volatility of 70%, 70% and 64%; and risk-free interest rates of
5.3%, 5.2% and 5.7%. The weighted-average fair value of those purchase rights
granted in 1997, 1996 and 1995 was $6.58, $5.20 and $5.40, respectively.
As of December 31, 1997, the Company has reserved 1,442,260 and 206,250 shares
of common stock for issuance upon exercise of stock options and issuance of
shares pursuant to the Plan, respectively.
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 as of December 31, 1997 and
1996 are as follows:
December 31
1997 1996
--------------------------------
Deferred tax liabilities:
Tax over book depreciation $ 702,000 $ 257,000
Deferred tax assets:
Inventory valuation 2,247,000 1,704,000
Foreign net operating loss carryforwards 1,084,000 795,000
Warranty and installation 1,878,000 379,000
Other 387,000 365,000
------------------------------
Total deferred tax assets 5,596,000 3,243,000
Valuation allowance (994,000) (795,000)
------------------------------
Net deferred tax assets 4,602,000 2,448,000
------------------------------
Net deferred taxes $3,900,000 $2,191,000
==============================
F-16
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
For financial reporting purposes, income (loss) before income taxes consists of:
Year ended December 31
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
Domestic $19,726,000 $17,770,000 $11,282,000
Foreign (17,000) (297,000) 261,000
----------------------------------------------------------
$19,709,000 $17,473,000 $11,543,000
==========================================================
Significant components of the provision (benefit) for income taxes are presented
below:
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------------
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 7,371,000 $6,442,000 $3,310,000
Foreign 306,000 129,000 379,000
State 1,458,000 1,239,000 280,000
Utilization of research tax credits - (277,000) (909,000)
Utilization of net operating losses - - (708,000)
------------------------------------------
9,135,000 7,533,000 2,352,000
Deferred:
Federal (1,517,000) (795,000) 171,000
Foreign - - (90,000)
State (192,000) (100,000) (127,000)
------------------------------------------
(1,709,000) (895,000) (46,000)
------------------------------------------
$ 7,426,000 $6,638,000 $2,306,000
==========================================
</TABLE>
F-17
<PAGE>
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:
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Tax at U.S. statutory rates $6,898,000 $6,069,000 $ 3,924,000
State income taxes (net of federal
benefit) 741,000 553,000 87,000
Goodwill amortization 46,000 46,000 44,000
Nondeductible merger expenses 700,000 - -
Other nondeductible expenses 116,000 52,000 56,000
Recognition of previously unrecognized
deferred tax assets, net - - (314,000)
Operating losses not currently realizable 335,000 225,000 212,000
Operating losses currently realizable (13,000) - (1,582,000)
Research and development tax credit (619,000) (184,000) (113,000)
Benefit of foreign sales corporation (479,000) (173,000) (144,000)
Other (299,000) 50,000 136,000
--------------------------------------------
$7,426,000 $6,638,000 $ 2,306,000
============================================
</TABLE>
Several of the Company's foreign subsidiaries have net operating loss
carryforwards for foreign tax purposes of approximately $2,700,000 at December
31, 1997, a portion of which expires in years 1998 through 2002 and a portion
for which the carryforward period is unlimited.
F-18
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies and Other Matters
Veeco is party to agreements with IBM, as amended (the "IBM Agreements"), with
respect to the IBM-manufactured Atomic Force Microscopes ("SXM Products"),
pursuant to which, Veeco has been appointed exclusive worldwide sales and
marketing representative to market, service and sell the SXM Products to
customers in the microelectronic and data storage industries. Pursuant to the
IBM Agreements, Veeco has agreed to purchase a minimum number of SXM Products.
At December 31, 1997, Veeco's purchase commitment under these agreements which
extend through February 2001 was approximately $8,000,000.
Minimum lease commitments as of December 31, 1997 for property and equipment
under operating lease agreements (exclusive of renewal options) are payable as
follows:
1998 $1,300,000
1999 1,132,000
2000 901,000
2001 853,000
2002 856,000
Thereafter 617,000
-------------
$5,659,000
=============
Rent charged to operations amounted to $1,334,000, $921,000 and $816,000 in
1997, 1996 and 1995, respectively. In addition, the Company is obligated under
the leases for certain other expenses, including real estate taxes and
insurance.
In compliance with a Cleanup and Abatement Order ("CAO") issued by the
California Regional Water Quality Control Board, Central Coast Region, the
Company completed soil remediation of a site which was leased by a predecessor
of the Company in September 1995. 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. The
Company cannot predict the extent of groundwater contamination at the site and
cannot determine at this time whether any or all of the groundwater
contamination may be attributable to activities of neighboring parties. The
Company cannot predict whether any groundwater remediation will be necessary or
the costs, if any, of such remediation.
F-19
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies and Other Matters (continued)
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 Company is a defendant in a patent infringement lawsuit filed in June 1988
in the United States District Court for the District of Arizona. The suit
alleged that certain Company products infringed the plaintiff's patents, and
sought monetary damages and an injunction. The case was decided adversely to the
Company in June 1994. The Company appealed the decision which was partially
reversed by a decision of the Court of Appeals, with an opinion determining that
only certain Company products made in 1988 and 1989 infringed a patent. The case
has been remanded to the District Court for a redetermination of damages. The
Company has been ordered to establish and fund an escrow account in the amount
of $1,500,000 until a final decision is reached. Such amount is included in
other assets. The Company believes this escrow amount exceeds the amount sought
in final recovery by the plaintiff. The Company has established a corresponding
litigation reserve of $1,500,000. Management does not believe the ultimate
resolution of this matter will have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
F-20
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies and Other Matters (continued)
The Company's business depends in large part upon the capital expenditures of
data storage, semiconductor and flat panel display manufacturers which accounted
for the following percentages of the Company's net sales:
December 31
1997 1996 1995
---------------------------------------------------
Data storage 65.1% 56.0% 41.6%
Semiconductor 18.9 26.0 32.4
Flat panel display 2.2 3.2 5.1
The Company cannot predict whether the growth experienced in the
microelectronics industry in the recent past will continue.
Sales to one customer accounted for approximately 18%, 14% and 20% and sales to
another customer accounted for approximately 14%, 15% and 8% of the Company's
net sales during the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, accounts receivable due from two customers
represented 20% and 21% 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
1997 1996
---------------------------------------
United States $ 17,189 $ 12,970
Europe 5,867 3,769
Far East 9,778 7,128
Other 431 247
---------------------------------------
$ 33,265 $ 24,114
=======================================
F-21
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Foreign Operations and Geographic Area Information
Information as to the Company's foreign operations and geographic area
information (assets not specifically identified to Europe and the Far East are
included in the United States amounts) is summarized below:
<TABLE>
<CAPTION>
Net Sales
Unaffiliated Customers Operating Income (Loss) Total Assets
------------------------------ ------------------------------ ------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $160,968 $110,273 $80,292 $19,209 $17,106 $11,265 $117,816 $89,059 $70,281
Europe (1) 12,436 11,214 11,863 584 (69) 651 8,786 6,953 8,790
Japan 1,262 915 913 (609) (231) (394) 1,137 785 539
Eliminations (9,258) (7,360) (7,243) - (131) (131) - - -
------------------------------------------------------------------------------------------------
$165,408 $115,042 $85,825 $19,184 $16,675 $11,391 $127,739 $96,797 $79,610
================================================================================================
</TABLE>
(1) Principally reflects the Company's operations and assets in France, United
Kingdom and Germany.
Export sales from the Company's United States operations are as follows:
1997 1996 1995
-----------------------------------------
(In thousands)
Asia Pacific $30,033 $24,146 $16,140
Japan 16,353 17,433 10,615
Europe 4,088 1,814 1,704
Other 1,298 748 822
-----------------------------------------
$51,772 $44,141 $29,281
=========================================
The aggregate foreign exchange gains and (losses) included in determining
consolidated results of operations were $(34,000), $(153,000) and $100,000 in
1997, 1996, and 1995, respectively.
F-22
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Defined Contribution Benefit Plans
The Company maintains two defined contribution plans under Section 401(k) of the
Internal Revenue Code. Principally of all of the Company's domestic full-time
employees are eligible to participate in one or the other plan. Under the plans,
employees may contribute up to a maximum of 18% or 20% of their annual wages.
Employees are immediately vested in their contributions. The plans provide for
matching contributions by the Company, which vest over a five-year period.
Company contributions to the plans were $296,000, $205,000 and $108,000 in 1997,
1996 and 1995, respectively.
F-23
<PAGE>
Veeco Instruments Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C
- ---------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------------------
Charged to
Balance at Beginning Charged to Other
Description of Period Costs and Expenses Accounts
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deducted from asset accounts:
Year ended December 31, 1997
Allowance for doubtful accounts $ 553,000 $248,000 $ -
Valuation allowance on net deferred tax assets 795,000 199,000 -
--------------------------------------------------------------
$1,348,000 $447,000 $ -
==============================================================
Deducted from asset accounts:
Year ended December 31, 1996
Allowance for doubtful accounts $ 592,000 $ 50,000 $ -
Valuation allowance on net deferred tax assets 1,913,000 - -
--------------------------------------------------------------
$2,505,000 $ 50,000 $ -
==============================================================
Deducted from asset accounts: Year ended December 31, 1995:
Allowance for doubtful accounts $ 458,000 $147,000 $ -
Valuation allowance on net deferred tax assets 2,858,000 - -
--------------------------------------------------------------
$3,316,000 $147,000 $ -
==============================================================
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------
COL. D COL. E
---------------------------------------
Balance at
End of
Description Deductions Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deducted from asset accounts:
Year ended December 31, 1997
Allowance for doubtful accounts $ 46,000 $ 755,000
Valuation allowance on net deferred tax assets - 994,000
--------------------------------------
$ 46,000 $1,749,000
======================================
Deducted from asset accounts:
Year ended December 31, 1996
Allowance for doubtful accounts $ 89,000 $ 553,000
Valuation allowance on net deferred tax assets 1,118,000 795,000
-------------------------------------
$1,207,000 $1,348,000
=====================================
Deducted from asset accounts: Year ended December 31, 1995:
Allowance for doubtful accounts $ 13,000 $ 592,000
Valuation allowance on net deferred tax assets 945,000 1,913,000
-------------------------------------
$ 958,000 $2,505,000
=====================================
</TABLE>
F-24
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
- -------- -------
2.1 Agreement and Plan of Merger among Veeco Instruments Inc., Digital
Instruments, Inc. and its Securityholders dated February 28, 1998. (10)
2.2 Agreement and Plan of Merger among Veeco Instruments Inc., Veeco
Acquisition Corp. and Wyko Corporation and its Securityholders dated
April 28, 1997. (7)
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company. (8)
3.2 Form of Amended and Restated By-Laws of the Company. (1)
4.1 Form of Certificate for Common Stock. (1)
10.1 Lease dated July 29, 1991, between Sloan Technology Corporation, a
California corporation, and Sloan Technology Corporation, a Delaware
corporation. (1)
10.2 OEM Agreement for Acquisition of IBM Products, dated July 20, 1993 by
and between IBM and the Company. (2)
10.3 Modification to OEM Agreement for Acquisition of IBM Products, dated
July 20, 1993, by and between IBM and the Company. (2)
10.4 UPA Technology Division, Veeco Instruments Inc. and Roentgenanalytik
Messtechnik GmbH XRF Development Program Agreement, dated December 8,
1992, between Veeco-UPA Technology Division and Roentgenanalytik
Messtechnik GmbH. (2)
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)
1
<PAGE>
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)
10.22 OEM Agreement for acquisition of IBM products, dated October 12, 1995,
between International Business Machines Corporation and Veeco
Instruments Inc. (5)
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. (6)
10.25 Credit Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (6)
10.26 Security Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (6)
10.27 Guarantee Agreement dated July 31, 1996 among the Registrant, Fleet Bank
N.A. and The Chase Manhattan Bank. (6)
10.28 Guarantor's Security Agreement dated July 31, 1996 among Sloan
Technology Corporation, Fleet Bank N.A. and The Chase Manhattan Bank.
(6)
10.29 The Pledge Agreement dated July 31, 1996 among the Registrant, Fleet
Bank N.A. and The Chase Manhattan Bank. (6)
10.30 The Patent and Trademark Security Agreement dated July 31, 1996 among
the Registrant, Fleet Bank N.A. and The Chase Manhattan Bank. (6)
10.31 Attachment 2 to the OEM Agreement for Acquisition of IBM Products
between International Business Machines Corporation and Veeco
Instruments Inc. dated as of May 13, 1997 (confidential treatment has
been granted for certain portions; confidential portions have been filed
separately with the Securities and Exchange Commission). (9)
10.32 Lease Extension dated as of November 1, 1997 by and between J. Anthony
Wilson and Veeco Instruments Inc.*
10.33 Letter Agreement, dated December 2, 1997 between Veeco Instruments Inc.
and Dr. Donald Kania. *
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, 1997.*
27.2 Financial Data Schedule of Veeco Instruments Inc. for the year ended
December 31, 1996 (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
<PAGE>
(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 September 30, 1995 and incorporated
herein by reference; confidential treatment granted.
(6) 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.
(7) 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.
(8) 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.
(9) Incorporated by reference from the Registrant's Current Report on Form
8-K dated July 2, 1997.
(10) Incorporated by reference from the Registrant's Current Report on Form
8-K dated March 9, 1998.
3
602 EAST MONTECITO STREET
LEASE EXTENSION
1997
This Lease Extension is entered into in Santa Barbara, California, by and
between J. Anthony Wilson ("Landlord") and Veeco Instruments, Inc., a Delaware
corporation ("Tenant").
Background:
a. This is an extension of a lease dated July 1993, originally between
Lambda (Santa Barbara) Inc. as Landlord and Veeco Instruments, Inc. as Tenant,
for property at 602 East Montecito Street, Santa Barbara, California.
Landlord and Tenant both wish to extend the lease, with certain revised
terms and conditions as set forth below.
1. Existing Lease Terms. The parties hereby confirm the existing lease
terms as entered into by themselves or their predecessors in interest, as set
forth in the attached copies:
a. Original Lease, dated July 1993, referred to above.
b. Lease Renewal, dated July 1993, extending the Lease to June 30,
1997.
c. Lease Renewal, undated, extending lease term to June 30, 1998.
Except as modified below, such agreement shall apply between the parties
to this Lease Extension.
2. Term. The term of the Lease shall be extended to June 30, 2003.
3. Rent.
3.1 Base Rent. Base rent shall increase as of July 1, 1998 to Twenty
Nine Thousand One Hundred Forty Dollars and Ten Cents ($29,140.10) per month,
payable in advance on the first day of the calendar month.
The current rent, through June 30, 1998, is Twenty Eight Thousand
Nineteen Dollars and Thirty Three Cents ($28,019.33) per month.
1
<PAGE>
3.2 Additional Rent. In addition to the Base Rent provided for in
Paragraph 3.1 above, Tenant shall pay to Landlord all operating expenses
associated with the Premises. "Operating Expenses" include, but are not limited
to, the following costs associated with the Premises: Real and personal property
taxes, maintenance and repair costs, insurance premiums for all risk and
earthquake coverage on the improvements and for public liability insurance, and
the cost of all utilities.
4. Base Rent Adjustment. The Base Rent shall be increased annually
throughout the term of the Lease. The annual increase shall be the greater of
(a) the increase in CPI as determined below or (b) four percent (4%). The first
such adjustment shall be made on July 1, 1999.
The CPI computation shall be based on the Consumer Price Index for
Urban Wage Earners and Clerical Workers Los Angeles/Anaheim/Riverside Area
Average, Subgroup "All Items", 1982-1984 = 100. The base CPI shall be the CPI as
of July, 1, 1998.
5. Security Deposit. The security deposit shall be $29,941. The security
deposit shall be increased annually so that the security deposit on hand is
always equal to the current monthly rent then applicable.
6. Use. The Premises shall be used and occupied only for general office,
manufacturing and assembly consistent with current zoning.
7. Condition of the Property. Tenant accepts the Property in its condition
as of the execution of this Lease Extension.
8. Obligations of Landlord and Tenant.
8.1 Landlord shall maintain the foundations and structural portions
of the building.
8.2 Tenant shall perform all other building and common area
maintenance and repairs including roof, utilities, real estate taxes and
insurance.
9. Additional Terms.
9.1 Landlord agrees to pave the vacant land area adjacent to the
building and stripe for additional Tenant parking within thirty (30) days after
Tenant's execution of this Lease Extension.
2
<PAGE>
9.2 Landlord shall provide to Tenant an allowance of up to Fifty
Thousand Dollars ($50,000) for actual third party costs incurred by Tenant
toward replacement of carpeting and paint on interior of entry and office space,
subject to Landlord's reasonable approval. Tenant shall submit a proposal to
Landlord, with bids, for Landlord's advance written approval as to cost and
quality, which shall not be unreasonably withheld.
9.3 Tenant shall have the right to sublet the Premises subject to
Landlord's reasonable approval.
10. Broker Representation. The parties acknowledge that Pacifica
Commercial Realty ("Broker") represents the Landlord.
11. Broker Participation. The parties warrant to Broker and to each other
that they have dealt with no real estate Broker in connection with this
transaction other than Pacifica Commercial Realty, and that no other Broker is
entitled to any commission on account of this Proposal.
12. Miscellaneous. Tenant does not have any options to extend this Lease.
IN WITNESS WHEREOF, the parties have signed this Lease Extension as of
November 1, 1997.
/s/ Anthony Wilson
------------------------------
J. Anthony Wilson
TENANT:
Veeco Instruments, Inc.,
a Delaware corporation
By: /s/ John F. Rein, Jr.
---------------------------
3
[ VEECO LETTERHEAD ]
REVISED
December 2, 1997
Don Kania, Ph.D.
438 Puerto Vallarta
Pleasanton, CA 94566
Dear Don:
I am pleased to confirm our offer to have you join Veeco Instruments as
Chief Technology Officer. This position includes a weekly base salary of
$3,317.31 (annual equivalent is $172,500) plus stock options for 25,000 shares
of Veeco stock in accordance with the Board approved Management Stock Option
Plan. Veeco will pay to you a $15,000 sign on bonus upon joining the company.
Your compensation package also includes a performance based annual bonus
expected to be up to 30% of salary in accordance with the Board approved
Management Bonus Plan. This position will be based in our San Jose Technology
Center. In addition, Veeco will provide you with a bridge loan for up to two
months and reflect an adjustment in your proposed base pay of $2,000 yearly,
representing the after tax interest differential. In addition, this position
includes a monthly car allowance of $550.
Veeco Instruments Inc. offers a full range of employee benefits, including
major medical and hospitalization, dental, life insurance and long term
disability insurance. These benefits will be described to you in greater detail
upon joining Veeco. You will be eligible to participate in the company's pre-tax
401(k) Plan during the next quarterly open enrollment. The 401(k) Plan does
allow for rollover contributions from your previous employer's qualified savings
plan. You will be eligible for fifteen days paid vacation accruing at ten hours
per month.
In regard to an executive compensation and retirement plan, Veeco has
engaged Ernst & Young to propose a plan. Our goal is to implement a plan that is
consistent with other hi-tech companies as well as to offer an attractive
vehicle for retirement savings. The plan would be structured to target a
retiremenet benefit of approximately 40% - 60% of an executive's gross salary.
Until Ernst & Young concludes their study, we cannot enumerate the specific
details of such a plan.
In the event of an involuntary separation or change in job status from the
company for reasons other than gross misconduct
1
<PAGE>
during the first three years of your employment, you will receive nine months'
salary continuation pay.
Please be advised that the provisions set forth in this letter constitute
all the terms of Veeco Instruments' offer of employment and supersede all
previous conditions, whether verbal, written or implied.
Don, I look forward to your joining the senior management of Veeco at a
most exciting time in the growth. Kindly indicate your acceptance by signing and
returning a copy of this confidential letter.
Very truly yours,
/s/ Wendy M. Hague
- ---------------------------
Wendy M. Hague
Director of Human Resources
Please sign below as your acknowledgment that you accept this employment offer.
/s/ Don Kania
- ---------------------------- --------------------
Don Kania, Ph.D. Date
2
Exhibit 21.1
Subsidiaries of the Registrant
Subsidiary Jurisdiction
- ---------- ------------
Sloan Technology Corporation Delaware
Veeco Instruments S.A. France
Elvion S.A. France
Veeco Instruments GmbH Germany
Veeco Instruments Limited England
Nihon Veeco K.K. Japan
Wyko Corporation Delaware
Veeco Real Estate, Inc. New York
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-87394) pertaining to the Veeco Instruments Inc. Amended and Restated
1992 Employees' Stock Option Plan and the Veeco Instruments Inc. 1994 Stock
Option Plan for Outside Directors, the Registration Statement (Form S-8 No.
33-95422) pertaining to the Veeco Instruments Inc. Employee Stock Purchase Plan,
the Registration Statement (Form S-8 No. 33-95424) pertaining to the Veeco
Instruments Inc. Amended and Restated 1992 Employees' Stock Option Plan, the
Registration Statement (Form S-8 No. 333-08981) pertaining to the Veeco
Instruments Inc. Amended and Restated 1992 Employees' Stock Option Plan and the
Amended and Restated Veeco Instruments Inc. 1994 Stock Option Plan for Outside
Directors, the Registration Statement (Form S-8 No. 333-35009) pertaining to the
Amended and Restated Veeco Instruments Inc. 1994 Stock Option Plan for Outside
Directors and the Registration Statement (Form S-8 No. 333-35011) pertaining to
the Stock Option Agreements dated July 25, 1997 between Veeco Instruments Inc.
and each of Esther J. Davenport and Roberto Constantakis of our report dated
February 9, 1998, with respect to the consolidated financial statements and
schedule of Veeco Instruments Inc. included in the Annual Report (Form 10-K) for
the year ended December 31, 1997.
/s/ ERNST & YOUNG LLP
Melville, New York
March 30, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
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AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JAN-01-1996
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0
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