<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 11, 1999
VEECO INSTRUMENTS INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-16244 11-298960l
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
Terminal Drive, Plainview, New York 11803
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (516) 349-8300
-----------------------------
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 5. OTHER EVENTS.
The Registrant's consolidated financial statements and related
financial data for the years ended December 31, 1995 through 1997,
which are set forth below, have been retroactively restated to
reflect the Registrant's mergers with Wyko Corporation in July 1997
and Digital Instruments, Inc. in May 1998, which have been accounted
for as pooling of interests transactions.
2
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<C> <S> <C>
Report of Independent Auditors................................................... F-2
Report of Independent Public Accountants......................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1997........................ F-4
Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997............................................... F-5
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1995, 1996 and 1997............................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997............................................... F-7
Notes to Consolidated Financial Statements....................................... F-8
</TABLE>
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 ("Veeco" or the "Company") as of December 31,
1996 and 1997, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the accompanying Index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the financial statements of Digital Instruments, Inc. and Affiliates
("Digital"), which merged with Veeco in May 1998, which statements reflect total
assets constituting 14% in 1996 and 20% in 1997 and total revenues constituting
30% in 1995, 30% in 1996, and 23% in 1997 of the consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to data included for Digital, is based
solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, 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, 1996 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 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
May 29, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Instruments, Inc.
and affiliates:
We have audited the combined balance sheets of DIGITAL INSTRUMENTS, INC. (a
California corporation) and affiliates as of December 31, 1997 and 1996, and the
related combined statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 (not presented
below). These financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these financial
statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of Digital Instruments, Inc.
and affiliates as of December 31, 1997 and 1996, and the 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.
/s/ Arthur Andersen LLP
Los Angeles, California
February 28, 1998
F-3
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 26,322 $ 20,444
Accounts and trade notes receivable, less allowance for doubtful accounts of $803 in
1996 and $1,005 in 1997............................................................... 32,504 44,927
Inventories............................................................................. 29,656 44,825
Prepaid expenses and other current assets............................................... 1,553 1,695
Deferred income taxes................................................................... 2,448 4,602
---------- ----------
Total current assets...................................................................... 92,483 116,493
Property, plant and equipment at cost, net................................................ 13,506 33,344
Excess of cost over net assets acquired, less accumulated amortization of $910 in 1996 and
$1,040 in 1997.......................................................................... 4,448 4,318
Other assets less accumulated amortization of $958 in 1996 and $1,501 in 1997............. 2,902 5,476
---------- ----------
Total assets.............................................................................. $ 113,339 $ 159,631
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 12,715 $ 21,360
Accrued expenses........................................................................ 16,122 22,146
Income taxes payable.................................................................... 1,546 3,999
Current portion of long-term debt....................................................... 106 210
---------- ----------
Total current liabilities................................................................. 30,489 47,715
Deferred income taxes..................................................................... 257 702
Long-term debt............................................................................ 2,563 9,146
Notes payable to former shareholders of Digital........................................... 8,000 8,000
Other liabilities......................................................................... 461 310
Shareholders' equity:
Common stock, 25,000,000 shares authorized; 14,283,556 and 14,475,719 shares issued and
outstanding at December 31, 1996 and 1997, respectively............................... 143 145
Additional paid-in capital................................................................ 47,683 54,474
Retained earnings......................................................................... 23,078 39,105
Cumulative translation adjustment......................................................... 665 34
---------- ----------
Total shareholders' equity................................................................ 71,569 93,758
---------- ----------
Total liabilities and shareholders' equity................................................ $ 113,339 $ 159,631
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-4
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................................... $ 123,976 $ 165,059 $ 216,728
Cost of sales................................................................ 61,693 83,521 110,680
---------- ---------- ----------
Gross profit................................................................. 62,283 81,538 106,048
Costs and expenses:
Research and development expense........................................... 13,297 17,702 24,470
Selling, general and administrative expense................................ 25,131 29,712 41,591
Amortization expense....................................................... 202 237 275
Other--net................................................................. 144 394 (382)
Merger expenses.............................................................. -- -- 2,250
Write-off of purchased in-process technology................................. -- -- 4,200
---------- ---------- ----------
38,774 48,045 72,404
---------- ---------- ----------
Operating income............................................................. 23,509 33,493 33,644
Interest expense (income), net............................................... 179 (345) 7
---------- ---------- ----------
Income before income taxes................................................... 23,330 33,838 33,637
Income tax provision......................................................... 2,497 6,941 7,610
---------- ---------- ----------
Net income................................................................... $ 20,833 $ 26,897 $ 26,027
---------- ---------- ----------
---------- ---------- ----------
Earnings per share:
Net income per common share................................................ $1.52 $1.89 $1.81
Diluted net income per common share........................................ $1.48 $1.86 $1.75
Weighted average shares outstanding........................................ 13,750 14,251 14,392
Diluted weighted average shares outstanding................................ 14,068 14,490 14,908
Pro forma presentation:
Income before income taxes................................................. $ 23,330 $ 33,838 $ 33,637
Pro forma income tax provision............................................. 7,054 12,963 12,817
---------- ---------- ----------
Pro forma net income....................................................... $ 16,276 $ 20,875 $ 20,820
---------- ---------- ----------
---------- ---------- ----------
Pro forma net income per common share...................................... $1.18 $1.46 $1.45
Pro forma diluted net income per common share.............................. $1.16 $1.44 $1.40
</TABLE>
See accompanying notes.
F-5
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------- PAID-IN RETAINED TRANSLATION COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL INCOME
------------ ----------- ----------- ---------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994....... 13,396,252 $ 135 $ 32,864 $ 7,348 $ 641 $ 40,988
Exercise of stock options.......... 38,497 -- 82 -- -- 82
Net proceeds from public
offering......................... 800,000 8 14,452 -- -- 14,460
Translation adjustment............. -- -- -- -- 128 128 $ 128
Net income......................... -- -- -- 20,833 -- 20,833 20,833
Distributions to former
shareholders of Digital.......... -- -- -- (18,000) -- (18,000) --
------------ ----- ----------- ---------- ----- ---------- -------
Balance at December 31, 1995....... 14,234,749 143 47,398 10,181 769 58,491 $ 20,961
-------
-------
Exercise of stock options and stock
issuances under stock purchase
plan............................. 48,807 -- 285 -- -- 285
Translation adjustment............. -- -- -- -- (104) (104) (104)
Net income......................... -- -- -- 26,897 -- 26,897 26,897
Distributions to former
shareholders of Digital.......... -- -- -- (14,000) -- (14,000) --
------------ ----- ----------- ---------- ----- ---------- -------
Balance at December 31, 1996....... 14,283,556 143 47,683 23,078 665 71,569 $ 26,793
-------
-------
Exercise of stock options and stock
issuances under stock purchase
plan............................. 192,163 2 2,068 -- -- 2,070
Translation adjustment............. -- -- -- -- (631) (631) (631)
Stock option income tax benefit.... -- -- 1,790 -- -- 1,790 --
Sale of stock...................... -- -- 2,933 -- -- 2,933 --
Net income......................... -- -- -- 26,027 -- 26,027 26,027
Distributions to former
shareholders of Digital.......... -- -- -- (10,000) -- (10,000) --
------------ ----- ----------- ---------- ----- ---------- -------
Balance at December 31, 1997....... 14,475,719 $ 145 $ 54,474 $ 39,105 $ 34 $ 93,758 $ 25,396
------------ ----- ----------- ---------- ----- ---------- -------
------------ ----- ----------- ---------- ----- ---------- -------
</TABLE>
See accompanying notes.
F-6
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
--------- --------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 20,833 $ 26,897 $ 26,027
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization............................................... 1,823 2,041 2,215
Deferred income taxes....................................................... (46) (895) (1,709)
Write-off of purchased in-process technology................................ -- -- 4,200
Changes in operating assets and liabilities:
Accounts receivable....................................................... (8,942) (4,205) (12,805)
Inventories............................................................... (5,718) (8,684) (13,633)
Accounts payable.......................................................... 1,364 2,901 8,694
Accrued expenses and other current liabilities............................ 3,711 4,086 4,483
Other, net................................................................ (610) 1,229 638
--------- --------- ----------
Net cash provided by operating activities....................................... 12,415 23,370 18,110
--------- --------- ----------
INVESTING ACTIVITIES
Capital expenditures, net....................................................... (1,403) (4,067) (21,047)
Net assets of business acquired................................................. -- -- (4,375)
--------- --------- ----------
Net cash used in investing activities........................................... (1,403) (4,067) (25,422)
--------- --------- ----------
FINANCING ACTIVITIES
Proceeds from stock issuance.................................................... 14,542 285 5,003
Proceeds from long-term debt.................................................... -- -- 6,800
Distributions to former shareholders of Digital................................. (10,000) (14,000) (10,000)
Other........................................................................... (158) (289) (160)
--------- --------- ----------
Net cash provided by (used in) financing activities............................. 4,384 (14,004) 1,643
--------- --------- ----------
Effect of exchange rate changes on cash and cash equivalents.................... (144) 161 (209)
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............................ 15,252 5,460 (5,878)
Cash and cash equivalents at beginning of period................................ 5,610 20,862 26,322
--------- --------- ----------
Cash and cash equivalents at end of period...................................... $ 20,862 $ 26,322 $ 20,444
--------- --------- ----------
--------- --------- ----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION
On May 29, 1998, the Company merged with Digital Instruments, Inc.
("Digital"), a leader in scanning probe/atomic force microscopy (SPM/AFM). Under
the merger, Digital shareholders received 5,583,725 shares of Veeco Instruments,
Inc. ("Veeco" or the "Company") common stock. The merger was accounted for as a
pooling of interests and, accordingly, historical financial data has been
restated to include Digital data. Merger and reorganization expenses principally
related to this transaction amounted to $7,500,000, which was comprised of
transaction fees and expenses of $3,300,000, a $1,585,000 non-cash compensation
charge related to stock issued in accordance with a pre-existing agreement with
a key Digital employee, $1,415,000 of duplicate facility costs and $1,200,000 of
reorganization costs all of which were charged to operating expenses during the
nine month period ended September 30, 1998. The Company owns 50% of Digital
Instruments GmbH, a German company, which exclusively distributes Digital's
products in Germany and Eastern Europe. The Company accounts for its investment
in Digital Instruments GmbH under the equity method of accounting. Prior to the
merger, Digital had elected "S" Corporation status for income tax purposes and
therefore was not subject to federal income taxes at the corporation level. As a
result of the merger, Digital's "S" Corporation election was terminated. Pro
forma net income presents income taxes for Digital as if it had been a "C"
Corporation for all periods presented.
On July 25, 1997, a wholly-owned subsidiary of Veeco merged into Wyko
Corporation ("Wyko") of Tucson, Arizona, a leading supplier of optical
interferometric measurement systems for the data storage and semiconductor
industries. Under the merger, Wyko shareholders received 2,863,810 shares of
Veeco common stock and holders of options to acquire Wyko common stock received
options to acquire an aggregate of 136,190 shares of Veeco common stock. The
merger was accounted for as a pooling of interests. Merger expenses of
approximately $2,250,000 pertaining to investment banking, legal fees and other
one-time transaction costs were charged to operating expenses during the year
ended December 31, 1997.
The following table displays the revenues and net income of the separate
companies for the periods preceding the business combinations and the post Wyko
merger amounts through December 31, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Veeco (pre-mergers)........................................................ $ 72,359 $ 96,832 $ 71,211
Wyko....................................................................... 13,466 18,210 18,285
Digital.................................................................... 38,151 50,017 51,320
Veeco/Wyko (post-merger)................................................... -- -- 75,912
---------- ---------- ----------
Combined................................................................... $ 123,976 $ 165,059 $ 216,728
---------- ---------- ----------
---------- ---------- ----------
Net income:
Veeco (pre-mergers)........................................................ $ 6,792 $ 8,038 $ 2,723
Wyko....................................................................... 2,445 2,797 3,472
Digital.................................................................... 11,596 16,062 13,744
Veeco/Wyko (post-merger)................................................... -- -- 6,088
---------- ---------- ----------
Combined................................................................... $ 20,833 $ 26,897 $ 26,027
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-8
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
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.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Veeco designs, manufactures, markets and services a broad line of precision
metrology and process equipment used to measure, test and manufacture
microelectronic products for the data storage and semiconductor industries.
Veeco's precision metrology equipment is primarily used to measure critical
dimensions on thin film magnetic heads and semiconductor devices. The Company's
process equipment is primarily used to etch and deposit materials in the
manufacture of thin film magnetic heads. Veeco sells its products worldwide to
many of the leading manufacturers in the data storage, semiconductor and other
industries, as well as research and development centers and universities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Veeco and its
subsidiaries. Intercompany items and transactions have been eliminated in
consolidation.
REVENUE
Revenue is recognized when title passes to the customer, generally upon
shipment. Service and maintenance contract revenues are recorded as deferred
income, which is included in other accrued expenses, and recognized as income on
a straight-line basis over the service period of the related contract. The
Company provides for (1) the estimated costs of fulfilling its installation
obligations and (2) warranty costs at the time the related revenue is recorded.
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 1995, 1996 and 1997 was approximately $825,000, $734,000 and,
$1,103,000, respectively. Income taxes paid in 1995, 1996 and 1997 were
approximately $1,147,000, $6,706,000 and $5,370,000, respectively.
F-9
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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, consists principally of
purchased technology, patents, software licenses and deferred finance costs of
$1,086,000 and $3,663,000 at December 31, 1996 and 1997, respectively. Other
intangible assets are amortized over periods ranging from 3 to 17 years.
ENVIRONMENTAL COMPLIANCE AND REMEDIATION
Environmental compliance costs include ongoing maintenance, monitoring and
similar costs. Such costs are expensed as incurred. Environmental remediation
costs are accrued when environmental assessments and/or remedial efforts are
probable and the cost can be reasonably estimated.
FOREIGN OPERATIONS
Foreign currency denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing at the balance sheet date. Resulting
translation adjustments due to fluctuations in the exchange rates are recorded
as a separate component of shareholders' equity. Income and expense items are
translated at the average exchange rates during the respective periods.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and
include expenses for development of new technology and the transition of the
technology into new products or services.
ADVERTISING AND PROMOTIONAL EXPENSE
The cost of advertising is expensed as of the first showing. The Company
incurred $2,437,000, $3,307,000 and $4,668,000 in advertising costs during 1995,
1996 and 1997, 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.
F-10
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, 1996 and 1997 approximates fair value.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 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.
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Weighted average shares outstanding.................................................. 13,750 14,251 14,392
Dilutive effect of stock options..................................................... 318 239 516
--------- --------- ---------
Diluted weighted average shares outstanding.......................................... 14,068 14,490 14,908
--------- --------- ---------
--------- --------- ---------
</TABLE>
PRO FORMA PRESENTATION
Pro forma net income and pro forma earnings per share as shown on the
Consolidated Statements of Income reflects income taxes as if Digital had been a
"C" corporation for all periods presented and, therefore, subject to federal
income taxes at the corporate level.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 was retroactively applied to January 1,
1995. SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this statement
had no impact on the Company's reported net income or shareholders' equity. SFAS
No. 130 requires foreign currency translation adjustments to be included in
other comprehensive income, net of income taxes. Due to foreign net operating
loss carryforwards, there is no income tax effect on the translation
adjustments.
F-11
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise". SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company will be required to comply with the provisions
of this statement in fiscal 1998.
RECLASSIFICATIONS
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform with the 1997 presentation.
3. BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Inventories:
Raw materials......................................................... $ 14,255 $ 25,277
Work in process....................................................... 7,396 8,528
Finished goods........................................................ 8,005 11,020
--------- ---------
$ 29,656 $ 44,825
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1996 1997 USEFUL LIVES
--------- --------- -------------
<S> <C> <C> <C>
(IN THOUSANDS)
Property, plant and equipment:
Land................................................... $ 2,166 $ 5,166
Buildings and improvements............................. 7,854 19,543 10-39 years
Machinery and equipment................................ 12,969 19,708 3-7 years
Leasehold improvements................................. 150 516 3-7 years
--------- ---------
23,139 44,933
Less accumulated depreciation and amortization......... 9,633 11,589
--------- ---------
$ 13,506 $ 33,344
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
3. BALANCE SHEET INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Accrued expenses:
Litigation reserve.................................................... $ 1,500 $ 1,500
Payroll and related benefits.......................................... 3,669 5,713
Taxes, other than income.............................................. 2,293 1,996
Deferred service contract revenue..................................... 532 594
Customer deposits and advanced billings............................... 3,861 2,262
Installation and warranty............................................. 1,037 4,638
Royalties............................................................. 920 1,097
Other................................................................. 2,310 4,346
--------- ---------
$ 16,122 $ 22,146
--------- ---------
--------- ---------
</TABLE>
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, 1996 and 1997, no borrowings were outstanding under the
Company's Credit Facility.
In April 1995, the stockholders of Digital received distributions in the
amount of $8,000,000 in the form of unsecured promissory notes, bearing interest
at 7.21% with interest due quarterly and principal due on or before March 31,
2000. Interest relating to these notes approximated $432,000, $577,000 and
$577,000 for 1995, 1996 and 1997, respectively.
Long-term debt consists of a mortgage note and a note payable. The mortgage
note was refinanced in October 1995. The mortgage 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. The note payable, which is secured by a parcel of land and
a building purchased in 1997, bears interest at 7.75% for the first five years
with a final payment due in December 2007. At the end of five years, the
interest rate will change
F-13
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. LONG-TERM DEBT (CONTINUED)
each year based on the bank's index rate plus 1.75%. This note payable is being
amortized over 25 years with a balloon payment due at the end of ten years.
Long-term debt matures as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998.......................................................................... $ 210
1999.......................................................................... 226
2000.......................................................................... 245
2001.......................................................................... 267
2002.......................................................................... 2,165
Thereafter.................................................................... 6,243
------
9,356
Less current portion.......................................................... 210
------
$ 9,146
------
------
</TABLE>
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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Pro forma net income....................................................... $ 20,485 $ 26,399 $ 24,784
Pro forma diluted earnings per share....................................... $ 1.46 $ 1.83 $ 1.67
</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.
F-14
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
5. STOCK COMPENSATION PLANS (CONTINUED)
The fair values of these options at the date of grant was estimated with the
following weighted-average assumptions for 1995, 1996 and 1997: 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.
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>
1996 1997
1995 ------------------------ ------------------------
------------------------------ WEIGHTED- WEIGHTED-
OPTION AVERAGE AVERAGE
SHARES PRICE SHARES EXERCISE SHARES EXERCISE
(000'S) PER SHARE (000'S) PRICE (000'S) PRICE
----------- ----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............. 340 $ 0.69 to $11.00 606 $ 8.85 658 $ 9.44
Granted...................................... 314 9.50 to 22.75 175 13.68 681 32.22
Exercised.................................... (38) 0.69 to 4.50 (32) 2.68 (165) 9.76
Forfeited.................................... (10) 0.69 to 13.38 (91) 13.67 (20) 21.60
----- ----------------- ----- ----------- ----- -----------
Outstanding at end of year................... 606 $ 0.69 to $22.75 658 $ 9.44 1,154 $ 22.64
----- ----------------- ----- ----------- ----- -----------
----- ----------------- ----- ----------- ----- -----------
Options exercisable at year-end.............. 204 $ 0.69 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 OUTSTANDING
AT DECEMBER WEIGHTED-AVERAGE AT DECEMBER
RANGE OF 31, 1997 REMAINING WEIGHTED-AVERAGE 31, 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 0.5 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>
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
F-15
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. STOCK COMPENSATION PLANS (CONTINUED)
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 16,476 shares, 14,278 shares and 12,996 shares to employees
in 1995, 1996 and 1997, respectively. The fair value of the employees' purchase
rights were estimated using the following assumptions for 1995, 1996 and 1997,
respectively: no dividend yield for all years; an expected life of six months,
one year and one year; expected volatility of 64%, 70% and 70%; and risk-free
interest rates of 5.7%, 5.2% and 5.3%. The weighted-average fair value of those
purchase rights granted in 1995, 1996 and 1997 was $5.40, $5.20 and $6.58,
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.
On January 27, 1994, Digital entered into an employment agreement with one
of its current employees promising a grant of one percent of the then
outstanding Digital common stock upon sale of more than 50 percent of Digital's
common stock to an outside investor or a public offering. Pursuant to this
agreement and in connection with the May 1998 merger between Digital and Veeco,
this employee was issued $1,585,000 of Digital stock which resulted in a
non-cash compensation charge which is a merger expense.
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, 1996 and
1997 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation......................................................... $ 257 $ 702
Deferred tax assets:
Inventory valuation................................................................ 1,704 2,247
Foreign net operating loss carryforwards........................................... 795 1,084
Warranty and installation.......................................................... 379 1,878
Other.............................................................................. 365 387
--------- ---------
Total deferred tax assets............................................................ 3,243 5,596
Valuation allowance.................................................................. (795) (994)
--------- ---------
Net deferred tax assets.............................................................. 2,448 4,602
--------- ---------
Net deferred taxes................................................................... $ 2,191 $ 3,900
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
6. INCOME TAXES (CONTINUED)
For financial reporting purposes, income (loss) before income taxes consists
of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Domestic..................................................... $ 23,069 $ 34,135 $ 33,654
Foreign...................................................... 261 (297) (17)
--------- --------- ---------
$ 23,330 $ 33,838 $ 33,637
--------- --------- ---------
--------- --------- ---------
</TABLE>
Significant components of the provision (benefit) for income taxes are
presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Current:
Federal............................................................................ $ 3,310 $ 6,442 $ 7,371
Foreign............................................................................ 379 129 306
State.............................................................................. 471 1,542 1,642
Utilization of research tax credits carryforward................................... (909) (277) --
Utilization of net operating losses................................................ (708) -- --
--------- --------- ---------
2,543 7,836 9,319
Deferred:
Federal............................................................................ 171 (795) (1,517)
Foreign............................................................................ (90) -- --
State.............................................................................. (127) (100) (192)
--------- --------- ---------
(46) (895) (1,709)
--------- --------- ---------
$ 2,497 $ 6,941 $ 7,610
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Tax at U.S. statutory rates...................................................... $ 8,166 $ 11,843 $ 11,773
State income taxes (net of federal benefit)...................................... 278 856 925
Goodwill amortization............................................................ 44 46 46
Nondeductible merger expenses.................................................... -- -- 700
Other nondeductible expenses..................................................... 56 52 116
Recognition of previously unrecognized deferred tax assets, net.................. (314) -- --
Income of "S" Corporation not subject to federal corporation tax................. (4,125) (5,728) (4,875)
Operating losses not currently realizable........................................ 212 225 335
Operating losses currently realizable............................................ (1,582) -- (13)
Research and development tax credit.............................................. (113) (184) (619)
Benefit of foreign sales corporation............................................. (144) (173) (479)
Other............................................................................ 19 4 (299)
--------- --------- ---------
$ 2,497 $ 6,941 $ 7,610
--------- --------- ---------
--------- --------- ---------
</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.
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
IBM AGREEMENT
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.
F-18
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
MINIMUM LEASE COMMITMENTS
Minimum lease commitments as of December 31, 1997 for property and equipment
under operating lease agreements (exclusive of renewal options) are payable as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998................................................................ $ 1,440
1999................................................................ 1,210
2000................................................................ 979
2001................................................................ 931
2002................................................................ 861
Thereafter.......................................................... 617
------
$ 6,038
------
------
</TABLE>
Rent charged to operations amounted to $1,266,000, $1,408,000 and $1,979,000
in 1995, 1996 and 1997, respectively. In addition, the Company is obligated
under the leases for certain other expenses, including real estate taxes and
insurance.
ROYALTIES
The Company has arrangements with three universities, three companies, three
research institutions, the United States government and two individuals to use
patents in accordance with license agreements. Royalties and license fees
expensed under these agreements approximated $1,189,000, $986,000 and $716,000
in 1995, 1996 and 1997, respectively.
ENVIRONMENTAL REMEDIATION
In compliance with a Cleanup and Abatement Order ("CAO") issued by the
California Regional Water Quality Control Board, Central Coast Region, the
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.
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.
F-19
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The Company is aware that petroleum hydrocarbon contamination has been
detected in the soil at the site of a facility leased by the Company in Santa
Barbara, California. The Company has been indemnified for any liabilities it may
incur which arise from environmental contamination at the site. Despite such
indemnification, the Company does not believe that any material loss or expense
is probable in connection with any such liabilities.
The former owner of the land and building in which Digital's operating
facilities and offices are located has disclosed that there are hazardous
substances present in the ground under the building. Management believes that
the comprehensive indemnification clause that is part of the purchase contract
provides adequate protection against any environmental issues that may arise.
LITIGATION
One patent licensor has asserted that the Company has incorrectly calculated
royalties for the patent on which the Company has paid royalties since inception
of the license agreement. Management believes the resolution of the matter will
not have a material adverse impact on the Company's consolidated financial
position, results of operations or cash flows.
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.
The Company is the defendant in a lawsuit by one of its former distributors
alleging wrongful termination and other claims. The former distributor is
seeking lost profits and commissions of approximately $3,000,000 plus exemplary
damages and the costs of the proceedings. Management, in consultation with legal
counsel, believes the resolution of the matter will not have a material adverse
impact on the Company's consolidated financial position, results of operations
or cash flows.
RELATED PARTY TRANSACTIONS
Balances and transactions with Digital GmbH that are reflected in the
accompanying financial statements are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Accounts receivable.............................................. $ 922 $ 1,788
Sales............................................................ 3,461 3,025
</TABLE>
F-20
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The Company makes purchases of inventory from a company, which is owned
partially by an individual who is also employed by Digital and has a management
position in Digital. Payments to this related company in 1995, 1996 and 1997
were approximately $2,386,000, $2,937,000 and $3,120,000, respectively.
CONCENTRATION OF CREDIT RISK
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Data storage............................................................ 33.4% 45.5% 53.2%
Semiconductor........................................................... 27.6 23.0 19.8
Flat panel display...................................................... 3.5 2.2 1.7
</TABLE>
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 15%, 11% and 14% and sales
to another customer accounted for approximately 6%, 11% and 11% of the Company's
net sales during the years ended December 31, 1995, 1996 and 1997, respectively.
At December 31, 1996 and 1997, accounts receivable due from two customers
represented 16% and 15% of aggregate accounts receivable, respectively.
The Company manufactures and sells its products to companies in different
geographic areas. 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 areas:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
United States....................................... $ 16,528 $ 22,131
Europe.............................................. 5,920 8,856
Far East............................................ 9,259 12,738
Other............................................... 797 1,202
--------- ---------
$ 32,504 $ 44,927
--------- ---------
--------- ---------
</TABLE>
F-21
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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 Japan are included
in the United States amounts) are summarized below:
<TABLE>
<CAPTION>
NET SALES TO
UNAFFILIATED CUSTOMERS OPERATING INCOME (LOSS) TOTAL ASSETS
---------------------------------- ------------------------------- ---------------------------------
1995 1996 1997 1995 1996 1997 1995 1996 1997
---------- ---------- ---------- --------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
United States......... $ 118,443 $ 160,290 $ 212,288 $ 23,383 $ 33,924 $ 33,669 $ 83,919 $ 105,601 $ 149,708
Europe (1)............ 11,863 11,214 12,436 651 (69) 584 8,790 6,953 8,786
Japan................. 913 915 1,262 (394) (231) (609) 539 785 1,137
Eliminations.......... (7,243) (7,360) (9,258) (131) (131)
---------- ---------- ---------- --------- --------- --------- ---------- ---------- ---------
$ 123,976 $ 165,059 $ 216,728 $ 23,509 $ 33,493 $ 33,644 $ 93,248 $ 113,339 $ 159,631
---------- ---------- ---------- --------- --------- --------- ---------- ---------- ---------
---------- ---------- ---------- --------- --------- --------- ---------- ---------- ---------
</TABLE>
- ------------------------------
(1) Principally reflects the Company's operations and assets in France, the
United Kingdom and Germany.
Export sales from the Company's United States operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Asia Pacific................................................. $ 18,429 $ 29,648 $ 37,731
Japan........................................................ 22,823 30,437 28,670
Europe....................................................... 7,045 11,317 11,273
Other........................................................ 1,967 1,748 2,324
--------- --------- ---------
$ 50,264 $ 73,150 $ 79,998
--------- --------- ---------
--------- --------- ---------
</TABLE>
The aggregate foreign exchange gains and (losses) included in determining
consolidated results of operations were $100,000, $(153,000) and $(34,000) in
1995, 1996, and 1997, respectively.
9. DEFINED CONTRIBUTION BENEFIT PLANS
The Company maintains three 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 of the three plans. Under
the plans, employees may contribute up to a maximum of 15% to 20% of their
annual wages, depending on the plan. Employees are immediately vested in their
contributions. Other than Digital's plan, the plans provide for partial matching
contributions by the Company, which vest over a five-year period. Company
contributions to the plans were $108,000, $205,000 and $296,000 in 1995, 1996
and 1997, respectively.
F-22
<PAGE>
MANAGEMENT'S 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 Veeco's consolidated statements of income
to its total net sales:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales........................................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................................... 49.8 50.6 51.1 50.9 54.0
--------- --------- --------- --------- ---------
Gross profit..................................................... 50.2 49.4 48.9 49.1 46.0
Operating expenses:
Research and development....................................... 10.7 10.7 11.3 10.9 13.2
Selling, general and administrative............................ 20.3 18.0 19.2 18.1 20.2
Amortization................................................... 0.2 0.1 0.2 0.1 0.2
Other-net...................................................... 0.1 0.3 (0.2) (0.2) (0.4)
Merger and reorganization expenses............................. -- -- 1.0 1.4 4.8
Write-off of purchased in-process technology................... -- -- 1.9 2.6 --
--------- --------- --------- --------- ---------
Total operating expenses......................................... 31.3 29.1 33.4 32.9 38.0
--------- --------- --------- --------- ---------
Operating income................................................. 18.9 20.3 15.5 16.2 8.0
Interest expense (income), net................................... 0.1 (0.2) 0.0 0.0 0.5
--------- --------- --------- --------- ---------
Income before income taxes....................................... 18.8 20.5 15.5 16.2 7.5
Income tax provision............................................. 2.0 4.2 3.5 3.7 2.3
--------- --------- --------- --------- ---------
Net income....................................................... 16.8% 16.3% 12.0% 12.5% 5.2%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-23
<PAGE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales were $216.7 million for the year ended December 31, 1997
representing an increase of approximately $51.7 million or 31.3%, when compared
to the year ended December 31, 1996. The increase reflects growth in Veeco's
process equipment and metrology product lines. Sales in the U.S. increased
approximately 54.2%, while international sales included a 27.3% increase in Asia
Pacific, a 5.2% increase in Europe and a 4.5% decrease in Japan.
Veeco received approximately $218.0 million of orders in 1997 compared to
approximately $186.1 million in 1996, reflecting both the increased demand for
high density hard drives and the continued industry transition to the next
generation MR thin film magnetic heads as well as increased semiconductor
industry investment in advanced products. The book-to-bill ratio was 1.01 to 1
for the year ended December 31, 1997.
Sales of metrology products increased by 22.5% to approximately $112.8
million in 1997 compared to 1996 principally as a result of increased sales of
Wyko optical interferometers, Dektak stylus profilers and scatterometers, atomic
force microscopes and Digital SPM systems. Sales of Wyko optical interferometers
increased by 81%, reflecting increased acceptance by the semiconductor industry
of non-contact optical measurement for advanced packaging. Sales of Dektak
stylus profilers and scatterometers increased by 21% reflecting acceptance of
new product introductions in the data storage and semiconductor industries.
Atomic force microscope sales increased 15% reflecting increased demand for
advanced semiconductor applications. Nano Scope Dimension SPM systems sales
increased by approximately 16%, partially offset by a decrease in sales of
Digital's other product groups. Sales of process equipment increased by 59% to
approximately $84.5 million in 1997 compared to 1996, driven principally by
increased demand from the data storage industry for equipment used in the
production of MR and GMR heads for high density hard drives. Of this increase,
approximately 39% was due to growth in volume, with the balance of the increase
due to a shift in customer demand to multi-process modules with increased
automation which resulted in an approximately 47% higher average selling price
of a system. Sales of industrial measurement products were approximately $19.4
million in 1997, which remained relatively flat when compared to 1996.
Gross profit increased to approximately $106.0 million, or 48.9% of net
sales for 1997, compared to $81.5 million or 49.4% of net sales for 1996. This
decrease in gross margin is principally attributable to a decrease in gross
margin in Digital's scanning probe/atomic force microscopes from 57.4% in 1996
to 52.6% in 1997.
Research and development expense increased by approximately $6.8 million to
approximately $24.5 million, or 11.3% of net sales in 1997 compared to
approximately $17.7 million or 10.7% of sales in 1996, due to increased R&D
investment in process equipment and metrology. Increased R&D investment was made
in process equipment in physical vapor deposition (PVD) and in ion beam
deposition. In metrology, increased investments were made in Wyko optical
interferometer products for both data storage and semiconductor market products
along with investments in Dektak stylus profilers for the semiconductor, data
storage and flat panel display markets and investments in Digital products for
integrated circuit and data storage applications.
Selling, general and administrative expenses increased by approximately
$11.9 million to 19.2% of net sales in 1997 from 18.0% for 1996. Selling expense
increased $9.0 million, principally due to higher sales commissions resulting
from higher sales volume, increased compensation and travel expense as a result
of additional sales and service personnel required to support Veeco's growth and
an increase in advertising and marketing to support new products.
F-24
<PAGE>
Operating expenses in 1997 include merger costs incurred in connection with
the merger with Wyko Corporation of approximately $2.3 million, consisting of
investment banking, legal and other transaction costs. Operating expenses in
1997 also include the effect of a $4.2 million charge 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 had not reached technological
feasibility and have no future alternative uses.
Income taxes amounted to $7.6 million or 22.6% of income before income taxes
for 1997 as compared to $6.9 million or 20.5% of income before income taxes for
1996. The principal reason for the low effective tax rate when compared to the
statutory income tax rate is due to Digital's "S" Corporation status. As an "S"
Corporation, Digital was not subject to federal income taxes at the corporation
level.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net sales were $165.1 million for the year ended December 31, 1996
representing an increase of approximately $41.1 million, or 33.1%, for the
fiscal year ended December 31, 1996 as compared to 1995. The increase reflects
growth in all three of Veeco's product lines: process equipment, metrology and
industrial measurement. Sales in the U.S. increased approximately 30.9%, while
international sales included a 60.9% increase in Asia Pacific, a 32.1% increase
in Japan and a 19.2% increase in Europe.
Sales of metrology products increased by 27.2% to approximately $92.1
million in 1996 compared to 1995 principally as a result of increased sales of
Wyko products for mass memory, semiconductor and microelectronic applications
and IBM-manufactured SXM Workstations for semiconductor applications and
increased sales in Digital scanning probe microscopes. Sales of process
equipment increased by 60.2% to approximately $53.2 million 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 MR and inductive thin film magnetic heads required in high density hard
drives. Sales of industrial measurement products increased by 7.6% to
approximately $19.8 million in 1996 compared to 1995 as a result of the
introduction of new products in the leak detection product line.
Veeco received approximately $186.1 million of orders in 1996 compared to
approximately $141.8 million of orders in 1995 for a 31.2% increase. This
resulted in a book-to-bill ratio of 1.13 to 1 for 1996.
Gross profit increased to approximately $81.5 million, or 49.4% of net sales
for 1996, compared to $62.3 million, or 50.2% of net sales for 1995. The decline
in gross margin percentage was principally due to changes in product mix and
geographic sales breakdown in metrology and industrial measurement product
lines.
Research and development expense increased by approximately $4.4 million to
approximately $17.7 million, or 10.7% of net sales in 1996 compared to
approximately $13.3 million or 10.7% of sales in 1995, as Veeco increased its
R&D investment in each of its product lines with particular emphasis in process
equipment and Digital products for integrated circuit and data storage
applications.
Selling, general and administrative expenses increased by approximately $4.6
million in 1996, but decreased as a percentage of sales to 18.0% for 1996 from
20.3% for 1995. Selling expense increased $3.6 million principally due to higher
sales commissions resulting from higher sales volume, as well as increased
compensation and travel expense as a result of additional sales and service
personnel required to support Veeco's growth.
Income taxes amounted to $6.9 million or 20.5% of income before income taxes
for 1996 as compared to $2.5 million or 10.7% of income before income taxes for
1995. In each period the lower effective income tax rate when compared to the
statutory income tax rate is impacted by Digital's "S" Corporation status. As an
"S" Corporation, Digital was not subject to federal income taxes at the
F-25
<PAGE>
corporation level. Veeco's effective tax rate in 1995 was also lower as a result
of Veeco recognizing previously unrecognized deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $18.1 million in 1997 compared to
$23.4 million and $12.4 million in 1996 and 1995, respectively. Cash provided by
operations in 1997 resulted from (i) net income plus non-cash charges of $32.4
million for depreciation and amortization and the write-off of purchased
in-process technology plus (ii) increases of accounts payable, accrued expenses
and other current liabilities, and other net operating assets and liabilities of
$8.7 million, $4.5 million and $0.6 million, respectively. These items were
partially offset by increases in accounts receivable, inventories and deferred
income taxes of $12.8 million, $13.6 million and $1.7 million, 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 plus non-cash charges for depreciation and amortization of $28.9 million
plus (ii) increases of accounts payable, accrued expenses and other current
liabilities, and other net operating assets and liabilities of $2.9 million,
$4.1 million and $1.2 million, respectively. These items were partially offset
by increases in accounts receivable, inventories and deferred income taxes of
$4.2 million, $8.7 million and $0.9 million, respectively. The increases in
accounts receivable, inventories, accounts payable and accrued expenses are
attributable to the increased 1996 sales volume.
Veeco used $25.4 million for investing activities in 1997 compared to
$4.1 million and $1.4 million in 1996 and 1995, respectively. Cash used for
investing activities in 1997 primarily related to the PVD acquisition ($4.4
million) and capital expenditures ($21.0 million). Capital expenditures in
1997 were principally for a parcel of land and a building, manufacturing
facilities, laboratory and test equipment and business system upgrades. Cash
used in investing activities in 1996 and 1995 were for capital expenditures.
Veeco generated $1.6 million of cash from financing activities in 1997
compared to a use of $14.0 million in 1996 and generation of $4.4 million of
cash from investing activities in 1995. Cash used in 1996 and generated in
1997 principally resulted from distributions of $14.0 million and $10.0
million, respectively, to former Digital shareholders partially offset by the
proceeds from the sale of Common Stock in 1996 and 1997, and proceeds from
long-term debt in 1997.
The Company has a $30.0 million Credit Facility (the "Credit Facility")
which may be used for working capital, acquisitions and general corporate
purposes. The Credit Facility bears interest at the prime rate of the lending
banks, but is adjustable to a maximum rate of 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.
The Company will be required to repay promissory notes owed to former
stockholders of Digital in the aggregate principal amount of $8,000,000 when
they become due in March 2000. The notes bear interest at an annual rate of
7.21%.
The Company believes that existing cash balances together with cash
generated from operations, amounts available under the Credit Facility and net
proceeds from the sale of Common Stock in this offering will be sufficient to
meet the Company's projected working capital and other cash flow requirements at
least through 1998.
F-26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated data of Veeco as of and for the years ended
December 31, 1995 through 1997 have been derived from its audited
consolidated financial statements and notes thereto, which are included
elsewhere herein, and should be read in conjunction with such financial
statements and notes thereto. The selected consolidated financial data have
been retroactively restated to reflect Veeco's mergers with Wyko Corporation
in July 1997 and Digital Instruments, Inc. in May 1998, which have been
accounted for as pooling of interests transactions.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales................................................... $ 123,976 $ 165,059 $ 216,728
Cost of sales............................................... 61,693 83,521 110,680
---------- ---------- ----------
Gross profit................................................ 62,283 81,538 106,048
Costs and expenses.......................................... 38,774 48,045 65,954
Merger and reorganization expenses (1)...................... -- -- 2,250
Write-off of purchased in-process technology................ -- -- 4,200
---------- ---------- ----------
Operating income............................................ 23,509 33,493 33,644
Interest expense (income), net.............................. 179 (345) 7
---------- ---------- ----------
Income before income taxes.................................. 23,330 33,838 33,637
Income tax provision........................................ 2,497 6,941 7,610
---------- ---------- ----------
Net income.................................................. $ 20,833 $ 26,897 $ 26,027
---------- ---------- ----------
---------- ---------- ----------
Net income per common share................................. $ 1.52 $ 1.89 $ 1.81
Diluted net income per common share......................... $ 1.48 $ 1.86 $ 1.75
Weighted average shares outstanding......................... 13,750 14,251 14,392
Diluted weighted average shares outstanding................. 14,068 14,490 14,908
PRO FORMA PRESENTATION (2):
Income before income taxes................................ $ 23,330 $ 33,838 $ 33,637
Pro forma income tax provision............................ 7,054 12,963 12,817
---------- ---------- ----------
Pro forma net income...................................... $ 16,276 $ 20,875 $ 20,820
---------- ---------- ----------
---------- ---------- ----------
Pro forma net income per common share..................... $ 1.18 $ 1.46 $ 1.45
Pro forma diluted net income per common share............. $ 1.16 $ 1.44 $ 1.40
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
1997
----------------------
<S> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 20,444
Working capital................................................. 68,778
Excess of cost over net assets acquired, net.................... 4,318
Total assets.................................................... 159,631
Long-term debt (including current installments)................. 17,356
Shareholders' equity............................................ 93,758
</TABLE>
- ------------------------
(1) During 1997, the Company recorded a $2.3 million charge for merger related
fees consisting of investment banking, legal and other transaction costs in
connection with the merger with Wyko.
(2) Pro forma net income and pro forma earnings per share present income taxes
as if Digital, which was merged with the Company in May 1998 in a
transaction accounted for as a pooling of interests, had been a "C"
corporation for all periods presented and, therefore, subject to federal
income taxes at the corporation level. Prior to the merger, Digital had
elected "S" corporation status for income tax purposes and, therefore, was
not subject to federal income taxes.
F-28
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VEECO INSTRUMENTS INC.
Date: January 11, 1999 By: /s/ Edward H. Braun
--------------------------------
Edward H. Braun
Chairman, Chief Executive
Officer and President
