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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                             -------------------------------------

                                    FORM 10-Q


               QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                    FOR THE QUARTER ENDED JUNESEPTEMBER 30, 1998

                         Commission file number 0-16244

                             -------------------------------------

                             VEECO INSTRUMENTS INC.
             (Exact name of registrant as specified in its charter)

           Delaware                                   11-2989601
(State or other jurisdiction of                       (I.R.S. Employer
incorporation or organization)                        Identification Number)

        Terminal Drive
     Plainview, New York                                    11803
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (516) 349-8300

                             -------------------------------------

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|X| No ---     ---

14,585,357|_|

14,739,783 shares of common stock, $.01 par value per share, were outstanding as
of August 7,November 5, 1998.

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                             VEECO INSTRUMENTS INC.

                                      INDEX

                                                                            PAGEPage
                                                                            ----
PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

        Condensed Consolidated Statements of Income -
         Three Months Ended JuneSeptember 30, 1998 and 1997                       3

        Condensed Consolidated Statements of Income -
         SixNine Months Ended JuneSeptember 30, 1998 and 1997                        4

        Condensed Consolidated Balance Sheets -
         JuneSeptember 30, 1998 and December 31, 1997                             5

        Condensed Consolidated Statements of Cash Flows -
         SixNine Months Ended JuneSeptember 30, 1998 and 1997                        6

        Notes to Condensed Consolidated Financial Statements                  7

Item 2.  Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                 9

PART II.  OTHER INFORMATION

Item 1.        Legal Proceedings                                             13

Item 4.   Submission of matters to a Vote of Security Holders                 1315

Item 6.        Exhibits and Reports on Form 8-K                              1315

SIGNATURES                                                                   1416


                                       -2-


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                     Veeco Instruments Inc. and Subsidiaries

                   Condensed Consolidated Statements of Income
                      (In thousands, except per share data)
                                   (Unaudited)

                                                           
Three Months Ended June 30, ---------------------- 1998 1997 ------- ------- Net sales $51,147 $54,547 Cost of sales 27,048 27,379 ------- ------- Gross profit 24,099 27,168 Costs and expenses: Research and development expense 7,007 6,076 Selling, general and administrative expense 11,184 9,871 Amortization expense 98 69 Other, net (124) (151) Merger and reorganization expenses 7,500 - Purchased in process technology - 4,200 ------- ------- Operating income (loss) (1,566) 7,103 Interest expense, net 267 75 ------- ------- Income (loss) before income taxes (1,833) 7,028 Income tax provision (benefit) (51) 1,363 ------- ------- Net income (loss) $(1,782) $ 5,665 ======= ======= Net income per common share $ (0.12) $ 0.39 Diluted net income per common share $ (0.12) $ 0.38 ======= ======= Weighted average shares outstanding 14,566 14,352 Diluted weighted average shares outstanding 14,827 14,848 ======= ======= Pro forma presentation: Income (loss) before income taxes $(1,833) $ 7,028 Pro forma income tax provision (benefit) (678) 2,709 ------- ------- Pro forma net income (loss) $(1,155) $ 4,319 ======= ======= Pro forma net income (loss) per common share $ (0.08) $ 0.30 Pro forma diluted net income (loss) per common share $ (0.08) $ 0.29 ======= =======
Three Months Ended September 30, ---------------------- 1998 1997 -------- -------- Net sales $ 50,539 $ 55,195 Cost of sales 27,317 28,234 -------- -------- Gross profit 23,222 26,961 Costs and expenses: Research and development expense 7,052 6,154 Selling, general and administrative expense 10,172 9,825 Amortization expense 97 69 Other, net (439) (20) Merger and reorganization expenses -- 2,250 -------- -------- Operating income 6,340 8,683 Interest expense (income), net 283 (209) -------- -------- Income before income taxes 6,057 8,892 Income tax provision 1,817 2,007 -------- -------- Net income $ 4,240 $ 6,885 ======== ======== Net income per common share $ 0.29 $ 0.48 Diluted net income per common share $ 0.29 $ 0.46 ======== ======== Weighted average shares outstanding 14,654 14,432 Diluted weighted average shares outstanding 14,860 15,049 ======== ======== Pro forma presentation (See Note 1): Income before income taxes $ 6,057 $ 8,892 Pro forma income tax provision 2,241 3,350 -------- -------- Pro forma net income $ 3,816 $ 5,542 ======== ======== Pro forma net income per common share $ 0.26 $ 0.38 Pro forma diluted income per common share $ 0.26 $ 0.37 ======== ======== See accompanying notes. -3- Veeco Instruments Inc. and Subsidiaries Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited)
Six Months Ended June 30, ----------------------- 1998 1997 -------- -------- Net sales $104,806 $103,757 Cost of sales 56,566 52,595 -------- -------- Gross profit 48,240 51,162 Costs and expenses: Research and development expense 13,497 11,107 Selling, general and administrative expense 21,231 19,017 Amortization expense 195 137 Other, net (256) (315) Merger and reorganization expenses 7,500 - Purchased in process technology - 4,200 -------- -------- Operating income 6,073 17,016 Interest expense, net 465 130 -------- -------- Income before income taxes 5,608 16,886 Income tax provision 1,682 3,920 -------- -------- Net income $ 3,926 $ 12,966 ======== ======== Net income per common share $ 0.27 $ 0.91 Diluted net income per common share $ 0.27 $ 0.88 ======== ======== Weighted average shares outstanding 14,538 14,327 Diluted weighted average shares outstanding 14,774 14,654 ======== ======== Pro forma presentation: Income before income taxes $ 5,608 $ 16,886 Pro forma income tax provision 2,158 6,501 -------- -------- Pro forma net income $ 3,450 $ 10,385 ======== ======== Pro forma net income per common share $ 0.24 $ 0.72 Pro forma diluted net income per common share $ 0.23 $ 0.71 ======== ========
Nine Months Ended September 30, ------------------------- 1998 1997 --------- --------- Net sales $ 155,345 $ 158,952 Cost of sales 83,883 80,829 --------- --------- Gross profit 71,462 78,123 Costs and expenses: Research and development expense 20,549 17,261 Selling, general and administrative expense 31,403 28,842 Amortization expense 292 206 Other, net (695) (335) Merger and reorganization expenses 7,500 2,250 Purchased in process technology -- 4,200 --------- --------- Operating income 12,413 25,699 Interest expense, (income) net 748 (79) --------- --------- Income before income taxes 11,665 25,778 Income tax provision 3,499 5,927 --------- --------- Net income $ 8,166 $ 19,851 ========= ========= Net income per common share $ 0.56 $ 1.38 Diluted net income per common share $ 0.55 $ 1.33 ========= ========= Weighted average shares outstanding 14,577 14,365 Diluted weighted average shares outstanding 14,813 14,879 ========= ========= Pro forma presentation (See Note 1): Income before income taxes $ 11,665 $ 25,778 Pro forma income tax provision 4,316 9,850 --------- --------- Pro forma net income $ 7,349 $ 15,928 ========= ========= Pro forma net income per common share $ 0.50 $ 1.11 Pro forma diluted net income per common share $ 0.50 $ 1.07 ========= ========= See accompanying notes. -4- Veeco Instruments Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands)
June 30, December 31, 1998 1997 ----------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 16,659 $ 20,444 Accounts and trade notes receivable, net 47,846 44,927 Inventories 49,328 44,825 Prepaid expenses and other current assets 2,094 1,695 Deferred income taxes 5,801 4,602 -------- -------- Total current assets 121,728 116,493 Property, plant and equipment at cost, net 35,436 33,344 Excess of cost over net assets acquired 4,253 4,318 Other assets, net 5,334 5,476 -------- -------- Total assets $166,751 $159,631 ======== ======== Liabilities and shareholders' equity Current liabilities 50,232 47,715 Other non-current liabilities 970 1,012 Long term debt, net of current portion 17,125 17,146 Shareholders' equity 98,424 93,758 -------- -------- Total liabilities and shareholders' equity $166,751September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) Assets Current assets: Cash and cash equivalents $ 14,251 $ 20,444 Accounts and trade notes receivable, net 46,795 44,927 Inventories 51,621 44,825 Prepaid expenses and other current assets 1,403 1,695 Deferred income taxes 6,001 4,602 -------- -------- Total current assets 120,071 116,493 Property, plant and equipment at cost, net 36,262 33,344 Excess of cost over net assets acquired 4,220 4,318 Other assets, net 5,338 5,476 -------- -------- Total assets $165,891 $159,631 ======== ========
Liabilities and shareholders' equity Current liabilities $ 42,227 $ 47,715 Other non-current liabilities 995 1,012 Long term debt, net of current portion 16,995 17,146 Shareholders' equity 105,674 93,758 -------- -------- Total liabilities and shareholders' equity $165,891 $159,631 ======== ======== See accompanying notes.notes -5- Veeco Instruments Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands)
Six Months Ended June 30, ----------------------- 1998 1997 -------- -------- Operating activities Net income $ 3,926 $12,966 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,311 739 Deferred income taxes (1,199) (1,882) Non-cash compensation charge 1,585 - Purchased in process technology - 4,200 Changes in operating assets and liabilities: Accounts receivable (3,048) (7,935) Inventories (4,536) (4,446) Accounts payable (1,121) 3,528 Accrued expenses and other current liabilities 4,814 5,758 Other, net (451) (303) ------- ------- Net cash provided by operating activities 2,281 12,625 Investing activities Capital expenditures (4,212) (4,080) Net assets of business acquired - (4,375) ------- ------- Net cash used in investing activities (4,212) (8,455) Financing activities Proceeds from stock issuance 364 1,332 Distribution to Digital shareholders (2,000) (5,000) Other (28) (51) ------- ------- Net cash used in financing activities (1,664) (3,719) Effect of exchange rates on cash (190) (252) ------- ------- Net change in cash and cash equivalents (3,785) 199 Cash and cash equivalents at beginning of period 20,444 26,322 ------- ------- Cash and cash equivalents at end of period $16,659 $26,521 ======= =======
Nine Months Ended September 30, -------------------- 1998 1997 -------- -------- Operating activities Net income $ 8,166 $ 19,851 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,570 1,319 Deferred income taxes (1,399) (1,919) Non-cash compensation charge 1,585 -- Purchased in process technology -- 4,200 Changes in operating assets and liabilities: Accounts receivable (1,546) (11,344) Inventories (6,614) (8,107) Accounts payable (5,756) 7,571 Accrued expenses and other current liabilities 233 4,214 Other, net 2,418 620 -------- -------- Net cash provided by operating activities 657 16,405 Investing activities Capital expenditures (6,194) (5,774) Net assets of business acquired -- (4,375) -------- -------- Net cash used in investing activities (6,194) (10,149) Financing activities Proceeds from stock issuance 1,952 1,751 Distribution to Digital shareholders (2,000) (8,000) Other (156) (83) -------- -------- Net cash used in financing activities (204) (6,332) Effect of exchange rates on cash (452) (179) -------- -------- Net change in cash and cash equivalents (6,193) (255) Cash and cash equivalents at beginning of period 20,444 26,322 -------- -------- Cash and cash equivalents at end of period $ 14,251 $ 26,067 ======== ======== See accompanying notes. -6- VEECO INSTRUMENTS INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) NOTENote 1 - BASIS OF PRESENTATIONBasis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation (consisting of normal recurring accruals) have been included. Operating results for the sixnine months ended JuneSeptember 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. The following table sets forth the reconciliation of diluted weighted-average shares outstanding:
Three Months Ended SixNine Months Ended JuneSeptember 30, JuneSeptember 30, ------------------ ------------------ ( In Thousands ) ( In Thousands )----------------- (In Thousands) (In Thousands) 1998 1997 1998 1997 ---- --------- ---- ---- Weighted - average shares outstanding 14,566 14,352 14,538 14,32714,654 14,432 14,577 14,365 Dilutive effect of stock options 261 496206 617 236 327514 ------ ------ ------ ------ Diluted weighted - average shares outstanding 14,827 14,848 14,774 14,65414,860 15,049 14,813 14,879 ====== ====== ====== ======
NOTEPro forma net income and pro forma earnings per share as shown on the Condensed Consolidated Statements of Income presents income taxes for Digital Instruments, Inc. as if Digital Instruments, Inc., which was merged in a pooling of interest with the Company in May 1998, had been a "C" Corporation for all periods presented and therefore, subject to federal income taxes at the corporation level (See Note 2). Note 2 - ACQUISITIONMerger On May 29, 1998, the Company merged with Digital Instruments, Inc. of Santa Barbara, CA ("Digital") a world 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 is accounted for as a pooling of interests transaction and, accordingly, historical financial data has been restated to include Digital data. Merger and reorganization expenses principally related to this transaction amounted to $7.5 million . They were comprised of transaction fees and expenses of $3.3 million, a $1.6 million of a non-cash compensation charge related to stock issued in accordance with a pre-existing agreement with a key Digital Instruments employee, $1.4 million of duplicate facility costs and $1.2 million of reorganization costs all of which were charged to operating expenses during the threenine month period ended JuneSeptember 30, 1998. Prior to the merger, Digital had elected "S" Corporation status for income tax purposes.purposes and therefore not subject to federal income taxes at the corporation level. As a result of the merger, Digital terminated -7- its "S" Corporation election. Pro forma net income (loss) presents income taxes for Digital as if it had been a "C" Corporation for all periods presented. The following unaudited pro forma data summarizes the combined results of operations of the Company and Digital as though the merger occurred at the beginning of fiscal year 1995 and as if Digital had been a "C" Corporation. -7- Unaudited pro forma data (In thousands, except per share data)
Years Ended December 31, 1997 1996 1995 ---------------------------------- Revenues: Veeco $165,408 $115,042 $ 85,825 Digital 51,320 50,017 38,151 -------- -------- -------- Combined $216,728 $165,059 $123,976 ======== ======== ======== Pro forma net income: Veeco $ 12,283 $ 10,835 $ 9,237 Digital 8,537 10,040 7,039 -------- -------- -------- Combined $ 20,820 $ 20,875 $ 16,276 ======== ======== ======== NOTE 3 - INVENTORIES Interim inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of: June 30, December 31, 1998 1997 -------- ------------ (In thousands) Raw materials $26,889 $25,016 Work-in process 10,393 8,101 Finished goods 12,046 11,708 ------- ------- $49,328 $44,825 ======= ======= NOTE 4 - BALANCE SHEET INFORMATION Selected balance sheet account disclosures follow: June 30, December 31, 1998 1997 -------- ------------ (In thousands) Allowance for doubtful accounts $ 1,091 $ 1,005 Accumulated depreciation and amortization of property, plant and equipment 13,700 11,589 Accumulated amortization of excess of cost over net assets acquired 1,105thousands) Years Ended December 31, 1997 1996 1995 -------------------------------------- Revenues: Veeco $165,408 $115,042 $ 85,825 Digital 51,320 50,017 38,151 -------- -------- -------- Combined $216,728 $165,059 $123,976 ======== ======== ======== Pro forma net income: Veeco $ 12,283 $ 10,835 $ 9,237 Digital 8,537 10,040 7,039 -------- -------- -------- Combined $ 20,820 $ 20,875 $ 16,276 ======== ======== ======== Note 3 - Inventories Interim inventories have been determined by lower of cost (principally first-in, first-out) or market. Inventories consist of: September 30, December 31, 1998 1997 ------- ------- (In thousands) Raw materials $29,430 $25,016 Work-in process 11,225 8,101 Finished goods 10,966 11,708 ------- ------- $51,621 $44,825 ======= ======= Note 4- Balance Sheet Information Selected balance sheet account disclosures follow: September 30, December 31, 1998 1997 ------- ------- (In thousands) Allowance for doubtful accounts $ 1,088 $ 1,005 Accumulated depreciation and amortization of property, plant and equipment 14,895 11,589 Accumulated amortization of excess of cost over net assets acquired 1,138 1,040
-8- NOTENote 5 - OTHER INFORMATIONOther Information Interest paid during the sixnine months ended JuneSeptember 30, 1998 and 1997 were $.7was $.9 million and $.5 million, respectively.for each period. The Company made income tax payments of $3.8 million and $3.1$4.3 million during each of the six monthsnine month periods ended JuneSeptember 30, 1998 and 1997, respectively. NOTE1997. Note 6 - NEW ACCOUNTING PRONOUNCEMENTNew Accounting Pronouncement As of January 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement had no impact on the Company's reported net income or shareholders' equity. SFAS No. 130 requires foreign currency translation adjustments which prior to its adoption were reported separately as part of stockholders' equity to be included in other comprehensive income. For the sixnine months ended JuneSeptember 30, 1998 and 1997, total comprehensive income amounted to $3.3$8.2 million and $12.6$19.2 million, respectively. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for both interim and annual financial statements for periods ending after December 15, 1997. Segment information is not required to be reported in interim financial statements in the first year of application. The Company intends to adopt SFAS No. 131 for the fiscal year endedending December 31, 1998. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED JUNEResults of Operations Three Months Ended September 30, 1998 ANDand 1997 Net sales of $51.1$50.5 million for the three months ended JuneSeptember 30, 1998 declined 6%8% from the 1997 comparable period sales of $54.5$55.2 million, reflecting a decline in process equipment sales partially offset by an increase in metrology sales. Sales in the US, Europe, Japan and Asia Pacific, respectively, accounted for 48%56%, 23%14%, 13%15% and 11%10%, respectively, of the Company's net sales for the three months ended JuneSeptember 30, 1998. Sales in the US decreased 28%and Japan remained flat while international sales included an 162% increase in Europe a 3% increaseincreased 11% and sales in Japan and a 23% decrease in Asia-PacificAsia Pacific decreased 58% from the comparable 1997 period. SalesMetrology sales in the US for each of the companies product lines, particularlyU.S. increased 22% while process equipment sales to the data storage industry declined in 1998.14%. The increase in European sales principally resulted from increased metrology sales while process equipment and industrial measurement sales were flat compared to the prior year.partially offset by a decline in process equipment sales. The decrease in sales in Asia Pacific reflectssales reflected the continued economic downturn in that region, particularly in the data storage segment.industry. The Company believes that there will continue to be quarter to quarter variations in the geographic concentration of sales. Metrology sales of $30.2 million for the three months ended JuneSeptember 30, 1998 of $34.4 million increased by $7.8$3.6 million or 30%13% over the comparable 1997 period, reflecting increased use of metrology products for in-line inspection of critical steps in data storage and semiconductor applications.storage. Process equipment sales of $11.9$15.6 million for the three months ended JuneSeptember 30, 1998 decreased by $10.9$8.4 million or 48%35% from the comparable 1997 period, as sales of ion beam etch products declined, partially offset by an increase in sales of new ion beam deposition equipment. Sales of ion beam etch products continue to be negatively affected by industry over capacity in data storage. Industrial measurement sales of $4.7 million for the three months ended JuneSeptember 30, 1998 of $4.8 million decreased 6%increased 3% from the comparable 1997 period. -9- Veeco received $50.0$43.5 million of orders for the three months ended JuneSeptember 30, 1998, a 16%27% decrease compared to $59.4$59.5 million of orders for the comparable 1997 period. Metrology orders increaseddecreased by 24% to $32.6$25.3 million reflecting the increased use of in line metrology for production applications such as PTR (pole tip recession) measurements for new MR/GMR thin film magnetic heads, and semiconductor industry use of AFM for .25 micron line widths. Processwhile process equipment orders decreased 52%33% to $13.0$14.0 million reflecting weakwhich reflects the continued weakness in the semiconductor and data storage market conditions accompanied by industry wide overcapacity.industries. The book/bill ratio for the secondthird quarter of 1998 was .98..86. Based upon the continued weakness in the semiconductor and data storage industries, the Company expects revenues and operating income to remain relatively flat for each of the next several quarters. Gross profit for the three months ended JuneSeptember 30, 1998 of $24.1$23.2 million represents a decline of $3.1$3.7 million from the comparable 1997 period. Gross profit as a percentage of net sales decreased to 47.1%45.9% for 1998 from 49.8%48.8% for the comparable 1997 period, principally due to a decrease in gross margin for theprocess equipment. This decline in process equipment product line. This declinegross margin resulted from lower sales volume, increased field service, 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 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 expenses inof $7.1 million for the second quarter ofthree months ended September 30, 1998 increased by $.9 million or 15% over the comparable period of 1997 as the Company invested an additional $.7 millioncontinues to increase spending for new product development in R&D foreach of its deposition equipmentproduct lines, particularly in its metrology product line and increased its R&D investment for in-line inspection metrology products.tools for semiconductor and data storage industries. Selling, general and administrative expenses increased by approximately $1.3of $10.2 million for the three months ended JuneSeptember 30, 1998 were relatively flat as compared to the comparable 1997same period as a result of increased sales and product support costs for new products as well as incremental selling costs1997. In connection with the merger with Wyko Corporation, the Company incurred approximately $2.3 million of merger related to the increased metrology sales. Duringfees in the three months ended June 30, 1998 the Company recorded a $7.5 million non-recurring pre-tax charge for merger and reorganization costs principally related to the merger with Digital completed on May 29, 1998. The $7.5 million charge is comprised of transaction costs of $3.3 million, a $1.6 million non cash compensation charge related to stock issued in accordance with a pre-existing agreement with a key Digital employee, $1.4 million of duplicate facility costs and $1.2 million of reorganization costs. During the three months ended JuneSeptember 30, 1997 the Company expensed $4.2 million in connection with an acquisition, representing the estimated valueconsisting of in-process engineeringinvestment banking, legal and development projects. The Company recorded a $0.05 million income tax benefitother transaction costs. Income taxes for the three months ended JuneSeptember 30, 1998 amounted to $1.8 million or 30% of income before income taxes as compared to a provision for$2.0 million or 23% of income before income taxes of $1.4 million in 1997. The income tax benefit recorded is a result of a pre-tax loss for the same period along with an adjustment toof 1997. This increase in the effective tax rate expectedreflects Digital's "S" Corporation tax status for the year due tofive months in 1998 (through the merger with Digital. The 19% effective tax rate in 1997 reflects Digital Instruments S Corp statusdate) compared to a full year in 1997. SIX MONTHS ENDED JUNEAs an "S" Corporation, Digital was not subject to federal income tax at the corporation level. Nine Months Ended September 30, 1998 ANDand 1997 Net sales were $104.8$155.3 million for the sixnine months ended JuneSeptember 30, 1998 representing an increasea decrease of $1.0$3.6 million or 1% over2% from the comparable 1997 period. The increase principallydecrease in sales reflects growtha 34% decrease in metrologyprocess equipment sales offset by a decrease23% increase in sales of process equipment.metrology sales. Sales in the US, Europe, Japan and Asia Pacific, respectively, accounted for 46%, 20%50%, 18%, 17% and 10%, respectively, of the Company's net sales for the sixnine months ended JuneSeptember 30, 1998. Sales in the US decreased approximately 21%14%, while international sales included an approximately 151%a 92% increase in Europe, a 31%21% increase in Japan and a 41%28% decrease in Asia Pacific from the comparable 1997 period. The decrease in US sales principally reflects reduced process equipment sales to data storage customers. The increase in European sales principally reflects increased process equipment sales to data storage customers along with increased metrology sales for data storage and semiconductor applications. The increase in sales in Japan principally reflects an increase in process metrology sales. The decrease in sales in Asia Pacific principally reflects a decrease in sales of all product lines resulting from the economic downturn in that region. The Company believes that there will continue to be quarter to quarter variations in the geographic concentration of sales. -10- Metrology sales of $97.6 million for the sixnine months ended JuneSeptember 30, 1998 of $67.3 million increased by $14.5$18.1 million or 27%23% over the comparable 1997 period principally reflecting increased use of metrology products for in-line inspection of -10- critical steps in data storage and semiconductor applications. Process equipment sales of $27.0$42.6 million for the sixnine months ended JuneSeptember 30, 1998 decreased by $19.0$22.0 million or 34% from the comparable 1997 period, as sales of ion beam etch products declined, partially offset by sales of new deposition equipment. Ion beam etch sales continue to be negatively affected by excess capacity in data storage. Industrial measurement sales for the sixnine months ended JuneSeptember 30, 1998 of $10.5$15.1 million increased 2%3% over the comparable 1997 period. Veeco received $115.9$159.4 million of orders for the sixnine months ended JuneSeptember 30, 1998 representing a 7% increase compared to $108.15% decrease from $167.6 million of orders in the comparable 1997 period. Metrology orders increased 42%16% to $72.0$97.2 million reflecting the increased use of in line metrology for production applications such as PTR (pole tip recession) measurements for new MR/GMR thin film magnetic heads, and semiconductor industry use of AFM for .25 micron line widths.heads. Process equipment orders decreased 24%27% to $35.0$48.9 million reflecting reducedas a result of a reduction in orders of ion beam etch products resulting from excess data storage capacity for older TFMH products reflecting weak data storage market conditions accompanied by industry wide over capacity. The book/bill ratio for the sixnine months ended JuneSeptember 30, 1998 was 1.10.1.03. Gross profit for the sixnine months ended JuneSeptember 30, 1998 of $48.2$71.5 million represents a decrease of $2.9$6.6 million from the comparable 1997 period. Gross profit as a percentage of net sales decreased to 46.0% for 1998 from 49.3%49.1% for 1997, principally due principally 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 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 infor the second halfnine months ended September 30, 1998 of 1998$20.5 million increased by $2.4$3.3 million or 22%19% over the comparable period of 1997, as the Company invested an additional $1.7 millioncontinues 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 R&Dtools for its process equipment product line and increased its R&D investment for in-line inspection metrology products.line. Selling, general and administrative expenses increased by $2.2of $31.4 million for the sixnine months ended JuneSeptember 30, 1998 increased by $2.6 million compared to the comparable 1997 period as a result of increased costs to support the growth in the metrology product line along with investments made in customer sales and productfield support costs for new products as well as incremental costs relatedincluding the transition to the increased process metrology sales.more direct sales and support coverage in Japan, Europe and Asia Pacific. As described above,in Note 2, the Company recorded a $7.5 million non-recurring pre-tax charge for merger and reorganization expenses during the sixnine months ended JuneSeptember 30, 1998 and during1998. During the sixnine months ended JuneSeptember 30, 1997, the Company recorded a $4.2 million expense for the fair value of acquired in-process engineering and development projects.projects and a non-recurring $2.3 million charge for merger related fees consisting of investment banking, legal and other transaction costs in connection with the merger with Wyko Corporation. Income taxes for the sixnine months ended JuneSeptember 30, 1998 amounted to $1.7$3.5 million or 30% of income before income taxes as compared to $3.9$5.9 million or 23% of income before income taxes for the same period of 1997. The 1998This increase in the effective tax rate reflects Digital S Corp status through May 29, 1998 while the 1997 effective tax rate reflects Digital S CorpDigital's "S" Corporation status for five months in 1998 (through the entire period. LIQUIDITY AND CAPITAL RESOURCESmerger 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 $2.3$.7 million for the sixnine months ended JuneSeptember 30, 1998 compared to $12.6$16.4 million for the comparable 1997 period. This change in cash provided from operations principally reflects a decrease in net income for the 1998 period of $9.1$11.7 million from the comparable 1997 period.period, along with the use of cash for changes in operating assets and liabilities. Accounts payable and accrued expenses and other current liabilities decreased by $5.5 million during the nine months ended September 30, 1998 while increasing $11.8 million during -11- the comparable period of 1997. The decrease in accounts payable and accrued expenses and other current liabilities in 1998 reflects the payment of certain liabilities including a portion of the non recurring merger related expenses and the reduction in customer deposits. The increase in accounts payable and accrued expenses and other current liabilities in 1997 reflect the growth in business in 1997 over 1996. Accounts receivable increased $3.0$1.5 million during the sixnine months ended JuneSeptember 30, 1998 reflecting concentration of shipments in last two weeks of the quarter as well as a slow down in payment terms by several key accounts. Inventory increased $4.5while increasing $11.3 million during the six months ended June 30, 1998 reflecting investments required for new metrology products as well rescheduling of process equipment orders. The increase of accrued expenses of $4.8 million during the six months ended June 30, 1998 principally resulted from accrued merger and reorganization costs. -11- comparable 1997 period. Veeco made capital expenditures of $4.2$6.2 million for the sixnine month period ended JuneSeptember 30, 1998, compared to $4.1$5.8 million in the comparable 1997 period. Capital expenses in 1998 were principally for engineering and application lab equipment. Capital expenses for the remaining six months of 1998 are expected to be relatively consistent with the first six months of 1998. The Company believes that existing cash balances together with cash generated from operations and amounts available under the Company's credit facility will be sufficient to meet the Company's projected working capital and other cash flow requirements for the next twelve months. FORWARD-LOOKING STATEMENTSYear 2000 The Year 2000 Issue is the result of computer programs using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company has determined that it will be required to modify or replace portions of its business systems software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of it business systems existing software and certain hardware, the Company's computer programs should be able to continue to operate effectively after December 31, 1999. However, if such modifications and replacements are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. Furthermore, in addition to its own systems, the Company relies directly and indirectly, on external systems of its customers, suppliers, creditors, financial organizations, utilities providers and governmental agencies (collectively, "Third Parties"). The Company is utilizing both internal and external resources to resolve the Year 2000 Issue following a phased approach which is comprised of inventory and assessment, planning and renovation, testing and implementation. The following describes the Company's efforts to identify and address its and applicable Third Party Year 2000 Issues with respect to a) the Company's information technology systems, including facilities and infrastructure, b) the Company's products and c) the Company's suppliers: a) The Company's information technology systems including facilities and infrastructure: In 1997, the Company completed its installation of a new business system for its process equipment and industrial product lines which has been certified by the vendor as Year 2000 compliant. The Company is in the process of either testing or assessing the extent of upgrades or modification required for its business systems for its metrology product lines. Furthermore, the Company is in the process of installing a new business system for its sales and service offices in Europe that the vendor has certified is Year 2000 compliant. The Company is also in the process of completing its inventory and assessment of its desktop systems -12- and laptops. The Company currently uses standard "off the shelf" vendor supplied software on its desktop systems and laptops. Many of these vendors are still implementing their Year 2000 compliance programs and the Company will implement the Year 2000 compliant versions as required when those solutions are available. The Company is in the process of assessing its Year 2000 risk with respect to telephone and communications systems, utility systems and building security systems. Formal inquires are expected to be sent to third parties before December 31, 1998 inquiring as to such Third Parties Year 2000 readiness. b) The Company's products: The Company is in the process of completing its inventory and assessment of its products Year 2000 readiness utilizing testing guidelines prepared by Sematech, a consortium of suppliers to worldwide semiconductor manufacturers. The Company plans to comply with Sematech's guidelines for Year 2000 compliance for its metrology and process equipment lines. The Company believes its new products are designed to be Year 2000 capable, however, some of the Company's older products will require upgrades for Year 2000 capability. The Company intends to provide upgrades for certain of such products, some of which will be provided to customers without charge. Notwithstanding such efforts, any failure of the Company's products to perform, including system malfunctions due to the onset of Year 2000, could result in claims against the Company which could have a material adverse effect on the Company's business, results of operations or financial condition. Moreover, the Company's customers could choose to convert to other Year 2000 capable products in order to avoid such malfunctions, which could have a material adverse effect on the Company's business, financial condition or results of operations. c) The Company's suppliers: The Company is in the process of inquiring of its significant suppliers and subcontractors the status of their Year 2000 readiness. To date, the Company is not aware of any Year 2000 issue that would materially impact the Company's results of operations, liquidity or capital resources. However, the Company has no means of ensuring that suppliers or subcontractors will be Year 2000 ready. The inability of suppliers or subcontractors to complete their Year 2000 resolution process in a timely fashion could materially impact the Company. The Company is unable to determine the effect of non-compliance by suppliers or subcontractors. The Company will utilize both internal and external resources to reprogram or replace, test, and implement the software and operating equipment for Year 2000 modifications. The total cost of the Year 2000 project is estimated at $400,000 to $750,000 and is being funded through operating cash flows. To date, the Company has incurred approximately $100,000 (which has been expensed), related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $250,000 to $400,000 is attributable to the purchase of new software and operating equipment which will be capitalized. The remaining $50,000 to $250,000 relates to repair of hardware and software and external consultant costs and will be expensed as incurred. Management of the Company believes it has an effective program in place to resolve the Year 2000 Issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event the Company does not successfully complete any additional phases, it may disrupt the Company's ability to do business with its suppliers and customers. In addition, there can be no assurance that the systems of Third Parties with which the Company interacts will not suffer from Year 2000 problems, or that such problems would not have a material adverse effect on the Company's business, financial condition or results of operations. In particular, Year 2000 problems that have been or may in the future be identified with respect to the IT and Non-IT systems of Third Parties having widespread national and international interactions with persons and entities generally (for example, certain IT and Non-IT systems of governmental agencies, utilities and information and financial networks) could have a material adverse impact on the Company's financial condition or results of operations. -13- The Company does not currently have any contingency plans with respect to the Year 2000 Issue. The Company currently is in the process of reviewing its Year 2000 compliance plans to determine what contingency plans, if any are appropriate. There can be no assurance that such measures will prevent the occurance of Year 2000 problems, which could have a material adverse effect upon Company's business, results of operations or financial condition. Forward-Looking Statements To the extent that this Report on Form 10-Q discusses expectations about market conditions, including the continued weakness experienced by the data storage and semiconductor industries, or about market acceptance and future sales of the Company's products or the Company's profitability, or otherwise makes statements about the future, including statements of the Company's Year 2000 readiness, such statements are forward looking and are subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. These factors include the cyclical nature of the data storage and semiconductor industries, risks associated with the acceptance of new products by individual customers and by the marketplace, and other factors discussed in the Business Description on Form 10-K and Annual Report to Shareholders. -12--14- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS As a result of the acquisition of Digital Instruments in May 1998, the Company succeeded to Digital's interest in an arbitration proceeding brought by one of Digital's former foreign distributors for wrongful termination. The former distributorReference is seeking lost profits and commissions of approximately $3,000,000 plus exemplary damages and reimbursement of the costs of the proceeding. Other than claims for post-termination commissions, which are not material, based on the facts knownmade to the Company, the Company believes the claims asserted by its former distributor are without merit. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders of the Company was heldCompany's quarterly report on May 29, 1998. Each person nominated for election as a director of the Company was elected to such position at the meeting by a minimum of 7,874,677 votes. The other matters voted upon at the meeting were as follows: (a) The proposed merger with Digital with and into the Company pursuant to the Agreement and Plan of Merger dated as of February 28, 1998, as amended; (b) an amendment to the Veeco Instruments Inc. Amended and Restated 1992 Employees' Stock Option Plan; and (c) the appointment of Ernst & Young LLP as auditors of the CompanyForm 10-Q for the fiscal year ending December 31,quarter ended June 30, 1998. The votes of the Company's stockholders on these matters were as follows: Broker Matters In Favor Opposed Abstained Non-Vote - ------- -------- ------- --------- -------- (a) 6,111,255 7,748 10,391 1,751,831 (b) 6,014,685 99,305 15,404 1,751,831 (c) 7,871,730 2,423 7,072 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits.Exhibits 27.1 Financial data schedule of Veeco Instruments Inc. for the quarterly period ended JuneSeptember 30, 1998, filed herein. 27.2 Financial data schedule of Veeco Instruments Inc. for the quarterly period ended JuneSeptember 30, 1997, (restated), filed herein. b) Reports on Form 8-K. The Registrant filed a current report on form 8-K on August 11, 1998 reporting that on May 29, 1998 it issued a press release announcing that it had completed a merger with Digital. Pursuant to the merger, Digital stockholders received an aggregate of 5,583,725 shares of Veeco common stock. -13-None. -15- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 13,November 12, 1998 Veeco Instruments Inc. By: /s/ Edward H. Braun -------------------------------------------------------- Edward H. Braun Chairman, CEO and President By: /s/ John F. Rein, Jr. -------------------------------------------------------- John F. Rein, Jr. Vice President, Finance and Chief Financial Officer -14--16- EXHIBIT INDEX Exhibits: 27.1 Financial data schedule of Veeco Instruments, Inc. for the quarterly period ended JuneSeptember 30, 1998, filed herein. 27.2 Financial data schedule of Veeco Instruments, Inc. for the quarterly period ended JuneSeptember 30, 1997 (restated), filed herein.