Annual Report — [x] Reg. S-K Item 405 — Form 10-K
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2: EX-10.2 Material Contract 6 25K
3: EX-10.4 Material Contract 9 37K
4: EX-21.1 Subsidiaries of the Registrant 1 6K
5: EX-23.1 Consent of Experts or Counsel 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION
13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-16244
VEECO INSTRUMENTS INC.
(Registrant)
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DELAWARE 11-2989601
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization
TERMINAL DRIVE 11803
PLAINVIEW, NEW YORK (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 349-8300
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Registration S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by references in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 1, 2000 as
reported on The Nasdaq National Market, was approximately $1,706,294,879. Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding Common Stock have been excluded from this computation
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
At March 1, 2000, the Registrant had 18,082,518 outstanding shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 12, 2000 are incorporated by reference into
Part III of this Form 10-K Report.
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SAFE HARBOR STATEMENT
This Annual Report on Form 10-K (the "Report") contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Discussions containing such forward-looking statements may be found in
Items 1, 3, 7 and 7A hereof, as well as within this Report generally. In
addition, when used in this Report, the words "believes," "anticipates,"
"expects," "estimates," "plans," "intends," and similar expressions are intended
to identify forward-looking statements. All forward-looking statements are
subject to a number of risks and uncertainties that could cause actual results
to differ materially from projected results. Factors that may cause these
differences include, but are not limited to:
- the dependence on principal customers and the cyclical nature of the data
storage, semiconductor and optical telecommunications industries,
- fluctuations in quarterly operating results,
- rapid technological change and risks associated with the acceptance of new
products by individual customers and by the marketplace,
- limited sales backlog,
- the highly competitive nature of industries in which the company operates,
- changes in foreign currency exchange rates, and
- matters set forth in this Report generally.
Consequently, such forward-looking statements should be regarded solely as
the Company's current plans, estimates and beliefs. The Company does not
undertake any obligation to update any forward-looking statements to reflect
future events or circumstances after the date of such statements.
PART I
ITEM 1. BUSINESS.
THE COMPANY
Veeco designs, manufactures, markets and services a broad line of equipment
primarily used by manufacturers in the data storage, optical telecommunications
and semiconductor industries. These industries help create a wide range of
information age products for today and tomorrow--such as personal computers,
network servers, fiber optic networks, digital cameras, TV set-top boxes and
personal digital assistants.
The Company's Process Equipment products precisely deposit or remove (etch)
various materials in the manufacturing of advanced thin film magnetic heads for
the data storage industry. With the acquisition of Ion Tech in 1999, Veeco
became the leading supplier of ion beam deposition equipment to the fast-growing
optical filter market (dense wavelength division multiplexing or "DWDM"). The
DWDM optical filters are used to expand the capacity of fiber optic networks.
Veeco's broad line of leading edge technology allows customers to improve time
to market of next generation products.
Veeco's Metrology equipment is used to provide critical surface measurements
on thin film magnetic heads and disks used in hard drives, as well as on
semiconductor devices and in research applications. This equipment allows
customers to monitor their products throughout the manufacturing process in
order to improve yields, reduce costs and improve product quality.
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
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quality of those components; and, in the data storage industry, the introduction
of new giant magnetoresistive (GMR) thin film magnetic heads (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 precisely deposit thin films, and/or
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, optical
telecommunications components and semiconductor devices.
Veeco supplies worldwide industry leaders including Seagate, IBM, Read-Rite,
TDK, and Alps in data storage; Motorola and Infineon in semiconductor; E-Tek
Dynamics, Hermann Technologies and DiCon Fiber Optics in optical
telecommunications. The Company's global sales and service organization is
located throughout the United States, Europe, Japan and Asia Pacific. At
December 31, 1999, Veeco had 893 employees, with manufacturing, research and
development and engineering facilities located in New York, California, Colorado
and Arizona.
RECENT DEVELOPMENTS
On February 29, 2000, the Company signed a definitive merger agreement with
CVC, Inc. ("CVC") of Rochester, New York. Under the terms of the agreement, CVC
shareholders will receive 0.43 shares of Veeco Common Stock for each share of
CVC Common Stock. The merger will be accounted for as a pooling of interests
and, as a result, historical financial data will be restated in future reports.
The merger is expected to close in the second quarter of 2000, pending the vote
of shareholders of both companies and other customary closing conditions. Upon
consumption of the merger, CVC will become a wholly-owned subsidiary of the
Company. CVC provides cluster tool manufacturing equipment used in the
production of evolving tape and disk drive recording head fabrication, optical
components, passive components, MRAM, bump metallization, and next generation
logic devices.
On February 11, 2000, Veeco entered into a strategic alliance with Seagate
Technology, Inc. ("Seagate") under which Veeco assumed production responsibility
for Seagate's internal Slider Level Crown (SLC) product line and acquired rights
to commercialize such products for sale to third parties. Sales of SLC tools
will be reflected in Veeco's results beginning in the first quarter of 2000.
On January 31, 2000, Monarch Labs, Inc., a privately held developer and
manufacturer of automated quasi-static test systems for the data storage
industry, merged with and into a subsidiary of Veeco. Monarch shareholders
received 282,224 shares of Veeco Common Stock in exchange for all of the
outstanding shares of Monarch. The merger was accounted for as a pooling of
interests. Since Monarch's historical results of operations and financial
position are not material in relation to those of Veeco, financial information
prior to the merger will not be restated in future reports.
On January 17, 2000, Veeco sold the assets constituting its leak detection
business, which no longer fit its long-term strategy, to Vacuum Instrument
Corp., a privately held leak detection company based in Ronkonkoma, New York.
On November 4, 1999, Ion Tech, Inc. and an affiliate (collectively, "Ion
Tech"), a leading supplier of Ion Beam Deposition Systems used to deposit
multi-layer films in the manufacture of optical filters critical to extending
"bandwidth" of fiber optic telecommunication networks, merged with and into
subsidiaries of Veeco. Founded in 1974, Ion Tech was a privately held company
based in Ft. Collins, Colorado. Under the terms of the agreement, Ion Tech
shareholders received 1,509,437 shares of Veeco Common Stock. The merger was
accounted for as a pooling of interests and, accordingly, historical data has
been restated to include Ion Tech data.
On October 14, 1999, Veeco purchased OptiMag Inc., of San Diego, California
("OptiMag"). OptiMag, a development-stage company founded in 1998, is a supplier
of automated optical defect inspection and process control equipment for the
data storage thin film magnetic head industry.
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On February 2, 1999, the Company completed a public offering, pursuant to
which 1,000,000 shares of Common Stock, par value $.01 per share, were issued
and sold by the Company for $52.00 per share, less underwriting discounts and
commissions of $2.34 per share. The Company is using the net proceeds of the
offering (approximately $49 million) for capital expenditures including
additional clean manufacturing areas and expanded customer application
laboratories and for working capital and general corporate purposes, including
potential acquisitions. In addition, as part of the public offering, certain
stockholders of the Company sold 2,575,000 shares of Common Stock. The Company
did not receive any of the proceeds from the sale of shares by the selling
stockholders.
COMPANY STRATEGY
Veeco has, and will continue to pursue, the following growth strategy:
- Strengthen the Company's position as the leading "one-stop shop" for etch,
deposition and metrology equipment for the data storage industry;
- Capitalize on the rapid growth in the optical telecommunications industry
by expanding process equipment and metrology solutions;
- Pursue focused market opportunities in the semiconductor industry in which
Veeco has specific technology leadership;
- Pursue organic growth, as well as strategic mergers and, where
appropriate, to further expand the Company's breadth of product line;
- Leverage Veeco's technology and strategic customer relationships and
assist customers' time to market for their new products;
- Utilize the Company's industry-leading global sales and service network to
further strengthen customer relationships.
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ACQUISITION HISTORY
In keeping with the strategy outlined above, Veeco has completed a number of
acquisitions, a summary of which follows:
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COMPANY/ASSETS ACQUIRED DATE OF TRANSACTION PRIMARY BUSINESS ACQUIRED
----------------------- ------------------- ------------------------------------
Certain assets of Lambda January 18, 1990 Initial management-led buyout of ion
Electronics, Inc., including Sloan beam, metrology and leak detection
Technology Corp. systems business
Certain physical vapor deposition April 10, 1997 Physical Vapor Deposition technology
(PVD) assets of Material Research for data storage industry
Corporation (MRC)
Wyko Corporation July 25, 1997 Optical interferometry for a broad
range of applications
Digital Instruments, Inc. May 29, 1998 Atomic force microscopy for a broad
range of applications
OptiMag, Inc. October 14, 1999 Optical measurement and test for
data storage industry
Ion Tech, Inc. November 4, 1999 Ion Beam Deposition for optical
telecommunications industry
Monarch Labs, Inc. January 31, 2000 Magnetic Measurement and Test for
data storage industry
Slider Level Crown (SLC) product February 11, 2000 Purchase of SLC technology to micro-
line of Seagate Technology, Inc. machine and measure thin film
magnetic heads
INDUSTRY BACKGROUND
GENERAL INTRODUCTION:
The semiconductor device, thin film magnetic head and optical electronic
components often consist of many intricate patterns on circuits. Depending upon
the specific design of any given integrated circuit, a variety of film
thicknesses 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
is achieved through an increased number of manufacturing steps involving greater
use of precise etching and deposition equipment. In addition, metrology systems
are used throughout the manufacturing process in order to monitor process
accuracy, product quality, repeatability and to measure critical dimensions and
other physical features such as film thickness, line width, step height,
sidewall angle and surface roughness, thereby improving yields.
The market for microelectronic components has grown rapidly in recent years,
driven by corporate and consumer use of data storage intensive products such as
networked personal computers (PCs), servers and the Internet, among others.
Veeco believes that annual unit growth in PCs, hard disk drives and MR/ GMR
heads since 1997 has been in the 10%-15% range, 12%-17% range and 20%-25% range,
respectively, and will continue to grow at such rates until 2001. While the
Company believes that the PC market is the primary driver of disk drive unit
growth, disk drives are also increasingly being used for emerging applications
such as television set-top boxes, video-on-demand systems, and small electronic
devices such as digital cameras and personal digital assistants.
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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 developed new
head designs incorporating higher areal densities which enable storage of 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, since 1990, areal densities have
been increasing at more than a 60% annual rate and are expected to continue to
do so until at least 2005. As increased storage capacity requires multiple disks
per drive, magnetic head production is growing faster than the overall disk
drive industry. Most magnetic heads produced prior to 1998 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 100 Gbits/in(2) by the year 2005.
The Company believes that substantial investment is being made in GMR
technology and that production is growing from approximately 30 million GMR
heads in 1998 to producing 400 million GMR heads in 1999, 735 million in 2000,
1 billion in 2001 and 1.4 billion in 2002. In addition, the conversion to
smaller sized heads (i.e., "pico" and even "femto" as compared to 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 OPTICAL TELECOMMUNICATIONS INDUSTRY: In the
telecommunications field, there is a need for higher bandwidth caused by the
rapidly expanding use of the internet and by the increasing use of data intense
file transfers, such as downloadable music, internet telephony and streaming
video. In response to this demand, a new technology called Dense Wavelength
Division Multiplexing (DWDM) was recently developed. DWDM technology combines a
number of wavelengths onto a single optical fiber, thereby increasing the
capacity of the fiber network. The appeal of the technology is its ability to
increase the capacity of the existing fiber optic telecommunications networks
without laying additional cable. DWDM has been described as sending laser pulses
of different colors simultaneously over the same fiber.
The use of DWDM in telecommunications networks is challenging component
manufacturers to design a variety of new devices that can be integrated into
DWDM systems. These include devices that can increase the number of wavelengths
carried, span long distances, and develop an all-optical layer so that
wavelengths do not need to be converted between optical and electrical signals.
A major component of DWDM networks are filters used for wavelength selection.
The typical high-speed fiber cable today transmits at 2.5Gbps, or
approximately 32,000 voice or data transmissions, but uses less than 1% of the
inherent bandwidth of the fiber. DWDM multiplies the capacity of existing,
embedded fiber optical lines by 8 to 32 times, or up to 80 Gbps. An optical
fiber with DWDM carries a number of wavelengths transmitting them at different
wavelengths through the same fiber, and then separates the wavelengths at the
other end--thereby multiplying the capacity of the fiber.
Thin film interference filters are glass substrates coated with precise
multilayers of dielectric materials to control transmission and reflection.
Bandwidth and shape of filters are very important for demultiplexers to minimize
the crosstalk (noise) and block unwanted light in optical amplifiers. Veeco is a
leading provider of ion beam deposition systems, which are today being used to
help create the optical filters which serve as a critical component of these
DWDM systems. In addition, Veeco's broad range of ion beam etch and physical
vapor deposition tools may serve a variety of applications in this rapidly
growing market.
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TRENDS IN THE SEMICONDUCTOR INDUSTRY: Current semiconductor industry
technology trends include smaller feature sizes (sub-0.25 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 process deviations as early in the
manufacturing process as possible. These tools are critical for yield
enhancement resulting in cost reduction in this increasingly competitive
environment.
VEECO'S PRODUCTS
Veeco offers two principal product lines: Metrology and Process Equipment.
Veeco divested its Leak Detection business on January 17, 2000, and the
remaining Industrial Measurement products represent a small percentage of the
Company's sales. Historical contribution to net sales by each of these product
lines is shown below for the years indicated:
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YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN MILLIONS)
Metrology................................................... $112.2 $126.2 $112.8
% OF NET SALES............................................ 45.5% 58.7% 50.5%
Process Equipment........................................... $117.4 $ 69.1 $ 91.2
% OF NET SALES............................................ 47.6% 32.1% 40.8%
Industrial Measurement...................................... $ 17.0 $ 19.7 $ 19.4
% OF NET SALES............................................ 6.9% 9.2% 8.7%
See note 8 of Consolidated Financial Statements of the Company for
additional information regarding the Company's reportable segments.
METROLOGY EQUIPMENT
Veeco's metrology product line includes atomic force/scanning probe
microscopes, optical metrology tools, magnetic force systems, and stylus
profilers. These products offer a broad range of solutions to customers in the
data storage, semiconductor and optical telecommunications industries, as well
as versatile tools for use by research and development centers and universities.
ATOMIC FORCE/SCANNING PROBE MICROSCOPES (AFM/SPMS)
Through its merger with Digital Instruments, Inc., in May 1998, Veeco
expanded its existing family of metrology products to include next generation
AFM/SPM technology capable of resolving and imaging nanometer-level dimensional
variations and surface properties. Over time, the feature sizes in integrated
circuits and magnetoresistive elements of data storage devices have decreased.
Today, the smallest feature sizes on integrated circuits are on the order of 250
nanometers. Plans are in place to fabricate integrated circuits with feature
sizes as small as 180 and then 130 nanometers within the next few years.
The Atomic Force Microscope "feels" the sample surface directly using a
probe consisting of a very sharp tip mounted on a microscopic spring arm (a
cantilever). The interaction of the probe with the surface is detected by
measuring deflections of the cantilever with an optical beam system.
AFMs permit resolution at the molecular level. Digital developed some of the
first AFMs used in commercial applications and most of the SPMs manufactured and
sold by Digital are AFMs. SPMs, and particularly AFMs, can directly measure both
lateral and vertical shapes with nanometer resolution and with direct 3D
capability. In contrast, light-based instruments, including interferometric and
confocal microscopes, have limited lateral resolution for measurements of less
than half the wavelength of light, or less than about 250 nanometers. Digital's
AFM products utilize its patented TappingMode-TM- technology, achieving the high
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resolution and stability previously obtainable only through destructive physical
contact with the sample surface while employing a light touch previously
achievable only through the less stable non-contact mode.
In addition to topography, AFMs can also directly measure magnetic field
(such as magnetic bits on a hard disk); electric field; hardness (such as thin
film integrity); electric charge density (such as dopant concentrations in
semiconductors); temperature (such as temperature distribution in disk drive
recording head elements); and various chemical properties (such as the
difference in binding preference among biological molecules). AFMs make these
measurements on almost any surface; in air, vacuum or under fluids; and with
minimal sample preparation.
Veeco produces a broad range of AFM/SPM products designed for data storage,
semiconductor, and other industrial and research applications. These products
include the NANOSCOPE DIMENSION SERIES SPMS, NANOSCOPE SPMS AND BIOSCOPE SPMS.
The BIOSCOPE SPMS are specifically designed for biological sciences. Veeco's
high-end DIMENSION 9000 SPM, the first of which was shipped in May 1998, meets
clean room specifications for full 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.
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. In 1999, Veeco combined the manufacturing facilities for its
atomic force metrology and stylus profiler products into one location.
OPTICAL METROLOGY PRODUCTS
Substantially all of Veeco's optical metrology instruments, produced by
Veeco's subsidiary, Wyko Corporation ("Wyko"), are designed to make non-contact
surface measurements using interferometry technology. This process involves the
use of 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.
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, incoming parts inspection, final parts inspection, and
field failure analysis.
In November, 1999, Veeco purchased OptiMag Inc., of San Diego, California,
thereby expanding Veeco's optical metrology technology for the data storage
industry. OptiMag's Automated Slider Inspection System (OASIS-TM-) is a
precision automated slider defect inspection station for high throughput
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production. OptiMag's optical inspection equipment detects and classifies visual
defects in magnetoresistive (MR) and giant magnetoresistive (GMR) thin film
heads at slider level to resolutions of .175m. It can also be used in research
and development where high resolution imaging or large statistical sample sizes
are desired. The system acquires slider images (nano, pico, or femto), using a 4
megapixel digital camera, and the user can define the desired combination of
inspection views of the air bearing surface and the pole tip. The system is
supplied with flexible software to meet the differing specifications of volume
head manufacturers. OASIS-TM- technology is extendable to meet the inspection
needs of other precision applications such as printer heads and biotechnology.
MAGNETIC MEASUREMENT
Veeco acquired Monarch Labs of Longmont, Colorado in January, 2000.
Monarch's QSW-TM- and QSE-TM- are fully automated test systems for
characterizing the magnetoresistance of bulk films and patterned devices. The
instrument monitors the performance of GMR heads used in high-density disk
drives, providing essential feedback for process control and device performance
improvement.
PROCESS EQUIPMENT
Veeco's process equipment product line includes etch and deposition systems
for data storage and optical telecommunications 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.
ETCH SYSTEMS
Veeco develops and produces ion beam etch systems, sold under the
MICROETCH-TM- 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's etch
systems are also applicable in the active optical telecommunications
marketplace.
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.
ION TECH SPECTOR-TM- SYSTEM: Ion Tech's IBD equipment is used to
manufacture precise multi-layer optical filters critical to extending
"bandwidth" of fiber optic telecommunication networks. Able to precisely control
thicknesses, with excellent repeatability, Ion Tech's IBD systems are used to
create the filters that allow multiple channels to share the same optical fiber.
With its precise control of deposition rates and uniformities, Spector-TM- is
able to produce high yields of 0.8nm bandwidths and below.
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DIAMOND-LIKE CARBON DEPOSITION SYSTEMS. Veeco's DLC-350V diamond-like
carbon deposition system has been developed to deposit protective coatings on
advanced TFMHs. The system consists of a single cassette vacuum loadlock and a
high vacuum processing chamber with two ion beam sources.
PHYSICAL VAPOR DEPOSITION SYSTEMS. Veeco's PVD Cymetra systems are
available in either a planetary or static configuration which can be used to
deposit films in several ways. The planetary configuration produces films with a
high degree of uniformity, repeatability and process control. Multiple targets
of different materials are provided in a single chamber to permit deposition of
a stack of films. The PVD Cymetra-TM- 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
As a result of the January 2000 divestiture of Veeco's Leak Detection
business, the Company's Industrial Measurement business now consists primarily
of X-Ray fluorescence ("XRF") thickness measurement systems. XRF systems measure
thickness and composition of thin films for data storage, semiconductor, and
industrial applications.
SERVICE AND SALES
Veeco recognizes that its customer service organization is a significant
factor in the Company's success. The Company provides service and support on a
warranty, service contract or an individual service-call basis. Veeco also
offers enhanced warranty coverage and services, including preventative
maintenance plans, on-call and on-site service plans and other comprehensive
service arrangements, product and application training, consultation services
and a 24-hour hotline service for certain products. The Company believes that
offering 24 hour, 7 day per week worldwide support creates stronger
relationships with customers and provides a significant competitive advantage.
Approximately 11.5% of Veeco's net sales for the year ended December 31, 1999
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, as appropriate.
Veeco sells its products worldwide through over 20 strategically located
sales and service facilities, including nine in the U.S., six in Europe, four in
Asia Pacific, and two in Japan. In 1997, 1998 and 1999, Veeco expanded its
direct worldwide sales and service support organization to focus on combined
field service and customer support for all Veeco process equipment and metrology
products. As of December 31, 1999, Veeco employed 118 sales and marketing
representatives and 132 field service representatives.
CUSTOMERS
Veeco sells its products to many of the world's major data storage,
semiconductor and optical telecommunications manufacturers, and to customers in
other industries, research centers and universities. For the year ended
December 31, 1999, 55% of Veeco's sales were to data storage customers, 25% to
research/industrial customers, 12% to semiconductor customers, and 8% to optical
telecommunications customers. During this period, sales to Veeco's top three
customers, Seagate, IBM, and Read-Rite accounted for approximately 31% of total
sales. Veeco's significant customers list also includes TDK/SAE, Alps, Hitachi,
E-Tek Dynamics, Fujitsu, Toshiba, Samsung, Hermann Technology and Matsushita.
10
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 customers and distributors
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 the past three years.
Veeco's research and development expenses were approximately $31.5 million,
$28.0 million and $25.0 million, or approximately 12.8%, 13.0% and 11.2% of net
sales, for the years ended December 31, 1999, 1998 and 1997, respectively. These
expenses consisted primarily of salaries, project material and other product
development and enhancement costs.
MANUFACTURING
The Company's principal manufacturing activities, which consist of design,
assembly and test operations, take place at its facilities in Plainview, New
York (ion beam etch and deposition and physical deposition systems), Santa
Barbara, California (atomic force and stylus metrology tools), Tucson, Arizona
(interferometry products), Ft. Collins, Colorado (ion beam deposition),
Minneapolis, Minnesota (SLC products), Longmont, Colorado (magnetic test), San
Diego, California (optical measurement and test), and Ronkonkoma, New York (XRF
equipment).
The Company's manufacturing and research and development functions have been
organized by product line. The Company believes that this organizational
structure allows each product line manager to more closely monitor the products
for which he is responsible, resulting in more efficient sales, marketing,
manufacturing and research and development. The Company seeks to emphasize
customer responsiveness, customer service, high quality products and a more
interactive management style. By implementing these management philosophies, the
Company believes that it has increased its competitiveness and positioned itself
for future growth.
Certain of the components and sub-assemblies included in the Company's
products are obtained from a single source or a limited group of suppliers.
Although the Company does not believe it is dependent upon any supplier of the
components and sub-assemblies referred to in the previous sentence as a sole
source or limited source for any critical components, the inability of the
Company to develop alternative sources, if required, or an inability to meet a
demand or a prolonged interruption in supply or a significant increase in the
price of one or more components could adversely affect the Company's operating
results.
BACKLOG
The Company's backlog consists generally of product orders for which a
purchase order has been received and which are scheduled for shipment within
twelve months. Because a large percentage of the Company's orders require
products to be shipped in the same quarter in which the order was received, and
due to possible changes in delivery schedules, cancellations of orders and
delays in shipment, the Company does not believe that the level of backlog at
any point in time is an accurate indicator of the Company's future performance.
COMPETITION
In each of the markets that it serves, Veeco faces substantial competition
from established competitors, some of which have greater financial, engineering,
manufacturing and marketing resources than Veeco. In addition, many of Veeco's
products face competition from alternative technologies, some of which are more
established than those used in Veeco 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
11
these factors in each market Veeco serves. 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 CVC, Inc., Hitachi,
Nordiko, Leybold and Balzers.
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 patents and exclusive and non-exclusive licenses to patents owned
by others covering certain of its products, which Veeco believes provide it with
a competitive advantage. Veeco has a policy of seeking patents when appropriate
on inventions concerning new products and improvements as part of its ongoing
research, development and manufacturing activities. Veeco believes that there
are no patents which are critical to its operations, and that the success of its
business depends primarily on the technical expertise, innovation, creativity
and marketing and distribution ability of its employees.
Veeco also relies upon trade secret protection for its confidential and
propriety information. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to Veeco's trade secrets or that Veeco can
meaningfully protect its trade secrets. In addition, the Company cannot be
certain that it will not be sued by third parties alleging that the Company has
infringed their patents or other intellectual property rights. If any third
party sues Veeco, the Company's business, results of operations or financial
condition could be materially adversely affected.
Following the merger with Digital, in September 1998, Veeco and IBM entered
into a cross license agreement providing for the grant by Veeco to IBM and the
grant by IBM to Veeco of the non-exclusive right to make, use or sell AFM/SPM
products utilizing technology covered by certain patents held by Veeco and IBM,
respectively. The agreement terminates in August 2003. The cross license
agreement replaced a prior patent license agreement between IBM and Digital.
EMPLOYEES
At December 31, 1999, the Company had approximately 893 employees, comprised
of 268 in manufacturing and testing, 118 in sales and marketing, 132 in service
and support, 272 in engineering, research and development, and 103 in general
administration and finance. The success of the Company's future operations
depends in large part on the Company's ability to recruit and retain engineers,
technicians and other highly-skilled professionals who are in considerable
demand. There can be no assurance that the Company will be successful in
retaining or recruiting key personnel. None of the Company's employees is
represented by a labor union and the Company has never experienced a work
stoppage, slowdown or strike. The Company considers its employee relations to be
good.
In general, the Company's senior management and key employees are not
subject to employment agreements or non-competition agreements with the Company.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and manufacturing and research and
development facilities for process equipment systems are located in an 80,000
square foot building in Plainview, New York, which is owned by the Company. The
Company also manufactures and designs products in various other sites in the
United States, which include a 100,000 square foot facility in Tucson, Arizona,
owned by the Company,
12
a 40,000 square foot facility in Ronkonkoma, New York, leased by the Company, a
100,000 square foot facility in Santa Barbara, California, owned by the Company,
a 25,600 square foot facility in Fort Collins, Colorado, owned by the Company, a
5,000 square foot facility in San Diego, California, leased by the Company, a
17,250 square foot facility in Orangeburg, New York, leased by the Company, an
11,000 square foot facility in San Jose, California, leased by the Company, and
a 7,000 square foot facility in Bloomington, Minnesota, leased by the Company.
The Tucson facility is subject to a mortgage, which at December 31, 1999, had an
outstanding balance of $2,322,000. The Santa Barbara facility is subject to a
mortgage, which at December 31, 1999 had an outstanding balance of $6,599,000.
The Ronkonkoma lease expires in 2003, the San Diego lease expires 2001 and the
Orangeburg lease expires 2004.
The Company also leases facilities located in Tustin, California, Santa
Barbara, California, Ft. Collins, Colorado and Chadds Ford, Pennsylvania for use
as sales and service centers for certain of its products. Subsidiaries of the
Company lease space for use as sales and service centers in Dourdan, France;
Munchen, Germany; Manheim, Germany; Cambridge, England; Watford, England;
Londonderry, Northern Ireland; Beijing, China; Hsinchu, Taiwan; Osaka, Japan;
Singapore, Tokyo, Japan and Penang, Malaysia. The Company believes its
facilities are adequate to meet its current needs. Certain levels of
environmental contamination have been detected at the Plainview, New York and
Santa Barbara, California facilities of the Company. See
"Business--Environmental Matters."
ITEM 3. LEGAL PROCEEDINGS.
ENVIRONMENTAL
535 EAST MONTECITO STREET, SANTA BARBARA, CALIFORNIA
In January 1990, the Company acquired certain assets of a company now known
as Lambda Electronics Inc. ("Lambda") (the "Acquisition"). In October 1993, the
California Regional Water Quality Control Board, Central Coast region (the
"RWQCB") issued a Cleanup and Abatement Order ("CAO") for the site (the "Site")
of a facility located in Santa Barbara, California which had been leased prior
to the Acquisition by a predecessor to one of the Company's subsidiaries. The
CAO declared that Lambda, the Company and certain other parties had caused or
permitted certain hazardous water to be discharged into waters of the State of
California at the Site where they create, or threaten to create, a condition of
nuisance.
In compliance with the CAO, the Company submitted a corrective action plan
for remediating contaminated soils at the Site. On June 6, 1994, the RWQCB
approved this corrective action plan and, on November 29, 1994, the Santa
Barbara County Air Pollution Control District exempted the corrective action
activities from the District's air permit requirements. The soil remediation was
performed in 1995 at a cost of approximately $35,000.
During 1994, the current and former owners of the Site commenced lawsuits
seeking, among other things, an order requiring remedial action at the Site and
payment of response costs previously incurred by the current and former owners
of the Site. In August 1995, the Company agreed to the settlement of such
lawsuits. Under the terms of the settlement, the Company was required to pay to
the plaintiffs a total of approximately $350,000 (the last installment of which
was paid by February 1, 1996) and agreed to perform any additional remediation
work at the Site required either by the RWQCB pursuant to the CAO or by any
other agency which asserts jurisdiction. In addition, the Company agreed to
indemnify the plaintiffs for future expenses incurred by them as a result of any
claim brought against them relating to the alleged contamination at the Site.
Pursuant to the CAO, in September 1998, the Company began implementation of
a groundwater remediation plan approved by the RWQCB, which included both air
"sparging" to remove volatile contaminants from Site groundwater and soil and
monthly monitoring of groundwater. The Company sampled the groundwater each
month between September 1998 and July 1999. The December samples did
13
not show any contaminants above laboratory detection limits. Since contaminants
remained below RWQCB standards, the Company asked the RWQCB to close the CAO
case. On July 9, 1999, the Company received a letter from the County of Santa
Barbara Protection Services Division Hazardous Materials Unit (the "Agency")
confirming the completion of the site investigation and remediation at the site.
In the letter the Agency stated that no further action with respect to the Site
was required at that time.
TERMINAL DRIVE, PLAINVIEW, NEW YORK
Pursuant to the Acquisition, the Company is required to pay, and has paid,
up to $15,000 per year of the expenses incurred in connection with the operation
of certain equipment used in connection with the monitoring and remediation of
certain environmental contamination at the Company's Plainview, New York
facility. The Company may under certain circumstances also be obligated to pay
up to an additional $250,000 in connection with the implementation of a
comprehensive plan of environmental remediation at the Plainview facility.
Pursuant to the terms of the Acquisition, Lambda, its corporate parent, Unitech
plc, and certain of Lambda's subsidiaries are required to pay all other costs
and expenses relating to any such plan of environmental remediation. There can
be no assurance, however, that Unitech plc and/or Lambda will comply with their
payment obligations, if any, with respect to remediation activities at such
site. If such parties do not fulfill their obligations, the Company may be held
responsible for such remediation costs. Because no such comprehensive plan of
remediation has been required to date, the Company is not in a position to
estimate more precisely what its actual liability might be.
602 EAST MONTECITO STREET, SANTA BARBARA, CALIFORNIA
The Company is aware that petroleum hydrocarbon contamination has been
detected in the soil at the site of a facility leased by Sloan in Santa Barbara,
California (the "Sloan Building") under a lease expiring in 2003 and subleased
to a third party. For 18 months after the Acquisition, the Company owned all of
the outstanding capital stock of an entity ("Old Sloan"), which held title to
the Sloan Building and a leasehold in the property on which the Sloan Building
is located. In July 1991, the capital stock of Old Sloan was transferred to
Lambda pursuant to provisions in the agreement relating to the Acquisition.
Although there appears to be no evidence that the petroleum constituents found
in the soil are associated with any activities of the Company and its
subsidiaries at the Sloan Building, under Federal and California environmental
statutes, current "owners and operators" at the time of disposal of hazardous
substances may be deemed liable for removal and remediation of contamination at
a facility. In connection with the Acquisition, Lambda and Unitech plc agreed to
indemnify the Company for any liabilities incurred by the Company which arise
from environmental contamination at the Site, and any costs and expenses
relating to the remediation thereof.
112 ROBIN HILL ROAD, SANTA BARBARA, CALIFORNIA
The headquarters of Digital, located at 112 Robin Hill Road, Santa Barbara,
California (the "Robin Hill Site"), was purchased from Raytheon Company
("Raytheon") in November 1997. At the time of such purchase, there were
quantities of certain volatile organic compounds, principally trichloroethene
and benzene, above the applicable California maximum concentration levels, in
aquifers lying approximately 40-50 feet below the northeast and southeast
corners of the Robin Hill Site. As such, it was a condition of such purchase
that Raytheon carry out additional testing at the site and indemnify the
purchaser and its successors against further costs of investigating the Robin
Hill Site and of remediating hazardous substances released upon or under the
site before the purchase, as well as continued migration on and under the site
of identified contaminants. In addition, the agreement provides that Raytheon
will be responsible for the conduct of discussions with governmental agencies,
including the RWQCB, relative to investigations and remediation of the Robin
Hill Site.
14
NON-ENVIRONMENTAL
The Company is involved in various other legal proceedings arising in the
normal course of its business. In the opinion of the Company's management, based
upon the advice of counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is quoted on the NASDAQ National Market under the symbol
"VECO". The 1999 and 1998 high and low closing prices are as follows:
[Enlarge/Download Table]
1999 1998
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter............................... $62.25 $36.50 $37.19 $20.38
Second Quarter.............................. 43.88 29.81 42.13 22.94
Third Quarter............................... 36.75 26.88 35.00 22.13
Fourth Quarter.............................. 49.13 24.63 54.38 21.63
On March 1, 2000, the closing price for the Company's Common Stock on the
NASDAQ National Market was $98.25. As of March 1, 2000, the Company had
approximately 233 shareholders of record.
On January 31, 2000, in connection with the Monarch merger, the Company
issued to the former stockholders of Monarch a total of 282,224 shares of Common
Stock. The securities were issued without registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof.
On November 4, 1999, in connection with the Ion Tech merger, the Company
issued to the former stockholders of Ion Tech a total of 1,509,437 shares of
Common Stock. The securities were issued without registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof.
On May 29, 1998, in connection with the Digital merger, the Company issued
to the former stockholders of Digital a total of 5,583,725 shares of Common
Stock. The securities were issued without registration under the Securities Act
of 1933 pursuant to Section 4(2) thereof.
The Company has not paid dividends on the Common Stock. The Company intends
to retain future earnings, if any, for the development of its business and,
therefore, does not anticipate that the Board of Directors will declare or pay
any dividends on the Common Stock in the foreseeable future. In addition, the
provisions of the Company's current credit facility limits the Company's ability
to pay dividends. The Board of Directors will determine future dividend policy
based on the Company's results of operations, financial condition, capital
requirements and other circumstances.
16
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this Form 10-K.
[Enlarge/Download Table]
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF INCOME DATA (1):
Net sales................................. $246,606 $214,985 $223,410 $170,829 $128,796
Cost of sales............................. 125,650 115,441 113,487 86,324 63,914
-------- -------- -------- -------- --------
Gross profit.............................. 120,956 99,544 109,923 84,505 64,882
Costs and expenses........................ 83,944 71,928 68,955 50,400 40,793
Merger and reorganization expenses........ 2,600(2) 7,500(3) 2,250(4) -- --
Loss on sale of leak detection business... 2,500 -- -- -- --
Write-off of purchased in-process
technology.............................. 1,300 -- 4,200 -- --
-------- -------- -------- -------- --------
Operating income.......................... 30,612 20,116 34,518 34,105 24,089
Interest (income) expense, net............ (1,784) 1,007 122 (236) 249
-------- -------- -------- -------- --------
Income before income taxes................ 32,396 19,109 34,396 34,341 23,840
Income tax provision...................... 11,986 5,736 7,780 7,067 2,590
-------- -------- -------- -------- --------
Net income................................ $ 20,410 $ 13,373 $ 26,616 $ 27,274 $ 21,250
======== ======== ======== ======== ========
EARNINGS PER SHARE:
Net income per common share............... $ 1.17 $ .83 $ 1.67 $ 1.73 $ 1.39
Diluted net income per common share....... $ 1.15 $ .82 $ 1.62 $ 1.70 $ 1.36
PRO FORMA INCOME TAX PRESENTATION (5):
Income before income taxes................ N/A $ 19,109 $ 34,396 $ 34,341 $ 23,840
Pro forma income tax provision............ N/A 7,190 12,987 13,089 7,147
-------- -------- -------- -------- --------
Pro forma net income...................... N/A $ 11,919 $ 21,409 $ 21,252 $ 16,693
======== ======== ======== ======== ========
Pro forma net income per common share..... N/A $ 0.74 $ 1.35 $ 1.35 $ 1.09
Pro forma diluted net income per common
share................................... N/A $ 0.73 $ 1.30 $ 1.33 $ 1.07
Weighted average shares outstanding....... 17,381 16,136 15,901 15,760 15,259
Diluted weighted average shares
outstanding............................. 17,768 16,396 16,417 15,999 15,577
17
[Enlarge/Download Table]
AS OF DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
BALANCE SHEET DATA (1):
Cash, cash equivalents and short-term
investments............................. $ 80,306 $ 23,493 $ 20,825 $ 26,640 $ 20,913
Working capital........................... 149,873 87,073 70,483 63,030 50,361
Excess of cost over net assets acquired,
net..................................... 5,509 4,187 4,318 4,448 4,579
Total assets.............................. 265,279 179,231 165,951 117,997 97,284
Long-term debt (including current
installments)........................... 16,994 18,797 19,367 12,007 11,944
Shareholders' equity...................... 192,351 115,739 96,147 73,525 60,127
------------------------
(1) Prior to the merger with Veeco, Ion Tech's fiscal year end was June 30. In
connection with the merger, the financial results of Ion Tech were recast
for 1998 to conform to Veeco's December 31 year end. For the year ended
1997, historical results include Ion Tech's fiscal year ended June 30, 1998
results, thus resulting in six months of 1998 activity included in the 1997
results of operations.
(2) During 1999, the Company recorded a $2.6 million charge for merger related
fees consisting of legal, investment banking and other transaction costs in
connection with the merger with Ion Tech.
(3) Merger expenses related to the Digital merger were comprised of transaction
fees and expenses of $3.3 million and a $1.6 million non-cash compensation
charge related to stock issued in accordance with a pre-existing agreement
with a key Digital employee. Reorganization expenses consisted of
$0.5 million for termination benefit costs, $0.7 million for an estimated
loss on a future sublease of an abandoned office and manufacturing facility,
$0.9 million for write-downs of long-lived assets held for sale or disposal,
and $0.5 million for other costs. See Note 2 to the Consolidated Financial
Statements.
(4) 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.
(5) 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 corporate level. Prior to the merger, Digital had
elected "S" corporation status for income tax purposes and, therefore, was
not subject to federal income taxes.
ITEM 7. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
Veeco is a leader in the design, manufacture, marketing and servicing of a
broad line of precision metrology and process equipment used to measure, test
and manufacture microelectronic products for the data storage, semiconductor and
optical telecommunications markets. Precision metrology equipment is primarily
used to measure critical dimensions of TFMHs and semiconductor devices. Process
equipment is primarily used to etch and deposit materials in the manufacture of
TFMHs and optical filters used in DWDM, a technology that greatly expands the
bandwidth (capacity) of existing fiber optic cables.
During the past several years, Veeco has strengthened both the process
equipment product line and the metrology product line with strategic
acquisitions. See "Item 1. Business--The Company-Acquisition History" above.
Veeco's consolidated financial condition and results of operations have been
restated to reflect the mergers with Ion Tech, Digital and Wyko, as they have
been accounted for as pooling of interests.
18
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:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 51.0 53.7 50.8
----- ----- -----
Gross profit................................................ 49.0 46.3 49.2
Operating expenses:
Research and development.................................. 12.8 13.0 11.2
Selling, general and administrative....................... 20.8 20.8 19.7
Other expense (income)--net............................... 0.4 (0.4) (0.1)
Merger and reorganization expenses........................ 1.1 3.5 1.0
Loss on sale of leak detection business................... 1.0 -- --
Write-off of purchased in-process technology.............. 0.5 1.9
----- ----- -----
Total operating expenses.................................... 36.6 36.9 33.7
----- ----- -----
Operating income............................................ 12.4 9.4 15.5
Interest expense............................................ 0.7 0.8 0.6
Interest income............................................. (1.4) (0.3) (0.5)
----- ----- -----
Income before income taxes.................................. 13.1 8.9 15.4
Income tax provision........................................ 4.8 2.7 3.5
----- ----- -----
Net income.................................................. 8.3% 6.2% 11.9%
===== ===== =====
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net sales were $246.6 million for the year ended December 31, 1999,
representing an increase of $31.6 million or 14.7%, when compared to the year
ended December 31, 1998. Sales in the U.S., Europe, Japan and Asia Pacific,
respectively, accounted for 45.7%, 16.6%, 20.7% and 15.6%, respectively, of the
Company's net sales for the year ended December 31, 1999. Sales in the U.S.
increased approximately 4.9%, while international sales included a 41.3%
increase in Japan and a 77.3% increase in Asia Pacific from the comparable 1998
period. The increase in U.S. sales principally reflects increased process
equipment sales to data storage customers and the addition of Ion Tech, which
had a 251% increase in U.S. sales over its prior year period. The increase in
sales in Japan and Asia Pacific principally reflects increased process equipment
sales to data storage customers along with increased metrology sales in Asia
Pacific for data storage and semiconductor applications. During the last
2 years, the Company has established subsidiaries in these regions which provide
direct Veeco sales and service. The Company believes that there will continue to
be quarter to quarter variations in the geographic concentration of sales.
Metrology sales of $112.2 million for the year ended December 31, 1999
decreased by $14.0 million or 11.1% from the comparable 1998 period, principally
reflecting decreased purchases of metrology products in data storage
applications. Process equipment sales of $117.4 million for the year ended
December 31, 1999, increased by $48.3 million or 69.9% from the comparable 1998
period, as sales improved across all product lines related to data storage. The
Company believes that the shift in data storage sales to process equipment from
metrology products in 1999 is a result of customers focusing on GMR product
qualifications rather than yield improvement. Additionally, 25.4% of the
increase related to strong Ion Tech sales related to the optical
telecommunications industry. Industrial measurement sales for the year ended
December 31, 1999, of $17.1 million decreased 13.5% from the comparable 1998
period.
Veeco received $257.2 million of orders for the year ended December 31,
1999, representing an 11.7% increase from $230.3 million of orders in the
comparable 1998 period. Metrology orders decreased 14.8% to $111.9 million
reflecting the reduction in orders for inspection equipment for data storage.
Process
19
equipment orders increased 62.4% to $131.0 million as a result of an increase in
orders of ion beam etch products and strong orders for Ion Tech's DWDM related
equipment. Industrial measurement orders decreased 21.7% to $14.3 million as a
result of a reduction in orders of industrial leak detection equipment. The
book-to-bill ratio for the year ended December 31, 1999 was 1.04 to 1.
Gross profit for the year ended December 31, 1999 of $121.0 million
represents an increase of $21.4 million from the comparable 1998 period. Gross
profit as a percentage of net sales increased to 49.0% for 1999 from 46.3% for
1998. Process equipment gross margin improved to 44.9% in 1999 compared to 39.6%
in 1998 principally as a result of increased sales volume. Metrology gross
margin improved to 56.0% in 1999 compared to 51.2% in 1998 in spite of the
volume decline noted above. The metrology margin improvement is due to favorable
mix and pricing in both the atomic force microscope and optical inspection
product lines.
Research and development expense for the year ended December 31, 1999 of
$31.5 million increased by $3.6 million or 12.8% over the comparable period of
1998, as the Company increased its investment in new product development,
primarily for the process equipment product line.
Selling, general and administrative expenses of $51.4 million for the year
ended December 31, 1999 increased $6.7 million or 14.9%. As a percentage of
sales, selling, general and administrative expenses represent 20.8% for both the
years ended December 31, 1999 and 1998. The 1999 increase is attributable to an
increase in international sales and service personnel and locations. In 1999 the
Company accelerated the transition from representative and distributor
organizations to direct Veeco sales and service capability in Japan and Asia
Pacific.
During 1999, the Company recorded charges of $2.6 million and $2.5 million
before taxes related to the merger with Ion Tech and the sale of the leak
detection business, respectively. In conjunction with the OptiMag acquisition,
the Company recorded a $1.3 million write-off of the fair values of acquired
in-process research and development ("R & D") projects that had not reached
technological feasibility and had no alternative uses. On the date of
acquisition, OptiMag's in-process R & D value was comprised of Oasis version 1.0
hardware and software component development program that was expected to reach
completion in March 2000. This program includes the introduction of certain new
technologies. At the acquisition date, OptiMag's R & D program was approximately
84% complete. The total continuing R & D commitment to complete the project is
currently expected to be approximately $55,000. On the acquisition date, certain
projects within OptiMag's R & D programs were expected, if successful, to begin
to bear results in 2001. Expenditures to complete OptiMag's R & D project are
currently expected to be approximately $55,000 in 2000. These estimates are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.
Additionally, this project will require maintenance R & D after it has reached a
state of technological and commercial feasibility. Management believes the
Company is positioned to complete the R & D program. However, there is risk
associated with the completion of the project and there is no assurance that the
project will meet with either technological or commercial success.
During 1998, the Company recorded a $7.5 million pre-tax charge for merger
and reorganization expenses principally related to the merger with Digital, of
which approximately $1.7 million represented severance and other costs and an
estimated loss on a future sublease of an abandoned office and manufacturing
facility. At December 31, 1999, approximately $35,000 remained accrued for these
expenses. During 1999, the Company incurred approximately $900,000 of costs that
were charged against the accrual.
Income taxes for the year ended December 31, 1999 amounted to $12.0 million
or 37% of income before income taxes, as compared with $5.7 million or 30% of
income before income taxes in 1998. The lower effective tax rate in 1998
reflects Digital's "S" Corporation tax status for five months in 1998 (through
the merger date). As an "S" Corporation, Digital was not subject to federal
income tax at the corporation level.
20
YEARS ENDED DECEMBER 31, 1998 AND 1997
Net sales were $215.0 million for the year ended December 31, 1998,
representing a decrease of $8.4 million or 3.8%, when compared to the year ended
December 31, 1997. Decrease in sales reflects a 24.3% decrease in process
equipment sales partially offset by an 11.9% increase in metrology sales. Sales
in the U.S. Europe, Japan and Asia Pacific, respectively, accounted for 50.0%,
19.1%, 16.8% and 10.1% respectively, of the Company's net sales for the year
ended December 31, 1998. Sales in the U.S. decreased approximately 15.6%, while
international sales included a 75.6% increase in Europe, a 17.2% increase in
Japan, and a 43.7% decrease in Asia Pacific from the comparable 1997 period. The
decrease in U.S. sales principally reflects reduced process equipment sales to
data storage customers. The increase in sales in Europe and in Japan principally
reflects increased process equipment sales to data storage customers along with
increased metrology sales for data storage and semiconductor applications. The
decrease in sales in Asia Pacific is due to a sales reduction in all product
lines resulting from the economic downturn in that region. The Company believes
that there will continue to be quarter to quarter variations in the geographic
concentration of sales.
Metrology Sales of $126.2 million for the year ended December 31, 1998
increased by $13.4 million or 11.9% over the comparable 1997 period principally
reflecting increased purchases of metrology products for in-line inspection of
critical steps in data storage applications. Process equipment sales of
$69.1 million for the year ended December 31, 1998 decreased by $22.1 million or
24.3% from the comparable 1997 period, as sales of ion beam etch products
declined, partially offset by increased sales of new deposition products
associated with the transition to magnetoresistive (MR) and giant
magnetoresistive (GMR) thin film magnetic heads (TFMHs). Ion Beam etch sales
continue to be negatively affected by excess capacity in the data storage
industry. Industrial measurement sales for the year ended December 31, 1998 of
$19.7 million increased 1.5% over the comparable 1997 period.
Veeco received $230.3 million of orders for the year ended December 31,
1998, representing a 1.8% increase from $226.2 million of orders in the
comparable 1997 period, Metrology orders increased 12.4% to $131.4 million
reflecting increased purchases of in-line metrology products for production
applications such as PTR (pole tip recession) measurements for new MR and GMR
thin film magnetic heads. Process equipment orders decreased 5.1% to
$80.7 million as a result of a reduction in orders of ion beam etch products,
reflecting weak data storage market conditions, including industry-wide
overcapacity. Industrial measurement orders decreased 25.0% to $18.3 million as
a result of a reduction in orders of industrial leak detection equipment. The
book to bill ratio was 1.07 to 1 for the year ended December 31, 1998.
Gross profit for the year ended December 31, 1998 of $99.5 million
represents a decrease of $10.4 million from the comparable 1997 period. Gross
profit as a percentage of net sales decreased to 46.3% for 1998 from 49.2% 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 year ended December 31, 1998 of
$28.0 million increased by $3.0 million or 11.8% 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 $44.8 million for the year
ended December 31, 1998 remained relatively flat when compared to 1997.
As described in Note 2 to the Company's Consolidated Financial Statements,
for the year ended December 31, 1998, the Company recorded a $7.5 million
pre-tax charge for merger and reorganization expenses principally related to the
merger with Digital during such period. During the year ended December 31, 1997,
the Company recorded a $4.2 million write-off for the fair values of acquired
21
in-process engineering and development projects that had not reached
technological feasibility and had no future alternative uses and a $2.3 million
charge related to the merger with Wyko.
Income taxes for the year ended December 31, 1998 amounted to $5.7 million
or 30% of income before income taxes as compared to $7.8 million or 22.6% 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations totaled $14.0 million in 1999 compared to
$10.4 million in 1998 and $17.9 million in 1997. Cash provided by operations in
1999 resulted principally from (i) net income plus non-cash charges for
depreciation and amortization, loss on the sale of the leak detection business
and write-off of purchased in-process technology aggregating $30.0 million plus
an increase of accrued expenses and other current liabilities of $6.8 million.
These items were partially offset by an increase in accounts receivable,
inventories and a deferred income tax benefit of $14.1 million, $4.7 million and
$3.3 million, respectively. The increase in accrued expenses and other current
liabilities is principally due to an increase in income taxes payable. Accounts
receivable increased due to increased sales volume. The increase in inventories
is attributable to an increase in process equipment orders as well as certain
shipments being delayed by customers at December 31, 1999. Net cash from
operations in 1998 resulted from (i) net income plus non-cash charges for
depreciation and amortization and certain merger and reorganization charges of
$21.9 million plus (ii) increases of accrued expenses and other current
liabilities, and other net operating assets and liabilities of $2.4 million and
$0.7 million, respectively, as well as a decrease in accounts receivable of
$2.3 million. These items were partially offset by increases in inventories and
a deferred income tax benefit of $10.1 million and $1.1 million, respectively
and a decrease in accounts payable of $5.8 million. The increase in inventories
was attributable to an increase in inventory at the Company's domestic
manufacturing and international sales locations to support new product
introductions. Net cash from operations in 1997 resulted from (i) net income
plus non-cash charges for depreciation and amortization and the write-off of
purchased in-process technology of $33.3 million plus (ii) increases of accounts
payable, accrued expenses and other current liabilities, and other net operating
assets and liabilities of $8.8 million, $5.0 million and $0.6 million,
respectively. These items were partially offset by increases in accounts
receivable, inventories and a deferred income tax benefit of $13.0 million,
$15.1 million and $1.7 million, respectively. The increases in accounts
receivable, inventories, accounts payable and accrued expenses were attributable
to the increased 1997 sales volume.
Net cash used in investing activities in 1999 totaled $61.6 million compared
to $8.3 million in 1998 and $25.6 million in 1997. Cash used in 1999 consisted
of net purchases of short-term investments of $50.9 million, $3.3 million for
the purchase of OptiMag's net assets and $10.5 of capital expenditures,
partially offset by $3.1 million of proceeds from sale of property, plant and
equipment. The net purchases of short-term investments resulted from the
proceeds of the Company's public offering in February, 1999. Net cash used for
investing activities in 1998 primarily related to capital expenditures of
$8.3 million. Net cash used for investing activities in 1997 primarily related
to the MRC acquisition of $4.4 million and capital expenditures of
$21.2 million. Capital expenditures in 1997 included the purchase of a 100,000
square foot building in California for $9.7 million for the Company's metrology
business, as well as for manufacturing facilities, laboratory and test equipment
and business system upgrades.
Net cash provided by financing activities totaled $53.2 million in 1999
compared to $1.5 million in 1998 and $2.1 million in 1997. The generation of
cash in 1999 primarily resulted from a public offering by the Company in
February, 1999, pursuant to which 1,000,000 shares of Common Stock, par value
$.01 per share, were issued and sold for $52.00 per share, less underwriting
discounts and commissions of $2.34 per share. The Company is using the net
proceeds of the offering (approximately $49.0 million) for capital expenditures
including clean manufacturing areas and expanded customer application
laboratories and for working capital and general corporate purposes, including
potential acquisitions. 1999 cash provided by
22
financing activities also included approximately $6.5 million of proceeds from
exercise of stock options and stock issuances under the Company's employee stock
purchase plan, partially offset by repayments of long-term debt. The generation
of cash in 1998 resulted from proceeds from stock issuances and long-term debt,
partially offset by distributions to former Digital shareholders of
$2.0 million. The generation of cash in 1997 resulted from proceeds from the
sale of Common Stock and proceeds from long-term debt offset by distributions to
former Digital shareholders of $10.0 million.
The Company has an unsecured $40.0 million Credit Facility (the "Credit
Facility") which may be used for working capital, acquisitions and general
corporate purposes. The Credit Facility bears interest at the prime rate of the
lending banks, but is adjustable to a maximum rate of 1/4% above the prime rate
in the event the Company's ratio of debt to cash flow exceeds a defined ratio. A
LIBOR-based interest rate option is also provided. The Credit Facility expires
December 31, 2001, but under certain conditions is convertible into a term loan,
which would amortize quarterly through December 31, 2005. As of December 31,
1999, there were no amounts outstanding under the Credit Facility.
The Company will be required to repay promissory notes owed to former
stockholders of Digital in the aggregate principal amount of $8,000,000 when
they become due in March 2000. The notes bear interest at an annual rate of
7.21%.
In connection with the OptiMag acquisition, the Company will be required to
pay consideration to the former shareholders of OptiMag based upon both future
sales and the future appraisal value of OptiMag. The consideration will be
calculated based upon a predetermined percentage of OptiMag's sales for the
period from January 1, 2000 to December 31, 2000, as well as the appraised fair
market value of OptiMag, adjusted for certain items as of December 31, 2000.
The Company believes that existing cash balances together with cash
generated from operations and amounts available under the Credit Facility will
be sufficient to meet the Company's projected working capital and other cash
flow requirements (including the payments described in the preceding paragraphs)
through 2000.
YEAR 2000
During the year, the Company completed its efforts to minimize the risk of
disruption from the Year 2000 Issue. The Year 2000 Issue is the result of
computer programs using two digits rather than four to define the applicable
year. Total expenditures related to the Year 2000 Issue were approximately
$0.3 million of which approximately $0.2 million was capitalized. The Company
has experienced no significant problems related to the Year 2000 issue.
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
In addition to the other information set forth herein, the following risk
factors should be carefully considered by shareholders of and by potential
investors in the Company.
DEPENDENCE ON MICROELECTRONICS INDUSTRY; CYCLICALITY OF DATA STORAGE,
SEMICONDUCTOR AND OPTICAL TELECOMMUNICATIONS INDUSTRIES. Veeco's business
depends in large part upon the capital expenditures of data storage,
semiconductor and optical telecommunications manufacturers which accounted for
the following percentages of the Company's net sales for the periods indicated:
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Data Storage......................................... 54.8% 52.8% 51.6%
Semiconductor........................................ 12.1% 18.6% 19.3%
Optical Telecommunications........................... 8.3% 3.8% 3.0%
The data storage, semiconductor and optical telecommunications 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
23
production overcapacity. A downturn in the businesses of one or more of the
Company's customers could have a material adverse effect on the Company's
results of operations or financial position.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Veeco's quarterly results have
fluctuated significantly in the past and we expect this trend to continue.
Factors which affect quarterly results include:
- specific economic conditions in the data storage, semiconductor, and
optical telecommunications industries,
- the timing of significant orders,
- shipment delays,
- specific feature requests by customers,
- the introduction of new products by Veeco and its competitors,
- production and quality problems,
- changes in the cost of materials,
- disruption in sources of supply,
- seasonal patterns of capital spending by customers,
- a downturn in the market for personal computers or other products
incorporating data storage technology and semiconductors, and
- market acceptance of Veeco's systems and Veeco's customers' products.
Many of these factors are beyond Veeco's control. If Veeco's net sales
levels in a particular quarter do not meet expectations, Veeco's operating
results will be adversely affected, which may have an adverse impact on the
Company's Common Stock price.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The
data storage, semiconductor and optical telecommunications manufacturing
industries are subject to rapid technological change and new product
introductions and enhancements. Veeco's ability to remain competitive will
depend in part upon the Company's ability to develop in a timely and cost
effective manner new and enhanced systems at competitive prices and to
accurately predict technology transitions. In addition, new product
introductions or enhancements by Veeco's competitors could cause a decline in
sales or loss of market acceptance of Veeco's existing products. Increased
competitive pressure could also lead to intensified price competition resulting
in lower margins, which could materially and adversely affect the Company's
business, financial condition and results of operations. The Company's success
in developing, introducing and selling new and enhanced systems depends upon a
variety of factors, including:
- Veeco's product offerings,
- timely and efficient completion of product design and development,
- timely and efficient implementation of manufacturing processes,
- effective sales, service and marketing, and
- product performance in the field.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
products under development and the equipment required to produce such products.
Veeco cannot be certain that it will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing existing products.
LIMITED SALES BACKLOG. Veeco's backlog at the beginning of a quarter
typically does not include all sales required to achieve Veeco's sales objective
for that quarter. Moreover, all customer purchase orders are subject to
cancellation or rescheduling by the customer, generally with limited or no
penalties. Therefore, backlog at any particular date is not necessarily
representative of actual sales for any succeeding
24
period. The Company's net sales and operating results for a quarter may depend
upon orders obtained for systems to be shipped in the same quarter that the
order is received. In addition, Veeco derives a substantial portion of its net
sales in any fiscal period from the sale of a relatively small number of
high-priced systems. As a result, the timing of recognition of revenue for a
single transaction could have a material adverse effect on Veeco's sales and
operating results. Veeco's business and financial results for a particular
period could be materially and adversely affected if an anticipated order for
even one system is not received in time to permit shipping during the period.
HIGHLY COMPETITIVE INDUSTRY. The industries in which Veeco operates are
intensely competitive. Established companies, both domestic and foreign, compete
with each of Veeco's product lines. Many of Veeco's competitors have greater
financial, engineering, manufacturing and marketing resources than the Company.
A substantial investment is required by customers to install and integrate
capital equipment into a production line. As a result, once a manufacturer has
selected a particular vendor's capital equipment, Veeco believes that the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same vendor. Accordingly, if a particular
customer selects a competitor's capital equipment, the Company expects to
experience difficulty in selling to that customer for a significant period of
time. The Company believes that Veeco's ability to compete successfully depends
on a number of factors both within and outside of Veeco's control, including:
- price,
- product quality,
- breadth of product line,
- system performance,
- cost of ownership,
- global technical service and support, and
- success in developing or otherwise introducing new products.
Veeco cannot be certain that it will be able to compete successfully in the
future.
DEPENDENCE ON PRINCIPAL CUSTOMERS; INDUSTRY CONCENTRATION. Veeco relies on
its principal customers for a significant portion of its sales. Veeco's
principal customers include Seagate Technology, Inc. ("Seagate"), International
Business Machines Corporation ("IBM"), and Read-Rite Corp. ("Read-Rite"). The
following table sets forth the percentage of Veeco's net sales to such principal
customers for the periods indicated:
[Enlarge/Download Table]
YEAR ENDED
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Seagate..................................................... 14% 10% 14%
IBM......................................................... 10% 17% 6%
Read-Rite................................................... 7% 7% 11%
Next five top customers..................................... 14% 11% 12%
The loss of a major customer, or of a significant portion of the sales to a
major customer, could adversely affect Veeco's results of operations. Veeco's
ability to increase sales in the future will depend in part upon Veeco's ability
to obtain orders from new customers. The Company cannot be certain that it will
be able to do so. In addition, a relatively small number of large manufacturers,
many of whom are Veeco's customers, dominate the data storage industry, the
semiconductor industry and the optical telecommunications industry. If any of
these large manufacturers discontinues its relationship with Veeco or suffers
economic setbacks, Veeco's results of operations could be materially and
adversely affected.
25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
MARKET RISK
The principal market risks (i.e. the risk of loss arising from adverse
changes in market rates and prices) to which the Company is exposed are:
- rates on debt and short-term investment portfolios, and
- exchange rates, generating translation and transaction gains and losses.
INTEREST RATES
Veeco centrally manages its debt and investment portfolios considering
investment opportunities and risks, tax consequences and overall financing
strategies. Veeco's investment portfolios consist of cash equivalents,
commercial paper, municipal bonds, floating rate bonds, obligations of U.S.
Government agencies and corporate bonds. These investments are considered
available-for-sale securities. Accordingly, the carrying amounts approximate
market value. Assuming year-end 1999 variable debt and investment levels, a
one-point change in interest rates would not have a material impact on net
interest expense.
FOREIGN OPERATIONS
Operating in international markets involves exposure to movements in
currency exchange rates, which are volatile at times. The economic impact of
currency exchange rate movements on Veeco is complex because such changes are
often linked to variability in real growth, inflation, interest rates,
governmental actions and other factors. These changes, if material, could cause
the Company to adjust its financing and operating strategies. Consequently,
isolating the effect of changes in currency does not incorporate these other
important economic factors.
Veeco's net sales to foreign customers represented approximately 54.3% of
Veeco's total net sales in 1999, 50.8% in 1998 and 42.9% in 1997. The Company
expects net sales to foreign customers will continue to represent a large
percentage of Veeco's total net sales. Veeco's net sales denominated in foreign
currencies represented approximately 11.5% of Veeco's total net sales in 1999,
12.4% in 1998 and 6.1% in 1997. The Company generally has not engaged in foreign
currency hedging transactions. The aggregate foreign exchange gains and (losses)
included in determining consolidated results of operations were ($421,000),
$774,000 and ($34,000) in 1999, 1998, and 1997, respectively.
Changes in foreign currency exchange rates which would have the largest
impact on translating Veeco's international operating profit, include the German
mark and Japanese yen. The Company estimates that a 10% change in foreign
exchange rates would impact reported operating profit by approximately
$1.1 million. The Company believes that this quantitative measure has inherent
limitations because, as discussed in the first paragraph of this section, it
does not take into account any governmental actions or changes in either
customer purchasing patterns or our financing and operating strategies.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are listed in the Index to
Consolidated Financial Statements and Financial Statement Schedule filed as part
of this Form 10-K.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected financial data for each quarter of
fiscal 1999 and 1998. Although unaudited, this information has been prepared on
a basis consistent with the Company's audited financial statements and, in the
opinion of the Company's management, reflects all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a fair
presentation of this information in accordance with generally accepted
accounting principles. Such quarterly results are not
26
necessarily indicative of future results of operations and should be read in
conjunction with the audited financial statements of the Company and the notes
thereto.
QUARTERLY STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT FOR PER SHARE DATA):
[Enlarge/Download Table]
FISCAL 1999 FISCAL 1998
---------------------------------------------------- ------------------------------
Q1* Q2* Q3* Q4 YEAR Q1* Q2* Q3*
-------- -------- -------- -------- -------- -------- -------- --------
Net sales....................... $59,884 $59,304 $63,621 $63,797 $246,606 $55,759 $52,966 $52,821
Cost of sales................... 31,324 29,825 32,479 32,022 125,650 30,425 27,742 28,448
------- ------- ------- ------- -------- ------- ------- -------
Gross profit.................... 28,560 29,479 31,142 31,775 120,956 25,334 25,224 24,373
Cost and expenses............... 19,652 19,529 20,953 23,810 83,944 17,261 19,047 17,749
Merger and reorganization
expenses...................... -- -- -- 2,600 2,600 -- 7,500 --
Loss on sale of leak detection
business...................... -- -- -- 2,500 2,500 -- -- --
Write-off of purchased
in-process technology......... -- -- -- 1,300 1,300 -- -- --
------- ------- ------- ------- -------- ------- ------- -------
Operating income (loss)......... 8,908 9,950 10,189 1,565 30,612 8,073 (1,323) 6,624
Interest (income) expense....... (116) (420) (372) (876) (1,784) 223 300 318
------- ------- ------- ------- -------- ------- ------- -------
Income (loss) before income
taxes......................... 9,024 10,370 10,561 2,441 32,396 7,850 (1,623) 6,306
Income tax provision............ 3,338 3,675 3,619 1,354 11,986 1,828 1 1,932
------- ------- ------- ------- -------- ------- ------- -------
Net income (loss)............... $ 5,686 $ 6,695 $ 6,942 $ 1,087 $ 20,410 $ 6,022 ($1,624) $ 4,374
======= ======= ======= ======= ======== ======= ======= =======
Net income (loss) per common
share......................... $ .33 $ .38 $ .40 $ .06 $ 1.17 $ .38 ($ .10) $ .27
Diluted net income (loss) per
common share.................. $ .32 $ .38 $ .39 $ .06 $ 1.15 $ .37 ($ .10) $ .27
Pro Forma Presentation:
Income (loss) before income
taxes......................... N/A N/A N/A N/A N/A $ 7,850 ($1,623) $ 6,306
Pro forma income tax provision
(benefit) N/A................. N/A N/A N/A N/A N/A 2,931 (626) 2,356
------- ------- ------- ------- -------- ------- ------- -------
Pro forma net income (loss)..... N/A N/A N/A N/A N/A $ 4,919 ($ 997) $ 3,950
======= ======= ======= ======= ======== ======= ======= =======
Pro forma net income (loss) per
common share.................. N/A N/A N/A N/A N/A $ .31 ($ .06) $ .24
Pro forma diluted net income
(loss) per common share....... N/A N/A N/A N/A N/A $ .30 ($ .06) $ .24
Weighted average shares
outstanding................... 17,040 17,438 17,474 17,565 17,381 16,019 16,075 16,163
Diluted weighted average shares
outstanding................... 17,521 17,737 17,714 17,983 17,768 16,242 16,336 16,369
FISCAL 1998
-------------------
Q4 YEAR
-------- --------
Net sales....................... $53,439 $214,985
Cost of sales................... 28,826 115,441
------- --------
Gross profit.................... 24,613 99,544
Cost and expenses............... 17,871 71,928
Merger and reorganization
expenses...................... -- 7,500
Loss on sale of leak detection
business...................... -- --
Write-off of purchased
in-process technology......... -- --
------- --------
Operating income (loss)......... 6,742 20,116
Interest (income) expense....... 166 1,007
------- --------
Income (loss) before income
taxes......................... 6,576 19,109
Income tax provision............ 1,975 5,736
------- --------
Net income (loss)............... $ 4,601 $ 13,373
======= ========
Net income (loss) per common
share......................... $ .28 $ .83
Diluted net income (loss) per
common share.................. $ .28 $ .82
Pro Forma Presentation:
Income (loss) before income
taxes......................... $ 6,576 $ 19,109
Pro forma income tax provision
(benefit) N/A................. 2,529 7,190
------- --------
Pro forma net income (loss)..... $ 4,047 $ 11,919
======= ========
Pro forma net income (loss) per
common share.................. $ .25 $ .74
Pro forma diluted net income
(loss) per common share....... $ .24 $ .73
Weighted average shares
outstanding................... 16,283 16,136
Diluted weighted average shares
outstanding................... 16,634 16,396
------------------------------
* Restated from previously filed form 10Q due to the Ion Tech merger.
A variety of factors influence the level of the Company's net sales in a
particular quarter including economic conditions in the semiconductor, data
storage and optical telecommunications industries, the timing of significant
orders, shipment delays, specific feature requests by customers, the
introduction of new products by the Company and its competitors, production and
quality problems, changes in material costs, disruption in sources of supply,
seasonal patterns of capital spending by customers, and other factors, many of
which are beyond the Company's control. In addition, the Company derives a
substantial portion of its revenues from the sale of products which have an
average selling price in excess of $750,000. As a result, the timing of
recognition of revenue from a single transaction could have a significant impact
on the Company's net sales and operating results in any given quarter.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning directors and executive
officers of the Registrant.
ITEM 11. EXECUTIVE COMPENSATION.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning security ownership of each
person known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, of each director of the Company and all executive
officers and directors as a group.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Reference is made to the Registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission within 120 days after the end of the
Registrant's fiscal year for information concerning certain relationships and
related transactions.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The Registrant's financial statements together with a separate table of
contents are annexed hereto. The financial statement schedule is listed in
the separate table of contents annexed hereto.
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K on November 17, 1999
reporting the completion of the merger with Ion Tech, Inc. and an
affiliate (Tulakes Real Estate Investments, Inc.) and reference was made
to the press release dated October 14, 1999 announcing the execution of
the Ion Tech merger agreement.
The Registrant filed a Current Report on Form 8-K/A on January 12, 2000
which amends and restates Item 7 of its Current Report on Form 8-K dated
November 17, 1999, to reflect that neither its acquisition of Ion
Tech, Inc., nor its acquisition of Tulakes Real Estate Investments, Inc.
is a significant business combination, which would require the filing of
financial statements or the pro forma financial information that would
otherwise be required.
(c) Exhibits
Unless otherwise indicated, each of the following exhibits has been
previously filed with the Securities and Exchange Commission by the Company
under File No. 0-16244.
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
2.1 Agreement and Plan of Merger among Veeco Quarterly Report on Form 10-Q for the
Instruments Inc., Veeco Acquisition Corp. Quarter Ended March 31, 1997, Exhibit 2
and Wyko Corporation and its
Securityholders dated April 28, 1997.
2.2 Agreement and Plan of Merger among Veeco Current Report on Form 8-K dated March 9,
Instruments Inc., Digital Instruments, 1998, Exhibit 99.1
Inc. and its Securityholders dated
February 28, 1998.
2.3 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Acquisition October 14, 1999, Exhibit 2.1
Corp., Ion Tech, Inc. and Certain of its
Security holders dated October 14, 1999.
2.4 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Real Estate October 14, 1999, Exhibit 2.2
Corp., Tulakes Real Estate Investments,
Inc. and its Security holders dated
October 14, 1999.
2.5 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Acquisition Corp. March 13, 2000, Exhibit 2.1
and CVC, Inc. dated February 29, 2000.
3.1 Form of Amended and Restated Certificate Quarterly Report on Form 10-Q for the
of Incorporation of the Company. Quarter Ended June 30, 1997, Exhibit 3.1
3.2 Form of Amended and Restated By-Laws of Registration Statement on Form S-1 (File
the Company. No. 33-85184), Exhibit 3.2
29
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
4.1 Form of Certificate for Common Stock. Registration Statement on Form S-1 (File
No. 33-85184), Exhibit 4.1
10.1 Credit Agreement dated July 31, 1996 Quarterly Report on Form 10-Q for the
among Veeco Instruments Inc., Fleet Bank Quarter Ended June 30, 1996, Exhibit
N.A. and The Chase Manhattan Bank. 10.25
10.2 Amendment No. 1 to Credit Agreement, *
dated June 25, 1997 among Veeco
Instruments, Inc., Fleet Bank N.A. and
The Chase Manhattan Bank.
10.3 Amendment No. 2 to Credit Agreement, Annual Report on Form 10-K for the Year
dated January 31, 1999 among Veeco Ended December 31, 1998, Exhibit 10.34
Instruments, Inc., Fleet Bank N.A. and
The Chase Manhattan Bank.
10.4 Amendment No. 3 and Waiver to Credit *
Agreement, dated March 3, 2000 between
Veeco Instruments, Inc., Fleet Bank N.A.
and The Chase Manhattan Bank.
10.5 Veeco Instruments Inc. Amended and Registration Statement on Form S-1 (File
Restated 1992 Employees' Stock Option No. 33-93958), Exhibit 10.20
Plan.
10.6 Amendment dated May 15, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1992 Employees' Stock Option Plan. Exhibit 10.1
10.7 Amendment dated July 25, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1992 Employees' Stock Option Plan. Exhibit 10.2
10.8 Amendment dated May 29, 1998 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1992 Employees' Stock Option Plan. Exhibit 10.1
10.9 Amendment dated May 14, 1999 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1992 Employees' Stock Option Plan. Exhibit 10.2
10.10 Veeco Instruments Inc. 1994 Stock Option Registration Statement on Form S-1 (File
Plan for Outside Directors. No. 33-85184), Exhibit 10.17
10.11 Amendment dated May 15, 1996 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-08981) filed July 26, 1996,
1994 Stock Option Plan for Outside Exhibit 10.2
Directors.
10.12 Amendment dated May 15, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1994 Stock Option Plan for Outside Exhibit 10.3
Directors.
10.13 Amendment dated May 21, 1999 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1994 Stock Option Plan for Outside Exhibit 10.3
Directors.
30
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
10.14 Veeco Instruments Inc. Employees Stock Registration Statement on Form S-1 (File
Purchase Plan. No. 33-93958), Exhibit 10.21
10.15 Letter Agreement, dated November 22, 1993 Registration Statement on Form S-1 (File
between the Company and John F. Rein, Jr. No. 33-85184), Exhibit 10.13
10.16 First Amendment and Restatement of Stock Registration Statement on Form S-1 (File
Option Agreement dated as of October 13, No. 33-85184), Exhibit 10.14
1994 between the Company and John F.
Rein, Jr.
10.17 Agreement dated as of February 7, 1994, Registration Statement on Form S-1 (File
effective as of December 31, 1993, No. 33-85184), Exhibit 10.15
between the Company and Robert Oates,
together with Amendment No. 1 thereto
dated as of October 13, 1994.
10.18 Letter Agreement dated January 16, 1995 Annual Report on Form 10-K for the Year
between the Company and John Kiernan. Ended December 31, 1994, Exhibit 10.20
10.19 Letter Agreement, dated December 2, 1997 Annual Report on Form 10-K for the Year
between Veeco Instruments Inc. and Ended December 31, 1997, Exhibit 10.33
Dr. Donald Kania.
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Ernst & Young LLP. *
27.1 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1999.
27.2 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1998 (restated).
27.3 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1997 (restated).
------------------------
* Filed herewith
(d) Consolidated Financial Statement Schedule.
SCHEDULE II.--VALUATION AND QUALIFYING ACCOUNTS
All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
[Download Table]
VEECO INSTRUMENTS INC.
BY: /S/ EDWARD H. BRAUN
-----------------------------------------
Edward H. Braun
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURES TITLE DATE
---------- ----- ----
Director, Chairman, Chief
/s/ EDWARD H. BRAUN Executive Officer and
------------------------------------------- President (principal March 13, 2000
Edward H. Braun executive officer)
/s/ RICHARD A. D'AMORE Director
------------------------------------------- March 13, 2000
Richard A. D'Amore
/s/ JOEL A. ELFTMANN Director
------------------------------------------- March 13, 2000
Joel A. Elftmann
/s/ HEINZ K. FRIDRICH Director
------------------------------------------- March 13, 2000
Heinz K. Fridrich
Director
------------------------------------------- March 13, 2000
Dr. Paul R. Low
/s/ ROGER D. MCDANIEL Director
------------------------------------------- March 13, 2000
Roger D. McDaniel
/s/ IRWIN H. PFISTER Director
------------------------------------------- March 13, 2000
Irwin H. Pfister
32
[Enlarge/Download Table]
SIGNATURES TITLE DATE
---------- ----- ----
/s/ WALTER J. SCHERR Director
------------------------------------------- March 13, 2000
Walter J. Scherr
Vice President-Finance, Chief
/s/ JOHN F. REIN, JR. Financial Officer,
------------------------------------------- Treasurer and Secretary March 13, 2000
John F. Rein, Jr. (principal financial
officer)
/s/ JOHN P. KIERNAN Vice President-Corporate
------------------------------------------- Controller (principal March 13, 2000
John P. Kiernan accounting officer)
33
INDEX TO EXHIBITS
Unless otherwise indicated, each of the following exhibits has been
previously filed with the Securities and Exchange Commission by the Company
under File No. 0-16244.
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
2.1 Agreement and Plan of Merger among Veeco Quarterly Report on Form 10-Q for the
Instruments Inc., Veeco Acquisition Corp. Quarter Ended March 31, 1997, Exhibit 2
and Wyko Corporation and its
Securityholders dated April 28, 1997.
2.2 Agreement and Plan of Merger among Veeco Current Report on Form 8-K dated March 9,
Instruments Inc., Digital Instruments, 1998, Exhibit 99.1
Inc. and its Securityholders dated
February 28, 1998.
2.3 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Acquisition October 14, 1999, Exhibit 2.1
Corp., Ion Tech, Inc. and Certain of its
Security holders dated October 14, 1999.
2.4 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Real Estate October 14, 1999, Exhibit 2.2
Corp., Tulakes Real Estate Investments,
Inc. and its Security holders dated
October 14, 1999.
2.5 Agreement and Plan of Merger among Veeco Current Report on Form 8-K filed
Instruments Inc., Veeco Acquisition Corp. March 13, 2000, Exhibit 2.1
and CVC, Inc. dated February 29, 2000.
3.1 Form of Amended and Restated Certificate Quarterly Report on Form 10-Q for the
of Incorporation of the Company. Quarter Ended June 30, 1997, Exhibit 3.1
3.2 Form of Amended and Restated By-Laws of Registration Statement on Form S-1 (File
the Company. No. 33-85184), Exhibit 3.2
4.1 Form of Certificate for Common Stock. Registration Statement on Form S-1 (File
No. 33-85184), Exhibit 4.1
10.1 Credit Agreement dated July 31, 1996 Quarterly Report on Form 10-Q for the
among Veeco Instruments Inc., Fleet Bank Quarter Ended June 30, 1996, Exhibit
N.A. and The Chase Manhattan Bank. 10.25
10.2 Amendment No. 1 to Credit Agreement, *
dated June 25, 1997 among Veeco
Instruments, Inc., Fleet Bank N.A. and
The Chase Manhattan Bank.
10.3 Amendment No. 2 to Credit Agreement, Annual Report on Form 10-K for the Year
dated January 31, 1999 among Veeco Ended December 31, 1998, Exhibit 10.34
Instruments, Inc., Fleet Bank N.A. and
The Chase Manhattan Bank.
34
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
10.4 Amendment No. 3 and Waiver to Credit *
Agreement, dated March 3, 2000 between
Veeco Instruments, Inc., Fleet Bank N.A.
and The Chase Manhattan Bank.
10.5 Veeco Instruments Inc. Amended and Registration Statement on Form S-1 (File
Restated 1992 Employees' Stock Option No. 33-93958), Exhibit 10.20
Plan.
10.6 Amendment dated May 15, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1992 Employees' Stock Option Plan. Exhibit 10.1
10.7 Amendment dated July 25, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1992 Employees' Stock Option Plan. Exhibit 10.2
10.8 Amendment dated May 29, 1998 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1992 Employees' Stock Option Plan. Exhibit 10.1
10.9 Amendment dated May 14, 1999 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1992 Employees' Stock Option Plan. Exhibit 10.2
10.10 Veeco Instruments Inc. 1994 Stock Option Registration Statement on Form S-1 (File
Plan for Outside Directors. No. 33-85184), Exhibit 10.17
10.11 Amendment dated May 15, 1996 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-08981) filed July 26, 1996,
1994 Stock Option Plan for Outside Exhibit 10.2
Directors.
10.12 Amendment dated May 15, 1997 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-35009) filed September 5, 1997,
1994 Stock Option Plan for Outside Exhibit 10.3
Directors.
10.13 Amendment dated May 21, 1999 to Veeco Registration Statement on Form S-8 (File
Instruments Inc. Amended and Restated No. 333-79469) filed May 27, 1999,
1994 Stock Option Plan for Outside Exhibit 10.3
Directors.
10.14 Veeco Instruments Inc. Employees Stock Registration Statement on Form S-1 (File
Purchase Plan. No. 33-93958), Exhibit 10.21
10.15 Letter Agreement, dated November 22, 1993 Registration Statement on Form S-1 (File
between the Company and John F. Rein, Jr. No. 33-85184), Exhibit 10.13
10.16 First Amendment and Restatement of Stock Registration Statement on Form S-1 (File
Option Agreement dated as of October 13, No. 33-85184), Exhibit 10.14
1994 between the Company and John F.
Rein, Jr.
10.17 Agreement dated as of February 7, 1994, Registration Statement on Form S-1 (File
effective as of December 31, 1993, No. 33-85184), Exhibit 10.15
between the Company and Robert Oates,
together with Amendment No. 1 thereto
dated as of October 13, 1994.
35
[Enlarge/Download Table]
INCORPORATED BY REFERENCE
NUMBER EXHIBIT TO THE FOLLOWING DOCUMENTS
------ ----------------------------------------- -----------------------------------------
10.18 Letter Agreement dated January 16, 1995 Annual Report on Form 10-K for the Year
between the Company and John Kiernan. Ended December 31, 1994, Exhibit 10.20
10.19 Letter Agreement, dated December 2, 1997 Annual Report on Form 10-K for the Year
between Veeco Instruments Inc. and Dr. Ended December 31, 1997, Exhibit 10.33
Donald Kania.
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Ernst & Young LLP. *
27.1 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1999.
27.2 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1998 (restated).
27.3 Financial Data Schedule of Veeco *
Instruments Inc. for the year ended
December 31, 1997 (restated).
*Filed herewith
36
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
[Download Table]
Report of Independent Auditors.............................. F-2
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets at December 31, 1999 and 1998... F-4
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1999, 1998 and 1997.......... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Schedule II--Valuation and Qualifying Accounts.............. S-1
F-1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and the Board of Directors
Veeco Instruments Inc.
We have audited the accompanying consolidated balance sheets of Veeco
Instruments Inc. and Subsidiaries ("Veeco" or the "Company") as of December 31,
1999 and 1998, and the related consolidated statements of income, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedule in
the accompanying Index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits. We did
not audit the financial statements of Digital Instruments, Inc. and Affiliates
("Digital"), which merged with Veeco in May 1998, which statements reflect total
revenues constituting 23% in 1997 of the consolidated total. These 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for
1997, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Veeco
Instruments Inc. and Subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Melville, New York
February 10, 2000
F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Digital Instruments, Inc.
and affiliates:
We have audited the combined statements of income, stockholders' equity and
cash flows for the year ended December 31, 1997 (not presented herein) of
DIGITAL INSTRUMENTS, INC. (a California corporation) and affiliates. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of Digital Instruments, Inc. and
affiliates operations and their cash flows for the year ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
February 28, 1998
F-3
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,418 $ 23,493
Short-term investments.................................... 50,888 --
Accounts receivable, less allowance for doubtful accounts
of $1,516 in 1999 and $1,725 in 1998.................... 58,393 43,976
Inventories............................................... 56,689 56,369
Prepaid expenses and other current assets................. 6,111 1,492
Deferred income taxes..................................... 9,544 5,944
-------- --------
Total current assets........................................ 211,043 131,274
Property, plant and equipment at cost, net.................. 41,924 39,313
Excess of cost over net assets acquired, less accumulated
amortization of $1,301 in 1999 and $1,171 in 1998......... 5,509 4,187
Other assets, net........................................... 6,803 4,457
-------- --------
Total assets................................................ $265,279 $179,231
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 16,444 $ 15,843
Accrued expenses.......................................... 28,911 26,249
Income taxes payable...................................... 7,580 1,325
Current portion of long-term debt......................... 235 784
Notes payable to former Digital shareholders.............. 8,000 --
-------- --------
Total current liabilities................................... 61,170 44,201
Deferred income taxes....................................... 2,727 937
Long-term debt.............................................. 8,759 10,013
Notes payable to former Digital shareholders................ -- 8,000
Other liabilities........................................... 272 341
Shareholders' equity:
Preferred stock, 500,000 shares authorized; no shares
issued and outstanding.................................. -- --
Common stock, 25,000,000 shares authorized; 17,627,701 and
16,350,467 shares issued and outstanding in 1999 and
1998, respectively...................................... 176 163
Additional paid-in capital................................ 120,245 62,936
Retained earnings......................................... 72,492 52,180
Other comprehensive income................................ (562) 460
-------- --------
Total shareholders' equity.................................. 192,351 115,739
-------- --------
Total liabilities and shareholders' equity.................. $265,279 $179,231
======== ========
SEE ACCOMPANYING NOTES.
F-4
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net sales................................................... $246,606 $214,985 $223,410
Cost of sales............................................... 125,650 115,441 113,487
-------- -------- --------
Gross profit................................................ 120,956 99,544 109,923
Costs and expenses:
Research and development expense.......................... 31,545 27,976 25,016
Selling, general and administrative expense............... 51,434 44,756 44,054
Other expense (income)--net............................... 965 (804) (115)
Merger and reorganization expenses........................ 2,600 7,500 2,250
Loss on sale of leak detection business................... 2,500 -- --
Write-off of purchased in-process technology.............. 1,300 -- 4,200
-------- -------- --------
90,344 79,428 75,405
-------- -------- --------
Operating income............................................ 30,612 20,116 34,518
Interest expense............................................ 1,616 1,594 1,220
Interest income............................................. (3,400) (587) (1,098)
-------- -------- --------
Income before income taxes.................................. 32,396 19,109 34,396
Income tax provision........................................ 11,986 5,736 7,780
-------- -------- --------
Net income.................................................. $ 20,410 $ 13,373 $ 26,616
======== ======== ========
Earnings per common share:
Net income per common share............................... $ 1.17 $ .83 $ 1.67
Diluted net income per common share....................... $ 1.15 $ .82 $ 1.62
Pro forma income tax presentation:
Income before income taxes................................ $ 19,109 $ 34,396
Pro forma income tax provision............................ 7,190 12,987
-------- --------
Pro forma net income...................................... $ 11,919 $ 21,409
======== ========
Pro forma earnings per common share:
Pro forma net income per common share..................... $ .74 $ 1.35
Pro forma diluted net income per common share............. $ .73 $ 1.30
Weighted average shares outstanding......................... 17,381 16,136 15,901
Diluted weighted average shares outstanding................. 17,768 16,396 16,417
SEE ACCOMPANYING NOTES.
F-5
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL INCOME
---------- -------- ---------- -------- ------------- -------- -------------
Balance at December 31,
1996................... 15,792,993 $158 $ 47,809 $ 24,893 $ 665 $ 73,525
Exercise of stock options
and
stock issuances under
stock
purchase plan.......... 192,163 2 2,068 -- -- 2,070
Sale of stock............ -- -- 2,933 -- -- 2,933
Stock option income tax
benefit................ -- -- 1,790 -- -- 1,790
Translation adjustment... -- -- -- -- (631) (631) $ (631)
Net income............... -- -- -- 26,616 -- 26,616 26,616
Distributions to former
shareholders of Digital
and Ion Tech........... -- -- -- (10,156) -- (10,156) --
---------- ---- -------- -------- ------- -------- -------
Balance at December 31,
1997................... 15,985,156 160 54,600 41,353 34 96,147 $25,985
=======
Exercise of stock options
and
stock issuances under
stock purchase plan.... 365,311 3 3,562 -- -- 3,565
Translation adjustment... -- -- -- -- 426 426 $ 426
Stock option income tax
benefit................ -- -- 3,189 -- -- 3,189 --
Non-cash compensation
charge................. 1,585 1,585 --
Net income............... -- -- -- 13,373 -- 13,373 13,373
Adjustment to reflect
change in year-end for
Ion Tech............... -- -- -- (412) -- (412) --
Distributions to former
shareholders of Digital
and Ion Tech........... -- -- -- (2,134) -- (2,134) --
---------- ---- -------- -------- ------- -------- -------
Balance at December 31,
1998................... 16,350,467 163 62,936 52,180 460 115,739 $13,799
=======
Exercise of stock options
and stock issuances
under stock purchase
plan................... 277,234 3 6,548 -- -- 6,551
Net proceeds from public
offering............... 1,000,000 10 48,850 48,860
Translation adjustment... -- -- -- -- (1,008) (1,008) $(1,008)
Stock option income tax
benefit................ -- -- 1,911 -- -- 1,911
Unrealized loss on
available-for-sale
securities............. -- -- -- -- (14) (14) (14)
Net income............... -- -- -- 20,410 -- 20,410 20,410
Distributions to former
shareholders of Ion
Tech................... -- -- -- (98) -- (98) --
---------- ---- -------- -------- ------- -------- -------
Balance at December 31,
1999................... 17,627,701 $176 $120,245 $ 72,492 $ (562) $192,351 $19,388
========== ==== ======== ======== ======= ======== =======
SEE ACCOMPANYING NOTES.
F-6
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
OPERATING ACTIVITIES
Net income.................................................. $ 20,410 $ 13,373 $ 26,616
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 5,830 5,012 2,484
Deferred income taxes..................................... (3,263) (1,076) (1,691)
Non-cash merger and reorganization expenses............... -- 3,544 --
Loss on sale of leak detection business................... 2,500 -- --
Write-off of purchased in-process technology.............. 1,300 -- 4,200
Other..................................................... (664) -- --
Changes in operating assets and liabilities:
Accounts receivable..................................... (14,109) 2,315 (12,974)
Inventories............................................. (4,702) (10,064) (15,087)
Accounts payable........................................ 458 (5,757) 8,779
Accrued expenses and other current liabilities.......... 6,773 2,390 4,973
Other, net.............................................. (579) 702 610
--------- -------- --------
Net cash provided by operating activities................... 13,954 10,439 17,910
--------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........................................ (10,482) (8,310) (21,221)
Proceeds from sale of property, plant and equipment......... 3,129 -- --
Net assets of business acquired............................. (3,300) -- (4,375)
Purchases of available-for-sale securities.................. (395,949) -- --
Sales of available-for-sale securities...................... 29,407 -- --
Maturities of available-for-sale securities................. 315,631 -- --
--------- -------- --------
Net cash used in investing activities....................... (61,564) (8,310) (25,596)
--------- -------- --------
FINANCING ACTIVITIES
Proceeds from stock issuance................................ 55,411 3,565 5,003
Proceeds from long-term debt................................ -- 1,001 8,116
Repayments of long term debt................................ (2,076) (904) (836)
Distributions to former shareholders of Digital and Ion
Tech...................................................... (98) (2,134) (10,156)
Other....................................................... -- -- (47)
--------- -------- --------
Net cash provided by financing activities................... 53,237 1,528 2,080
--------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... 298 (989) (209)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 5,925 2,668 (5,815)
Cash and cash equivalents at beginning of year.............. 23,493 20,825 26,640
--------- -------- --------
Cash and cash equivalents at end of year.................... $ 29,418 $ 23,493 $ 20,825
========= ======== ========
SEE ACCOMPANYING NOTES.
F-7
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Veeco Instruments Inc. ("Veeco" or the "Company") designs, manufactures,
markets and services a broad line of equipment primarily used by manufacturers
in the data storage, optical telecommunications and semiconductor industries.
These industries help create a wide range of information age products for today
and tomorrow--such as personal computers, network servers, fiber optic networks,
digital cameras, TV set-top boxes and personal digital assistants. The Company's
process equipment products precisely deposit or remove (etch) various materials
in the manufacturing of advanced thin film magnetic heads for the data storage
industry. With the acquisition of Ion Tech in 1999, Veeco became a supplier of
ion beam deposition equipment to the optical filter market (dense wavelength
division multiplexing or "DWDM"). The DWDM optical filters are used to expand
the capacity of fiber optic networks. Veeco's broad line of leading edge
technology allows customers to improve time to market of next generation
products. Veeco's metrology equipment is used to provide critical surface
measurements on thin film magnetic heads and disks used in hard drives, as well
as on semiconductor devices and in research applications. This equipment allows
customers to monitor their products throughout the manufacturing process in
order to improve yields, reduce costs and improve product quality.
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
revenue, which is included in other accrued expenses, and recognized as revenue
on a straight-line basis over the service period of the related contract. The
Company provides for warranty costs and the estimated costs of fulfilling its
installation obligations at the time the related revenue is recorded.
CASH FLOWS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Interest paid during 1999,
1998 and 1997 was approximately $1,603,000, $1,550,000 and $1,230,000,
respectively. Income taxes paid in 1999, 1998 and 1997 was approximately
$5,848,000, $4,884,000 and $5,451,000, respectively.
INVENTORIES
Inventories are stated at the lower of cost (principally first-in, first-out
method) or market.
F-8
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
LONG-LIVED ASSETS
Excess of cost of investment over net assets acquired is being amortized on
a straight-line basis over periods ranging from 10 to 40 years. Other intangible
assets, included within other assets on the balance sheet, consist of purchased
technology, patents, assembled workforce, trademarks, covenants not-to-compete,
software licenses and deferred finance costs of $5,666,000 and $2,126,000, which
are net of accumulated amortization of $1,348,000 and $1,474,000 at
December 31, 1999 and 1998, respectively. Other intangible assets are amortized
over periods ranging from 2 to 17 years.
The carrying values of intangible and other long-lived assets are
periodically reviewed to determine if any impairment indicators are present. If
it is determined that such indicators are present and the review indicates that
the assets will not be fully recoverable, based on undiscounted estimated cash
flows over the remaining amortization and depreciation period, their carrying
values are reduced to estimated fair value. Impairment indicators include, among
other conditions, cash flow deficits, an historic or anticipated decline in
revenue or operating profit, adverse legal or regulatory developments,
accumulation of costs significantly in excess of amounts originally expected to
acquire the asset and a material decrease in the fair value of some or all of
the assets. Assets are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows generated
by other asset groups. No such impairment exists at December 31, 1999.
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 $4,102,000, $4,052,000 and $4,738,000 in advertising costs during 1999,
1998 and 1997, respectively.
F-9
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations. Under APB 25, because the
exercise price of the Company's employee stock options is set equal to the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued expenses approximate 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, 1999 and 1998 approximates its fair value.
EARNINGS PER SHARE
The following table sets forth the reconciliation of weighted average shares
outstanding and diluted weighted average shares outstanding:
[Download Table]
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Weighted average shares outstanding................. 17,381 16,136 15,901
Dilutive effect of stock options.................... 387 260 516
------ ------ ------
Diluted weighted average shares outstanding......... 17,768 16,396 16,417
====== ====== ======
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the 1999 presentation.
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION
ION TECH, INC.
On November 4, 1999, Ion Tech, Inc. and an affiliate (collectively,
"Ion Tech"), a supplier of ion beam deposition systems merged with and into
subsidiaries of Veeco. The merger was accounted for as a pooling of interests
and, accordingly, historical financial data has been restated to include Ion
Tech data. Under the merger, Ion Tech shareholders received 1,509,437 shares of
Veeco Common Stock. Merger expenses of approximately $2,600,000 pertaining to
investment banking, legal fees and other one-time transaction costs were charged
to operating expenses during the year ended December 31, 1999.
Prior to the merger, Ion Tech's fiscal year end was June 30. In connection
with the merger, the financial results of Ion Tech were recast for 1998 to
conform to Veeco's December 31 year end. For the
F-10
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
year ended 1997, historical results include Ion Tech's fiscal year ended
June 30 1998 results, thus resulting in six months of 1998 activity included in
the 1997 results of operations. The following describes the adjustment to
retained earnings in 1998 from changing the fiscal year end of Ion Tech
(in thousands):
[Download Table]
Revenues from January 1, 1998 to June 30, 1998.............. $3,919
Expenses from January 1, 1998 to June 30, 1998.............. 3,447
------
Net income.................................................. 472
Distributions to shareholders............................... 60
------
Adjustment to retained earnings............................. $ 412
======
DIGITAL INSTRUMENTS, INC.
On May 29, 1998, Veeco merged with Digital Instruments, Inc. ("Digital"), a
leader in scanning probe/ atomic force microscopy (SPM/AFM). Under the merger,
Digital shareholders received 5,583,725 shares of Veeco Common Stock. The merger
was accounted for as a pooling of interests and, accordingly, historical
financial data has been restated to include Digital data. Merger expenses were
comprised of transaction fees and expenses of $3,300,000 and a $1,585,000
non-cash compensation charge related to stock issued in accordance with a
pre-existing agreement with a key Digital employee. Reorganization expenses,
principally related to the Digital merger, consisted of $509,000 for severance
costs, $750,000 for an estimated loss on a future sublease of an abandoned
office and manufacturing facility, $887,000 for write-downs of long-lived assets
held for sale or disposal and $469,000 for other costs. The Company implemented
its reorganization plan in an effort to integrate Digital into the Company,
consolidate manufacturing facilities, terminate its marketing and distribution
agreements for a metrology product which competed directly with Digital, and
reduce other operating expenses. The severance costs covered 13 management and
manufacturing employees located in Santa Barbara, California, and Plainview and
Orangeburg, New York in the Metrology and Process Equipment segments,
respectively. The sublease loss covered an office and manufacturing facility in
Santa Barbara, California. Charges associated with the sublease loss will be
paid over the remaining life of the lease. The write-down of long-lived assets,
to estimated net realizable value, related primarily to three SXM atomic force
microscopes previously used for demonstration and testing purposes in the
Metrology segment. Termination benefits paid during 1998 approximated $300,000.
The Company substantially completed the reorganization plan in 1999 and incurred
severance, a loss on a sublease and other costs aggregating approximately
$900,000, which were charged against the reorganization accrual. At
December 31, 1999, approximately $35,000 remained accrued for these expenses.
The Company sold the long-lived assets in 1999 for an aggregate amount that
approximated net book value.
The Company owns 50% of Digital Instruments GmbH, a German company, which
exclusively distributed Digital's products in Germany and Eastern Europe through
September 30, 1998. The Company accounts for its investment in Digital
Instruments GmbH under the equity method of accounting. Prior to the merger,
Digital had elected "S" Corporation status for income tax purposes and therefore
was not subject to federal income taxes at the corporation level. As a result of
the merger, Digital's "S" Corporation election was terminated. Pro forma net
income and pro forma net income per common share as shown in the accompanying
Consolidated Statements of Income reflects income taxes for Digital as if it had
been a "C" Corporation for all periods presented.
F-11
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
WYKO CORPORATION
On July 25, 1997, Wyko Corporation ("Wyko") a leading supplier of optical
interferometric measurement systems for the data storage and semiconductor
industries, merged with and into a subsidiary of Veeco. Under the merger, Wyko
shareholders received 2,863,810 shares of Veeco Common Stock and holders of
options to acquire Wyko common stock received options to acquire an aggregate of
136,190 shares of Veeco Common Stock. The merger was accounted for as a pooling
of interests transaction. Merger expenses of approximately $2,250,000 pertaining
to investment banking, legal fees and other one-time transaction costs were
charged to operating expenses during the year ended December 31, 1997.
The following table displays the revenues and net income of Ion Tech for the
periods preceding the business combination and the amounts after the merger
through December 31, 1999:
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Net Sales:
Veeco (pre-merger).......................... $178,291 $206,838 $216,728
Ion Tech.................................... 14,497 8,147 6,682
Veeco (post-merger)......................... 53,818 -- --
-------- -------- --------
Combined.................................... $246,606 $214,985 $223,410
======== ======== ========
Net income:
Veeco (pre-merger).......................... $ 14,344 $ 12,701 $ 26,027
Ion Tech.................................... 2,450 672 589
Veeco (post-merger)......................... 3,616 -- --
-------- -------- --------
Combined.................................... $ 20,410 $ 13,373 $ 26,616
======== ======== ========
OPTIMAG, INC.
On October 14, 1999, Veeco acquired the capital stock of OptiMag Inc.
("OptiMag"), of San Diego, California, for cash of $3,300,000 and a deferred
payment of $1,200,000 due on October 14, 2000. In addition, the acquisition
calls for contingent consideration to be paid by Veeco based upon both future
earnings and the future appraised value of OptiMag. The contingent consideration
will be calculated based upon a predetermined percentage of OptiMag's sales for
the period from January 1, 2000 to December 31, 2000, as well as the appraised
fair market value of OptiMag, adjusted for certain items, as of December 31,
2000. OptiMag, a development-stage company founded in 1998, is a supplier of
automated optical defect inspection and process control equipment for the data
storage thin film magnetic head industry. 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. The purchase price was allocated as
follows: $2,450,000 to excess of cost over net assets acquired; $3,200,000 to
core technology; $570,000 to assembled workforce, trademarks and a covenant
not-to-compete and $1,300,000 to in-process research and development projects
("R & D") for projects that had not reached technological feasibility and had no
alternative future uses and, thus, the amounts allocated to such projects were
expensed as of the date of acquisition.
F-12
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS AND BASIS OF PRESENTATION (CONTINUED)
OptiMag's in-process R & D value is comprised of Oasis version 1.0 software
and hardware component development program, which includes the introduction of
certain new technologies. At the acquisition date, OptiMag's R & D program was
approximately 84% complete. The total continuing R & D commitment to complete
the project is currently expected to be approximately $55,000 and is expected to
be completed in March 2000. Expenditures to complete OptiMag's project are
subject to change, given the uncertainties of the development process, and no
assurance can be given that deviations from these estimates will not occur.
Additionally, the project will require maintenance R & D after it has reached a
state of technological and commercial feasibility. There is risk associated with
the completion of the project, and there is no assurance that the project will
meet with technological or commercial success.
The value assigned to purchased in-process R & D was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The revenue
projection used to value the in-process R & D is based on estimates of relevant
market sizes and growth factors, expected trends in technology and the nature
and expected timing of new product introductions by the Company and its
competitors. The rate utilized to discount the net cash flows to their present
value was 30%.
The amortization periods of intangible assets related to excess of cost over
net assets acquired, core technology, assembled workforce, trademarks and
covenant not-to-compete are ten years, five years, three years, five years and
two years, respectively.
The results of operations of OptiMag for the period from October 15, 1999 to
December 31, 1999 are included in the accompanying Consolidated Statement of
Income for the year ended December 31, 1999. Results of operations prior to the
acquisition are not material to the Consolidated Statements of Income for the
years ended 1999 and 1998.
PHYSICAL VAPOR DEPOSITION
On April 10, 1997, Veeco acquired from Materials Research Corporation,
certain assets of its Physical Vapor Deposition data storage business for cash
of $4,375,000 plus the assumption of certain liabilities. The acquisition was
accounted for using the purchase method of accounting. Accordingly, the purchase
price was allocated to the net assets acquired based on their estimated fair
values as determined by an independent appraisal, including $4,200,000 allocated
to in-process engineering and development projects. The associated projects had
not reached technological feasibility and had no alternative future uses and
thus the amounts allocated to such projects were expensed as of the date of
acquisition.
F-13
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET INFORMATION
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Inventories:
Components and spare parts................. $32,729 $29,871
Work in process............................ 8,429 13,785
Finished goods............................. 15,531 12,713
------- -------
$56,689 $56,369
======= =======
[Enlarge/Download Table]
DECEMBER 31,
------------------- ESTIMATED
1999 1998 USEFUL LIVES
-------- -------- -------------------
(IN THOUSANDS)
Property, plant and equipment:
Land....................................... $ 4,463 $ 5,463
Buildings and improvements................. 21,327 19,760 10-40 years
Machinery and equipment.................... 34,248 30,005 3-10 years
Leasehold improvements..................... 3,554 1,831 3-7 years
------- -------
63,592 57,059
Less accumulated depreciation and
amortization............................. 21,668 17,746
------- -------
$41,924 $39,313
======= =======
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Accrued expenses:
Litigation reserve......................... $ 1,080 $ 1,500
Payroll and related benefits............... 6,759 5,375
Taxes, other than income................... 4,433 4,062
Deferred service contract revenue.......... 465 738
Customer deposits and advanced billings.... 3,029 3,507
Installation and warranty.................. 5,802 6,119
Other...................................... 7,343 4,948
------- -------
$28,911 $26,249
======= =======
SHORT-TERM INVESTMENTS
Management determines the appropriate classification of securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
All investments are classified as available-for-sale securities.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported as a separate component of shareholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest (income) expense. Realized gains and
losses, interest and
F-14
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET INFORMATION (CONTINUED)
dividends and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest (income) expense. The
cost of securities sold is based on the specific identification method.
The carrying amounts of available-for-sale securities approximate fair
value. The following is a summary of available-for-sale securities:
[Download Table]
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
Commercial paper............................................ $19,047
Municipal bonds............................................. 14,527
Floating rate bonds......................................... 9,029
Corporate bonds............................................. 6,071
Obligations of U.S. Govt. agencies.......................... 2,003
Other debt securities....................................... 211
-------
$50,888
=======
All investments at December 31, 1999 have contractual maturities of one year
or less. During the year ended December 31, 1999, available-for-sale securities
with fair values at the date of sale of approximately $29.0 million were sold.
4. LONG-TERM DEBT
The Company has an unsecured credit facility, as amended (the "Credit
Facility"), which may be used for working capital, acquisitions and general
corporate purposes. The Credit Facility provides the Company with up to
$40 million of availability. The Credit Facility's interest rate is the prime
rate of the lending banks, but is adjustable to a maximum rate of 1/4% above the
prime rate in the event the Company's ratio of debt to cash flow exceeds a
defined ratio. A LIBOR based interest rate option is also provided.
The Credit Facility expires December 31, 2001, but under certain conditions
is convertible into a term loan, which would amortize quarterly through
December 31, 2005.
The Credit Facility contains certain restrictive covenants, which among
other things, impose limitations with respect to incurrence of certain
additional indebtedness, payments of dividends, long-term leases, investments,
mergers, consolidations and specified sales of assets. The Company is also
required to satisfy certain financial tests.
As of December 31, 1999 and 1998, no borrowings were outstanding under the
Company's Credit Facility and the Company was contingently liable for a letter
of credit of approximately $859,000 issued under the Credit Facility and
expiring in April, 2000.
In April 1995, the stockholders of Digital received distributions in the
amount of $8,000,000 in the form of unsecured promissory notes, bearing interest
at 7.21 percent per annum with interest due quarterly and principal due on or
before March 31, 2000. Interest relating to these notes approximated $577,000
for each of the years ended 1999, 1998 and 1997.
F-15
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Long-term debt consists of two mortgage notes payable, each secured by
certain land and buildings, with carrying amounts of approximately $2,800,000
and $11,800,000, respectively, at December 31, 1999. One mortgage note payable
bears interest at a rate of 8.5% and matures on October 14, 2002. The other
mortgage note payable bears interest at rate of 7.75% for the first five years
with a final payment due in December 2007. At the end of five years, the
interest rate will change each year based on the bank's index rate plus 1.75%.
This note payable is being amortized over 25 years with a balloon payment due at
the end of ten years.
Long-term debt matures as follows:
[Download Table]
(IN THOUSANDS)
2000........................................................ $ 235
2001........................................................ 290
2002........................................................ 2,218
2003........................................................ 142
2004........................................................ 148
Thereafter.................................................. 5,961
------
8,994
Less current portion........................................ 235
------
$8,759
======
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS
Historical net income and earnings per share determined on a pro forma basis
as if the Company had accounted for its stock options granted subsequent to
December 31, 1994 under the fair value method estimated at the date of grant
using a Black-Scholes option pricing model follows:
[Download Table]
DECEMBER 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNT)
Pro forma net income.............................. $15,022 $9,704 $25,373
Pro forma net income per share.................... $ .86 $ .60 $ 1.60
Pro forma diluted net income per share............ $ .85 $ .59 $ 1.55
FIXED OPTION PLANS
The Company has two fixed option plans. The Veeco Instruments Inc. Amended
and Restated 1992 Employees' Stock Option Plan (the "Stock Option Plan")
provides for the grant to officers and key employees of up to 2,826,787 options
(141,171 options available for future grants as of December 31, 1999) 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 215,000 options (80,003 options
available for future grants as of December 31, 1999) to purchase
F-16
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
shares of Common Stock of the Company. Such options granted are exercisable
immediately and expire after ten years. In connection with the merger with Wyko,
holders of the then outstanding Wyko stock options received options to purchase
an aggregate of 136,190 shares of Veeco Common Stock.
The fair values of the options issued under the two plans at the date of
grant were estimated with the following weighted-average assumptions for 1999,
1998 and 1997: risk-free interest rate of 5.6%, 5.5% and 6.3% respectively, no
dividend yield, volatility factor of the expected market price of the Company's
Common Stock of 64%, 59% and 50%, respectively, and a weighted-average expected
life of the options of four years.
A summary of the Company's stock option plans as of December 31, 1997, 1998
and 1999, and changes during the years ended on those dates is presented below:
[Enlarge/Download Table]
1997 1998 1999
------------------- -------------------- --------------------
OPTION WEIGHTED- WEIGHTED-
PRICE AVERAGE AVERAGE
SHARES PER SHARE EXERCISE SHARES EXERCISE
(000) SHARES (000) PRICE (000) PRICE
-------- -------- -------- --------- -------- ---------
Outstanding at beginning of year.................. 658 $ 9.44 1,154 $22.64 1,687 $25.46
Granted........................................... 681 32.22 1,037 24.29 869 31.16
Exercised......................................... (165) 9.76 (336) 8.86 (261) 22.67
Forfeited......................................... (20) 21.60 (168) 29.61 (171) 27.11
----- ------ ----- ------ ----- ------
Outstanding at end of year........................ 1,154 $22.64 1,687 $25.46 2,124 $27.95
===== ====== ===== ====== ===== ======
Options exercisable at year-end................... 330 $ 9.25 346 $24.42 620 $26.49
Weighted-average fair value of options granted
during the year................................. $14.83 $12.36 $16.71
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
[Enlarge/Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
NUMBER NUMBER
OUTSTANDING OUTSTANDING
AT DECEMBER 31, WEIGHTED-AVERAGE AT DECEMBER 31,
RANGE OF 1999 REMAINING WEIGHTED-AVERAGE 1999 WEIGHTED-AVERAGE
EXERCISE PRICE (000'S) CONTRACTUAL LIFE EXERCISE PRICE (000'S) EXERCISE PRICE
--------------------- --------------- ---------------- ---------------- --------------- ----------------
$ 0.69 1 3.0 $ 0.69 1 $ 0.69
2.18 5 0.5 2.18 5 2.18
4.50 16 4.6 4.50 16 4.50
9.50 - 13.38 38 5.8 12.20 38 12.20
14.50 - 21.63 56 6.4 16.49 51 15.95
22.00 - 32.06 1,751 8.7 27.24 372 26.47
35.00 - 50.25 255 8.5 39.58 136 37.98
57.25 2 7.8 57.25 1 57.25
----- --- ------ --- ------
0.69 - 57.25 2,124 8.5 $27.95 620 $26.49
===== === ====== === ======
F-17
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY AND STOCK COMPENSATION PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
Under the Veeco Instruments Inc. Employee Stock Purchase Plan (the "Plan"),
the Company is authorized to issue up to 250,000 shares of Common Stock to its
full-time domestic employees, nearly all of whom are eligible to participate.
Under the terms of the Plan, employees can choose each year to have up to 6% of
their annual base earnings withheld to purchase the Company's Common Stock. The
purchase price of the stock is 85% of the lower of its beginning-of-year or
end-of-year market price. Under the Plan, the Company issued 15,949 shares,
29,352 shares and 12,996 shares to employees in 1999, 1998 and 1997,
respectively. The fair value of the employees' purchase rights was estimated
using the following assumptions for 1999, 1998 and 1997, respectively: no
dividend yield for all years; an expected life of one year for all years;
expected volatility of 64%, 59%, and 70%; and risk-free interest rates of 4.5%,
5.3%, and 5.3%. The weighted-average fair value of those purchase rights granted
in 1999, 1998 and 1997 was $20.65, $8.79 and $6.58 respectively.
As of December 31, 1999, the Company has reserved 2,345,511 and 160,949
shares of Common Stock for issuance upon exercise of stock options and issuance
of shares pursuant to the Plan, respectively.
PREFERRED STOCK
The Board of Directors has authority under the Company's Certificate of
Incorporation to issue shares of preferred stock with voting and economic rights
to be determined by the Board or Directors.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation................................ $2,719 $ 937
Other..................................................... 8 --
------ ------
Total deferred tax liabilities.............................. 2,727 937
Deferred tax assets:
Inventory valuation....................................... 5,539 2,861
Foreign net operating loss carryforwards.................. 234 246
Warranty and installation................................. 2,222 2,380
Other..................................................... 1,783 703
------ ------
Total deferred tax assets................................... 9,778 6,190
Valuation allowance......................................... (234) (246)
------ ------
Net deferred tax assets..................................... 9,544 5,944
------ ------
Net deferred taxes.......................................... $6,817 $5,007
====== ======
F-18
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
For financial reporting purposes, income (loss) before income taxes consists
of:
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Domestic......................................... $26,950 $17,094 $34,413
Foreign.......................................... 5,446 2,015 (17)
------- ------- -------
$32,396 $19,109 $34,396
======= ======= =======
Significant components of the provision (benefit) for income taxes are
presented below:
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Current:
Federal........................................ $10,441 $ 4,683 $ 7,510
Foreign........................................ 2,738 546 306
State.......................................... 2,133 1,583 1,664
------- ------- -------
15,312 6,812 9,480
Deferred:
Federal........................................ (2,516) (960) (1,509)
Foreign........................................ (468) 90 --
State.......................................... (342) (206) (191)
------- ------- -------
(3,326) (1,076) (1,700)
------- ------- -------
$11,986 $ 5,736 $ 7,780
======= ======= =======
The following is a reconciliation of the income tax expense computed using
the federal statutory rate to the Company's actual income tax expense:
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Tax at U.S. statutory rates...................... $11,339 $ 6,688 $12,039
State income taxes (net of federal benefit)...... 1,073 843 941
Goodwill amortization............................ 396 46 46
Nondeductible merger expenses.................... 910 1,164 700
Other nondeductible expenses..................... 48 143 120
Operating losses not currently realizable........ 91 14 335
Income of "S" Corporation not subject to federal
corporation tax................................ -- (1,513) (4,875)
Operating losses currently realizable............ (15) (168) (13)
Research and development tax credit.............. (1,000) (805) (627)
Benefit of foreign sales corporation............. (1,118) (460) (479)
Other............................................ 262 (216) (407)
------- ------- -------
$11,986 $ 5,736 $ 7,780
======= ======= =======
F-19
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
One of the Company's foreign subsidiaries has net operating loss
carryforwards for foreign tax purposes of approximately $600,000 at
December 31, 1999, which expire in the year 2004.
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS
MINIMUM LEASE COMMITMENTS
Minimum lease commitments as of December 31, 1999 for property and equipment
under operating lease agreements (exclusive of renewal options) are payable as
follows:
[Download Table]
(IN THOUSANDS)
2000........................................................ $2,032
2001........................................................ 1,835
2002........................................................ 1,684
2003........................................................ 764
2004........................................................ 384
Thereafter.................................................. 59
------
$6,758
======
Rent charged to operations amounted to $2,515,000, $1,817,000 and $2,057,000
in 1999, 1998 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 a number of third parties to use patents
in accordance with license agreements. Royalties and license fees expensed under
these agreements approximated $847,000, $511,000 and $753,000 in 1999, 1998 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
"RWQCB"), the Company performed soil remediation in 1995 at a site which was
leased by a predecessor of the Company (the "Site").
In settlement of a lawsuit brought by the current and former owners of the
Site, the Company agreed to pay approximately $350,000 (the last installment was
paid by February 1, 1996), to perform any additional remediation work at the
Site required by environmental authorities, and to indemnify the plaintiffs with
respect to alleged contamination at the Site.
Pursuant to the CAO, in September 1998, the Company began implementation of
a groundwater remediation plan approved by the RWQCB. Because monthly monitoring
following implementation of the plan indicated contaminant levels within
permitted standards, the local environmental authority issued a letter in July
1999 confirming completion of the site remediation and stating that no further
action was required at that time.
F-20
VEECO INSTRUMENTS INC. AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
The Company may, under certain circumstances, be obligated to pay up to
$250,000 in connection with the implementation of a comprehensive plan of
environmental remediation at its Plainview, New York facility. The Company has
been indemnified for any liabilities it may incur in excess of $250,000 with
respect to any such remediation. No comprehensive plan has been required to
date. Even without consideration of such indemnification, the Company does not
believe that any material loss or expense is probable in connection with any
remediation plan that may be proposed.
The Company is aware that petroleum hydrocarbon contamination has been
detected in the soil at the site of a facility leased by the Company in Santa
Barbara, California. The Company has been indemnified for any liabilities it may
incur which arise from environmental contamination at the site. Even without
consideration of 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
In January 2000, Veeco received a revised calculation of damages in a 1988
patent infringement lawsuit in the U.S. District Court of Arizona. Pursuant to
this revision, Veeco reversed approximately $420,000 of the $1,500,000
litigation reserve in 1999 that was no longer required. The reversal is included
in other expense (income)-net in the accompanying consolidated statement of
income.
The Company is involved in various legal proceedings arising in the normal
course of its business. In the opinion of the Company's management, based upon
the advice of counsel, the ultimate resolution of these matters will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
RELATED PARTY TRANSACTION
Balances and transactions with Digital Instruments GmbH that are reflected
in the accompanying consolidated financial statements are as follows:
[Download Table]
1998 1997
-------- --------
(IN THOUSANDS)
Accounts receivable......................................... $ -- $1,788
Sales....................................................... 4,337 3,025
The Company makes purchases of inventory from a company, which is owned
partially by an individual who is also employed by the Company. Payments to this
related company in 1999, 1998 and 1997 were approximately $2,996,000, $4,883,000
and $3,120,000, respectively.
F-21
VEECO INSTRUMENTS INC. AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES AND OTHER MATTERS (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company's business depends in large part upon the capital expenditures
of data storage, semiconductor and optical telecommunications manufacturers
which accounted for the following percentages of the Company's net sales:
[Enlarge/Download Table]
DECEMBER 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Data storage......................................... 54.8% 52.8% 51.6%
Semiconductor........................................ 12.1% 18.6% 19.3%
Telecommunications................................... 8.3% 3.8% 3.0%
Sales to one customer accounted for approximately 14%, 10% and 14%, sales to
another customer accounted for approximately 10%, 17% and 6% and sales to
another customer accounted for approximately 7%, 7% and 11% of the Company's net
sales during the years ended December 31, 1999, 1998 and 1997, respectively.
Each of the Company's segments sell to these major customers. At December 31,
1999 and 1998, accounts receivable due from these three customers represented
24% and 37% of aggregate accounts receivable, respectively.
The Company manufactures and sells its products to companies in different
geographic locations. In general, the Company does not require payment in
advance of shipment or collateral for payment. The Company does, however,
perform periodic credit evaluations of its customers' financial condition and,
where appropriate, requires that letters of credit be provided on foreign sales.
Receivables generally are due within 30-60 days. The Company's net accounts
receivable are concentrated in the following geographic locations:
[Download Table]
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
United States............................................. $22,994 $18,481
Europe.................................................... 9,028 11,942
Japan..................................................... 17,889 8,583
Asia Pacific.............................................. 8,161 3,297
Other..................................................... 321 1,673
------- -------
$58,393 $43,976
======= =======
SALE OF LEAK DETECTION BUSINESS
During the fourth quarter of 1999, the Company entered into an agreement to
sell its leak detection business, which is part of the industrial measurement
product segment. For the years ended 1999, 1998 and 1997, the leak detection
business represented approximately $9,200,000, $10,300,000 and $10,400,000,
respectively, of total sales. The sale closed on January 17, 2000. As a result
of the transaction, the Company recorded a loss of $2,500,000 on the sale,
including the write-off of approximately $1,000,000 of goodwill that was
previously allocated to this line of business. The assets held for sale are
included in prepaid expenses and other current assets in the accompanying
consolidated balance sheet at December 31, 1999.
F-22
VEECO INSTRUMENTS INC. AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN OPERATIONS, GEOGRAPHIC AREA AND PRODUCT SEGMENT INFORMATION
Revenue and long-lived assets related to operations in the United States and
other foreign countries as of and for the years ended December 31, 1999, 1998
and 1997 are as follows:
[Enlarge/Download Table]
NET SALES TO
UNAFFILIATED CUSTOMERS LONG-LIVED ASSETS
------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
United States............. $227,421 $207,410 $218,970 $46,119 $43,133 $39,722
Foreign Countries......... 70,777 39,103 13,698 1,314 367 115
Eliminations.............. (51,592) (31,528) (9,258) -- -- --
-------- -------- -------- ------- ------- -------
$246,606 $214,985 $223,410 $47,433 $43,500 $39,837
======== ======== ======== ======= ======= =======
The aggregate foreign exchange gains and (losses) included in determining
consolidated results of operations were ($421,000), $774,000, and ($34,000) in
1999, 1998, and 1997, respectively.
The Company has three reportable segments: metrology, process equipment and
industrial measurement. The Company's metrology product line manufactures and
distributes to customers in the data storage and semiconductor industries, as
well as research and development centers and universities. The Company's process
equipment product line includes etch and deposition systems, primarily for data
storage and optical telecommunications applications. The Company's industrial
measurement products have applications in a wide range of industries including
electronic, aerospace, transportation and semiconductor.
The Company evaluates performance based on profit or loss from operations
before income taxes. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies. Costs
excluded from segment profit primarily consist of corporate expenses, including
income taxes, as well as other non-recurring charges for purchased in-process
technology, reorganization and asset impairment charges and merger-related
costs. Corporate expenses are comprised primarily of general and administrative
expenses.
The Company's reportable segments are business units that offer different
products. The reportable segments are each managed separately because they
manufacture and distribute distinct products with different production
processes.
The following represents the reportable product segments of the Company:
[Enlarge/Download Table]
NET SALES OPERATING INCOME (LOSS) TOTAL ASSETS
------------------------------ ------------------------------ ------------------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- -------- -------- -------- --------
Metrology...................... $112,172 $126,160 $112,751 $22,955 $26,328 $23,748 $ 64,959 $ 73,445 $ 68,025
Process equipment.............. 117,359 69,078 91,212 20,113 3,315 20,384 87,643 61,769 58,348
Industrial measurement......... 17,075 19,747 19,447 (2,000) (5) (381) 15,135 16,807 13,162
Unallocated corporate amount... -- -- -- (4,056) (2,022) (2,783) 97,542 27,210 26,416
Merger and reorganization
expenses..................... -- -- -- (2,600) (7,500) (2,250) -- -- --
Loss on sale of leak detection
business..................... -- -- -- (2,500) -- -- -- -- --
Write-off of purchased
in-process technology........ -- -- -- (1,300) -- (4,200) -- -- --
-------- -------- -------- ------- ------- ------- -------- -------- --------
Total.......................... $246,606 $214,985 $223,410 $30,612 $20,116 $34,518 $265,279 $179,231 $165,951
======== ======== ======== ======= ======= ======= ======== ======== ========
F-23
VEECO INSTRUMENTS INC. AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. FOREIGN OPERATIONS, GEOGRAPHIC AREA AND PRODUCT SEGMENT INFORMATION
(CONTINUED)
OTHER SIGNIFICANT ITEMS
[Download Table]
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
Depreciation and amortization expense:
Metrology....................................... $ 1,571 $1,674 $ 522
Process equipment............................... 3,498 2,698 1,589
Industrial measurement.......................... 129 122 15
Unallocated corporate........................... 632 518 358
------- ------ -------
Consolidated depreciation and amortization
expense....................................... $ 5,830 $5,012 $ 2,484
======= ====== =======
Expenditures for long-lived assets:
Metrology....................................... $ 4,230 $1,488 $13,216
Process equipment............................... 4,884 6,079 8,336
Industrial measurement.......................... 50 65 646
Unallocated corporate........................... 3,768 678 1,548
------- ------ -------
Consolidated expenditures for long-lived
assets........................................ $12,932 $8,310 $23,746
======= ====== =======
9. DEFINED CONTRIBUTION BENEFIT PLANS
The Company maintains three defined contribution plans under Section 401(k)
of the Internal Revenue Code. Principally all of the Company's domestic
full-time employees are eligible to participate in one of the three plans. Under
the plans, employees may contribute up to a maximum of 15% to 20% of their
annual wages, depending on the plan. Employees are immediately vested in their
contributions. Two of the plans provide for partial matching contributions by
the Company, which vest over a five-year period. Company contributions to the
plans were $782,000, $717,000 and $496,000 in 1999, 1998 and 1997, respectively.
10. SUBSEQUENT EVENTS
On February 29, 2000, the Company signed a definitive merger agreement with
CVC, Inc. ("CVC") of Rochester, New York. Under the terms of the agreement, CVC
shareholders will receive 0.43 shares of Veeco Common Stock for each share of
CVC Common Stock outstanding. The merger will be accounted for as a pooling of
interests, and as a result, historical financial data will be restated in future
reports. The merger is expected to close in the second quarter of 2000, pending
the vote of shareholders of both companies and other customary closing
conditions. Upon consumption of the merger, CVC will become a wholly-owned
subsidiary of the Company. CVC provides cluster tool manufacturing equipment
used in the production of evolving tape and disk drive recording head
fabrication, optical components, passive components, MRAM, bump metallization,
and next generation logic devices.
On February 11, 2000, Veeco entered into a strategic alliance with Seagate
Technology, Inc. ("Seagate") under which Veeco assumed production responsibility
for Seagate's internal Slider Level Crown ("SLC") product line and acquired
rights to commercialize such products for sale to third parties. The acquisition
was accounted for using the purchase method of accounting.
F-24
VEECO INSTRUMENTS INC. AND SUBISDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
On January 31, 2000, Monarch Labs, Inc. ("Monarch"), a developer and
manufacturer of automated quasi-static test systems for the data storage
industry, merged with and into a subsidiary of Veeco. Monarch was a privately
held company located in Longmont, Colorado. Under the terms of the merger,
Monarch shareholders received 282,224 shares of Veeco Common Stock. The merger
was accounted for as a pooling of interests transaction, however, as Monarch's
historical results of operations and financial position are not material in
relation to those of Veeco, financial information prior to the merger will not
be restated in future reports.
F-25
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
[Enlarge/Download Table]
COL. A COL. B COL. C COL. D COL. E
-------------------------------------- ------------ ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-------------------------------------- ------------ ---------- ---------- ---------- ----------
Deducted from asset accounts:
Year ended December 31, 1999:
Allowance for doubtful accounts... $1,725,000 $497,000 $ -- $706,000 $1,516,000
Valuation allowance on net
deferred tax assets............. 246,000 -- -- 12,000 234,000
---------- -------- --------- -------- ----------
$1,971,000 $497,000 $ -- $718,000 $1,750,000
========== ======== ========= ======== ==========
Deducted from asset accounts:
Year ended December 31, 1998:
Allowance for doubtful accounts... $1,005,000 $746,000 $ -- $ 26,000 $1,725,000
Valuation allowance on net
deferred tax assets............. 994,000 -- -- 748,000 246,000
---------- -------- --------- -------- ----------
$1,999,000 $746,000 $ -- $774,000 $1,971,000
========== ======== ========= ======== ==========
Deducted from asset accounts:
Year ended December 31, 1997:
Allowance for doubtful accounts... $ 803,000 $403,000 $ -- $201,000 $1,005,000
Valuation allowance on net
deferred tax assets............. 795,000 199,000 -- -- 994,000
---------- -------- --------- -------- ----------
$1,598,000 $602,000 $ -- $201,000 $1,999,000
========== ======== ========= ======== ==========
S-1
Dates Referenced Herein and Documents Incorporated by Reference
| Referenced-On Page |
|---|
| This ‘10-K405’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 12/31/05 | | 23 | | 51 | | | 10-K |
| | 10/14/02 | | 52 |
| | 12/31/01 | | 23 | | 51 | | | 10-K, 10-K/A |
| | 12/31/00 | | 23 | | 48 | | | 10-K |
| | 10/14/00 | | 48 |
| | 5/12/00 | | 1 | | | | | 8-K, DEF 14A |
| | 3/31/00 | | 51 | | | | | 10-Q |
| Filed on: | | 3/15/00 | | | | | | | S-4 |
| | 3/13/00 | | 29 | | 34 | | | 8-K |
| | 3/3/00 | | 30 | | 35 |
| | 3/1/00 | | 1 | | 16 |
| | 2/29/00 | | 3 | | 60 | | | 425, 8-K |
| | 2/11/00 | | 3 | | 60 | | | SC 13D/A |
| | 2/10/00 | | 38 |
| | 1/31/00 | | 3 | | 61 |
| | 1/17/00 | | 3 | | 58 |
| | 1/12/00 | | 29 | | | | | 8-K/A |
| | 1/1/00 | | 23 | | 48 |
| For Period End: | | 12/31/99 | | 1 | | 62 | | | 10-K/A |
| | 11/17/99 | | 29 | | | | | 8-K |
| | 11/4/99 | | 3 | | 46 | | | 8-K, 8-K/A |
| | 10/15/99 | | 49 |
| | 10/14/99 | | 3 | | 48 |
| | 7/9/99 | | 14 |
| | 5/27/99 | | 30 | | 35 | | | S-8 |
| | 5/21/99 | | 30 | | 35 |
| | 5/14/99 | | 30 | | 35 | | | DEF 14A |
| | 2/2/99 | | 4 |
| | 1/31/99 | | 30 | | 34 |
| | 12/31/98 | | 11 | | 62 | | | 10-K |
| | 9/30/98 | | 47 | | | | | 10-Q |
| | 6/30/98 | | 18 | | 47 | | | 10-Q |
| | 5/29/98 | | 5 | | 47 | | | 8-K, DEF 14A |
| | 2/28/98 | | 29 | | 39 | | | 8-K |
| | 1/1/98 | | 47 |
| | 12/31/97 | | 11 | | 62 | | | 10-K, 10-K/A |
| | 12/2/97 | | 31 | | 36 |
| | 9/5/97 | | 30 | | 35 | | | S-8 |
| | 7/25/97 | | 5 | | 48 | | | 8-K |
| | 6/30/97 | | 29 | | 34 | | | 10-Q |
| | 6/25/97 | | 30 | | 34 |
| | 5/15/97 | | 30 | | 35 | | | DEF 14A, PRE 14A |
| | 4/28/97 | | 29 | | 34 |
| | 4/10/97 | | 5 | | 49 |
| | 3/31/97 | | 29 | | 34 | | | 10-Q, 10-Q/A |
| | 12/31/96 | | 42 | | | | | 10-K, 10-K/A |
| | 7/31/96 | | 30 | | 34 |
| | 7/26/96 | | 30 | | 35 | | | 8-K, S-8 |
| | 6/30/96 | | 30 | | 34 | | | 10-Q, 10-Q/A |
| | 5/15/96 | | 30 | | 35 |
| | 2/1/96 | | 13 | | 56 |
| | 1/16/95 | | 31 | | 36 |
| | 12/31/94 | | 31 | | 52 |
| | 11/29/94 | | 13 |
| | 10/13/94 | | 31 | | 35 |
| | 9/5/94 | | 30 | | 35 |
| | 7/26/94 | | 30 | | 35 |
| | 6/6/94 | | 13 |
| | 5/27/94 | | 30 | | 35 |
| | 2/7/94 | | 31 | | 35 |
| | 12/31/93 | | 31 | | 35 |
| | 11/22/93 | | 31 | | 35 |
| | 9/5/92 | | 30 | | 35 |
| | 5/27/92 | | 30 | | 35 |
| List all Filings |
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