<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 21, 1999
FILED PURSUANT TO RULE 424(A)
REGISTRATION NUMBER 333-70417
PROSPECTUS
3,575,000 SHARES
[LOGO]
COMMON STOCK
--------------
We are offering and selling 1,000,000 shares of common stock with this
prospectus. Certain of our stockholders are offering and selling 2,575,000
shares of common stock with this prospectus. We will not receive any of the
proceeds from the sale of shares by the selling stockholders. Our shares are
traded on the Nasdaq National Market under the symbol "VECO." On January 19,
1999, the last reported sale price of our common stock on the Nasdaq National
Market was $60 11/16 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
-----------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------- -----
<S> <C> <C>
Public Offering Price......................................... $ $
Underwriting Discount......................................... $ $
Proceeds, before expenses, to Veeco........................... $ $
Proceeds to Selling Stockholders.............................. $ $
</TABLE>
The underwriters may also purchase up to an additional 150,000 shares from
us and 386,250 shares from the selling stockholders at the public offering
price, less the underwriting discount, within 30 days from the date of this
prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about February , 1999.
------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
<PAGE>
SOUNDVIEW TECHNOLOGY GROUP
------------------
The date of this prospectus is , 1999.
<PAGE>
[Artwork]
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Where You Can Find More Information......................................................................... iv
Incorporation of Certain Documents by Reference............................................................. iv
Prospectus Summary.......................................................................................... 1
Special Note Regarding Forward Looking Statements........................................................... 5
Risk Factors................................................................................................ 5
Use of Proceeds............................................................................................. 11
Dividend Policy............................................................................................. 11
Price Range of Common Stock................................................................................. 11
Capitalization.............................................................................................. 12
Selected Consolidated Financial Data........................................................................ 13
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 15
Business.................................................................................................... 22
Management.................................................................................................. 31
Selling Stockholders........................................................................................ 34
Underwriting................................................................................................ 36
Legal Matters............................................................................................... 38
Experts..................................................................................................... 38
Index to Consolidated Financial Statements and Financial Statement Schedule................................. F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
THE INFORMATION IN THIS PROSPECTUS MAY NOT CONTAIN ALL OF THE INFORMATION
THAT MAY BE IMPORTANT TO YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, AS WELL AS
THE DOCUMENTS INCORPORATED BY REFERENCE IN THE PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. ALL REFERENCES TO "WE", "US", "OUR", "VEECO" OR THE
"COMPANY" IN THIS PROSPECTUS MEANS VEECO INSTRUMENTS INC. AND ALL ENTITIES OWNED
OR CONTROLLED BY VEECO INSTRUMENTS INC., EXCEPT WHERE IT IS MADE CLEAR THAT THE
TERM MEANS ONLY THE PARENT COMPANY.
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, therefore, we file reports,
proxy statements, information statements and other information with the
Securities and Exchange Commission (the "Commission"). You may inspect and copy
this information (at prescribed rates) at the Commission's public reference
facilities at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Please call the Commission at
1-800-SEC-0330 for more information on its public reference rooms. The
Commission also maintains an Internet Website at http://www.sec.gov that
contains reports, proxy statements and information statements and other
information regarding issuers that file electronically with the Commission. In
addition, this information may also be inspected at the offices of the National
Association of Securities Dealers, Inc., located at 1735 K Street, N.W.,
Washington, D.C. 20006.
We have filed with the Commission a Registration Statement (which contains
this prospectus) on Form S-3 (the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"). The Registration Statement
relates to the Common Stock offered by us and the Selling Stockholders. This
prospectus does not contain all of the information set forth in the Registration
Statement and its exhibits and schedules. Statements contained in this
prospectus as to the contents of any document referred to are not necessarily
complete, and in each instance we refer you to the copy of such document filed
as an exhibit to the Registration Statement. For further information with
respect to us and the securities offered hereby, we refer you to the
Registration Statement and its exhibits and schedules, which may be obtained at
the locations described in the preceding paragraph.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us (File No. 0-16244) to incorporate by reference the
information we file with them, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this prospectus, and
information that we later file with the Commission will automatically update and
supersede the information in this prospectus. Accordingly, we incorporate by
reference the documents listed below and any future filings we make with the
Commission under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
- The description of our Common Stock which is contained in our Registration
Statement on Form S-1 filed with the Commission on June 27, 1995 and any
amendments or reports filed for the purpose of updating such description.
- Our Annual Report on Form 10-K for the year ended December 31, 1997, as
amended.
- Our Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998, in each case, if applicable, as
amended.
- Our Proxy Statement dated May 9, 1998.
- Our Current Reports on Form 8-K filed with the Commission on February 13,
1998, March 9, 1998, August 11, 1998 and January 11, 1999.
All documents which we subsequently file pursuant to Section 13(a), 13(c),
14, or 15(d) of the Exchange Act prior to the termination of the offering shall
be deemed to be a part of this prospectus from the date of filing of such
documents. These documents are or will be available for inspection or copying at
the locations identified above under the caption "Where You Can Find More
Information". Information that we file with the Commission after the date of
this prospectus will automatically update and supersede the information
contained or incorporated by reference in this prospectus.
iv
<PAGE>
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any and all of the documents that have been incorporated by reference in
this prospectus (other than exhibits to such documents unless such exhibits are
specifically incorporated by reference). You should direct requests for
documents to Veeco Instruments Inc., Terminal Drive, Plainview, New York 11803,
Attention: Secretary. The telephone number is (516) 349-8300.
Veeco, UPA, Xpert, Microetch, Wyko, TappingMode and Dektak are our
trademarks, SXM is a trademark of International Business Machines Corporation
and Windows is a trademark of Microsoft Corporation.
v
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION.
THE COMPANY
We design, manufacture, market and service a broad line of equipment
primarily used by manufacturers in the data storage and semiconductor
industries. Our metrology, or measurement, equipment is primarily used to
provide critical measurements such as thickness, width, height, angle and
roughness of certain features on thin film magnetic heads used in hard disk
drives, as well as on semiconductor devices. This metrology equipment allows
customers to monitor their products throughout the manufacturing process in
order to improve yields, reduce costs and improve product quality. Our second
major product area, process equipment, either deposits or removes various
materials as an integral part of the production of current and next generation
thin film magnetic heads. We sell our products throughout the world to data
storage and semiconductor industry customers, including leading companies such
as IBM, Seagate and Read-Rite.
The industries we serve produce storage devices and semiconductors used in a
wide range of technology products, including personal computers and servers, as
well as in emerging product areas such as television set-top boxes, digital
cameras and personal digital assistants. These products continually require
smaller, faster and less expensive microelectronic components, including thin
film magnetic heads and semiconductor devices. Devices with smaller feature
sizes and higher levels of performance require more manufacturing steps which,
in turn, require increased use of precise etching, deposition and metrology
equipment in the manufacturing process. As a result, manufacturers of thin film
magnetic heads and semiconductor devices are required to increase their
investments in advanced manufacturing equipment capable of producing these
components as quickly and cost-effectively as possible, thereby driving the
demand for the types of products we sell. We work closely with our customers to
understand their next generation technology roadmaps in order to help them
develop and refine critical manufacturing processes and achieve their product
objectives.
Our corporate strategy focuses on providing our data storage and
semiconductor customers with technical expertise and equipment to improve the
quality of their products and reduce the time it takes them to bring new
products to market. Key elements of our strategy include:
- Expanding our product lines to be the leading full service metrology and
process equipment supplier to data storage manufacturers, and focusing on
emerging applications for our metrology equipment in the semiconductor
industry
- Capitalizing on our technology expertise and working closely with our
customers to develop next-generation products
- Pursuing strategic mergers and acquisitions to provide our customers with
a broad range of complementary products and technologies
- Identifying important trends in technology in order to capitalize on
particular areas of growth
- Utilizing our global sales and service network to provide world class
support to our customers for existing and future products
During the last several years, we have increased our focus on metrology
equipment, as demonstrated by our mergers with Wyko Corporation in July 1997 and
Digital Instruments, Inc. in May 1998. These mergers significantly broadened our
metrology product offerings. For the nine months ended September 30, 1998, our
metrology product line accounted for 62.8% of our net sales.
Our principal executive offices are located at Terminal Drive, Plainview,
New York 11803, and our telephone number is (516) 349-8300.
1
<PAGE>
THE OFFERING
EXCEPT AS OTHERWISE NOTED, ALL SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 1,000,000 shares
Common Stock offered by the Selling
Stockholders............................... 2,575,000 shares
Total Offering........................... 3,575,000 shares
Common Stock outstanding as of
January 19, 1999........................... 14,846,696 shares
Common Stock to be outstanding after the
Offering................................... 15,846,696 shares. This does not include (1)
1,801,129 shares of Common Stock reserved for
issuance upon exercise of stock options
(options to purchase 1,681,455 of which were
outstanding as of January 19, 1999) and (2)
176,899 shares of Common Stock reserved for
issuance pursuant to the Veeco Instruments
Inc. Employee Stock Purchase Plan.
Risk Factors................................. Investing in our Common Stock involves a high
degree of risk. See "Risk Factors."
Use of Proceeds.............................. For capital expenditures, working capital and
general corporate purposes, including
potential acquisitions. See "Use of
Proceeds."
We will not receive any proceeds from the
sale of shares in the offering by the Selling
Stockholders.
Nasdaq National Market Symbol................ VECO
</TABLE>
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA (1):
Net sales................................................... $ 123,976 $ 165,059 $ 216,728 $ 158,952 $ 155,345
Cost of sales............................................... 61,693 83,521 110,680 80,829 83,883
---------- ---------- ---------- ---------- ----------
Gross profit................................................ 62,283 81,538 106,048 78,123 71,462
Costs and expenses.......................................... 38,774 48,045 65,954 45,974 51,549
Merger and reorganization expenses (2)...................... -- -- 2,250 2,250 7,500
Write-off of purchased in-process technology................ -- -- 4,200 4,200 --
---------- ---------- ---------- ---------- ----------
Operating income............................................ 23,509 33,493 33,644 25,699 12,413
Interest expense (income), net.............................. 179 (345) 7 (79) 748
---------- ---------- ---------- ---------- ----------
Income before income taxes.................................. 23,330 33,838 33,637 25,778 11,665
Income tax provision........................................ 2,497 6,941 7,610 5,927 3,499
---------- ---------- ---------- ---------- ----------
Net income.................................................. $ 20,833 $ 26,897 $ 26,027 $ 19,851 $ 8,166
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per common share................................. $ 1.52 $ 1.89 $ 1.81 $ 1.38 $ 0.56
Diluted net income per common share......................... $ 1.48 $ 1.86 $ 1.75 $ 1.33 $ 0.55
Weighted average shares outstanding......................... 13,750 14,251 14,392 14,365 14,577
Diluted weighted average shares outstanding................. 14,068 14,490 14,908 14,879 14,813
PRO FORMA PRESENTATION (3):
Income before income taxes................................ $ 23,330 $ 33,838 $ 33,637 $ 25,778 $ 11,665
Pro forma income tax provision............................ 7,054 12,963 12,817 9,850 4,316
---------- ---------- ---------- ---------- ----------
Pro forma net income...................................... $ 16,276 $ 20,875 $ 20,820 $ 15,928 $ 7,349
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income per common share..................... $ 1.18 $ 1.46 $ 1.45 $ 1.11 $ 0.50
Pro forma diluted net income per common share............. $ 1.16 $ 1.44 $ 1.40 $ 1.07 $ 0.50
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------
AS ADJUSTED
ACTUAL (4)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA (1):
Cash and cash equivalents............................................................ $14,251 $71,608
Working capital...................................................................... 77,844 135,201
Excess of cost over net assets acquired, net......................................... 4,220 4,220
Total assets......................................................................... 165,891 223,248
Long-term debt (including current installments)...................................... 17,200 17,200
Shareholders' equity................................................................. 105,674 163,031
</TABLE>
- ------------------------
(1) All financial information presented has been retroactively restated to
reflect our 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) Merger and reorganization expenses principally related to the merger with
Digital amounted to $7.5 million which was comprised of transaction fees and
expenses of $3.3 million, a $1.6 million non-cash compensation charge, $1.4
million of duplicate facilities costs and $1.2 million of reorganization
costs, all of which were charged to operating expenses during the nine-month
period ended September 30, 1998. During 1997, the Company recorded a $2.3
million charge for merger related fees consisting of investment banking,
legal and other transaction costs in connection with the merger with Wyko.
3
<PAGE>
(3) Pro forma net income and pro forma earnings per share present income taxes
as if Digital, which was merged with the Company in May 1998 in a
transaction accounted for as a pooling of interests, had been a "C"
corporation for all periods presented and, therefore subject to federal
income taxes at the corporation level. Prior to the merger, Digital had
elected "S" corporation status for income tax purposes and, therefore, was
not subject to federal income taxes.
(4) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
us in this prospectus at an estimated offering price of $60 11/16 per share
and after deducting the underwriting discounts and estimated offering
expenses, and the application of the estimated net proceeds. See "Use of
Proceeds" and "Capitalization."
4
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain certain
forward-looking statements including, without limitation, statements concerning
our expectations of future sales, gross profits, research and development
expenses, selling, general and administrative expenses, product introductions
and cash requirements. Forward-looking statements often, although not always,
include words or phrases such as "will likely result", "expect", "will
continue", "anticipate", "estimate", "intend", "plan", "project", "outlook" or
similar expressions. Actual results may vary materially from those expressed in
such forward-looking statements. Factors which could cause actual results to
differ from expectations include those set forth under "Risk Factors." We cannot
be certain that our results of operations will not be adversely affected by one
or more of these factors.
RISK FACTORS
AN INVESTMENT IN THE SHARES OFFERED BY THIS PROSPECTUS INVOLVES A HIGH
DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS
THE OTHER INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS
BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
DEPENDENCE ON MICROELECTRONICS INDUSTRY; CYCLICALITY OF DATA STORAGE AND
SEMICONDUCTOR INDUSTRIES. Our business depends in large part upon the capital
expenditures of data storage and semiconductor manufacturers which accounted for
the following percentages of our net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
Data Storage...................................... 33.4% 45.5% 53.2% 50.4%
Semiconductor..................................... 27.6% 23.0% 19.8% 22.5%
</TABLE>
The data storage and semiconductor industries have been characterized by
cyclicality. These industries have experienced significant economic downturns at
various times in the last decade, characterized by diminished product demand,
accelerated erosion of average selling prices and production overcapacity.
Recently, the data storage and semiconductor industries have experienced
inventory oversupply and poor operating results and, as a result, our sales to
data storage and semiconductor customers were weaker in 1998 than in 1997.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Our quarterly results have
fluctuated significantly in the past and we expect this trend to continue.
Factors which affect our quarterly results include:
- specific economic conditions in the data storage and semiconductor
industries
- the timing of significant orders
- shipment delays
- specific feature requests by customers
- the introduction of new products by us and our competitors
- production and quality problems
- changes in the cost of materials
- disruption in sources of supply
- seasonal patterns of capital spending by customers
- a downturn in the market for personal computers or other products
incorporating data storage technology and semiconductors
- market acceptance of our systems and our customers' products
Many of these factors are beyond our control. If our net sales levels in a
particular quarter do not meet expectations, our operating results will be
adversely affected, which may have an adverse impact on our Common Stock price.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The
data storage and semiconductor manufacturing industries are subject to rapid
technological change and new product
5
<PAGE>
introductions and enhancements. Our ability to remain competitive will depend in
part upon our ability to develop in a timely and cost effective manner new and
enhanced systems at competitive prices and to accurately predict technology
transitions. In addition, new product introductions or enhancements by our
competitors could cause a decline in sales or loss of market acceptance of our
existing products. Increased competitive pressure could also lead to intensified
price competition resulting in lower margins, which could materially and
adversely affect our business, financial condition and results of operations.
Our success in developing, introducing and selling new and enhanced systems
depends upon a variety of factors, including:
- our product offerings
- timely and efficient completion of product design and development
- timely and efficient implementation of manufacturing processes
- effective sales, service and marketing
- product performance in the field
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
products under development and the equipment required to produce such products.
We cannot be certain that we will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing existing products.
LIMITED SALES BACKLOG. Our backlog at the beginning of a quarter typically
does not include all sales required to achieve our sales objective for that
quarter. Moreover, all customer purchase orders are subject to cancellation or
rescheduling by the customer, generally with limited or no penalties. Therefore,
backlog at any particular date is not necessarily representative of actual sales
for any succeeding period. Our net sales and operating results for a quarter may
depend upon orders we obtain for systems to be shipped in the same quarter that
the order is received. In addition, we derive a substantial portion of our net
sales in any fiscal period from the sale of a relatively small number of
high-priced systems. As a result, the timing of recognition of revenue for a
single transaction could have a material adverse effect on our sales and
operating results. Our business and financial results for a particular period
could be materially and adversely affected if an anticipated order for even one
system is not received in time to permit shipping during the period.
HIGHLY COMPETITIVE INDUSTRY. The data storage and semiconductor capital
equipment industries are intensely competitive. Established companies, both
domestic and foreign, compete with each of our product lines. Many of our
competitors have greater financial, engineering, manufacturing and marketing
resources than we do. 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, we
believe that the manufacturer generally relies upon that equipment for the
specific production line application and frequently will attempt to consolidate
its other capital equipment requirements with the same vendor. Accordingly, if a
particular customer selects a competitor's capital equipment, we expect to
experience difficulty in selling to that customer for a significant period of
time. We believe that our ability to compete successfully depends on a number of
factors both within and outside of our control, including:
- price
- product quality
- breadth of product line
- system performance
- cost of ownership
- global technical service and support
- success in developing or otherwise introducing new products
We cannot be certain that we will be able to compete successfully in the future.
6
<PAGE>
DEPENDENCE ON PRINCIPAL CUSTOMERS; INDUSTRY CONCENTRATION. We rely on our
principal customers for a significant portion of our sales. Our principal
customers include International Business Machines Corporation ("IBM"), Seagate
Technology, Inc. ("Seagate") and Read-Rite Corp. ("Read-Rite"). The following
table sets forth the percentage of our net sales to such principal customers for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
IBM.................................... 0.9% 4.1% 5.9% 16.4%
Seagate................................ 14.8% 10.5% 13.9% 10.3%
Read-Rite.............................. 5.8% 10.6% 11.0% 6.9%
Next five top customers................ 8.7% 7.8% 11.8% 8.7%
</TABLE>
If we lose a major customer, or a significant portion of our sales to any
major customer, it could adversely affect our results of operations. Our ability
to increase sales in the future will depend in part upon our ability to obtain
orders from new customers. We cannot be certain that we will be able to do so.
In addition, a relatively small number of large manufacturers, many of whom are
our customers, dominate the data storage industry and, to a lesser extent, the
semiconductor industry. If any of these large manufacturers discontinues its
relationship with us or suffers economic setbacks, our results of operations
could be materially and adversely affected.
YEAR 2000. The Year 2000 Issue is the result of computer programs using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware or other equipment that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
Based on recent assessments, we have determined that we need to modify or
replace portions of our business systems' software and certain hardware so that
those systems will properly utilize dates beyond December 31, 1999. In 1997, we
installed a new business system for our process equipment and industrial product
lines which has been certified by the vendor as Year 2000 compliant. We are in
the process of either testing or assessing the extent of upgrades or
modifications required for our business systems for our metrology product lines.
We are also in the process of installing a new business system for our sales and
service offices in Europe that the vendor has certified is Year 2000 compliant.
In addition, we are in the process of completing our inventory and assessment of
our desktop systems and laptops. We currently use standard "off the shelf"
vendor-supplied software on our desktop systems and laptops. Many of these
vendors are still implementing their Year 2000 compliance programs and we will
implement the Year 2000 compliant versions as required when those solutions are
available. We believe that with these and other modifications or replacements of
our business systems' existing software and certain hardware, our computer
programs should be able to continue to operate effectively after December 31,
1999. However, if such modifications and replacements are not made, or are not
completed in a timely manner, the Year 2000 Issue could have a material impact
on our operations.
In addition to our own systems, we rely directly and indirectly on external
systems of our customers, suppliers, subcontractors, utilities providers and
other third parties. We are currently in the process of asking our significant
suppliers, subcontractors and utilities providers about their Year 2000
readiness. To date, we are not aware of any third party Year 2000 issues that
would materially impact our results of operations, liquidity or capital
resources. However, we have no means of ensuring that the third parties that we
deal with will be Year 2000 ready. If the systems of any third parties with
which we interact experience Year 2000 problems, our business, financial
condition or results of operations could be materially and adversely affected.
We cannot be certain that the systems of third parties with which we interact
will not suffer from Year 2000 problems.
7
<PAGE>
Our new products are designed to be Year 2000 ready; however, some of our
older products will require upgrades for Year 2000 readiness. We intend to
provide upgrades for certain of these products, some of which will be provided
to customers without charge. Notwithstanding these efforts, if any of our
products fails to perform or causes a system malfunction due to the onset of
Year 2000, customers could bring claims against us, which could have a material
adverse effect on our business, results of operations or financial condition.
Moreover, our customers could choose to convert to other Year 2000 ready
products in order to avoid such malfunctions, which could have a material
adverse effect on our business, results of operations or financial condition.
We do not currently have any contingency plans and have not yet determined
our most reasonably likely worst case scenario with respect to the Year 2000
Issue. We are currently in the process of reviewing our Year 2000 compliance
plans to determine what contingency plans, if any, are appropriate. We cannot be
certain that any of these measures will prevent the occurrence of Year 2000
problems, which could have a material adverse effect on our business, results of
operations or financial condition.
FOREIGN OPERATIONS. Our net sales to foreign customers represented
approximately 50.8% of our total net sales in 1995, 51.7% in 1996, 43.2% in 1997
and 50.5% in the first nine months of 1998. We expect net sales to foreign
customers will continue to represent a large percentage of our total net sales.
International sales are subject to various risks, including:
- changes in foreign currency exchange rates
- political and economic instability
- the greater difficulty of administering business abroad
- the need to comply with a wide variety of foreign and U.S. export laws and
regulatory requirements
Many Pacific Rim countries have been and are continuing to experience
economic difficulties, which has resulted in and could continue to result in
reduced demand for our products from customers in this area.
Our net sales denominated in foreign currencies represented approximately
10.3% of our total net sales in 1995, 7.3% in 1996, 6.3% in 1997 and 11.3% in
the first nine months of 1998. We generally have not engaged in foreign currency
hedging transactions.
PATENTS AND OTHER INTELLECTUAL PROPERTY. Our success depends in part on our
proprietary technology. Although we attempt to protect our intellectual property
rights through patents, copyrights, trade secrets and other measures, we cannot
be certain that we will be able to protect our technology adequately or that our
competitors will not be able to develop similar technology independently. We
cannot be certain that others will not independently develop similar products,
duplicate our products or, if patents have been issued to us, design around our
patents, nor can we be certain that we can meaningfully protect our trade
secrets. In addition, we cannot be certain that we will not be sued by third
parties alleging that we have infringed their patents or other intellectual
property rights. If any third party sues us, our business, results of operations
or financial condition could be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL. Our future success depends in part on our
ability to attract and retain qualified management, technical, sales and support
personnel for our operations. Competition for such personnel is intense.
Specifically, the success of our business will be dependent upon the continued
services of Edward H. Braun, our Chairman, Chief Executive Officer and
President. If Mr. Braun's services were no longer available to us, our future
operations could be materially and adversely affected. None of our key personnel
is subject to a long-term employment agreement or an agreement not to compete
with us. Accordingly, we cannot be certain that we will be able to retain our
key personnel in the future. Failure to retain key personnel could have an
adverse effect on our operations.
8
<PAGE>
GROWTH THROUGH MERGERS AND ACQUISITIONS. An important element of our growth
strategy has been and continues to be the merger with and acquisition of
businesses that complement, enhance or geographically expand our existing
business segments or product lines. In April 1997, we acquired assets to develop
a line of high performance physical vapor deposition equipment to complement our
process equipment product line. In July 1997, we merged with Wyko Corporation
and in May 1998 we merged with Digital Instruments, Inc., in each case to expand
our metrology product offerings and customer base. We can give you no assurance,
however, that we will be able to (a) maintain our recent growth rate through
mergers and acquisitions, (b) identify suitable acquisition candidates and
acquire such companies on favorable terms, (c) successfully integrate acquired
businesses into our existing operations or realize the intended benefits of such
acquisitions, or (d) retain sales representatives and key employees previously
associated with acquired businesses. To complete future mergers or acquisitions,
we may issue a significant number of shares of Common Stock and/or incur
significant additional indebtedness, which could have a dilutive effect on our
earnings or book value per share of Common Stock.
VOLATILITY OF STOCK PRICE. The stock market in general and the market for
shares of technology companies in particular have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
the affected companies. Many companies in the data storage, semiconductor and
related equipment industries, including Veeco, have experienced dramatic
volatility in the market prices of their common stock. We believe that a number
of factors, both within and outside our control, could cause the price of our
Common Stock to fluctuate, perhaps substantially. These factors include:
- announcements of developments related to our business or our competitors'
or customers' businesses
- fluctuations in our financial results
- general conditions or developments in the personal computer, data storage
or semiconductor industry
- potential sales of our Common Stock into the marketplace by Veeco or our
stockholders
- announcements of technological innovations or new or enhanced products by
us or our competitors or customers
- a shortfall in revenue, gross margin, earnings or other financial results
or changes in research analysts' expectations
- the limited number of shares of our Common Stock traded on a daily basis
We cannot be certain that the market price of our Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are material, adverse and unrelated to our performance.
ANTI-TAKEOVER PROVISIONS. Our Board of Directors has the authority to issue
up to 500,000 shares of Preferred Stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of these shares without
any further vote or action by the holders of the Common Stock. The rights of the
holders of any Preferred Stock that may be issued in the future may adversely
affect the rights of the holders of the Common Stock. The issuance of the
Preferred Stock, while providing us with desirable flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect
of making it more difficult for a third party to acquire a majority of our
outstanding voting stock, thereby delaying, deferring or preventing a change of
control of Veeco. Furthermore, such Preferred Stock may have other rights
including economic rights senior to the Common Stock, and as a result, the
issuance of the Preferred Stock could have a material adverse effect on the
market value of the Common Stock. We have no present plan to issue shares of
Preferred Stock.
Our Board of Directors is divided into three classes of directors with
staggered terms. Directors are elected to three-year terms and the term of one
class of directors expires each year. The existence
9
<PAGE>
of a classified board is designed to provide continuity and stability to our
management, which results from directors serving for three-year, rather than
one-year terms. The existence of a classified board is also designed to render
certain hostile takeovers more difficult. The existence of a classified board
may therefore have the effect of making it more difficult for a third party to
acquire control of Veeco in certain instances, thereby delaying, deferring or
preventing a change of control that a holder of Common Stock might consider in
its best interest. Further, if stockholders are dissatisfied with the policies
and/or decisions of the Board of Directors, the existence of a classified board
will make it more difficult for the stockholders to change the composition (and
therefore the policies) of the Board of Directors in a relatively short period
of time.
Furthermore, we may in the future adopt certain other measures that may have
the effect of delaying, deferring or preventing a change in control of Veeco.
Certain of such measures may be adopted without any further vote or action by
the holders of the Common Stock. In addition, certain other provisions of our
certificate of incorporation and by-laws relating to (a) actions required to be
taken at a meeting of stockholders and (b) the percentage of stockholders
required to call a special meeting of stockholders, may have anti-takeover
effects, which may delay, defer or prevent a takeover attempt that a holder of
Common Stock might consider in its best interest.
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of our Company's Common Stock
in the public market, or the issuance of shares of Common Stock upon the
exercise of stock options, or otherwise, could adversely affect the market price
of the Common Stock. The 3,575,000 shares of Common Stock sold in this offering
(4,111,250 if the underwriters' over-allotment option is exercised in full) will
be freely transferable without restrictions or registration under the Securities
Act. In addition, as of January 19, 1999, there were 1,801,129 shares of Common
Stock reserved for issuance upon exercise of stock options. As of January 19,
1999, options to purchase 1,681,455 of such shares were outstanding and options
to purchase 400,121 of such shares were fully vested and exercisable. In
addition, our employees are entitled to purchase shares under the Veeco
Instruments Inc. Employee Stock Purchase Plan. We are authorized to issue up to
an additional 176,899 shares under the Employee Stock Purchase Plan. Any shares
purchased thereunder will be eligible for sale following the expiration of
applicable holding periods. Notwithstanding the foregoing, we have a securities
trading policy which restricts our officers, directors and employees from
engaging in transactions involving our securities, including the Common Stock,
during certain specified periods.
In addition, certain of our stockholders, who will hold in the aggregate
5,954,763 shares of Common Stock (not including shares of Common Stock subject
to stock options) following this offering, are currently entitled to certain
"piggy-back" registration rights with respect to such shares. In addition,
certain of such holders are, and beginning May 29, 1999, certain other of such
holders will be, entitled to certain demand registration rights with respect to
such shares. If such holders, by exercising their registration rights, cause a
large number of shares to be registered and sold in the public market, such
sales may have an adverse effect on the market price for the Common Stock.
10
<PAGE>
USE OF PROCEEDS
The Company expects to receive approximately $57,357,000 (approximately
$66,050,000 if the underwriters exercise their over-allotment option in full)
from the sale of the 1,000,000 shares of Common Stock offered by the Company
hereby at the public offering price of $60 11/16 per share, and after deducting
the underwriting discount and estimated offering expenses payable by the
Company. The Company expects to use the net proceeds of this offering: (1) for
capital expenditures of between $10,000,000 and $15,000,000 over the next 12 to
18 months for additional clean manufacturing areas and expanded customer
application laboratories and (2) for working capital and general corporate
purposes, including potential acquisitions. Pending such uses, the Company
expects to invest the net proceeds from the offering in short-term income
producing investments. While the Company engages in discussions relating to
potential acquisitions from time to time, no such transaction is contemplated as
of the date of this prospectus.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Stockholders offered hereby. See "Selling Stockholders."
DIVIDEND POLICY
The Company has not paid dividends on its capital 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 of the Company 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 limit the
Company's ability to pay dividends. The Board of Directors of the Company will
determine future dividend policy based on the Company's results of operations,
financial condition, capital requirements and other circumstances.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on The Nasdaq National Market under the
symbol "VECO." The following table sets forth the high and low closing prices of
the Common Stock, for the periods indicated, as reported by The Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1997
First Quarter.............................................................. $ 31.38 $ 21.88
Second Quarter............................................................. 41.50 25.75
Third Quarter.............................................................. 72.50 38.50
Fourth Quarter............................................................. 59.50 19.19
FISCAL 1998
First Quarter.............................................................. $ 37.19 $ 20.38
Second Quarter............................................................. 42.13 22.94
Third Quarter.............................................................. 35.00 22.13
Fourth Quarter............................................................. 54.38 21.63
FISCAL 1999
First Quarter*............................................................. $ 62.00 $ 52.13
</TABLE>
- ------------------------
* Information through January 19, 1999.
On January 19, 1999, the last reported sale price for the Company's Common
Stock on The Nasdaq National Market was $60 11/16. As of January 19, 1999, there
were approximately 122 holders of record of the Company's Common Stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) at
September 30, 1998 and (b) as adjusted as of such date to give effect to the
sale by the Company of 1,000,000 shares of Common Stock offered hereby at the
public offering price per share of $60 11/16, and after deducting the
underwriting discount and estimated offering expenses payable by the Company,
and assuming that the Underwriters' overallotment option is not exercised. This
table contains unaudited information and should be read in conjunction with the
consolidated financial statements appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------
<S> <C> <C>
ACTUAL ADJUSTED
---------- ----------
<CAPTION>
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Shareholders' equity:
Preferred Stock, par value $0.01 per share; 500,000 shares authorized; no shares
outstanding........................................................................ $ -- $ --
Common Stock, par value $0.01 per share; 25,000,000 shares authorized; 14,739,617
actual shares outstanding and 15,739,617 shares outstanding, as adjusted (1)....... 147 157
Additional paid-in capital........................................................... 60,228 117,575
Retained earnings.................................................................... 45,271 45,271
Cumulative translation adjustment.................................................... 28 28
---------- ----------
Total shareholders' equity........................................................... 105,674 163,031
---------- ----------
Total capitalization............................................................... $ 105,674 $ 163,031
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) In each case, excludes (i) 1,878,857 shares of Common Stock reserved for
issuance upon exercise of stock options and (ii) 206,250 shares of Common
Stock reserved for issuance pursuant to the Veeco Instruments Inc. Employee
Stock Purchase Plan as of September 30, 1998. As of September 30, 1998,
options to purchase 1,744,436 shares of Common Stock were outstanding, of
which options to purchase 364,102 shares of Common Stock were exercisable at
a weighted average exercise price of approximately $18.31 per share.
12
<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 data of Veeco as of and for the nine-month periods
ended September 30, 1997 and 1998 have been derived from its unaudited condensed
consolidated financial statements and notes thereto, which are included
elsewhere herein, and should be read in conjunction with such financial
statements and notes. 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>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA:
Net sales................................................... $ 123,976 $ 165,059 $ 216,728 $ 158,952 $ 155,345
Cost of sales............................................... 61,693 83,521 110,680 80,829 83,883
---------- ---------- ---------- ---------- ----------
Gross profit................................................ 62,283 81,538 106,048 78,123 71,462
Costs and expenses.......................................... 38,774 48,045 65,954 45,974 51,549
Merger and reorganization expenses (1)...................... -- -- 2,250 2,250 7,500
Write-off of purchased in-process technology................ -- -- 4,200 4,200 --
---------- ---------- ---------- ---------- ----------
Operating income............................................ 23,509 33,493 33,644 25,699 12,413
Interest expense (income), net.............................. 179 (345) 7 (79) 748
---------- ---------- ---------- ---------- ----------
Income before income taxes.................................. 23,330 33,838 33,637 25,778 11,665
Income tax provision........................................ 2,497 6,941 7,610 5,927 3,499
---------- ---------- ---------- ---------- ----------
Net income.................................................. $ 20,833 $ 26,897 $ 26,027 $ 19,851 $ 8,166
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income per common share................................. $ 1.52 $ 1.89 $ 1.81 $ 1.38 $ 0.56
Diluted net income per common share......................... $ 1.48 $ 1.86 $ 1.75 $ 1.33 $ 0.55
Weighted average shares outstanding......................... 13,750 14,251 14,392 14,365 14,577
Diluted weighted average shares outstanding................. 14,068 14,490 14,908 14,879 14,813
PRO FORMA PRESENTATION (2):
Income before income taxes................................ $ 23,330 $ 33,838 $ 33,637 $ 25,778 $ 11,665
Pro forma income tax provision............................ 7,054 12,963 12,817 9,850 4,316
---------- ---------- ---------- ---------- ----------
Pro forma net income...................................... $ 16,276 $ 20,875 $ 20,820 $ 15,928 $ 7,349
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net income per common share..................... $ 1.18 $ 1.46 $ 1.45 $ 1.11 $ 0.50
Pro forma diluted net income per common share............. $ 1.16 $ 1.44 $ 1.40 $ 1.07 $ 0.50
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
1997 1998
---------------------- -----------------------
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 20,444 $ 14,251
Working capital................................................. 68,778 77,844
Excess of cost over net assets acquired, net.................... 4,318 4,220
Total assets.................................................... 159,631 165,891
Long-term debt (including current installments)................. 17,356 17,200
Shareholders' equity............................................ 93,758 105,674
</TABLE>
- ------------------------
(1) Merger and reorganization expenses principally related to the merger with
Digital amounted to $7.5 million which was comprised of transaction fees and
expenses of $3.3 million, a $1.6 million non-cash compensation charge, $1.4
million of duplicate facilities costs and $1.2 million of reorganization
costs, all of which were charged to operating expenses during the nine-month
period ended September 30, 1998. 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.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Veeco is a leader in the design, manufacture, marketing and servicing of a
broad line of precision metrology and process equipment used to measure, test
and manufacture microelectronic products for the data storage and semiconductor
industries. Precision metrology equipment is primarily used to measure critical
dimensions on thin film magnetic heads (TFMHs) and semiconductor devices.
Process equipment is primarily used to etch and deposit materials in the
manufacture of TFMHs.
During the last several years, Veeco has increasingly emphasized its
metrology product line, which accounted for $97.5 million or 62.8% of its net
sales for the nine months ended September 30, 1998. This emphasis was
demonstrated by the mergers with Wyko Corporation ("Wyko") in July 1997 and
Digital Instruments, Inc. ("Digital") in May 1998. These mergers resulted in a
broadening of the metrology product line by adding the optical interferometry
products manufactured by Wyko and atomic force/scanning probe microscopes
manufactured by Digital to the stylus profiler products manufactured by Veeco.
Veeco's net sales for the first nine months of 1998 included $77.0 million
attributable to sales of Wyko and Digital products. Veeco's financial condition
and results of operations have been retroactively restated to reflect Veeco's
mergers with Wyko and Digital, which have been accounted for as pooling of
interests transactions.
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>
NINE MONTHS ENDED
YEAR 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>
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales were $155.3 million for the nine months ended September 30, 1998
representing a decrease of $3.6 million or 2% from the comparable 1997 period.
The decrease in sales reflects a 34% decrease in process equipment sales offset
by a 23% increase in metrology sales. Sales in the U.S., Europe, Japan and Asia
Pacific, respectively, accounted for 50%, 18%, 17% and 10%, respectively, of the
Company's net sales for the nine months ended September 30, 1998. Sales in the
U.S. decreased approximately 14%, while international sales included a 92%
increase in Europe, a 21% increase in
15
<PAGE>
Japan and a 28% decrease in Asia Pacific from the comparable 1997 period. The
decrease in U.S. sales principally reflects reduced process equipment sales to
data storage customers. The increase in European sales principally reflects
increased process equipment sales to data storage customers along with increased
metrology sales for data storage and semiconductor applications. The increase in
sales in Japan principally reflects an increase in metrology sales. The decrease
in sales in Asia Pacific principally reflects a decrease in sales of all product
lines resulting from the economic downturn in that region. The Company believes
that there will continue to be quarter to quarter variations in the geographic
concentration of sales.
Metrology sales of $97.5 million for the nine months ended September 30,
1998 increased by $18.0 million or 23% over the comparable 1997 period
principally reflecting increased purchases of metrology products for in-line
inspection of critical steps in data storage applications. Process equipment
sales of $42.6 million for the nine months ended September 30, 1998 decreased by
$22.1 million or 34% from the comparable 1997 period, as sales of ion beam etch
products declined, partially offset by sales of new deposition equipment. Ion
beam etch sales continue to be negatively affected by excess capacity in the
data storage industry. Industrial measurement sales for the nine months ended
September 30, 1998 of $15.2 million increased 2% over the comparable 1997
period.
Veeco received $159.4 million of orders for the nine months ended September
30, 1998 representing a 5% decrease from $167.6 million of orders in the
comparable 1997 period. Metrology orders increased 16% to $97.2 million
reflecting increased purchases of in-line metrology products for production
applications such as PTR (pole tip recession) measurements for new
magnetoresistive (MR) and giant magnetoresistive (GMR) thin film magnetic heads.
Process equipment orders decreased 27% to $48.9 million as a result of a
reduction in orders of ion beam etch products reflecting weak data storage
market conditions, including industry-wide overcapacity. The book-to-bill ratio
for the nine months ended September 30, 1998 was 1.03 to 1.
Gross profit for the nine months ended September 30, 1998 of $71.5 million
represents a decrease of $6.6 million from the comparable 1997 period. Gross
profit as a percentage of net sales decreased to 46.0% for 1998 from 49.1% for
1997, principally due to a decrease in gross margin for the process equipment
product line. This decline resulted from lower sales volume, increased field
support, warranty, facility and information system costs and the increase in
sales of new deposition products with lower initial gross margins than
established ion beam etch products. The metrology product line experienced
higher field service and warranty costs as it expanded sales of production
related inspection tools to data storage customers at a variety of international
locations.
Research and development expense for the nine months ended September 30,
1998 of $20.5 million increased by $3.3 million or 19% over the comparable
period of 1997, as the Company continues to invest in new product development in
each of its product lines with particular emphasis on in-line inspection tools
in the metrology product line and deposition tools for its process equipment
line.
Selling, general and administrative expenses of $31.4 million for the nine
months ended September 30, 1998 increased by $2.6 million compared to the
comparable 1997 period as a result of increased costs to support the growth in
the metrology product line along with investments made in customer sales and
support including the transition to more direct sales and support coverage in
Japan, Europe and Asia Pacific.
As described in Note 2 to the Company's Consolidated Financial Statements
for the nine months ended September 30, 1998, the Company recorded a $7.5
million pre-tax charge for merger and reorganization expenses principally
related to the merger with Digital during such period. During the nine months
ended September 30, 1997, the Company recorded a $4.2 million expense for the
fair value of acquired in-process engineering and development projects and 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
Corporation.
16
<PAGE>
Income taxes for the nine months ended September 30, 1998 amounted to $3.5
million or 30% of income before income taxes as compared to $5.9 million or 23%
of income before income taxes for the same period of 1997. These effective tax
rates reflect Digital's "S" Corporation status for five months in 1998 (through
the merger date) compared to a full year in 1997. As an "S" Corporation, Digital
was not subject to federal income taxes at the corporation level.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Net sales were $216.7 million for the year ended December 31, 1997
representing an increase of approximately $51.7 million or 31.3%, when compared
to the year ended December 31, 1996. The increase reflects growth in Veeco's
process equipment and metrology product lines. Sales in the U.S. increased
approximately 54.2%, while international sales included a 27.3% increase in Asia
Pacific, a 5.2% increase in Europe and a 4.5% decrease in Japan.
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.
17
<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
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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 $0.7 million for the nine months
ended September 30, 1998 compared to $16.4 million for the comparable 1997
period. This change in cash provided from operations reflects a decrease in net
income for the 1998 period of $11.7 million from the comparable 1997 period,
along with the use of cash for changes in operating assets and liabilities.
Accounts payable and accrued expenses and other current liabilities decreased by
$5.5 million during the nine months ended September 30, 1998 while increasing
$11.8 million during the comparable period of 1997. The decrease in accounts
payable and accrued expenses and other current liabilities in 1998 reflects the
payment of certain liabilities including a portion of the non-recurring merger
related expenses and the reduction in customer deposits. The increase in
accounts payable and accrued expenses and other current liabilities in 1997
reflect the growth in business in 1997 over 1996. Accounts receivable increased
$1.5 million during the nine months ended September 30, 1998 while increasing
$11.3 million during the comparable 1997 period.
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 made capital expenditures of $6.2 million for the nine month period
ended September 30, 1998, compared to $5.8 million in the comparable 1997
period. Capital expenditures in 1998 were principally for engineering and
application lab equipment. 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 used $0.2 million of cash in financing activities for the nine month
period ended September 30, 1998 compared to $6.3 million for the comparable 1997
period. The use of cash in 1997 resulted from distributions to former Digital
shareholders of $8.0 million partially offset by proceeds from the sale of
Common Stock. 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
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the event the Company's ratio of debt to cash flow exceeds a defined ratio. A
LIBOR-based interest rate option is also provided. As of December 31, 1998 there
were no amounts outstanding under the Credit Facility. The 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 1999.
YEAR 2000
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or hardware or other equipment that have date-sensitive software or
embedded chips may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
Based on recent assessments, the Company has determined that it needs to
modify or replace portions of its business systems' software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. The Company presently believes that with modifications or replacements of
its business systems existing software and certain hardware, the Company's
computer programs should be able to continue to operate effectively after
December 31, 1999. However, if such modifications and replacements are not made,
or are not completed in a timely manner, the Year 2000 Issue could have a
material impact on the operations of the Company. Furthermore, in addition to
its own systems, the Company relies directly and indirectly on external systems
of its customers, suppliers, creditors, financial organizations, utilities
providers and governmental agencies (collectively, "Third Parties").
The Company is utilizing both internal and external resources to resolve the
Year 2000 Issue following a phased approach which is comprised of inventory and
assessment, planning and renovation, testing and implementation. The following
describes the Company's efforts to identify and address its and applicable Third
Party Year 2000 Issues with respect to a) the Company's information technology
(IT) and non-IT systems, including facilities and infrastructure, b) the
Company's products and c) the Company's suppliers:
a) The Company's IT and non-IT systems including facilities and
infrastructure:
In 1997, the Company completed the installation of a new business system
for its process equipment and industrial product lines which has been
certified by the vendor as Year 2000 compliant. The Company is in the
process of either testing or assessing the extent of upgrades or
modifications required for its business systems for its metrology product
lines. Furthermore, the Company is in the process of installing a new
business system for its sales and service offices in Europe that the vendor
has certified is Year 2000 compliant.
The Company is also in the process of completing its inventory and
assessment of its desktop systems and laptops. The Company currently uses
standard "off the shelf" vendor-supplied software on its desktop systems and
laptops. Many of these vendors are still implementing their Year 2000
compliance programs and the Company will implement the Year 2000 compliant
versions as required when those solutions are available.
The Company is in the process of assessing its Year 2000 risk with
respect to telephone and communications systems, utility systems and
building security systems. Formal inquiries were sent to Third Parties in
December 1998 inquiring as to such Third Parties' Year 2000 readiness.
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b) The Company's products:
The Company is in the process of completing its inventory and assessment
of its products' Year 2000 readiness utilizing testing guidelines prepared
by Sematech, a consortium of suppliers to worldwide semiconductor
manufacturers. The Company plans to comply with Sematech's guidelines for
Year 2000 compliance for its metrology and process equipment lines. The
Company's new products are designed to be Year 2000 ready; however, some of
the Company's older products will require upgrades for Year 2000 readiness.
The Company intends to provide upgrades for certain of such products, some
of which will be provided to customers without charge. Notwithstanding such
efforts, any failure of the Company's products to perform, including system
malfunctions due to the onset of Year 2000, could result in claims against
the Company which could have a material adverse effect on the Company's
business, results of operations or financial condition. Moreover, the
Company's customers could choose to convert to other Year 2000 ready
products in order to avoid such malfunctions, which could have a material
adverse effect on the Company's business, financial condition or results of
operations.
c) The Company's suppliers:
The Company is in the process of asking of its significant suppliers and
subcontractors the status of their Year 2000 readiness. To date, the Company
is not aware of any Year 2000 issue that would materially impact the
Company's business, financial condition or results of operations. However,
the Company has no means of ensuring that suppliers or subcontractors will
be Year 2000 ready. The inability of suppliers or subcontractors to complete
their Year 2000 resolution process in a timely fashion could materially
impact the Company. The Company is unable to determine the effect of
non-compliance by suppliers or subcontractors.
The Company will utilize both internal and external resources to reprogram
or replace, test, and implement the software and operating equipment for Year
2000 modifications. The total cost of the Year 2000 project is estimated at
$400,000 to $750,000 and is being funded through operating cash flows. To date,
the Company has incurred approximately $100,000 (which has been expensed),
related to all phases of the Year 2000 project. Of the total remaining project
costs, approximately $250,000 to $400,000 is attributable to the purchase of new
software and operating equipment which will be capitalized. The remaining
$50,000 to $250,000 relates to repair of hardware and software and external
consultant costs and will be expensed as incurred.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 Issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
the Company does not successfully complete any additional phases, the Company's
ability to do business with its suppliers and customers may be disrupted. In
addition, there can be no assurance that the systems of Third Parties with which
the Company interacts will not suffer from Year 2000 problems, or that such
problems would not have a material adverse effect on the Company's business,
financial condition or results of operations. In particular, Year 2000 problems
that have been or may in the future be identified with respect to the IT and
Non-IT systems of Third Parties having widespread national and international
interactions with persons and entities generally (for example, certain IT and
Non-IT systems of governmental agencies, utilities and information and financial
networks) could have a material adverse impact on the Company's financial
condition or results of operations.
The Company does not currently have any contingency plans and has not yet
determined its most reasonably likely worst case scenario with respect to the
Year 2000 Issue. The Company currently is in the process of reviewing its Year
2000 compliance plans to determine what contingency plans, if any, are
appropriate. There can be no assurance that such measures will prevent the
occurrence of Year 2000 problems, which could have a material adverse effect
upon the Company's business, results of operations or financial condition.
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BUSINESS
INTRODUCTION
Veeco is a leader in the design, manufacture, marketing and servicing of a
broad line of precision metrology and process equipment used to measure, test
and manufacture microelectronic products for the data storage and semiconductor
industries. Veeco's precision metrology equipment is primarily used to measure
critical dimensions on thin film magnetic heads (TFMHs) and semiconductor
devices. The Company's process equipment is primarily used to etch and deposit
materials in the manufacture of TFMHs.
Demand for Veeco's products has been driven by the increasing
miniaturization of microelectronic components; the need for manufacturers to
meet reduced time-to-market schedules while ensuring the quality of those
components; and, in the data storage industry, the introduction of new
magnetoresistive (MR) and giant magnetoresistive (GMR) TFMHs which require
additional manufacturing steps and the ability to conduct critical measurements
for quality control and other purposes during the manufacturing process. The
ability of Veeco's products to deposit precise thin films, precisely etch
sub-micron patterns and make critical surface measurements in these components
enables manufacturers to improve yields and quality in the fabrication of
advanced microelectronic devices, such as TFMHs and semiconductor devices.
Veeco sells its products worldwide to many leading manufacturers in the data
storage, semiconductor and other industries, as well as research and development
centers and universities. Customers include IBM, Seagate, Read-Rite, Siemens,
Lawrence Livermore National Laboratory, TDK and Storage Technology.
INDUSTRY BACKGROUND
TFMHs and semiconductor devices are fabricated by performing a complex
series of process steps on aluminum oxide-titanium carbide substrates or silicon
wafers. The three primary categories of wafer processing steps are deposition,
photolithography and etching. Similarly, the production of TFMHs includes many
steps of patterning, etch and deposition. Each of these steps is typically
repeated several times during the fabrication process to create multi-layered
structures. The resulting semiconductor device or TFMH consists of many
intricate patterns on circuits. Depending upon the specific design of any given
integrated circuit, a variety of film thickness and a number of layers and film
types will be used to achieve desired performance characteristics. Continued
demand for smaller, faster and less expensive microelectronic components,
particularly in the computer industry, has led to increasing miniaturization.
This increasing miniaturization of microelectronic components, including TFMHs
and semiconductor devices, has resulted in an increased number of manufacturing
steps which require greater use of precise etching and deposition equipment. In
addition, metrology systems are used throughout the manufacturing process in
order to improve yields by monitoring process accuracy, product quality,
repeatability and by measuring critical dimensions and other physical features
such as film thickness, line width, step height, sidewall angle and surface
roughness.
The market for microelectronic components (including disk drives, TFMHs and
semiconductor devices) has grown rapidly in recent years, driven by corporate
and consumer use of data storage intensive products such as networked personal
computers (PCs), Windows NT, client servers and the Internet, among others.
Veeco believes that annual unit growth in PCs, hard disk drives and MR/GMR heads
has been since 1997 in the 10%-15% range, 12%-17% range and 20%-25% range,
respectively and will continue to grow in such ranges until 2001. While the
Company believes that the PC market is the primary driver of disk drive unit
growth, disk drives are also increasingly being used for emerging applications
such as television set-top boxes, video-on-demand systems, and small electronic
devices such as digital cameras and personal digital assistants.
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TRENDS IN THE DATA STORAGE INDUSTRY. In order to satisfy market demand for
devices with greater storage capacity, the data storage industry has responded
with new head designs incorporating the higher areal densities required to store
more data. The capacity of disk drives is largely determined by the capability
of the magnetic recording heads, which read and write signals onto hard disks.
According to data storage industry sources, areal densities have been increasing
since 1990 at approximately a 60% annual rate and are expected to continue to do
so until at least 2005. With more storage capacity requiring multiple disks per
drive, magnetic head production is growing faster than the overall disk drive
industry. Prior to 1998, most magnetic heads being produced were inductive, but
new designs utilize MR and GMR heads, which allow for higher areal densities.
Inductive heads were limited to areal densities of approximately 1-2 gigabits
per square inch (Gbits/in(2)), while MR heads allow for 5 Gbits/in(2) and GMR
heads are expected to allow for 50 Gbits/in(2) by the year 2005.
The Company believes that substantial investment is being made in GMR
technology and that the industry is transitioning from producing approximately
30 million GMR heads in 1998 to producing nearly 100 million GMR heads in 1999,
375 million in 2000 and 775 million in 2001. In addition, the conversion to
smaller sized heads (i.e., "pico," "femto" vs. the "nano" designs currently in
production) requires tighter dimensional tolerance control.
As a result of the increased miniaturization of microelectronic components,
the data storage industry has recently experienced a trend toward the expanded
use of in-line metrology products for yield improvement and integrated test
programs in the production of TFMHs and hard disks. Since the new heads are more
sensitive and more complicated to manufacture, there is a greater need for 100%
testing of critical process steps. In addition, such testing allows
manufacturers to ramp up production more quickly and improve yields on these
next generation heads.
TRENDS IN THE SEMICONDUCTOR INDUSTRY. Current semiconductor industry
technology trends include smaller feature sizes (sub-.25 micron line widths),
larger substrates (i.e., the transition to 300mm wafers) and the increased use
of metrology in the manufacturing process. The semiconductor industry is also
undergoing trends related to advanced interconnect and chemical mechanical
polishing (CMP) technologies. Semiconductor manufacturers use metrology tools in
their wafer fabrication facilities to detect any process deviations as early in
the manufacturing process as possible. These tools are critical for yield
enhancement resulting in cost reduction.
VEECO'S STRATEGY
Veeco's corporate strategy is focused on providing its data storage and
semiconductor customers with integrated process solutions for improved
manufacturing yields and faster time-to-market for their next-generation
products. The goal of this strategy is to expand relationships with existing
customers and attract new customers by offering process equipment which improves
manufacturing processes, and metrology products which monitor the manufacturing
process and enable customers to improve yields and reduce costs. A core
component of this strategy is the Company's ability to successfully identify and
integrate complementary acquisitions and develop new products internally which
respond to customer needs.
The Company will continue to implement its strategy to:
- PROVIDE COMPREHENSIVE METROLOGY AND PROCESS EQUIPMENT SOLUTIONS TO THE
DATA STORAGE INDUSTRY. Veeco has identified the data storage industry as a
focus for future growth due to the transition to MR and GMR technology and
other factors. Veeco believes that its etch and deposition and in-line
metrology tools are critical to Veeco's data storage customers in their
production of MR/ GMR heads. Veeco believes that its customers desire to
work with fewer, more significant suppliers offering a breadth of products
and the capability of worldwide sales, service and process support.
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- LEVERAGE TECHNOLOGY EXPERTISE AND CUSTOMER RELATIONSHIPS TO DEVELOP
NEXT-GENERATION PRODUCTS. Through a dedicated research and development
effort and the integration of research teams from Veeco's various product
lines, the Company endeavors to identify technology developments and
anticipate and respond to customer product requirements. For example,
Veeco recently developed ion beam and diamond-like carbon coating
deposition technology to expand its process equipment capabilities. An
example of Veeco's new technology in metrology is its automated in-line
pole tip recession measurement tool targeted at the data storage industry.
In addition, Veeco gains insight into its customers' future development
plans by participating in technology roadmap sessions and helping
customers design and implement their processes. Active interaction with
customers will help enable Veeco to develop future products which meet
data storage and semiconductor customer requirements.
- PURSUE STRATEGIC MERGERS AND ACQUISITIONS IN ORDER TO BROADEN PRODUCT
LINES. During 1997, Veeco broadened its process equipment product line by
acquiring physical vapor deposition technology. This technology combined
with Veeco's other process equipment technology enables the Company to
provide data storage customers with cluster tools capable of advanced
MR/GMR development and production. Through the mergers with Wyko
Corporation ("Wyko") in 1997 and Digital Instruments, Inc. ("Digital") in
1998, Veeco added optical measurement tools and atomic force microscopy to
its metrology product line. These two mergers have enabled Veeco to better
serve current customers and to attract new customers by offering a broad
range of measurement technologies for yield improvement and integrated
test programs. Veeco believes its product and end-market diversity helps
offset industry cyclicality. The Company intends to continue to pursue the
acquisition of complementary technologies and products.
- IDENTIFY AND CAPITALIZE ON TECHNOLOGY CHANGES IN THE MICROELECTRONICS
MARKET. Veeco is focused on identifying specific areas of rapid
technological change which provide opportunities to market Veeco's process
equipment and metrology products. These include the MR/GMR transition in
data storage and emerging semiconductor applications such as advanced
interconnect and CMP. The Company believes that this focus on tools which
address technology transitions has softened the effects of data storage
and semiconductor industry cyclicality on Veeco.
- UTILIZE GLOBAL SALES AND SERVICE NETWORK TO FURTHER STRENGTHEN CUSTOMER
RELATIONSHIPS. Veeco has created an integrated worldwide sales force,
which sells the full range of the Company's products and allows for better
penetration in each market segment. In addition, Veeco supplies its
customers with global service and support 24 hours a day, seven days a
week. Veeco's focus on collaborating with customers to maximize product
performance and customer satisfaction has enabled it to continue to build
total solutions for its customers. A critical part of Veeco's strategy is
to continue to achieve better account penetration at each of its customers
and enhance product offerings by providing quality and timely customer
service. Veeco believes that its worldwide sales and service network is a
major advantage over smaller competitors.
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VEECO'S PRODUCTS
Veeco offers three primary product lines: metrology, process equipment and
industrial measurement. Historical contribution to net sales by each of these
product lines is shown below for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS)
Metrology...................................................... $ 72.4 $ 92.1 $ 112.8 $ 79.5 $ 97.5
% OF NET SALES............................................. 58.4% 55.8% 52.0% 50.0% 62.8%
Process Equipment.............................................. $ 33.2 $ 53.2 $ 84.5 $ 64.7 $ 42.6
% OF NET SALES............................................. 26.8% 32.2% 39.0% 40.7% 27.4%
Industrial Measurement......................................... $ 18.4 $ 19.8 $ 19.4 $ 14.8 $ 15.2
% OF NET SALES............................................. 14.8% 12.0% 9.0% 9.3% 9.8%
</TABLE>
METROLOGY EQUIPMENT
Veeco's metrology product line includes atomic force/scanning probe
microscopes, optical interferometers and stylus profilers. These products offer
a broad range of solutions to customers in the data storage and semiconductor
industries, as well as versatile tools for use by research and development
centers and universities.
ATOMIC FORCE/SCANNING PROBE MICROSCOPES (AFM/SPMS)
In May 1998, Veeco merged with Digital, a leader in AFM/SPM technology. By
merging with Digital, Veeco complemented its existing family of metrology
products by adding next generation AFM/SPM technology capable of resolving and
imaging nanometer-level dimensional variations and surface properties. Over
time, the feature sizes in integrated circuits and magnetoresistive elements of
data storage devices have decreased. Today, the smallest feature sizes on
integrated circuits are on the order of 250 nanometers. Plans are in place to
fabricate integrated circuits with feature sizes as small as 180 and then 130
nanometers within the next few years.
The Atomic Force Microscope "feels" the sample surface directly using a
probe consisting of a very sharp tip mounted on a microscopic spring arm (a
cantilever). The interaction of the probe with the surface is detected by
measuring deflections of the cantilever with an optical beam system. AFMs permit
resolution at the molecular level. Digital developed some of the first AFMs used
in commercial applications and most of the SPMs manufactured and sold by Digital
are AFMs. SPMs, and particularly AFMs, can directly measure both lateral and
vertical shapes with nanometer resolution and with direct 3D capability. In
contrast, light-based instruments, including interferometric and confocal
microscopes, have limited lateral resolution for measurements of less than half
the wavelength of light, or less than about 250 nanometers. Veeco's AFM products
utilize its patented TappingMode technology, achieving the high resolution and
stability previously obtainable only through destructive physical contact with
the sample surface while employing a light touch previously achievable only
through the less stable non-contact mode.
In addition to topography, AFMs can also directly measure magnetic field
(such as magnetic bits on a hard disk); electric field; hardness (such as thin
film integrity); electric charge density (such as dopant concentrations in
semiconductors); temperature (such as temperature distribution in disk drive
recording head elements); and various chemical properties (such as the
difference in binding preference
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among biological molecules). AFMs make these measurements on almost any surface;
in air, vacuum or under fluids; and with minimal sample preparation.
Veeco produces a broad range of AFM/SPM products designed for data storage,
semiconductor, and other industrial and research applications. These products
include the NANOSCOPE-REGISTERED TRADEMARK- DIMENSION SERIES SPMS, NANOSCOPE
SPMS AND BIOSCOPE-TM- SPMS. The BIOSCOPE SPMS are specifically designed for
biological sciences. Average selling prices of these products range from $40,000
to $700,000. Veeco's high-end DIMENSION 9000 SPM, the first of which was shipped
in May 1998, meets clean room specifications for full wafer fab compatibility.
Veeco believes this product is well suited for on-line integrated circuit and
data storage processing applications, because it is available with tip
evaluation and automated tip exchange.
From July 1993 through December 1998, Veeco was the exclusive worldwide
sales and marketing representative to market, sell and service the
IBM-manufactured SXM Workstation AFM to customers in the semiconductor and data
storage industries. Following the merger with Digital, which provided Veeco with
access to Digital's AFM/SPM technology and products, Veeco entered into an
agreement with IBM in December 1998 pursuant to which Veeco paid IBM
approximately $300,000 in satisfaction of all obligations owed to IBM with
respect to prior product purchases and Veeco's exclusive rights were terminated.
The parties continue to maintain a non-exclusive business relationship with
respect to the SXM Workstation, pursuant to which Veeco may market and sell
product units previously purchased by Veeco and IBM will continue to provide
replacement parts to Veeco to enable Veeco to satisfy its warranty obligations
to its customers. IBM continues to be a major customer of each of Veeco's
product lines. See "--Customers."
OPTICAL INTERFEROMETRY PRODUCTS
Substantially all of Veeco's optical instruments, produced by Wyko, are
designed to make non-contact surface measurements using interferometry
technology. These instruments employ either white light or laser sources to
measure surface roughness and shape by creating interference patterns from the
optical path difference between the test surface and a reference surface. Using
a combination of phase shifting interferometry (PSI) and vertical scanning
interferometry (VSI), these instruments are designed to rapidly and precisely
measure and characterize a range of surface sizes and shapes. The average
selling prices for optical interferometry instruments range from approximately
$90,000 to $170,000.
Veeco's major optical products include the NT2000, the SP3000 and the
HD-SERIES optical profilers. The NT2000 product line measures surface roughness,
heights and shapes. The WYKO SP3000, for advanced packaging applications,
measures surface height, bump volume and diameter and bump coplanarity on
silicon wafers and ceramic substrates. Wyko's HD-SERIES instruments are a line
of microstructure measurement equipment used by manufacturers of mass memory
components including manufacturers of heads, disks, drives and suspensions.
HD-SERIES instruments are used for research and development, production control,
process improvement, final parts inspection, incoming parts inspection, and
field failure analysis.
During 1998, Veeco received multiple orders for WYKO HD2100 and HD3300
in-line measurement tools from leading data storage manufacturers for advanced
MR and GMR thin film head production, including IBM, Seagate and Read-Rite, to
be used for 100% in-line testing of TFMHs. The latest model, the HD3300, is a
production-configured optical profiler that repeatably measures both pole-tip
recession and air-bearing surface flatness on either nano- or pico-series TFMHs
in one pass. The HD3300 system, with its smaller footprint, allows TFMH
manufacturers to further monitor and refine their manufacturing processes for
next-generation higher areal densities. The system's increased speed and
reliability allow 100% in-line production testing of thin film magnetic sliders,
providing a means for improving head yields with a corresponding rapid payback
of the customer's investment in the system.
26
<PAGE>
STYLUS PROFILERS
Stylus profilers are used to produce cross-sectional representations and/or
quantitative measurements, which are displayed on a video monitor. Veeco's
stylus profiler systems utilize a precision translation stage which creates
relative motion between the sample and a diamond tipped stylus. As the sample
moves under the stylus, surface variations cause vertical translation of the
stylus, which is tracked and measured. Stylus profilers are widely used for
height, width, pitch and roughness measurements of features on semiconductor
devices, magnetic and optical storage media (e.g., hard drives), flat panel
displays, and hybrid circuits. Veeco believes that its stylus profiler products
are recognized for their accuracy, repeatability, ease of use and technology
features, and are designed to meet a range of industry specifications and
customer requirements. Each of Veeco's stylus profilers incorporates a
proprietary software package to assist in data collection, analysis and
interpretation. Stylus profilers have average selling prices in the range of
approximately $30,000 to $300,000, depending upon product specifications,
materials handling capability and specific applications.
PROCESS EQUIPMENT
Veeco's process equipment product line includes etch and deposition systems,
primarily for data storage applications. Veeco's deposition products include ion
beam deposition (IBD) systems, diamond-like carbon (DLC) deposition systems and
physical vapor deposition (PVD) systems. Veeco offers ion beam etch/IBD/PVD
technologies in a single cluster tool to provide data storage customers a total
solution for the manufacture of next generation MR/GMR TFMHs. Average selling
prices of Veeco process equipment products range from approximately $650,000 to
$3,000,000.
ETCH SYSTEMS
Veeco develops and produces ion beam etch systems, sold under the MICROETCH
brand name. These systems etch precise, complex features for use primarily by
data storage and semiconductor manufacturers in the fabrication of discrete and
integrated microelectronic devices such as TFMHs. Veeco believes that it holds
the leadership position in the overall market for ion beam etching systems
utilized for production of TFMHs.
Ion beam etching permits precise sub-micron low temperature etching of a
wide variety of materials, including many which cannot be etched by other
processes, and has emerged as a leading fabrication process in the TFMH data
storage industry for both circuit patterning and micromachining. This technology
is utilized in multiple steps of the advanced TFMH fabrication process. In
addition, as the demand for integrated circuits and microsensors with sub-micron
features grows, Veeco believes the demand for ion beam etching systems will
increase. Each process equipment product is available as a single loadlock
system or in an automated (multi-chamber) cluster tool configuration. These
systems provide flexibility and throughput by either permitting the etch process
to occur in up to three parallel chambers or by combining with ion beam
deposition or physical vapor deposition.
DEPOSITION SYSTEMS
ION BEAM DEPOSITION SYSTEMS. IBD-350 ion beam deposition systems utilize an
ion beam to deposit thin films and may be mated to Veeco's Cluster System
platform to allow either parallel or sequential etch/deposition processes. The
IBD-350 deposits high purity thin film layers and provides maximum uniformity
and repeatability.
DIAMOND-LIKE CARBON DEPOSITION SYSTEMS. Veeco's DLC-350V diamond-like
carbon deposition system has been developed to deposit protective coatings on
advanced TFMHs. The system consists of a single cassette vacuum loadlock and a
high vacuum processing chamber with two ion beam sources.
27
<PAGE>
PHYSICAL VAPOR DEPOSITION SYSTEMS. Veeco's PVD Cymetra systems are
available in either a planetary or static configuration which can be used to
deposit films in several ways. The planetary configuration produces films with a
high degree of uniformity, repeatability and process control. Multiple targets
of different materials are provided in a single chamber to permit deposition of
a stack of films. The PVD Cymetra systems are also available in static
configurations. These consist of individual chambers dedicated to a single
target material.
IBE/IBD/PVD CLUSTER TOOLS. Veeco's cluster tool format allows for
combinations of etch and deposition modules to address the challenging
manufacturing requirements of MR/GMR TFMHs.
INDUSTRIAL MEASUREMENT EQUIPMENT
Veeco's industrial measurement products include X-Ray fluorescence thickness
measurement systems as well as leak detection/vacuum equipment. These products
have applications in a wide range of industries including electronic, aerospace,
transportation and semiconductor. Average selling prices for industrial
measurement products range from approximately $20,000 to $1,700,000.
X-RAY FLUORESCENCE THICKNESS MEASUREMENT SYSTEMS
Veeco believes that its X-Ray Fluorescence (XRF) systems incorporate an
advanced technology for non-destructive thickness and composition measurement of
plated parts, providing high accuracy and precision on a cost-effective basis.
As industries increase their emphasis on tighter process control manufacturing
specifications (e.g., ISO 9000), XRF technology has become important due to its
speed, repeatability, accuracy and non-destructive measurement capability. Due
to increased miniaturization of components in the microelectronics industry and
the increased need for on-line production testing, Veeco believes that the XRF
market will grow and that XRF technology will be brought into new applications,
such as microelectronic, data storage and metal finishing electrical corrosion
resistant coatings. Veeco's XRF products incorporate Veeco's XPert software
package, which operates in a Microsoft Windows environment and offers features
including advanced user-friendly interface and sophisticated statistical data
analysis.
LEAK DETECTION/VACUUM EQUIPMENT
For over 50 years, Veeco (and its predecessors) have produced mass
spectrometry leak detection equipment used for the non-destructive precise
identification of the size and location of leaks in sealed components. Leak
detectors are used in a broad range of electronic, aerospace and transportation
products, with applications in the production of automotive airbags,
semiconductor devices, air conditioning and refrigeration components, chemical
valves, medical devices such as pacemakers, and fiber optic cable production.
Veeco also produces vacuum systems, including vacuum pumping stations and
gauges, which are sold primarily to industrial customers.
SERVICE, SALES AND FACILITIES
Veeco recognizes that its customer service organization is a significant
factor in the Company's success. The Company provides service and support on a
warranty, service contract or an individual service-call basis. Veeco also
offers enhanced warranty coverage and services, including preventative
maintenance plans, on-call and on-site service plans and other comprehensive
service arrangements, product and application training, consultation services
and a 24-hour hotline service for certain products. The Company believes that
offering seven-day per week, 24-hour per day worldwide support to its customers
creates stronger relationships with customers and provides a significant
competitive advantage. Approximately 15.6% of Veeco's net sales in the first
nine months of 1998 constituted revenues from service and support and the sale
of spare parts and components. These results are included in Veeco's process
equipment, metrology and industrial measurement sales.
28
<PAGE>
Veeco sells its products worldwide through 19 strategically located sales
and service facilities, including nine in the U.S., five in Europe, three in
Asia Pacific, and two in Japan. In 1997 and 1998, Veeco expanded its direct
worldwide sales and service support organization to focus on combined field
service and customer support for all Veeco process equipment and metrology
products. As of September 1998, Veeco employed 103 sales and marketing
representatives and 119 field service representatives.
Veeco's corporate headquarters and manufacturing and research and
development facilities for process equipment systems are located in Plainview,
New York. Veeco's main manufacturing and research and development facilities for
metrology are located in Tucson, Arizona and Santa Barbara, California. Veeco
also manufactures and designs products in Ronkonkoma, New York. Veeco and its
subsidiaries also operate sales and service centers for certain of Veeco's
products.
CUSTOMERS
Veeco sells its products to many of the world's major data storage and
semiconductor manufacturers, and to customers in other industries, research
centers and universities. For the nine months ended September 30, 1998, 50% of
Veeco's sales were to data storage customers, 23% to semiconductor customers and
27% to others. During this nine-month period, sales to Veeco's top three
customers, IBM, Read-Rite and Seagate, accounted for approximately one-third of
total sales.
Veeco's major customers include:
Alps
AMD
Applied Magnetics/DAS Devices
Headway Technologies
Hewlett Packard
Hitachi
Hutchinson Technology
Ibiden
IBM
Intel
Lawrence Livermore National Laboratory
Quantum
Read-Rite
Samsung
Seagate
Seiko
Sharp
Siemens
Silmag
SONY
Storage Technology
Texas Instruments
TDK
Toshiba
RESEARCH AND DEVELOPMENT
Veeco believes that continued and timely development of new products and
enhancements to existing products are necessary to maintain its competitive
position. Veeco utilizes information supplied by its distributors and customers
to design and develop new products and product enhancements and to reduce
time-to-market for these products.
Veeco's research and development programs are organized by product line; new
products have been introduced into each of Veeco's product lines in each of
1998, 1997, 1996 and 1995. During the last two years, Veeco has introduced new
ion beam deposition, diamond-like carbon coating and physical vapor deposition
systems, Digital has introduced new AFM/SPM products and Wyko has introduced
several new production-oriented interferometry products.
In addition, Veeco has leveraged technology on a company-wide basis to
develop new products. In 1998, Veeco's AFM and stylus profiler research teams
collaborated in the development of the Vx-series Atomic Force Profiler.
Veeco's research and development expenses were approximately $13.3 million,
$17.7 million and $24.5 million, or approximately 10.7%, 10.7% and 11.3% of net
sales, for each of the years ended
29
<PAGE>
December 31, 1995, 1996 and 1997, respectively, and approximately $20.5 million,
or approximately 13.2% of net sales, for the nine months ended September 30,
1998. These expenses consisted primarily of salaries, project material and other
product development and enhancement costs.
COMPETITION
Veeco 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 Veeco. In addition, to a lesser
extent many of Veeco's product lines face competition from alternative
technologies, some of which are more established than those used by Veeco in its
products. Significant marketing factors for metrology and process equipment
tools include system performance, accuracy, repeatability, ease of use,
reliability, cost of ownership, and technical service and support. Veeco
believes it competes favorably on the basis of these factors in each of Veeco's
served markets for such products. None of Veeco's competitors competes with
Veeco across all of Veeco's product lines.
Veeco competes with metrology product manufacturers such as Hitachi,
KLA-Tencor, Thermo-Microscopes, ADE Corporation and Zygo Corporation. Veeco
competes with process equipment manufacturers such as Commonwealth Scientific
Corporation, Hitachi, Nordiko, CVC and Balzers. Veeco competes with industrial
measurement product manufacturers such as Kevex, CMI International, Fischer,
Varian Associates, Leybold and Alcatel.
PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY
Veeco's success depends in part on its proprietary technology. Although
Veeco attempts to protect its intellectual property rights through patents,
copyrights, trade secrets and other measures, there can be no assurance that
Veeco will be able to protect its technology adequately or that competitors will
not be able to develop similar technology independently.
Veeco has more than 75 patents and over 10 exclusive and non-exclusive
licenses to patents owned by others covering its various products which Veeco
believes provide it with a competitive advantage. Veeco has a policy of seeking
patents when appropriate on inventions concerning new products and improvements
as part of its ongoing research, development and manufacturing activities. Veeco
believes that there are no patents which are critical to Veeco'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.
Veeco also relies upon trade secret protection for its confidential and
propriety information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Veeco's trade secrets or disclose such
technology or that Veeco can meaningfully protect its trade secrets. In
addition, we cannot be certain that we will not be sued by third parties
alleging that we have infringed their patents or other intellectual property
rights. If any third party sues us, our business, results of operations or
financial condition could be materially adversely affected.
Following the merger with Digital, in September 1998, Veeco and IBM entered
into a cross license agreement providing for the grant by Veeco to IBM and the
grant by IBM to Veeco of the non-exclusive right to make, use or sell SPM
products utilizing technology covered by certain patents held by Veeco and IBM,
respectively. The agreement terminates in August 2003. The cross license
agreement replaces a prior patent license agreement between IBM and Digital.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Edward H. Braun........................... 58 Director, Chairman, Chief Executive Officer and President
Richard A. D'Amore........................ 45 Director
Joel A. Elftmann.......................... 58 Director
Virgil Elings, Ph.D....................... 59 Director
Heinz K. Fridrich......................... 65 Director
John A. Gurley............................ 42 Director
Dr. Paul R. Low........................... 65 Director
Roger D. McDaniel......................... 59 Director
Irwin H. Pfister.......................... 54 Director
Walter J. Scherr.......................... 73 Director
James C. Wyant, Ph.D...................... 55 Director
Thomas A. Cully........................... 52 Assistant Treasurer
Don R. Kania, Ph.D........................ 44 Chief Technology Officer
John P. Kiernan........................... 36 Vice President-Corporate Controller
Emmanuel N. Lakios........................ 37 President-Process Equipment
Robert P. Oates........................... 45 Vice President and General Manager-Industrial Measurement
Products
John F. Rein, Jr.......................... 52 Vice President-Finance, Chief Financial Officer, Treasurer and
Secretary
Joseph F. Rivlin.......................... 63 Executive Vice President-Worldwide Field Operations
Francis Steenbeke......................... 53 Vice President-International Sales and Marketing
</TABLE>
EDWARD H. BRAUN has been a Director and Chairman, Chief Executive Officer
and President of the Company since January 1990. Prior to 1990, Mr. Braun was
employed as the Executive Vice President and Chief Operating Officer of Veeco
Instruments Inc. (now Lambda Electronics, Inc.), the company from which the
Company acquired its business operations (the "Predecessor"). Mr. Braun joined
the Predecessor in 1966 as a Regional Sales Manager/Sales Engineer and held
numerous positions with the Predecessor, including Director of Marketing,
Director of Operations, and General Manager. Mr. Braun is a director of
Semiconductor Equipment and Materials International, of which he was Chairman of
the Board in 1993.
RICHARD A. D'AMORE has been a Director of the Company since January 1990.
Mr. D'Amore has been a General Partner of North Bridge Venture Partners since
1992. In addition to the Company, Mr. D'Amore is a director of Solectron
Corporation and Xionics Document Technologies.
JOEL A. ELFTMANN has been a Director of the Company since May 1994. Mr.
Elftmann has been the Chairman of the Board and President of FSI International
("FSI"), a manufacturer of semiconductor processing products, since 1983. From
August 1983 through August 1989, and from May 1991 through the present, he also
served as Chief Executive Officer of FSI.
VIRGIL ELINGS, PH.D. has been a Director of the Company since May 1998. Dr.
Elings co-founded Digital in 1987 and has served as its President since that
time. Previously, Dr. Elings was Professor of Physics at the University of
California, Santa Barbara. Dr. Elings has a Ph.D. in Physics from Massachusetts
Institute of Technology and a B.S. in Mechanical Engineering from Iowa State
University.
31
<PAGE>
HEINZ K. FRIDRICH has been a Director of the Company since May 1998. Mr.
Fridrich is a courtesy professor in the Department of Industrial and Systems
Engineering of the University of Florida. He joined the University of Florida in
1994 after 43 years with IBM. He began his career in Germany in 1950 and held a
number of key management positions in Europe and the U.S. including Vice
President and General Manager of IBM's largest development and manufacturing
site for semiconductors and electronic packaging. In 1987, he was elected IBM
Vice President responsible for worldwide manufacturing and quality until he
retired in 1993. Mr. Fridrich graduated as a Diplom Ingenieur in Electrical
Engineering in Germany and holds a Master of Science degree in Industrial
Management from the Massachusetts Institute of Technology. He is a member of the
German Society of Engineers and a Fellow of the Royal Academy of Engineering in
the U.K. He is also a director of Central Hudson Gas & Electric Company in
Poughkeepsie, New York and Solectron Corp. in Milpitas, California. Prior to his
retirement he was a member of the National Research Council and the Industrial
Advisory Board of the American Society of Mechanical Engineers.
JOHN A. GURLEY has been a Director of the Company since May 1998. Mr. Gurley
co-founded Digital in 1987 and has served as its Vice President since that time.
Previously, he designed flight simulators for Link Flight Simulation. Mr. Gurley
has an M.S. in Physics from the University of California, Santa Barbara.
DR. PAUL R. LOW has been a Director of the Company since May 1994. Dr. Low
has been the President and Chief Executive Officer of PRL Associates, a
technology consulting firm, since founding the firm in 1992. Previously, Dr. Low
was Vice President-General Manager, Technology Products for IBM, Inc. from 1989
through 1992 and a member of IBM's Management Board from 1990 to 1992. Dr. Low
is also a director of Applied Materials Corporation, Integrated Packaging
Assembly Corp., Solectron Corporation, VLSI Technology and Xionics Document
Technologies.
ROGER D. MCDANIEL has been a Director of the Company since May 1998. Mr.
McDaniel is President, Chief Executive Officer and a director of Integrated
Process Equipment Corp. (NASDAQ National Market: IPEC), a leading manufacturer
of chemical-mechanical planarization (CMP) equipment for the semiconductor
industry. IPEC is headquartered in San Jose, California with operations in
Phoenix, Arizona; Portland, Oregon; and a subsidiary, IPEC Precision, a
manufacturer of advanced wafer polishing and metrology equipment, located in
Bethel, Connecticut. Through August 1996, Mr. McDaniel was Chief Executive
Officer of MEMC Electronic Materials, Inc., the world's second-largest producer
of silicon wafers. Mr. McDaniel is a member of the Board of Directors, and past
Chairman of SEMI--an international industry association of more than 2,000
semiconductor material and equipment manufacturers located in Asia, Europe and
the United States. He also is a member of the board of Fluoroware, Inc. and of
Anatel. A member of the U.S. Korea Committee on Business Cooperation, which is
sponsored by the U.S. Department of Commerce and the Korean Ministry of Trade,
Industry and Energy, Mr. McDaniel also serves on the Advisory Board to St. Louis
University's Institute of International Business.
IRWIN H. PFISTER has been a Director of the Company since May 1998. Mr.
Pfister is Executive Vice President and corporate officer of Schlumberger Ltd.
He is responsible for the management of the Test and Transactions Group, an
international business segment serving the semiconductor, financial, telecom and
retail petroleum industries. Mr. Pfister joined Schlumberger in May of 1986 and
has held several management positions. From January of 1990 to June of 1997, Mr.
Pfister was President of the Semiconductor Automated Test Equipment division.
WALTER J. SCHERR has been a Director of the Company since January 1990.
Since December 1995, Mr. Scherr has been employed by the Company as a
consultant. From December 1993 through December 1995, he was Executive Vice
President of the Company. From January 1990 through December 1993, he was the
Chief Financial Officer of the Company. Mr. Scherr joined the Predecessor in
1986 as the General Manager of the Predecessor's UPA Technology Division of the
Predecessor's Instrument Group. Prior to joining the Predecessor, Mr. Scherr was
the principal and founder of Visual
32
<PAGE>
Sciences, Inc./Panafax (the first publicly traded facsimile company); prior to
that, he held a variety of other financial and operating management positions
with Litton Industries and Sperry Gyroscope Co.
JAMES C. WYANT, PH.D. has been a Director of the Company since July 1997.
From 1984 to July 1997, Dr. Wyant was Chairman of the Board and President of
Wyko Corporation. Dr. Wyant has been a Professor of Optical Sciences at the
University of Arizona since 1974. Prior to joining the faculty at the University
of Arizona, Dr. Wyant spent six years at the Itek Corporation, first as an
optical engineer and later, as manager of advanced optical techniques.
THOMAS A. CULLY has been Assistant Treasurer of the Company since November
1997 and was appointed an executive officer in January 1998. Prior to November
1997, Mr. Cully was employed in various other financial management positions
within the Company. Mr. Cully was employed by the Predecessor from 1979 to 1991,
where he held the position of Manager of Internal Audit; prior to that, he held
various audit positions with Ernst & Young LLP from 1972 to 1979.
DON R. KANIA, PH.D. has been Chief Technology Officer of the Company since
January 1998. Starting in 1993, Dr. Kania was a senior manager at Lawrence
Livermore Laboratory where he directed the Advanced Microtechnology Program in
the development of advanced sensors for data storage, extreme ultraviolet
lithography for semiconductor manufacturing and several other leading-edge
technologies. From 1991 to 1993, Dr. Kania was Research Director at Crystallume,
a thin film diamond company. Dr. Kania's other experience includes nine years of
research experience at the Department of Energy's Los Alamos and Livermore
Laboratory.
JOHN P. KIERNAN has been Vice President and Corporate Controller of the
Company since November 1998. From February 1995 to November 1998, Mr. Kiernan
was Corporate Controller of the Company. Prior to joining the Company, Mr.
Kiernan was an Audit Senior Manager at Ernst & Young LLP from October 1991
through January 1995 and held various audit staff positions with Ernst & Young
LLP from June 1984 through September 1991.
EMMANUEL N. LAKIOS has been President of Process Equipment since February
1998. From June 1997 to February 1998, Mr. Lakios was Executive Vice President
of Worldwide Field Operations. From June 1991 to June 1997, Mr. Lakios was Vice
President and General Manager of Process Equipment. Prior to 1991, Mr. Lakios
was employed in various other positions within the Company. Mr. Lakios joined
the Predecessor in June 1984 as an engineer and held positions of Program
Manager, Product Marketing Manager and Director of Engineering.
ROBERT P. OATES has been Vice President and General Manager-Industrial
Measurement Products since March 1995. From September 1994 until March 1995, Mr.
Oates was Vice President and General Manager-XRF Thickness Measurement Systems
of the Company, and he was Vice President and Treasurer of the Company from
January 1993 through September 1994. From January 1990 through December 1992, he
was Assistant Treasurer of the Company. Mr. Oates was employed by the
Predecessor from 1976 to 1990, where he held a variety of financial positions.
JOHN F. REIN, JR. has been Vice President-Finance and Chief Financial
Officer of the Company since December 1993, and became Treasurer and Secretary
of the Company in October 1994. Prior to joining the Company, Mr. Rein served
for eight years as Vice President-Controller for Axsys Technologies, Inc. From
1979 to 1986, Mr. Rein was Treasurer of Industrial General Corporation; prior to
that, he was on the audit staff of Ernst & Young LLP.
JOSEPH F. RIVLIN has been Executive Vice President-Worldwide Field
Operations since July 1998. Prior to joining Veeco, Mr. Rivlin was Vice
President of Sales at Electro-Scientific Industries since 1994. From 1986 to
1994, he served as President and CEO of XRL, Inc. a semiconductor equipment
supplier.
FRANCIS STEENBEKE has been Vice President-International Sales and Marketing
of the Company since January 1990. Mr. Steenbeke joined the Predecessor in 1968
as a sales engineer and held a variety of general management and sales positions
with the Predecessor until January 1990.
33
<PAGE>
SELLING STOCKHOLDERS
The table below presents the following information about the number of
shares of the Common Stock of the Company which is owned by the Selling
Stockholders: (i) the number of shares such Selling Stockholder beneficially
owns as of the date of this prospectus, (ii) the percentage of the Company's
outstanding shares of Common Stock that such Selling Stockholder beneficially
owns prior to the offering, (iii) the number of shares that such Selling
Stockholder is offering under this prospectus, (iv) the number of shares that
such Selling Stockholder will beneficially own after the completion of this
offering and (v) the percentage of the Company's outstanding shares of Common
Stock that such Selling Stockholders will beneficially own after the completion
of the offering.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
SHARES OF COMMON STOCK BENEFICIALLY OWNED
BENEFICIALLY OWNED NUMBER OF AFTER OFFERING (1)(2)(3)
PRIOR TO OFFERING (1) SHARES BEING ---------------------------
--------------------------- OFFERED BY PERCENT OF
PERCENT OF SELLING TOTAL
TOTAL SHARES SHAREHOLDERS SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING (2) NUMBER OUTSTANDING
- ------------------------------------------- ---------- --------------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
James C. Wyant, Ph.D. (4)(5)............... 1,835,127 12.4% 535,000 1,300,127 8.2%
John A. Gurley (5)(6)...................... 1,594,681 10.7% 420,000 1,174,681 7.4%
Virgil Elings, Ph.D. (5)(6)................ 1,390,873 9.4% 400,000 990,873 6.3%
Betty Elings-Wells......................... 1,323,531 8.9% 400,000 923,531 5.8%
John B. Hayes (6).......................... 687,315 4.6% 175,000 512,315 3.2%
Jeffrey Elings (6)......................... 603,197 4.1% 200,000 403,197 2.5%
Michael Elings............................. 536,930 3.6% 100,000 436,930 2.8%
Edward H. Braun (7)........................ 226,684 1.5% 75,000 151,684 *
James C. and Louise A. Wyant Foundation.... 165,000 1.1% 165,000 0 *
Francis Steenbeke (8)...................... 77,672 * 36,000 41,672 *
Matthew Longmire (9)....................... 53,692 * 15,000 38,692 *
John F. Rein, Jr. (10)..................... 38,494 * 15,000 23,494 *
Peter Maivald (6).......................... 26,846 * 25,000 1,846 *
Emmanuel M. Lakios (11).................... 11,300 * 6,000 5,300 *
Don R. Kania, Ph.D. (12)................... 8,333 * 3,000 5,333 *
John P. Kiernan (13)....................... 6,700 * 5,000 1,700 *
</TABLE>
- ------------------------
* Less than one percent.
(1) Shares of the Company's Common Stock subject to options that are currently
exercisable or exercisable within 60 days of January 19, 1999 are deemed to
be outstanding and to be beneficially owned by the person holding such
options for the purpose of computing the percentage ownership of such person
but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option.
(3) Assumes that the Selling Stockholders have sold all of the shares offered by
this prospectus.
(4) Does not include 165,000 shares held by the James C. and Louise A. Wyant
Foundation. Dr. Wyant shares voting and disposition power over 1,835,127
shares of Veeco Common Stock with his wife, Louise Wyant.
(5) Member of the Company's Board of Directors.
(6) Employee of the Company.
34
<PAGE>
(7) Includes options to purchase 26,665 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 137,335 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Mr. Braun is a member of the
Company's Board of Directors and the Chairman, Chief Executive Officer and
President of the Company.
(8) Includes options to purchase 3,333 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 16,001 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Mr. Steenbeke is the Vice
President-International Sales and Marketing of the Company.
(9) Mr. Longmire shares voting and dispositive power over 53,692 shares with his
wife, Pamela Wrobel Longmire.
(10) Includes options to purchase 37,166 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 67,334 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Mr. Rein is the Vice
President-Finance, Chief Financial Officer, Treasurer and Secretary of the
Company.
(11) Includes options to purchase 10,667 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 41,334 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Mr. Lakios is the President-Process
Equipment of the Company.
(12) Includes options to purchase 8,333 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 16,667 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Dr. Kania is the Chief Technology
Officer of the Company.
(13) Includes options to purchase 6,332 shares of Veeco Common Stock which are
exercisable within 60 days after January 19, 1999. Excludes options to
purchase 21,335 shares of Veeco Common Stock which are not exercisable
within 60 days after January 19, 1999. Mr. Kiernan is the Vice
President-Corporate Controller of the Company.
35
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation, NationsBanc Montgomery Securities LLC, Salomon
Smith Barney Inc. and SoundView Technology Group, Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement among us, the Selling
Stockholders and the underwriters, we and the Selling Stockholders have agreed
to sell to the underwriters, and each of the underwriters severally and not
jointly has agreed to purchase from us and the Selling Stockholders, the number
of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................
Donaldson, Lufkin & Jenrette Securities Corporation..............................
NationsBanc Montgomery Securities LLC............................................
Salomon Smith Barney Inc.........................................................
SoundView Technology Group, Inc..................................................
----------
Total.................................................................. 3,575,000
----------
----------
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to such agreement if any of the shares of
common stock being sold pursuant to such agreement are purchased. Under certain
circumstances, under the purchase agreement, the commitments of non-defaulting
underwriters may be increased.
The representatives have advised us and the Selling Stockholders that the
underwriters propose initially to offer the shares of common stock to the public
at the public offering price set forth on the cover page of this prospectus, and
to certain dealers at such price less a concession not in excess of $ per share
of common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of common stock on sales to certain other
dealers. After the public offering, the public offering price, concession and
discount may be changed.
We and the Selling Stockholders have granted options to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 536,250 additional shares of common stock at the public offering
price set forth on the cover page of this prospectus, less the underwriting
discount. The underwriters may exercise these options solely to cover
over-allotments, if any, made on the sale of the common stock offered hereby. To
the extent that the underwriters exercise these options, each underwriter will
be obligated, subject to certain conditions, to purchase a number of additional
shares of common stock proportionate to such underwriter's initial amount
reflected in the foregoing table.
The following table shows the per share and total underwriting discounts to
be paid by us and the Selling Stockholders to the underwriters. This information
is presented assuming either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT
PER SHARE OPTION WITH OPTION
---------- --------------- ---------------
<S> <C> <C> <C>
Public Offering Price........................ $ $ $
Underwriting Discount........................ $ $ $
Proceeds, before expenses, to us............. $ $ $
Proceeds to Selling Stockholders............. $ $ $
</TABLE>
36
<PAGE>
We will not receive any of the proceeds from the sale of shares by the
Selling Stockholders. The expenses of the offering are estimated at $600,000 and
are payable by us.
The shares of common stock are being offered by the several underwriters,
subject to prior sale, when as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the underwriters and certain
other conditions. The underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part.
We, our directors and executive officers and certain of our stockholders,
including the Selling Stockholders, have agreed not to offer or sell any other
shares of common stock or common stock equivalents for 90 days after the date of
this prospectus. Common stock equivalents include securities convertible into or
exchangeable for common stock. During the 90-day period, we and such persons
have also agreed not to sell to third parties any option or other right to
acquire common stock or common stock equivalents and not to purchase from third
parties any option or other right to sell common stock or common stock
equivalents. In addition, we and such persons have agreed not to enter into any
swap or other arrangement that transfers the economic consequences of ownership
of common stock or common stock equivalents. There are some exceptions to these
restrictions, including the issuance by us of common stock and options in
connection with our employee and director option plans and stock purchase plans
and gifts of common stock by such persons, provided the transferee agrees to be
bound by the foregoing restrictions.
We and the Selling Stockholders have agreed to indemnify the underwriters
against certain liabilities, including certain liabilities under the Securities
Act, or to contribute to payments the underwriters may be required to make in
respect thereof.
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the underwriters and certain selling group
members to bid for and purchase the common stock. As an exception to these
rules, the representatives are permitted to engage in certain transactions that
stabilize the price of the common stock. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of the
common stock.
If the underwriters create a short position in the common stock in
connection with the offerings, i.e., if they sell more shares of common stock
than are set forth on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither we nor any of the Selling Stockholders or underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the common stock. In
addition, neither we nor any of the Selling Stockholders or underwriters makes
any representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without notice.
Some of the underwriters or their affiliates have provided investment or
commercial banking services to us in the past and are likely to do so in the
future. They receive customary fees and commissions for these services.
37
<PAGE>
LEGAL MATTERS
The validity of the Common Stock being offered hereby is being passed upon
for the Company by Kaye, Scholer, Fierman, Hays & Handler, LLP, 425 Park Avenue,
New York, New York 10022. Certain legal matters are being passed upon for the
Underwriters by Hale and Dorr LLP, 60 State Street, Boston, Massachusetts 02109.
EXPERTS
The consolidated financial statements of Veeco Instruments, Inc. at December
31, 1996 and 1997 and for each of the three years in the period ended December
31, 1997 included in this prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, which is based in part on the report of other auditors. The financial
statements referred to above are included in reliance upon such report given
upon the authority of such firms as experts in accounting and auditing.
38
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<C> <S> <C>
I December 31 Financial Statements
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
II September 30 Financial Statements (unaudited)
Condensed Consolidated Balance Sheet at September 30, 1998....................... F-23
Condensed Consolidated Statements of Income for
the Nine Months Ended September 30, 1997 and 1998.............................. F-24
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1998.............................. F-25
Notes to Condensed Consolidated Financial Statements............................. F-26
III Schedule II--Valuation and Qualifying Accounts................................... S-1
</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
herein). 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>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 14,251
Accounts and trade notes receivable, less allowance for doubtful accounts of $1,088.............. 46,795
Inventories...................................................................................... 51,621
Prepaid expenses and other current assets........................................................ 1,403
Deferred income taxes............................................................................ 6,001
-------------
Total current assets............................................................................... 120,071
Property, plant and equipment at cost, less accumulated depreciation and amortization of $14,895... 36,262
Excess of cost over net assets acquired, less accumulated amortization
of $1,138........................................................................................ 4,220
Other assets....................................................................................... 5,338
-------------
Total assets....................................................................................... $ 165,891
-------------
-------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities................................................................................ $ 42,227
Other non-current liabilities...................................................................... 995
Long term debt, net of current portion............................................................. 16,995
Total shareholders' equity......................................................................... 105,674
-------------
Total liabilities and shareholders' equity......................................................... $ 165,891
-------------
-------------
</TABLE>
See accompanying notes.
F-23
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Net sales................................................................................. $ 158,952 $ 155,345
Cost of sales............................................................................. 80,829 83,883
---------- ----------
Gross profit.............................................................................. 78,123 71,462
Costs and expenses:
Research and development expense........................................................ 17,261 20,549
Selling, general and administrative expense............................................. 28,842 31,403
Amortization expense.................................................................... 206 292
Other--net.............................................................................. (335) (695)
Merger expenses........................................................................... 2,250 7,500
Write-off of purchased in-process technology.............................................. 4,200 --
---------- ----------
52,424 59,049
---------- ----------
Operating income.......................................................................... 25,699 12,413
Interest expense (income), net............................................................ (79) 748
---------- ----------
Income before income taxes................................................................ 25,778 11,665
Income tax provision...................................................................... 5,927 3,499
---------- ----------
Net income................................................................................ $ 19,851 $ 8,166
---------- ----------
---------- ----------
Earnings per share:
Net income per common share............................................................. $1.38 $0.56
Diluted net income per common share..................................................... $1.33 $0.55
Weighted average shares outstanding..................................................... 14,365 14,577
Diluted weighted average shares outstanding............................................. 14,879 14,813
Pro forma presentation (SEE NOTE 1)
Income before income taxes.............................................................. $ 25,778 $ 11,665
Pro forma income tax provision.......................................................... 9,850 4,316
---------- ----------
Pro forma net income.................................................................... $ 15,928 $ 7,349
---------- ----------
---------- ----------
Pro forma net income per common share................................................... $1.11 $0.50
Pro forma diluted net income per common share........................................... $1.07 $0.50
</TABLE>
See accompanying notes.
F-24
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................................. $ 19,851 $ 8,166
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization............................................................. 1,319 3,570
Deferred income taxes..................................................................... (1,919) (1,399)
Non-cash compensation charge.............................................................. -- 1,585
Write-off of purchased in-process technology.............................................. 4,200 --
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (11,344) (1,546)
Inventories............................................................................. (8,107) (6,614)
Accounts payable........................................................................ 7,571 (5,756)
Accrued expenses and other current liabilities.......................................... 4,214 233
Other, net.............................................................................. 620 2,418
--------- ---------
Net cash provided by operating activities................................................... 16,405 657
INVESTING ACTIVITIES
Capital expenditures, net................................................................... (5,774) (6,194)
Net assets of business acquired............................................................. (4,375) --
--------- ---------
Net cash used in investing activities....................................................... (10,149) (6,194)
FINANCING ACTIVITIES
Proceeds from stock issuances............................................................... 1,751 1,952
Distributions to former shareholders of Digital............................................. (8,000) (2,000)
Other....................................................................................... (83) (156)
--------- ---------
Net cash used in financing activities....................................................... (6,332) (204)
Effect of exchange rate changes on cash and cash equivalents................................ (179) (452)
--------- ---------
Net change in cash and cash equivalents..................................................... (255) (6,193)
Cash and cash equivalents at beginning of period............................................ 26,322 20,444
--------- ---------
Cash and cash equivalents at end of period.................................................. $ 26,067 $ 14,251
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-25
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation
(consisting of normal recurring accruals) have been included. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included elsewhere herein for the years ended December 31, 1995, 1996 and 1997.
Earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted average number of common and common equivalent shares
outstanding during the period.
The following table sets forth the reconciliation of diluted
weighted-average shares outstanding:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
(IN THOUSANDS)
Weighted-average shares outstanding..................................... 14,365 14,577
Dilutive effect of stock options........................................ 514 236
--------- ---------
Diluted weighted-average shares outstanding............................. 14,879 14,813
--------- ---------
--------- ---------
</TABLE>
Pro forma net income and pro forma net income per share as shown on the
Condensed Consolidated Statements of Income reflects income taxes for Digital
Instruments, Inc. ("Digitial") as if Digital, which was merged in a transaction
accounted for as a pooling of interests with the Company in May 1998, had been a
"C" Corporation for all periods presented and, therefore, subject to federal
income taxes at the corporation level (See Note 2).
2. MERGER
On May 29, 1998, the Company merged with 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. They were 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 Instruments
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. 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,
as presented in the Condensed Consolidated Statements of Income, reflects income
taxes for Digital as if it had been a
F-26
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. MERGER (CONTINUED)
"C" Corporation for all periods presented. Upon termination of Digital's "S"
Corporation status, the Company recorded deferred income taxes to provide for
the cumulative deferred taxes as if Digital was a "C" Corporation which resulted
in a credit to the provision for income taxes of approximately $1,073,000 during
the nine-month period ended September 30, 1998.
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 for the nine-month periods ended September 30, 1997 and 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
(IN THOUSANDS)
Revenues:
Veeco (pre-merger)............................................... $ 122,506 $ 56,364
Digital.......................................................... 36,446 22,666
Veeco (post-merger).............................................. -- 76,315
---------- ----------
Combined......................................................... $ 158,952 $ 155,345
---------- ----------
Net income (loss):
Veeco (pre-merger)............................................... $ 9,494 $ (310)
Digital.......................................................... 10,357 4,242
Veeco (post-merger).............................................. -- 4,234
---------- ----------
Combined......................................................... $ 19,851 $ 8,166
---------- ----------
---------- ----------
</TABLE>
3. INVENTORIES
Interim inventories have been determined by lower of cost (principally
first-in, first-out) or market. Inventories consist of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
--------------
<S> <C>
(IN THOUSANDS)
Raw materials....................................................... $ 29,430
Work in process..................................................... 11,225
Finished goods...................................................... 10,966
-------
$ 51,621
-------
-------
</TABLE>
4. OTHER INFORMATION
Interest paid during the nine months ended September 30, 1997 and 1998 was
$900,000 for each period. The Company made income tax payments of $4,300,000
during each of the nine-month periods ended September 30, 1997 and 1998.
F-27
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ('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.
For the nine months ended September 30, 1997 and 1998, total comprehensive
income amounted to approximately $19,200,000 and $8,200,000, respectively.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", which is
effective for both interim and annual financial statements for periods ending
after December 15, 1997. Segment information is not required to be reported in
interim financial statements in the first year of application. The Company
intends to adopt SFAS 131 for the fiscal year ending December 31, 1998.
F-28
<PAGE>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
COL. B ADDITIONS COL. E
------------ ------------------------ ------------
COL. A BALANCE AT CHARGED TO CHARGED TO COL. D BALANCE AT
- ---------------------------------------------- BEGINNING OF COSTS AND OTHER ------------ END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Deducted from asset accounts:
Year ended December 31, 1995:
Allowance for doubtful accounts........... $ 558,000 $ 147,000 $ -- $ 13,000 $ 692,000
Valuation allowance on net deferred tax
assets.................................. 2,858,000 -- -- 945,000 1,913,000
------------ ----------- ----------- ------------ ------------
$ 3,416,000 $ 147,000 $ -- $ 958,000 $ 2,605,000
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Deducted from asset accounts:
Year ended December 31, 1996:
Allowance for doubtful accounts........... $ 692,000 $ 200,000 $ -- $ 89,000 $ 803,000
Valuation allowance on net deferred tax
assets.................................. 1,913,000 -- -- 1,118,000 795,000
------------ ----------- ----------- ------------ ------------
$ 2,605,000 $ 200,000 $ -- $ 1,207,000 $ 1,598,000
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
Deducted from asset accounts:
Year ended December 31, 1997:
Allowance for doubtful accounts........... $ 803,000 $ 403,000 $ -- $ 201,000 $ 1,005,000
Valuation allowance on net deferred tax
assets.................................. 795,000 199,000 -- -- 994,000
------------ ----------- ----------- ------------ ------------
$ 1,598,000 $ 602,000 $ -- $ 201,000 $ 1,999,000
------------ ----------- ----------- ------------ ------------
------------ ----------- ----------- ------------ ------------
</TABLE>
S-1
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,575,000 SHARES
[LOGO]
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY SECURITIES LLC
SALOMON SMITH BARNEY
SOUNDVIEW TECHNOLOGY GROUP
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
