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- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 8-K/A
AMENDMENT NO. 3 TO
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
Date of Report (Date of earliest event reported): September 17, 2001
-----------------------------
VEECO INSTRUMENTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-16244 11-2989601
(STATE OR OTHER (COMMISSION (IRS EMPLOYER
JURISDICTION FILE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION)
100 SUNNYSIDE BOULEVARD, WOODBURY, NEW YORK 11797
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (516) 677-0200
Not applicable.
---------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
- --------------------------------------------------------------------------------
<Page>
The registrant hereby amends its Current Report on Form 8-K filed with the
Securities and Exchange Commission (the "Commission") on September 21, 2001, as
amended by Amendment No. 1 filed with the Commission on October 1, 2001 and
Amendment No. 2 filed with the Commission on October 2, 2001, to include the
financial information set forth below:
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
(i) The audited consolidated balance sheets of Applied Epi, Inc. and
Subsidiaries as of December 31, 2000 and 1999, and the related audited
consolidated statements of operations, stockholders' equity and cash flows
for the years then ended, and the related independent auditors' report are
included on pages 4 through 20.
(ii) The unaudited consolidated balance sheet of Applied Epi, Inc. and
Subsidiaries as of June 30, 2001, and the related unaudited consolidated
statements of operations and cash flows for each of the six month periods
ended June 30, 2001 and 2000 are included on pages 21 through 25.
(b) Pro forma financial information
The unaudited pro forma combined condensed consolidated balance sheet of
Veeco Instruments Inc. as of June 30, 2001 and the unaudited pro forma
combined condensed consolidated statements of operations for the year
ended December 31, 2000 and the six months ended June 30, 2000 and 2001,
respectively, are included on pages 26 through 32.
(c) Exhibits
Exhibit Description of Document
------- -----------------------
23.1 Consent of Deloitte & Touche LLP
2
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INDEX TO FINANCIAL STATEMENTS
Consolidated balance sheets of Applied Epi, Inc. and Subsidiaries as of
December 31, 2000 and 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended
Independent auditors' report 4
Consolidated balance sheets 5
Consolidated statements of operations 6
Consolidated statements of stockholders' equity 7
Consolidated statements of cash flows 8
Notes to consolidated financial statements 9
Consolidated balance sheet of Applied Epi, Inc. and Subsidiaries as of June 30,
2001 and the related consolidated statements of operations and cash flows for
each of the six month periods ended June 30, 2001 and 2000 (unaudited)
Consolidated balance sheet 21
Consolidated statements of operations 22
Consolidated statements of cash flows 23
Notes to consolidated financial statements 24
Pro forma Combined Condensed Consolidated Financial Statements of Veeco
Instruments Inc. and Subsidiaries (unaudited)
Pro forma combined condensed consolidated balance sheet
as of June 30, 2001 27
Pro forma combined condensed consolidated statement
of operations for the year ended December 31, 2000 28
Pro forma combined condensed consolidated statement
of operations for the six months ended June 30, 2000 29
Pro forma combined condensed consolidated statement
of operations for the six months ended June 30, 2001 30
Notes to pro forma combined condensed consolidated
financial information 31
3
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INDEPENDENT AUDITORS' REPORT
To the Boards of Directors and Stockholders of
Applied Epi, Inc. and Subsidiaries
Saint Paul, Minnesota
We have audited the accompanying consolidated balance sheets of Applied Epi,
Inc. and Subsidiaries (the Company) as of December 31, 2000 and 1999 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Applied Epi, Inc.
and Subsidiaries as of December 31, 2000 and 1999 and the consolidated results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
March 16, 2001
(September 17, 2001 as to the last paragraph of Note 11)
4
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<Table>
<Caption>
APPLIED EPI, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
- ------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 483,344 $ 1,478,464
Accounts receivable (less allowance for doubtful accounts of
$120,869 and $60,000 at December 31, 2000 and 1999) 4,379,681 2,939,386
Due from related party 589,932
Inventories 8,861,640 2,505,278
Prepaid expenses and advances 171,818 105,123
Other 150,921
------------ ------------
Total current assets 14,047,404 7,618,183
PROPERTY AND EQUIPMENT:
Land 4,108,401 1,825,000
Building 5,156,776 4,280,040
Equipment, furniture, and fixtures 2,628,597 1,190,558
------------ ------------
Total 11,893,774 7,295,598
Less accumulated depreciation 1,011,310 662,495
------------ ------------
Net property and equipment 10,882,464 6,633,103
GOODWILL, net of accumulated amortization 585,713 715,871
OTHER ASSETS 904,273 847,468
------------ ------------
$ 26,419,854 $ 15,814,625
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 3,000,000
Current portion of long-term debt 716,060 $ 325,914
Notes payable - related parties 500,000
Accounts payable 2,631,770 494,396
Deferred profit 1,671,299 469,702
Accrued compensation 647,173 311,726
Current portion of employee performance plan 60,243 623,252
Accrued warranty expenses 298,332 146,881
Other accrued expenses 578,561 31,700
------------ ------------
Total current liabilities 9,603,438 2,903,571
EMPLOYEE PERFORMANCE PLAN, less current portion
LONG-TERM DEBT, less current portion 6,059,213 5,018,296
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value - 25,000,000 shares authorized,
none issued and outstanding
Common stock, $0.01 par value - 100,000,000 shares authorized,
27,003,725 shares issued and outstanding 270,037 270,037
Additional paid-in capital 24,885,467 593,973
Deferred stock-based compensation (2,192,931)
Retained (deficit) earnings (12,205,370) 6,390,388
------------ ------------
Total stockholders' equity 10,757,203 7,254,398
------------ ------------
$ 26,419,854 $ 15,814,625
============ ============
</Table>
See notes to consolidated financial statements.
5
<Page>
<Table>
<Caption>
APPLIED EPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999
- -------------------------------------------------------------------------------------
2000 1999
SALES $ 24,885,535 $ 15,388,941
COST OF SALES (exclusive of $2,820,359
reported below as stock-based compensation
in 2000) 13,801,118 8,579,349
------------ ------------
GROSS PROFIT 11,084,417 6,809,592
OPERATING EXPENSES:
Selling expenses (exclusive of $1,595,949
reported below as stock-based compensation
in 2000) 2,788,067 1,828,934
General and administrative expenses (exclusive
of $14,887,077 reported below as stock-based
compensation in 2000) 2,564,938 1,001,316
Research and development expenses (exclusive
of $1,599,979 reported below as stock-based
compensation in 2000) 2,177,180 471,561
Stock-based compensation 20,903,364
------------ ------------
Total operating expenses 28,433,549 3,301,811
------------ ------------
(LOSS) INCOME FROM OPERATIONS (17,349,132) 3,507,781
INTEREST AND OTHER (EXPENSE) INCOME:
Interest expense (581,605) (437,379)
Nonrecurring financing costs (523,346)
Other, primarily interest income from related
party in 1999 76,208 2,021,446
------------ ------------
Total interest and other (expense) income (1,028,743) 1,584,067
------------ ------------
NET (LOSS) INCOME $(18,377,875) $ 5,091,848
============ ============
</Table>
See notes to consolidated financial statements.
6
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APPLIED EPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<Table>
<Caption>
Note
(Payable to)
Receivable
Common Stock Additional Deferred Retained From Total
------------------------- Paid-in Stock-Based Earnings Related Stockholders'
Amount Shares Capital Compensation (Deficit) Party Equity
Balance at January 1, 1999 $ 270,037 27,003,725 $ 593,973 $ 1,298,540 $ (6,269,168) $ (4,106,618)
Net income 5,091,848 5,091,848
Advances to related parties (2,117,038) (2,117,038)
Repayments from related parties
(net of discount) 8,386,206 8,386,206
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 270,037 27,003,725 593,973 6,390,388 -- 7,254,398
Net loss (18,377,875) (18,377,875)
Deferred stock-based
compensation 12,403,082 $(12,403,082)
Amortization of deferred
stock-based compensation 10,210,151 10,210,151
Majority stockholder sale
deemed capital contribution 5,494,699 5,494,699
Dissolution of employee
performance plan 6,393,713 6,393,713
Distributions to stockholders (217,883) (217,883)
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2000 $ 270,037 27,003,725 $ 24,885,467 $ (2,192,931) $(12,205,370) $ -- $ 10,757,203
============ ============ ============ ============ ============ ============ ============
</Table>
See notes to consolidated financial statements.
7
<Page>
<Table>
<Caption>
APPLIED EPI, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999
- -------------------------------------------------------------------------------------------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(18,377,875) $ 5,091,848
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 481,046 292,733
Discount on note receivable from related party (1,532,000)
Gain on sale of property and equipment (6,670)
Stock-based compensation 20,903,364
Changes in operating assets and liabilities:
Accounts receivable (1,440,295) (433,786)
Inventories (6,356,362) (672,535)
Prepaid expenses and advances (241,801) 129,352
Accounts payable 2,137,374 174,542
Deferred profit 1,201,597 (89,727)
Accrued expenses 1,027,589 406,345
------------ ------------
Net cash (used in) provided by operating activities (672,033) 3,366,772
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (4,675,329) (7,274,422)
Proceeds from sale of property and equipment 81,750
Payments from related party on note receivable 9,918,206
Advances to related party on note receivable (2,117,038)
------------ ------------
Net cash (used in) provided by investing activities (4,593,579) 526,746
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit 3,000,000
Payments for loan origination fees (32,620) (109,378)
Proceeds from issuance of long-term debt 1,785,000 5,100,000
Proceeds from issuance of notes payable - related parties 500,000
Payments on notes payable (109,727) (7,313,943)
Payments on notes payable - related parties (2,135,000)
Payments on notes payable - former stockholders (244,210) (255,648)
Distributions to stockholders (127,951)
------------ ------------
Net cash provided by (used in) financing activities 4,270,492 (4,213,969)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (995,120) (320,451)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,478,464 1,798,915
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 483,344 $ 1,478,464
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 558,289 $ 499,310
Income taxes paid (refunded) 2,566 (58,068)
Nonmonetary exchange of amount due from related party
for note payable to related party 500,000
Nonmonetary distribution to majority stockholder for
amount due from related party 89,932
</Table>
See notes to consolidated financial statements.
8
<Page>
APPLIED EPI, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Applied Epi, Inc. (formerly Chorus Corporation) was incorporated in
Minnesota in 1986 and was 81%- and 90%-owned by the Majority Stockholder
at December 31, 2000 and 1999, respectively. Applied Epi, Inc. (the
Company) is a provider of epitaxial equipment and related components
used to produce compound semiconductors for the fiber optic, wireless,
and lighting and display markets, as well as other consumer
applications.
In 1992, Applied Epi International, Inc. (formerly Chorus International
Corporation) was incorporated as an Interest Charge Domestic
International Sales Corporation (IC-DISC). Applied Epi International,
Inc. was formed to perform foreign sales activities and to obtain tax
benefits related to the Company's foreign sales.
In 1993, Applied Epi Europe, Inc. (formerly EPI Europe, Ltd.) was
incorporated as a Minnesota company. Applied Epi Europe, Inc. was
formed for the purpose of sales and distribution of the Company's
products in Europe.
In December 2000, the Board of Directors (the Board) declared a
five-for-one stock split effective December 31, 2000. All stock option,
performance unit, and share data have been restated to reflect the split.
In September 2000, the Company entered into a tax-free transaction
pursuant to Section 351 of the Internal Revenue Code and issued 122,005
shares of common stock to the Majority Stockholder in exchange for 100%
of the shares of Applied Epi International, Inc. and Applied Epi Europe,
Inc., resulting in these entities becoming wholly owned subsidiaries of
the Company. Since Applied Epi International, Inc. and Applied Epi
Europe, Inc. were under the common control of the Company due to the
Majority Stockholder's controlling interest in all three entities, the
transaction has been accounted for on an "as if pooling" basis. The
consolidated financial statements represent the financial position,
results of operations, and cash flows of the Company, Applied Epi
International, Inc., and Applied Epi Europe, Inc. for the period from
January 1, 1999 to December 31, 2000 as if the transaction had occurred
at the beginning of the earliest period presented. All significant
intercompany accounts and activities have been eliminated in these
consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT'S USE OF ESTIMATES - The preparation of the consolidated
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
9
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BUSINESS RISKS - The nature of the Company's operations exposes the Company
to certain business risks. The markets for the Company's products are
competitive and subject to technological change and evolving industry
standards that may significantly alter the operation of the Company and its
potential customers. Also, the Company is dependent on certain key
employees.
CONCENTRATION OF CREDIT RISK - The Company had three and two different
customers that accounted for 57% and 42% of consolidated trade accounts
receivable at December 31, 2000 and 1999, respectively. The Company had
sales to an unrelated international distributor of its products who
individually accounted for 20% of consolidated sales in 2000. The Company
had no customers who individually accounted for more than 10% of
consolidated sales in 1999. During 2000 and 1999, the Company's top ten
customers accounted for an aggregate of 67% and 46% of sales, respectively.
The Company periodically reviews all customer accounts receivable for
collectibility. It generally does not require collateral for its trade
accounts receivable. The Company manages credit risk by evaluating
creditworthiness regularly. Estimated losses within accounts receivable are
reserved through establishment of an allowance for doubtful accounts.
Customer accounts considered by management to be uncollectible are written
off.
FAIR VALUE OF FINANCIAL INSTRUMENTS - At December 31, 2000 and 1999, the
Company's financial instruments included cash and cash equivalents,
accounts receivable, accounts payable, and debt. At December 31, 2000 and
1999, the fair values of cash and cash equivalents, accounts receivable,
and accounts payable approximated carrying values because of the short-term
nature of these instruments. The carrying amounts of the line of credit and
long-term debt are considered to be representative of their respective fair
values as their interest rates are generally based on market rates.
FOREIGN CURRENCY TRANSLATION - Assets and liabilities of Applied Epi
Europe, Inc. are translated from U.K. pounds to U.S. dollars at year-end
rates, and the statements of operations are translated at average
exchange rates during the year. As the functional currency of Applied
Epi Europe, Inc. is the U.S. dollar, all other translation adjustments
are recorded in the consolidated statements of operations within other
income (expense). Foreign currency losses were $(264,480) and $(41,441)
during 2000 and 1999, respectively.
REVENUE RECOGNITION - The Company currently manufactures high-volume
production, low-volume production, and research Molecular Beam Epitaxy
(MBE) systems and performance products (effusions cells, software, and
accessories). The Company's revenue recognition policies are in accordance
with the Securities and Exchange Commission's (SEC) Staff Accounting
Bulletin (SAB) No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. The
Company's revenue recognition policies for its products are as follows:
High-Volume Production, Low-Volume Production, and Research Systems -
For the majority of these systems, the customer is invoiced a portion
of the contract price upon receipt of a signed purchase order (ranging
from 0%-30%). Once the Company manufactures the system, the customer
witnesses a factory acceptance test at the Company's facility and
signs an acceptance form. The production system is then disassembled,
shipped to the customer's site, and reassembled by the Company and
customer personnel. Upon shipment, an additional portion of the
contract price is billed to the customer (ranging from 50%-90%). Once
the system has been reassembled at the customer's plant, generally a
final site acceptance test is performed and the customer signs a final
acceptance form. In some instances, final customer acceptance may also
require achieving certain performance
10
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specifications. Upon receipt of final customer acceptance, the
remaining unbilled contract price is invoiced to the customer (ranging
from 5%-20%) and all revenue from the contract is recognized. Until
final customer acceptance has been received, amounts that have been
billed to the customer net of the cost of systems awaiting final
customer acceptance are recorded as deferred profit. At the time
of final customer acceptance, a warranty reserve for the system is
also established.
Performance Products - Revenue is recognized upon shipment of product
to the customer. Upon shipment, the customer is invoiced for the
purchase price and payment is generally due within 30 days.
Freight billed to customers is recorded in sales, and freight costs
are included in cost of sales.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market. The Company includes in inventory all direct
material, labor, and production costs.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at historical
cost and are depreciated using both straight-line and accelerated methods
over the following estimated useful lives:
Building 39 years
Equipment, furniture, and fixtures 5 - 10 years
TAX INCREMENT FINANCING RECEIVABLE - On September 1, 1998, the Company
entered into a development agreement with the Economic Development
Authority of the Town of White Bear, Minnesota (the Authority) and
Continental Technology Center, LLP (Continental). Under the terms of the
agreement, the Authority was to pay Continental tax increment assistance on
a pay-as-you-go basis commencing February 1, 2001. The Authority was to pay
Continental 80% of the tax increments that it received and retained with
respect to real estate taxes paid during the preceding calendar year. Such
payments by the Authority were to continue until the earlier of (i)
February 1, 2009 or (ii) until Continental had received the principal
amount of $656,000, together with interest on the unpaid principal balance,
at an annual rate of 9.75% (such interest to accrue from January 1, 1999).
The Company leased approximately 90% of the building built by Continental
from July 1998 until it purchased the building and adjacent land from
Continental for $6,825,000 in December 1999. In connection with this
purchase, the tax increment financing arrangement was assigned to the
Company. In connection with this assignment, the Company recorded a
receivable in the amount of the expected future payments to be received of
$719,960 and reduced its basis in the building by that amount.
GOODWILL - Goodwill of $1,301,583 is related to the 1995 acquisition of
Superior Vacuum Technology, Inc. (SVT) and is shown in the balance sheets
net of accumulated amortization of $715,870 and $585,712 at December 31,
2000 and 1999, respectively. Goodwill is being amortized on a straight-line
basis over ten years. The Company periodically reviews goodwill to assess
recoverability. The Company evaluates the recoverability by measuring the
unamortized balance of such goodwill against estimated future cash flows.
If events or circumstances indicate
11
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that the carrying amount of such asset may not be recoverable, goodwill
would be adjusted to the present value of the estimated future cash flows.
Based on evaluations performed, there was no adjustment to the carrying
value of goodwill during 2000 and 1999.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates its long-lived
assets (including certain property and equipment) for impairment if events
or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. The Company evaluates the recoverability of
long-lived assets by measuring the unamortized balance of the long-lived
assets against estimated undiscounted future cash flows. If such analysis
were to indicate that the carrying amount of such assets may not be
recoverable, the assets would be adjusted to estimated fair value based on
the present value of the estimated future cash flows. There was no
adjustment to the carrying value of long-lived assets in 2000 and 1999.
ACCRUED WARRANTY EXPENSES - The Company warrants its system and nonsystem
products for periods of one and two years, respectively. The Company
provides for estimated and known warranty costs through a warranty reserve.
The warranty reserve of $298,332 and $146,881 at December 31, 2000 and
1999, respectively, represents the Company's estimated liability for known
and unknown defective items not yet repaired.
RESEARCH AND DEVELOPMENT - The Company incurs costs related to research and
development in connection with new product development and the enhancement
of existing products. Research and development costs consist primarily of
wages and related employee benefits and are charged to expense as incurred.
STOCK-BASED COMPENSATION - The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. Accordingly, compensation expense has been recorded based on the
intrinsic value amortized over the vesting period. In addition, the Company
has adopted Financial Accounting Standards Board Interpretation No. (FIN)
44, ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN
INTERPRETATION OF APB OPINION NO. 25.
FIN 44 clarifies the application of APB Opinion No. 25 for only certain
issues. Among other issues, FIN 44 clarifies (a) the definition of employee
for purposes of applying APB Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 had
no effect on the Company's accounting policies concerning stock-based
compensation.
INCOME TAXES - Beginning with tax year 1997, the Company elected to be
recognized as an S Corporation under the provisions of the Internal Revenue
Code (the Code) and, as such, does not pay federal or state income taxes.
The income from this corporation is included in the individual income tax
returns of the stockholders, who are then responsible for the related
income taxes.
In 1997, Applied Epi Europe, Inc. also elected to be recognized as an S
Corporation. As discussed in Note 1, Applied Epi Europe, Inc. became a
subsidiary of Applied Epi, Inc. in September 2000. Applied Epi Europe,
Inc. is currently a C Corporation. As a result, Applied Epi Europe,
Inc. will be required to pay approximately $1,000 in federal corporate
income taxes for 2000.
12
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As an IC-DISC, Applied Epi International, Inc. is not required to pay
federal corporate income taxes. Approximately $465,000 and $838,000 of
income from Applied Epi International, Inc. was not subject to income
taxes in 2000 and 1999, respectively. As required to retain its status
as an IC-DISC, it is the intention of management to reinvest such
earnings indefinitely.
NEW ACCOUNTING STANDARD - On January 1, 2001, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, as amended by SFAS No. 138, ACCOUNTING
FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES. SFAS No.
133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that all derivatives,
including those embedded in other contracts, be recognized as either assets
or liabilities and that those financial instruments be measured at fair
value. The accounting for changes in the fair value of derivatives depends
on their intended use and designation. Management has reviewed the
requirements of SFAS No. 133 and has determined that they have no
freestanding or embedded derivatives. All contracts that contain provisions
meeting the definition of a derivative also meet the requirements of, and
have been designated as, normal purchases or sales.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1999
consolidated financial statements to conform with the 2000 presentation.
These reclassifications had no effect on net income or total stockholders'
equity as previously reported.
3. SEGMENTS
Management considers all of the Company's operating activities as one
reportable segment due to commonality in products, production process,
types or classes of customers, and method of product distribution.
Sales by geographic area (allocated by the customer's location) were as
follows for the years ended December 31:
<Table>
<Caption>
2000 1999
United States $16,060,617 $ 9,281,145
Other countries 8,824,918 6,107,796
----------- -----------
$24,885,535 $15,388,941
<Caption>
4. INVENTORIES
Inventories consist of the following at December 31:
2000 1999
Raw materials $3,739,656 $1,379,734
Work-in-progress 5,056,987 1,030,018
Finished goods 64,997 95,526
---------- ----------
$8,861,640 $2,505,278
</Table>
13
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5. DEBT
Short-term debt consists of the following at December 31:
2000 1999
Line of credit $3,000,000
REVOLVING CREDIT AGREEMENT - In June 2000, the Company entered into a
revolving credit agreement with U.S. Bank, National Association (the
Revolver), which was amended in November 2000. The Revolver consists of a
revolving loan of up to $5,000,000. The Revolver requires the Company to
pay interest on the outstanding debt on a monthly basis at a floating rate
equal to the sum of (a) the adjusted Eurodollar rate (as defined) plus the
applicable margin (as defined). The Company's borrowing base under the
Revolver is equal to the sum of (1) the lesser of 50% of eligible inventory
or $3,000,000 plus (2) 80% of eligible receivables. The outstanding
principal together with all unpaid interest is due on July 1, 2001. As of
December 31, 2000, the outstanding balance under the Revolver was
$3,000,000 and total available borrowing capacity was approximately
$4,595,000.
The credit agreement prohibits the Company from paying dividends or making
any cash distributions on the Company's stock other than distributions to
allow the Company's stockholders to pay their respective income taxes as a
result of the Company's S Corporation status, without U.S. Bank's prior
written consent.
The Revolver is secured by substantially all of the Company's inventory,
equipment, and general intangibles. The Revolver is guaranteed by the
Majority Stockholder. Also, the Revolver requires the Company to meet
certain affirmative and negative covenants. As of December 31, 2000, the
Company was in compliance with the financial covenants contained in the
Revolver.
Long-term debt consists of the following at December 31:
<Table>
<Caption>
2000 1999
Term note payable for building mortgage, due in monthly installments
through December 2019, variable interest rate
(7.91% at December 31, 2000) $4,406,619 $4,500,000
Term note payable for land purchase, due December 2001,
variable interest rate (9.5% at December 31, 2000) 600,000 600,000
Term note payable for land purchase, due in monthly
installments through August 2005, variable interest rate
(8.54% at December 31, 2000) 1,633,654
Note payable to economic development authority, due
December 2008 (0% at December 31, 2000) 135,000
Notes payable to former stockholders, paid January 2000 244,210
---------- ----------
6,775,273 5,344,210
Less current portion 716,060 325,914
---------- ----------
$6,059,213 $5,018,296
========== ==========
</Table>
14
<Page>
Long-term debt maturities at December 31 were as follows:
<Table>
2001 $ 716,060
2002 125,665
2003 136,067
2004 147,331
2005 and thereafter 5,650,150
----------
$6,775,273
</Table>
CREDIT AGREEMENTS - In December 1999, the Company entered into a credit
agreement with Jackson National Life Insurance Company. The credit
agreement consists of a $4,500,000 note payable over a term of 20 years.
The note requires monthly payments of principal and interest of $39,081 at
the greater of the annual LIBOR rate plus 2.05% or 6%. The proceeds of the
note were used for the purchase of land and the Company's building in Saint
Paul, Minnesota. The note is secured by a lien on the land and building and
a security interest in certain property, fixtures, and equipment. The note
is also guaranteed by the Majority Stockholder.
In December 1999, the Company entered into a credit agreement with North
American Banking Company (NABC). The agreement consists of a $600,000
unsecured note, which is payable at maturity in December 2001. The note
requires monthly interest payments at NABC's prime rate. The proceeds of
the note were used for the purchase of land. The credit agreement requires
the Company to maintain certain financial covenants as to minimum tangible
net worth and current ratio. As of December 31, 2000, the Company was in
compliance with the provisions of the financial covenants of the credit
agreement.
In July 2000, the Company entered into a term loan credit agreement with
U.S. Bank (the Term Loan). The Term Loan consists of a $1,650,000 note
payable beginning September 1, 2000. The Term Loan requires monthly
payments of principal and interest of $12,694. The proceeds of the note
were used for the purchase of land. The Term Loan is secured by
substantially all of the Company's inventory, equipment, and general
intangibles. The Term Loan is guaranteed by the Majority Stockholder.
Interest on the outstanding debt is equal to a floating rate equal to the
sum of the adjusted Eurodollar rate (as defined) plus 1.9%. The outstanding
principal together with all unpaid interest is due on August 1, 2005.
NOTES PAYABLE - RELATED PARTIES - In 1999, the Majority Stockholder
advanced the Company $500,000. The note payable required monthly payments
of interest only at prime plus 0.5%. In April 2000, the Company entered
into a nonmonetary exchange whereby the note payable to the Majority
Stockholder was offset against the amount due from NuVision LLC (see Note
6). The difference of $89,932 was recorded as a nonmonetary stockholder
distribution.
6. RELATED-PARTY TRANSACTIONS AND AGREEMENTS
DUE FROM RELATED PARTY - As of December 31, 1999, the Company was owed
$589,932 by NuVision LLC. NuVision LLC and the Company have the same
Majority Stockholder. The balance due was repaid in a nonmonetary exchange
in April 2000 (see Note 5).
NOTES RECEIVABLE AND STOCK RECEIVED FROM RELATED PARTY - During 1998 and
until June 1999, the Company utilized its credit facility to advance funds
to Spectracom, Inc. (Spectracom), which was majority-owned by the Company's
Majority Stockholder. In June 1999, Spectracom was sold to an unrelated
third party and all amounts due to the Company were repaid. The advances to
Spectracom were at a favorable interest rate to Spectracom, for which
Spectracom compensated
15
<Page>
the Company by issuing 3,070,880 shares of Spectracom's common stock to the
Company. Management of the Company estimated that the fair value of the
stock granted to the Company was approximately $3,137,000, of which
$1,605,000 was recorded as interest income in 1998 with the remaining
amount of $1,532,000 reflected in the December 31, 1998 balance sheet as
discount on notes receivable from related party. Upon receipt of the
Spectracom stock, the Company distributed the Spectracom stock to the
Company's stockholders. This discount was recorded as interest income
ratably by the Company until June 1999, when the remaining discount was
recognized as interest income when Spectracom was sold and repaid all
amounts owed to the Company.
MAJORITY STOCKHOLDER SALES OF COMMON STOCK - In April 2000, the Majority
Stockholder sold 711,390 common shares of the Company to four current
employees at $1.12 per share. This transaction has been accounted for in
accordance with the AICPA's Accounting Interpretation No. 1 of APB Opinion
No. 25. Accordingly, a charge to compensation expense was made to the
extent the price was below the fair value of the shares sold and a
corresponding entry was made to record additional paid-in capital of
$5,494,699 in 2000.
7. STOCK OPTION PLANS AND STOCK-BASED COMPENSATION
STOCK OPTION PLANS - In June 1993, the Board approved the 1993 Stock Option
Plan under which the Company has reserved 7,500,000 shares of common stock
for the issuance of incentive stock options (ISO) and nonqualified stock
options (NQO) to officers and other key employees. In July 2000, the Board
approved the 2000 Stock Plan under which the Company has reserved 7,500,000
shares of common stock for the issuance of ISOs, NQOs, and restricted stock
to executives, key employees, consultants, and directors. The provisions of
the plans, as amended, state that the term of any ISO shall be fixed by the
Board. However, no ISO shall be exercisable more than ten years after the
date of grant. The term of any ISO granted to an employee who owns more
than 10% of the combined voting power of all classes of stock of the
Company is limited to no more than five years from the date of grant.
For employees who do not own more than 10% of the combined voting power of
all classes of stock of the Company, the ISO exercise price shall not be
less than fair value at the date of grant. For employees who own more than
10% of the combined voting power of all classes of stock of the Company,
the ISO exercise price shall not be less than 110% of the fair value at the
date of grant. The NQO exercise price per share is any price deemed
appropriate by the Board.
Options on common shares granted and outstanding, as well as the weighted
average exercise price, are shown below:
<Table>
<Caption>
Options Outstanding
------------------------------------------------
Weighted Weighted Weighted
Average 2000 Average Average
1993 Stock Exercise Stock Exercise Options Exercise
Option Plan Price Plan Price Exercisable Price
Outstanding at December 31, 1999
Granted 2,420,310 $ 3.96 357,495 $ 10.00
---------- ----------
Outstanding at December 31, 2000 2,420,310 3.96 357,495 10.00 1,164,305 $ 1.43
========== ========== =========== ========
</Table>
16
<Page>
The following table summarizes information for options outstanding and
exercisable at December 31, 2000:
<Table>
<Caption>
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Number of Remaining Exercise Number of Exercise
Range of Prices Shares Life Price Shares Price
$ 1.12 1,307,310 9.3 years $ 1.12 1,124,310 $ 1.12
6.00 600,500 9.3 6.00
8.00 300,000 9.5 8.00
10.00 569,995 9.6 10.00 39,995 10.00
----------- ------------
2,777,805 9.4 5.44 1,164,305 1.43
=========== ============
</Table>
As of December 31, 2000, there were 5,079,690 and 7,142,505 shares
available for grant under the 1993 Stock Option Plan and 2000 Stock Plan,
respectively.
STOCK-BASED COMPENSATION - Stock options granted during 2000 contained
exercise prices that were management's best estimate of fair value of the
underlying common stock on the date of grant. However, subsequent to the
grant date, management concluded that certain grants, which occurred after
the Company's development of a new high-volume MBE system, may not have
fully reflected the impact of this event. Management has concluded that for
the grants made in April and May 2000, the fair value per share on the date
of grant was $8.84. For subsequent grants, management has concluded that
the fair value per share was $10.00. During 2000, compensation cost
aggregated $12,403,082, which will be amortized to expense over the
three-year vesting period of the options. This compensation is being
recognized on an accelerated basis using the model presented in paragraph
24 of FIN 28. Accordingly, amortization of these options, which vest over
three years, will be approximately 48%, 37%, and 15%, respectively.
However, in August 2000, vesting was accelerated on 1,124,310 options
originally issued in April 2000 to two officers of the Company. This
accelerated vesting resulted in a new measurement date and a noncash charge
of $8,684,170. For the year ended December 31, 2000, compensation expense
related to these grants aggregated $10,210,151.
PRO FORMA DISCLOSURES - As described in Note 2, the Company uses the
intrinsic value method to measure compensation expense associated with
grants of stock options to employees. If the Company had used the fair
value method to measure compensation, the Company's pro forma net loss
would have been approximately $19,200,000 for the year ended December 31,
2000.
The fair value of each option grant was estimated on the grant date using
the Black-Scholes option pricing model with the following weighted average
assumptions during the year ended December 31, 2000:
<Table>
Expected life of option grants 3 years
Risk-free interest rate 6.0%
Volatility 0.0%
Dividend yield 0.0%
</Table>
The Black-Scholes option pricing model was designed to value readily
tradable stock options with relatively short lives. However, management
believes that the assumptions used to value the options and the model
applied yield a reasonable estimate of the fair value of the grants made
under the circumstances.
17
<Page>
8. EMPLOYEE PERFORMANCE PLAN
The Company had a nonqualified employee performance plan (the Plan). The
Plan provided for an annual discretionary award of performance units
determined by the Board. The value per unit was determined at the end of
the current year based on cumulative adjusted net income, as defined, for
the three-year period then ended. The Company recognized expense for units
granted in the current year and the change in the value of the unpaid units
granted in prior years. Units exercised in a given year were paid in cash
at the value per unit determined on the last calendar year-end. The Company
expensed approximately $16,000 and $468,500 related to the Plan during 2000
and 1999, respectively. During 2000 and 1999, the Company paid $22,648 and
$104,305 to participants who redeemed 5,662 and 34,538 units, respectively.
Prior to the Plan's termination, the value of a performance unit as of
December 31, 2000 was $0.772.
As of December 31, 2000, the Plan was terminated by the Board. In
connection with the termination of the Plan, the Company approved a plan to
grant options to purchase shares of the Company's restricted common stock
in exchange for the performance units.
In exchange for the employees' (the Optionees) performance units in and all
rights under the Plan, including all rights to receive cash under the Plan,
the Company granted options on January 1, 2001 to the Optionees to purchase
shares of restricted common stock. Each option received in exchange for a
performance unit has an exercise price of $0.05 per share and was 100%
vested upon grant. Upon exercise of the option, the Optionees shall receive
shares of the Company's restricted common stock. The Optionees agree that
the shares of restricted stock shall not be sold, exchanged, transferred,
pledged, hypothecated, or otherwise disposed of until the earlier of the
following: (1) six months after the consummation of a firm commitment,
underwritten initial public offering of the Company's common stock; or (2)
a sale of the Company (as defined). However, a one-time exception allowed
Optionees to sell their stock to the Company for cash on March 15, 2001.
Certain employees exercised options for 83,440 shares of common stock and
subsequently sold those shares to the Company at the Plan's termination
value. The difference between the termination value of a performance unit
and the exercise price of the options for these employees aggregated
$60,243. This amount is recorded as a current liability at December 31,
2000.
In connection with the termination of the Plan, the Company recorded
additional paid-in capital of $6,393,713 representing the value of the
1,655,400 options issued on January 1, 2001 to those employees not electing
the one-time exception described above. The options issued in connection
with the termination of the Plan are not included in the tables in Note 7.
The Company recorded $5,198,514 of stock-based compensation in connection
with the termination of the Plan based upon an independent third-party
valuation.
9. 401(k) PLAN
The Company adopted a 401(k) plan effective April 1995. Employees become
eligible to participate in the 401(k) plan after their first month of
employment. The 401(k) plan is intended to qualify under Section 401(k) of
the Code, so that contributions to the 401(k) plan by employees or the
Company and the investment earnings thereon are not taxable to the
employees until withdrawn. If the 401(k) plan qualifies under Section
401(k) of the Code, the Company's contributions will be deductible when
made. Employees may elect to reduce their current
18
<Page>
compensation by up to the statutorily prescribed annual limit of $10,500 in
2000 and to have those funds contributed to the 401(k) plan. The 401(k)
plan permits, but does not require, the Company to make additional matching
contributions on behalf of all participants. During 2000 and 1999, the
Company did not make any contributions to the 401(k) plan.
10. COMMITMENTS AND CONTINGENCIES
LEASES - In 1998, the Company entered into an operating lease for its
facility. In December 1999, the Company purchased its facility and an
adjacent lot for $6,825,000 and canceled the operating lease. Rent expense
prior to the lease cancellation totaled approximately $582,000 for the year
ended December 31, 1999.
PURCHASE COMMITMENT - At December 31, 2000, the Company had a contract with
Kalway Construction Company for approximately $2,193,000 for construction
of a new building adjacent to its Saint Paul, Minnesota facility. At
December 31, 2000, approximately $842,000 of the contract had been paid.
Such construction-in-progress is included in buildings on the balance
sheet.
LITIGATION - In the ordinary course of business, the Company is subject to
various lawsuits, claims, and proceedings relating to the conduct of its
businesses. The Company records liabilities when loss amounts are
determined to be probable and reasonably estimable. Although the outcome of
litigation cannot be predicted with certainty and some lawsuits, claims, or
proceedings may be disposed of unfavorably to the Company, management
believes, based on facts presently known, that the outcome of such legal
proceedings and claims will not have a material adverse effect on the
Company's financial position, liquidity, or future results of operations.
11. SUBSEQUENT EVENTS
SUBORDINATED NOTES - In February 2001, the Company issued $5,000,000 of a
$10,000,000 commitment in subordinated notes to certain officers,
directors, and stockholders of the Company. Interest at 10% per annum is
payable semiannually in arrears, and the entire outstanding principal
balance is due in February 2004. Subject to certain restrictions, the notes
can be prepaid at any time in increments of $500,000 with the following
penalties:
Months Penalty
1 - 12 5% fee on the amount of the prepayment
13 - 24 4% fee on the amount of the prepayment
Over 24 No prepayment penalty
The notes are required to be prepaid without penalty upon an initial public
offering (as defined), a change in control (as defined), or an event of
default (as defined). The notes are unsecured and subordinated to all of
the Company's existing and future indebtedness.
In exchange for the $10,000,000 commitment in subordinated notes, the
Company issued detachable warrants to purchase 1,150,000 shares of common
stock. The warrants have an exercise price of $5.40 per share, contain
certain antidilution provisions, and have a term of five years. The
warrants were valued at approximately $1,088,000 based on the Black-Scholes
option pricing model and will be accounted for as additional paid-in
capital. The resulting discount on
19
<Page>
the subordinated notes will be amortized as additional interest expense
over the term of the debt using the effective interest method.
MERGER - On September 6, 2001, Veeco Instruments Inc. (Veeco) entered into
an Agreement and Plan of Merger, (the Merger Agreement), by and among the
Company, Veeco Acquisition Corp. (Acquisition), Veeco, and certain
stockholders of the Company. On September 17, 2001, pursuant to the Merger
Agreement, Acquisition merged with and into the Company. As a result, the
Company became a wholly owned subsidiary of Veeco. Under the Merger
Agreement, the stockholders of the Company received an aggregate of
3,883,460 shares of Veeco common stock and $29.8 million in cash. In
addition, Veeco incurred acquisition costs and exchanged and assumed
options and warrants of Applied Epi for options and warrants to purchase
1,021,248 shares of the Veeco's common stock. The assumed options and
warrants were recorded at fair market value using the Black-Scholes
option-pricing model. The merger will be accounted for using the
purchase method of accounting.
20
<Page>
APPLIED EPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<Table>
<Caption>
(UNAUDITED) JUNE 30,
2001
--------
ASSETS
Current assets:
Cash and cash equivalents $ 175
Accounts receivable, net 9,928
Inventories 14,160
Prepaid expenses and other current assets 255
--------
Total current assets 24,518
Property, plant and equipment, net 12,921
Other assets, net 1,216
--------
Total assets $ 38,655
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,547
Accrued expenses 1,723
Deferred profit 7,974
Current portion of long-term debt 716
Line of credit 1,216
--------
Total current liabilities 15,222
Long-term debt, less current portion 10,005
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 25,000,000 shares authorized,
none issued and outstanding
Common stock, $0.01 par value, 100,000,000 shares authorized,
27,003,725 shares issued and outstanding 270
Additional paid-in capital 25,991
Deferred stock-based compensation (1,473)
Retained deficit (11,360)
--------
Stockholders' equity 13,428
--------
Total liabilities and stockholders' equity $ 38,655
========
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
21
<Page>
APPLIED EPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
-------- --------
Sales $ 18,939 $ 10,180
Cost of sales 10,252 5,237
-------- --------
Gross profit 8,687 4,943
Operating expenses:
Selling, general and administrative expenses 3,713 2,140
Research and development expenses 1,973 747
Stock-based compensation 720 7,224
Other income, net (37) --
-------- --------
Operating income (loss) 2,318 (5,168)
Interest and other expense, net 598 93
-------- --------
Net income (loss) $ 1,720 $ (5,261)
======== ========
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
22
<Page>
APPLIED EPI, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-----------------------
2001 2000
------- -------
OPERATING ACTIVITIES
Net income (loss) $ 1,720 $(5,261)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation and amortization 328 222
Stock based compensation 720 7,224
Other, net 24 --
Changes in operating assets and liabilities:
Accounts receivable (5,548) 722
Inventories (5,298) (3,181)
Accounts payable 917 697
Accrued expenses, deferred profit and other current liabilities 6,500 1,554
Other, net 278 (30)
------- -------
Net cash (used in) provided by operating activities (359) 1,947
INVESTING ACTIVITIES
Capital expenditures (2,323) (2,868)
Proceeds from sale of property, plant and equipment 10 --
------- -------
Net cash used in investing activities (2,313) (2,868)
FINANCING ACTIVITIES
Net repayments on line of credit (1,738) --
Net proceeds from borrowings of subordinated debt 5,000 --
Distributions to stockholders (874) (218)
Net proceeds from issuance of long-term debt -- 1,546
Other (24) --
------- -------
Net cash provided by financing activities 2,364 1,328
------- -------
Net change in cash and cash equivalents (308) 407
Cash and cash equivalents at beginning of period 483 1,478
------- -------
Cash and cash equivalents at end of period $ 175 $ 1,885
======= =======
</Table>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED).
23
<Page>
APPLIED EPI, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 -- NATURE OF BUSINESS AND BASIS OF PRESENTATION
Applied Epi, Inc. and Subsidiaries (the Company) is a provider of epitaxial
equipment and related components used to produce compound semiconductors for the
fiber optic and wireless markets, as well as other consumer applications.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The
condensed consolidated balance sheet as of June 30, 2001, the condensed
consolidated statements of operations and the condensed consolidated statements
of cash flows for the six months ended June 30, 2001 and 2000 have been prepared
by the Company without audit. The amounts as of and for the six months ended
June 30, 2001 included within the Notes to Condensed Consolidated Financial
Statements have also been prepared by the Company without audit. In the opinion
of management, all adjustments (which include only normal recurring adjustments)
considered necessary to present fairly the financial position, results of
operations and statements of cash flows at June 30, 2001 and for the periods
ended June 30, 2001 and 2000 have been made. Interim results are not necessarily
indicative of the results that will be achieved for the year.
NOTE 2 -- INVENTORIES
Inventories consist of the following at June 30 (in thousands):
<Table>
<Caption>
JUNE 30,
2001
--------
Raw materials $ 7,698
Work-in-progress 6,462
Finished goods --
--------
$14,160
========
</Table>
NOTE 3 -- SUBORDINATED NOTES
In February 2001, the Company issued $5.0 million of a $10.0 million commitment
in subordinated notes to certain officers, directors, and stockholders of the
Company. Interest at 10% per annum is payable semiannually in arrears, and the
entire outstanding principal balance is due in February 2004. Subject to certain
restrictions, the notes can be prepaid at any time in increments of $500,000
with the following penalties:
Months Penalty
1 - 12 5% fee on the amount of the prepayment
13 - 24 4% fee on the amount of the prepayment
Over 24 No prepayment penalty
The notes are required to be prepaid without penalty upon an initial public
offering (as defined), a change in control (as defined), or an event of default
(as defined). The notes are unsecured and subordinated to all of the Company's
existing and future indebtedness.
24
<Page>
In exchange for the $10.0 million commitment in subordinated notes, the Company
issued detachable warrants to purchase 1,150,000 shares of common stock. The
warrants have an exercise price of $5.40 per share, contain certain antidilution
provisions, and have a term of five years. The warrants were valued at
approximately $1,088,000 based on the Black-Scholes option pricing model and
were accounted for as additional paid-in capital. The resulting discount on the
subordinated notes is amortized as additional interest expense over the term of
the debt using the effective interest method.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No.
142, GOODWILL AND OTHER INTANGIBLE ASSETS, effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and other intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives. In
addition, Statement 141 eliminates the pooling-of-interests method of accounting
for business combinations, except for qualifying business combinations that were
initiated prior to July 1, 2001.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
other intangible assets as of January 1, 2002. As of June 30, 2001, the Company
has not yet determined what the effect these standards will have on the earnings
or financial position of the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENT
At December 31, 2000, the Company had a contract with Kalway Construction
Company for approximately $2.2 million for construction of a new building
adjacent to its Saint Paul, Minnesota facility. During February 2001, the
construction of the new building was completed and the contract was paid in
full.
NOTE 6 - SUBSEQUENT EVENT
On September 6, 2001, Veeco Instruments Inc. (Veeco) entered into an Agreement
and Plan of Merger, (the Merger Agreement), by and among the Company, Veeco
Acquisition Corp. (Acquisition), Veeco, and certain stockholders of the Company.
On September 17, 2001, pursuant to the Merger Agreement, Acquisition merged with
and into the Company. As a result, the Company became a wholly owned subsidiary
of Veeco. Under the Merger Agreement, the stockholders of the Company received
an aggregate of 3,883,460 shares of Veeco common stock and $29.8 million in
cash. In addition, Veeco incurred acquisition costs and exchanged and assumed
options and warrants of Applied Epi for options and warrants to purchase
1,021,248 shares of the Veeco's common stock. The assumed options and warrants
were recorded at fair market value using the Black-Scholes option-pricing model.
The merger consideration was determined by arm's-length negotiations among the
respective parties. The merger will be accounted for using the purchase method
of accounting. In connection with the merger, the subordinated notes, which are
required to be prepaid without penalty upon a change in control, will be repaid.
25
<Page>
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed consolidated financial
statements are presented to give effect to the purchase agreement and the
acquisition of Applied Epi, Inc. (Applied Epi) under the purchase method of
accounting. The balance sheet assumes that the Applied Epi acquisition had been
consummated on June 30, 2001. The statements of operations for the year ended
December 31, 2000 and for the six months ended June 30, 2000 and 2001, assume
that the acquisition of Applied Epi had been consummated on January 1, 2000. The
pro forma financial statements are not necessarily indicative of the results of
operations or the financial position which would have occurred had the Applied
Epi acquisition been consummated at such times, nor are they necessarily
indicative of the results of future results of operations or financial position.
The allocation of the purchase price of Applied Epi has been determined by an
independent appraisal and reflects the fair value of any adjustments to assets
and liabilities. The unaudited pro forma combined condensed consolidated
financial statements should be read in conjunction with the historical condensed
consolidated financial statements of Veeco Instruments Inc., and Subsidiaries
("Veeco" or "the Company") including notes thereto, and the financial statements
of Applied Epi, Inc., included herein, including the notes thereto.
26
<Page>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
HISTORICAL FOR APPLIED EPI FOR APPLIED EPI
VEECO APPLIED EPI ACQUISITION (NOTE 1) ACQUISITION
- ---------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 60,241 $ 175 $ (34,800)(a) $ 25,616
Short-term investments 27,629 -- -- 27,629
Accounts receivable, net 86,191 9,928 3,399 (b) 99,518
Inventories, net 134,958 14,160 1,533 (c) 150,651
Prepaid expenses and other current assets 9,467 255 -- 9,722
Deferred income taxes 36,769 -- 2,333 (d) 39,102
--------- --------- --------- ---------
Total current assets 355,255 24,518 (27,535) 352,238
Property, plant & equipment, net 62,981 12,921 -- 75,902
Excess cost over net assets acquired, net 13,437 -- 101,615 (e) 115,052
Other assets, net 10,639 1,216 48,500 (e) 60,355
--------- --------- --------- ---------
Total assets $ 442,312 $ 38,655 $ 122,580 $ 603,547
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 33,325 $ 3,547 $-- $ 36,872
Accrued expenses 58,990 1,723 5,665 (f) 66,378
Deferred gross profit 19,954 7,974 (3,476)(g) 24,452
Current installment of long-term debt 1,293 716 -- 2,009
Revolving line of credit 2,106 1,262 -- 3,368
--------- --------- --------- ---------
Total current liabilities 115,668 15,222 2,189 133,079
Long-term debt, less current portion 13,960 10,005 (5,000)(a) 18,965
Other non-current liabilities 1,216 -- -- 1,216
Deferred tax liability 2,629 -- 22,663 (d) 25,292
STOCKHOLDERS' EQUITY
Common stock 248 270 (232)(h) 286
Additional paid-in-capital 230,797 25,991 97,127 (h) 353,915
Retained earnings (deficit) 81,048 (11,360) 4,360 (h) 74,048
Cumulative translation adjustment (2,957) -- -- (2,957)
Deferred stock-based compensation -- (1,473) 1,473 (h) --
Other components of stockholders' equity (297) -- -- (297)
--------- --------- --------- ---------
Total stockholders' equity 308,839 13,428 102,728 424,995
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 442,312 $ 38,655 $ 122,580 $ 603,547
========= ========= ========= =========
</Table>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.
27
<Page>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
HISTORICAL FOR APPLIED EPI FOR APPLIED EPI
VEECO APPLIED EPI ACQUISITION (NOTE 2) ACQUISITION
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 386,668 $ 24,885 $ -- $ 411,553
Cost of sales 227,838 13,801 -- 241,639
--------- --------- --------- ---------
Gross profit 158,830 11,084 -- 169,914
Selling, general and administrative expense 78,861 5,353 -- 84,214
Research and development expense 53,904 2,177 -- 56,081
Amortization expense 3,736 -- 11,552 (i) 15,288
Other expense (income), net 929 -- -- 929
Merger and reorganization expense 14,206 -- -- 14,206
Asset impairment charge 3,722 -- -- 3,722
Stock-based compensation -- 20,903 -- 20,903
Non-recurring finance charge -- 523 -- 523
--------- --------- --------- ---------
Operating income (loss) 3,472 (17,872) (11,552) (25,952)
Interest (income)/expense, net (1,307) 506 1,308 (j) 507
--------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 4,779 (18,378) (12,860) (26,459)
Income tax provision (benefit) 4,277 -- (10,933)(k) (6,656)
--------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle $ 502 $ (18,378) $ (1,927) $ (19,803)
========= ========= ========= =========
Income (loss) per common share before cumulative
effect of change in accounting principle $ 0.02 $ (0.72)
Diluted income (loss) per common share before cumulative
effect of change in accounting principle $ 0.02 N/A
Weighted average shares outstanding 23,805 27,688
Diluted weighted average shares outstanding 25,128 N/A
</Table>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.
28
<Page>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
HISTORICAL FOR APPLIED EPI FOR APPLIED EPI
VEECO APPLIED EPI ACQUISITION (NOTE 2) ACQUISITION
- ------------------------------------------------------------------------------------------------------------------
Sales $ 189,155 $ 10,180 $ -- $ 199,335
Cost of sales 119,792 5,237 -- 125,029
--------- --------- --------- ---------
Gross profit 69,363 4,943 -- 74,306
Selling, general and administrative expense 36,286 2,140 -- 38,426
Research and development expense 27,408 747 -- 28,155
Amortization expense 1,485 -- 7,526 (i) 9,011
Other expense (income), net 41 -- -- 41
Merger and reorganization expense 14,206 -- -- 14,206
Asset impairment charge 3,722 -- -- 3,722
Stock-based compensation -- 7,224 -- 7,224
--------- --------- --------- ---------
Operating loss (13,785) (5,168) (7,526) (26,479)
Interest (income)/expense, net (521) 93 654 (j) 226
--------- --------- --------- ---------
Loss before income taxes and cumulative effect
of change in accounting principle (13,264) (5,261) (8,180) (26,705)
Income tax benefit (5,186) -- (4,704)(k) (9,890)
--------- --------- --------- ---------
Loss before cumulative effect of change
in accounting principle $ (8,078) $ (5,261) $ (3,476) $ (16,815)
========= ========= ========= =========
Loss per common share before cumulative
effect of change in accounting principle $ (0.35) $ (0.62)
Diluted loss per common share before cumulative
effect of change in accounting principle N/A N/A
Weighted average shares outstanding 23,253 27,136
Diluted weighted average shares outstanding N/A N/A
</Table>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.
29
<Page>
VEECO INSTRUMENTS INC. AND SUBSIDIARIES
PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PRO FORMA PRO FORMA
ADJUSTMENTS AS ADJUSTED
HISTORICAL FOR APPLIED EPI FOR APPLIED EPI
VEECO APPLIED EPI ACQUISITION (NOTE 2) ACQUISITION
- --------------------------------------------------------------------------------------------------------------
Sales $ 240,723 $ 18,939 $ -- $ 259,662
Cost of sales 127,935 10,252 -- 138,187
--------- --------- --------- ---------
Gross profit 112,788 8,687 -- 121,475
Selling, general and administrative expense 42,979 3,713 -- 46,692
Research and development expense 31,116 1,973 -- 33,089
Amortization expense 2,317 -- 4,026 (i) 6,343
Other expense, net 1,632 (37) -- 1,595
Reorganization expense 1,000 -- -- 1,000
Stock-based compensation -- 720 -- 720
--------- --------- --------- ---------
Operating income (loss) 33,744 2,318 (4,026) 32,036
Interest (income)/expense, net (1,163) 598 654 (j) 89
--------- --------- --------- ---------
Income (loss) before income taxes 34,907 1,720 (4,680) 31,947
Income tax provision (benefit) 12,034 -- (1,036)(k) 10,998
--------- --------- --------- ---------
Net income (loss) $ 22,873 $ 1,720 $ (3,644) $ 20,949
========= ========= ========= =========
Net income per common share $ 0.93 $ 0.73
Diluted net income per common share $ 0.91 $ 0.71
Weighted average shares outstanding 24,722 28,605
Diluted weighted average shares outstanding 25,222 29,412
</Table>
SEE NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL
INFORMATION.
30
<Page>
PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- PRO FORMA BALANCE SHEET ADJUSTMENTS
On September 17, 2001, Veeco acquired Applied Epi in a business combination
accounted for as a purchase. Under the merger agreement, the stockholders of
Applied Epi received an aggregate of 3,883,460 shares of Veeco common stock and
$29.8 million in cash. In addition, Veeco incurred acquisition costs and
exchanged and assumed options and warrants of Applied Epi for options and
warrants to purchase 1,021,248 shares of Veeco's common stock. The assumed
options and warrants were recorded at fair market value using the Black-Scholes
option-pricing model. The following notes explain the pro forma adjustments:
(a) Adjustment to record the $29.8 million cash payment to the
stockholders' of Applied Epi and the repayment of Applied Epi's
subordinated debt of $5.0 million.
(b) Adjustment to record a $3.4 million increase to accounts receivable,
to conform Applied Epi's treatment of customer deposits to Veeco's
methodology. This has no effect on the statement of operations.
(c) Adjustment to record a $1.5 million step-up in the fair value of
inventory.
(d) Adjustment to record a deferred tax asset of $2.3 million and a
$22.7 million deferred tax liability to reflect the difference
between the book and tax basis of Applied Epi's net assets. Prior to
the merger, Applied Epi was an S Corporation and did not provide
deferred taxes at the corporation level. In addition, a significant
portion of the deferred tax liability results from the step up in
basis of assets, associated with the merger being accounted for
using the purchase method.
(e) Adjustment to record $101.6 million of the excess purchase price
over the net assets acquired in connection with Veeco's purchase of
Applied Epi and $55.5 million of other intangible assets acquired
through the acquisition of Applied Epi, off-set by a $7.0 million
write-off of purchased in-process technology.
(f) Adjustment to record acquisition costs of $2.9 million and to
reclass customer deposits of $2.8 million, in connection with
adjustment (b).
(g) Adjustment to record the decrease of $3.5 million in deferred gross
profit to recognize the fair value of the liability assumed.
(h) Adjustment to record the elimination of the historical equity of
Applied Epi including $27.0 million shares of common stock,
$26.0 million of additional paid-in-capital, $11.4 million of
retained deficit and $1.5 million of deferred stock-based
compensation. In addition, this adjustment also records the
fair market value of the shares, options and warrants issued
in the merger with Applied Epi aggregating $120.3 million.
NOTE 2 - PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS
Details of the pro forma adjustments relating to the acquisition and financing
are set forth below:
(i) Adjustment to record the amortization expense related to the
amortizable intangible assets acquired. The intangible assets
acquired are comprised of the following: $41.0 million of core
31
<Page>
technology, amortized over approximately six years; $1.0 million of
non-compete agreements, amortized over three years; $4.5 million of
customer related intangibles, amortized principally over six months
and $2.0 million of trademarks and trade names, amortized over ten
years.
(j) Adjustment to record the reduction of interest income, due to the
use of $32.7 million of cash related to the purchase of Applied Epi.
(k) Adjustment to record an income tax provision (benefit) for Applied
Epi and pro forma adjustments using a 35% tax rate. Prior to
the merger, Applied Epi was an S Corporation and was not taxed
at the Corporation level.
The pro forma adjustments included in the income statements do not give effect
to the impact on gross profit of the adjustment to increase inventory by
approximately $1.5 million to its estimated fair value. The pro forma
adjustments also do not give effect to the impact on sales and gross profit of
the adjustment to decrease deferred gross profit by approximately $3.5 million
to its estimated fair value. Such adjustments, as of the June 30, 2001 balance
sheet, were required under the purchase method of accounting.
32
<Page>
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
November 30, 2001
VEECO INSTRUMENTS INC.
(Registrant)
By: /s/ John P. Kiernan
----------------------------------------
John P. Kiernan
Vice President, Finance and
Corporate Controller
33
<Page>
EXHIBIT INDEX
Exhibit Description of Document
------- -----------------------
23.1 Consent of Deloitte & Touche LLP
34