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UNITED STATES FORM 10-Q (Mark One)
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
£
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-12944 ZYGO CORPORATION
Delaware
06-0864500
Laurel Brook Road, Middlefield, Connecticut
06455 (860) 347-8506 N/A 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 S NO £ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).(1) YES £ NO £ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer £
Accelerated filer S
Non-accelerated filer £
Smaller reporting company £ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES £ NO S APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. 17,461,179 shares of Common Stock, $.10 Par Value, at May 3, 2010
(1)
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES EXCHANGE ACT OF 1934
OR
SECURITIES EXCHANGE ACT OF 1934
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
(Address of principal executive offices)
(zip code)
(Registrants telephone number, including area code)
(Former name, former address, and former fiscal year, if changed from last report)
(Do not check if a smaller
reporting company)
The registrant is not currently required to submit Interactive Data Files pursuant to Rule 405 of Regulation S-T.
FORWARD LOOKING STATEMENTS All statements other than statements of historical fact included in this Form 10-Q Quarterly Report regarding financial performance, condition and operations, and the business strategy, plans, anticipated revenues, bookings, market acceptance, growth rates, market opportunities, and objectives of
management of the Company for future operations are forward-looking statements. Forward-looking statements are intended to provide managements current expectations or plans for the future operating and financial performance of the Company based upon information currently available and
assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as anticipate, believe, estimate, expect, intend, plans, strategy, project, and other words of similar meaning in connection with a discussion of future operating or financial
performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending of
our customers; fluctuations in net sales to our major customer; manufacturing and supplier risks; risks of order cancellations, push-outs and de-bookings; dependence on timing and market acceptance of new product development; rapid technological and market change; risks in international operations;
risks related to the reorganization of our business; dependence on proprietary technology and key personnel; length of the revenue cycle; environmental regulations; investment portfolio returns; fluctuations in our stock price; the risk that anticipated growth opportunities may be smaller than anticipated or
may not be realized; risks related to the acquisition of Zemetrics and integration of the business and employees; the risk related to the Companys transition to new senior management; and the risk associated with unsolicited proposals to purchase the outstanding shares of common stock of the company. Any forward-looking statements included in this Quarterly Report speak only as of the date of this document. We undertake no obligation to publicly update or revise forward-looking statements to reflect events or circumstances occurring after the date of this Form 10-Q. Further information on
potential factors that could affect our business is described in this Form 10-Q and in our reports on file with the Securities and Exchange Commission, including our Form 10-K, as amended, for the fiscal year ended June 30, 2009. 2
PART IFINANCIAL INFORMATION Item 1. Financial Statements CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Net revenues
$
25,439
$
20,020
$
72,845
$
90,913 Cost of goods sold
13,962
15,311
43,241
57,461 Gross margin
11,477
4,709
29,604
33,452 Selling, general, and administrative expenses
8,127
15,120
23,215
36,349 Research, development, and engineering expenses
3,546
6,262
11,089
17,129 Impairment of goodwill
2,003
2,003
Provision for doubtful accounts and notes
(155
)
15
(102
)
1,014 Operating loss
(2,044
)
(16,688
)
(6,601
)
(21,040
) Other income (expense) Interest income
5
140
79
800 Miscellaneous expense
(101
)
(233
)
(17
)
(210
) Total other income (expense)
(96
)
(93
)
62
590 Loss from continuing operations before income taxes, including noncontrolling interest
(2,140
)
(16,781
)
(6,539
)
(20,450
) Income tax benefit (expense)
(131
)
5,175
(505
)
6,497 Net loss from continuing operations
(2,271
)
(11,606
)
(7,044
)
(13,953
) Loss from discontinued operations, net of tax
(193
)
(3,392
)
(2,667
)
(3,935
) Net loss including noncontrolling interest
(2,464
)
(14,998
)
(9,711
)
(17,888
) Less: Net earnings attributable to noncontrolling interest
232
103
677
751 Net loss attributable to Zygo Corporation
$
(2,696
)
$
(15,101
)
$
(10,388
)
$
(18,639
) Basic and dilutedLoss per share attributable to Zygo Corporation Continuing operations
$
(0.15
)
$
(0.70
)
$
(0.45
)
$
(0.87
) Discontinued operations
(0.01
)
(0.20
)
(0.16
)
(0.24
) Net loss per share
$
(0.16
)
$
(0.90
)
$
(0.61
)
$
(1.11
) Weighted average shares outstanding Basic and diluted shares
17,342
16,872
17,091
16,826 Amounts Attributable to Zygo Corporation Net loss from continuing operations attributable to Zygo Corporation
$
(2,503
)
$
(11,709
)
$
(7,721
)
$
(14,704
) Discontinued operations, net of tax
(193
)
(3,392
)
(2,667
)
(3,935
) Net loss attributable to Zygo Corporation
$
(2,696
)
$
(15,101
)
$
(10,388
)
$
(18,639
) See accompanying notes to condensed consolidated financial statements. 3
(Unaudited)
(Thousands, except per share amounts)
March 31,
March 31,
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
June 30, Assets Current assets: Cash and cash equivalents
$
40,891
$
32,723 Marketable securities
1,000
4,015 Receivables, net of allowance for doubtful accounts of $2,622 and $2,550, respectively (Note 8)
19,471
20,874 Inventories (Note 9)
25,157
30,452 Prepaid expenses and other
1,690
1,527 Income tax receivable
1,041
1,022 Current assets of discontinued operations (Note 3)
17
294 Total current assets
89,267
90,907 Marketable securities
980
499 Property, plant, and equipment, net (Note 10)
23,978
27,325 Intangible assets, net (Note 11)
5,541
4,211 Other assets
1,030
1,013 Non-current assets of discontinued operations (Note 3)
144 Total assets
$
120,796
$
124,099 Liabilities and Stockholders Equity Current liabilities: Accounts payable
$
5,143
$
5,089 Accrued progress payments and deferred revenue
5,839
5,924 Accrued salaries and wages
3,643
3,508 Other accrued liabilities
5,301
6,313 Income tax payable
317
Current liabilities of discontinued operations (Note 3)
389
331 Total current liabilities
20,632
21,165 Long-term income tax payable (Note 16)
1,826
1,826 Other long-term liabilities
1,525
1,081 Non-current liabilities of discontinued operations (Note 3)
365
Commitments and contingencies (Note 17) Stockholders equity: Common stock, $0.10 par value per share: 40,000,000 shares authorized; 19,637,269 shares issued (19,044,331 at June 30, 2009); 17,454,466 shares outstanding (16,914,978 at June 30, 2009)
1,965
1,904 Additional paid-in capital
162,301
156,176 Accumulated deficit
(43,938
)
(33,550
) Accumulated other comprehensive income (loss): Foreign currency translation effect
93
(306
) Treasury stock, at cost, 2,182,803 shares (2,129,353 at June 30, 2009)
(26,040
)
(25,641
) Total stockholders equityZygo Corporation
94,381
98,583 Noncontrolling interest
2,067
1,444 Total stockholders equity
96,448
100,027 Total liabilities and stockholders equity
$
120,796
$
124,099 See accompanying notes to condensed consolidated financial statements. 4
(Unaudited)
(Thousands, except share amounts)
2010
2009
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
Common Stock
Additional
Treasury Stock
Retained
Accumulated
Total
Non-
Total
Comprehensive
Shares
Amount
Shares
Amount Balance at June 30, 2008
16,732
$
1,882
$
152,663
2,092
$
(25,390
)
$
32,514
$
855
$
162,524
$
2,266
$
164,790 Comprehensive income (loss): Net earnings (loss)
(18,639
)
(18,639
)
752
(17,887
)
$
(18,639
) Unrealized gain on marketable securities
39
39
39
39 Foreign currency translation effect
(1,980
)
(1,980
)
(389
)
(2,369
)
(1,980
)
$
(20,580
) Non-cash compensation charges related to stock options
2,324
2,324
2,324 Employee stock purchase
26
3
204
207
207 Restricted stock vesting and related tax effect
96
12
(12
)
20
(162
)
(162
)
(162
) Exercise of employee stock options and related tax effect
26
2
183
185
185 Dividend paid
(1,302
)
(1,302
) Balance at March 31, 2009
16,880
$
1,899
$
155,362
2,112
$
(25,552
)
$
13,875
$
(1,086
)
$
144,498
$
1,327
$
145,825 Balance at June 30, 2009
16,915
$
1,904
$
156,176
2,129
$
(25,641
)
$
(33,550
)
$
(306
)
$
98,583
$
1,444
$
100,027 Comprehensive income (loss): Net earnings (loss)
(10,388
)
(10,388
)
677
(9,711
)
$
(10,388
) Foreign currency translation effect
399
399
(54
)
345
399
$
(9,989
) Non-cash compensation charges related to stock awards
1,824
1,824
1,824 Issuanceacquisition
361
36
3,865
3,901
3,901 Restricted stock vesting and related tax effect
124
21
(21
)
54
(404
)
(404
)
(404
) Exercise of employee stock options and related tax effect
54
4
457
5
466
466 Balance at March 31, 2010
17,454
$
1,965
$
162,301
2,183
$
(26,040
)
$
(43,938
)
$
93
$
94,381
$
2,067
$
96,448 See accompanying notes to consolidated financial statements. 5
(Unaudited)
(Thousands)
Paid-In
Capital
Earnings
(Accumulated
Deficit)
Other
Comprehensive
Income (Loss)
Zygo
Corp.
Controlling
Interest
Equity
Income (Loss)
Attributable
to Zygo Corp.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31,
2010
2009 Cash provided by operating activities: Net loss including noncontrolling interest
$
(9,711
)
$
(17,888
) Adjustments to reconcile net loss to cash provided by (used for) operating activities from continuing operations: Loss from discontinued operations
2,667
3,935 Depreciation and amortization
4,618
5,973 Loss on disposal of assets
55
136 Deferred income taxes
(53
)
(7,959
) Impairment of marketable securities
309 Impairment of goodwill
2,003
Impairment of intangible assets
1,211 Provision for doubtful accounts
71
1,031 Compensation cost related to share-based payment arrangements
1,759
2,294 Excess tax benefits from share-based payment arrangements
(10
)
(9
) Other
(74
)
(528
) Changes in operating accounts, excluding the effect of acquisition: Receivables
1,348
9,836 Inventories
6,046
(2,516
) Prepaid expenses and other current assets
(134
)
(129
) Accounts payable, accrued expenses, and taxes payable
(752
)
5,834 Net cash provided by operating activities from continuing operations
7,833
1,530 Net cash used for operating activities from discontinued operations
(1,359
)
(1,741
) Cash provided by investing activities: Additions to property, plant, and equipment
(1,040
)
(4,251
) Purchase of marketable securities
(1,998
)
(8,174
) Additions to intangibles and other assets
(427
)
(840
) Acquistions, net of cash
11
Proceeds from the sale and maturity of marketable securities
5,000
24,862 Proceeds from the sale of other assets
291
Net cash provided by investing activities
1,837
11,597 Cash provided by (used for) financing activities: Employee stock purchase
207 Dividend payment to noncontrolling interest
(1,301
) Excess tax benefits from share-based payment arrangements
10
9 Restricted stock vesting and related tax benefits
(404
)
(162
) Exercise of employee stock options
465
185 Net cash provided by (used for) financing activities
71
(1,062
) Effect of exchange rate changes on cash and cash equivalents
(214
)
(1,019
) Net increase in cash and cash equivalents
8,168
9,305 Cash and cash equivalents, beginning of year
32,723
26,421 Cash and cash equivalents, end of period
$
40,891
$
35,726 Supplemental Cash Flow Information Net cash paid (received) for income tax amounted to ($469) and $1,150 for the nine months ended March 31, 2010 and 2009, respectively. See accompanying notes to condensed consolidated financial statements. 6
(Unaudited)
(Thousands)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1: Accounting Policies Basis of Presentation and Principles of Consolidation Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets. The accompanying condensed consolidated financial statements include
the accounts of Zygo Corporation and its subsidiaries (Zygo, we, us, our or the Company). The Company follows accounting principles generally accepted in the United States of America (US GAAP). Zygos reporting currency is the U.S. dollar. The functional currency of the majority of
our foreign subsidiaries is their local currency and, as such, amounts included in the consolidated statements of operations are translated at the weighted-average exchange rates for the period. Assets and liabilities are translated at period-end exchange rates and resulting foreign exchange translation
adjustments are recorded in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). All transactions and accounts with the subsidiaries have been eliminated from the condensed consolidated financial statements. The results of operations for the three and nine
months ended March 31, 2010 are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet at March 31, 2010, the Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2010 and 2009, and the Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2010 and 2009 are
unaudited but, in managements opinion, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes included in our Annual Report on Form 10-K, as amended, for the year ended June 30, 2009, including items incorporated by reference therein. Discontinued Operations The Company classifies operations as discontinued when the operations have either ceased, or are expected to be disposed of in a sale transaction in the near term, and the operations and cash flows of all discontinued operations have been eliminated or will be eliminated upon the ceasing of
operations or the consummation of an expected sale transaction, and the Company will not have any significant continuing involvement in the discontinued operations. Authoritative guidance related to the impairment or disposal of long-lived assets requires the calculation of estimated fair value less cost
to sell of long-lived assets for assets held for sale. The calculation of estimated fair value less cost to sell includes significant estimates and assumptions, including, but not limited to: operating projections; excess working capital levels; property values; and the anticipated costs involved in the selling
process. As more fully described in Note 3, Discontinued Operations, we have discontinued the Singapore IC packaging metrology operations of our Vision Systems product line, which was included in our Metrology Solutions segment. Reclassification Certain amounts have been reclassified to conform to current-year presentations related to discontinued operations and non-controlling interests. Subsequent Events The Company has performed an evaluation of subsequent events through the date these financial statements were issued in Form 10-Q. Adoption of New Accounting Pronouncements On July 1, 2009, we adopted authoritative guidance issued by the Financial Accounting Standards Board (FASB) on changes to the accounting and reporting of noncontrolling interests. 7
(Dollars in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) This guidance requires that ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated balance sheets within equity, but separate from the parents equity. Furthermore, the amount of consolidated net income (loss) attributable to
the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of operations. The new guidance is reflected in the condensed consolidated financial statements for all periods presented. On July 1, 2009, we adopted authoritative guidance issued by the FASB on business combinations. The guidance provides specific guidance on how the acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the
acquirer, and goodwill acquired or any bargain purchase gains. The adoption of the new guidance was applied to the acquisition described in Note 2. Recent Accounting Guidance Not Yet Adopted In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective for us beginning on July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that
are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe adoption
of this new guidance will not have a material impact on our financial statements. In June 2009, the FASB issued authoritative guidance on the consolidation of variable interest entities, which is effective for us beginning on July 1, 2010. The new guidance requires revised evaluations of whether entities represent variable interest entities, ongoing assessments of power over such
entities, and additional disclosures for variable interests. We believe adoption of this new guidance will not have a material impact on our financial statements. Note 2: Business Acquisition On January 18, 2010, the Company entered into an agreement to purchase all of the outstanding stock and to retire the outstanding shareholder notes of Zemetrics, Inc., an Arizona corporation (Zemetrics), in exchange for 361,217 shares of the Companys common stock. The value of the common
stock issued was $3,901 based on the fair value of the common stock on the closing date of $10.80. Per the purchase agreement, the number of shares delivered was calculated by taking the sum of $1,941 and the outstanding shareholder notes (including accrued interest) of $856 divided by the average of
the closing prices of the Companys common stock reported by the NASDAQ Stock Market during the forty trading days ending two days prior to the closing date of January 22, 2010 of $7.74 (the Average Trading Price). Dr. Chris L. Koliopoulos, Zygos new President and CEO, was a major shareholder of Zemetrics stock as well as being the major holder of Zemetrics outstanding shareholder notes. Dr Koliopoulos received a total of 195,790 shares of Zygo Company common stock consisting of 106,233 shares of
Company common stock as consideration for the purchase of his shares of Zemetrics stock and 89,557 shares of Company common stock in payment of $680 principal amount of outstanding shareholder notes (plus accrued interest thereon) from Dr. Koliopoulos to Zemetrics. 8
(Dollars in thousands, except per share amounts)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Acquisition costs for the three and nine months ended March 31, 2010 were $377 and $457, respectively, and appear as part of Selling general & administrative (SG&A). An escrow account with 38,743 shares (including 16,421 shares issued to Dr. Koliopoulos) of Company common stock was established to secure potential indemnification claims until the date that is fifteen days after completion of the audit of the Companys financial statements for the first fiscal year
ending after the closing. The following is the final purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition on January 22, 2010: Cash
$
11 Inventories
403 Prepaid expenses
18 Property and equipment
15 Customer relationships
112 Technology
1,428 Goodwill
2,003 Total assets
3,990 Less: Liabilities assumed
89 Total
$
3,901 In addition, net deferred tax assets of $360 were recorded in the opening balance sheet at zero value, net of a full valuation allowance. Based on the Companys expectations of future U.S. taxable income the Company believes it is more likely than not that such net deferred tax assets could not be
realized. The purchase price was allocated to the underlying assets acquired and liabilities assumed based on their fair values. Analyses supporting the purchase price allocation include a valuation of assets and liabilities as of the closing date, an analysis of intangible assets and a detailed review of the opening
balance sheet to determine other significant adjustments required to recognize assets and liabilities at fair value. Intangible assets of technology and customer relationships were valued on an income approach based on future earnings projections the technology intangible asset relates to proprietary
technology incorporated into Zemetrics ZeMapper and related products. The following disclosure presents certain information regarding the Companys acquired intangible assets as of March 31, 2010. All acquired intangible assets were valued by the income approach and are being amortized over their initial estimated useful lives of three years for customer relationships
and seven years for technology with no estimated residual values. We review our intangible assets for impairment annually.
Customer
Technology
Total Balance at January 22, 2010
$
112
$
1,428
$
1,540 Amortization expense
(6
)
(34
)
(40
) Balance at March 31, 2010
$
106
$
1,394
$
1,500 The Company recorded an impairment charge of $2,003 relating to acquired goodwill in the period ended March 31, 2010 subsequent to the acquisition date. The Zemetrics reporting unit had minimal sales history and cumulative losses since inception. In addition, the fair value of common stock
issued as consideration on the closing date was $10.80 per share, which was significantly in excess of the implied value per share in the formula used in the purchase agreement to determine the number of common shares issued as consideration (which was based on the market price per share during the
40-day period prior to closing). In consideration of these factors, management determined the carrying value of the reporting unit exceeded its fair value, and that the implied fair value of goodwill was zero at March 31, 2010. 9
(Dollars in thousands, except per share amounts)
Relationships
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) The results of operations of Zemetrics are included in the consolidated financial statements from the date of acquisition. The following unaudited proforma condensed financial information shows the results of operations for the three and nine months ended March 31, 2010 and 2009 as though the
acquisition of Zemetrics had occurred at the beginning of each respective fiscal year. The proforma information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of
that time:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Net revenues
$
25,439
$
20,094
$
72,920
$
91,062 Net loss attributable to Zygo Corporation
$
(2,797
)
$
(15,442
)
$
(11,132
)
$
(19,540
) Earnings (loss) per share amounts: Basic and DilutedEarnings (loss) per share
$
(0.16
)
$
(0.90
)
$
(0.65
)
$
(1.16
) Note 3: Discontinued Operations During the quarter ended September 30, 2009, we determined to sell or otherwise close down the Singapore IC packaging metrology operations of our Vision Systems product line, included in our Metrology Solutions segment. Operations have ceased at this location. In accordance with authoritative
guidance, the results of operations for the aforementioned operations are presented in the Companys Condensed Consolidated Financial Statements as discontinued operations. In addition, adjustments are made to the carrying value of assets held for sale if the carrying value exceeds their estimated fair
value less cost to sell. The following table summarizes the operating results of our discontinued operations for the three and nine months ended March 31, 2010 and 2009:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Net revenues
$
$
11
$
665
$
960 Cost of goods sold
1,564
268
2,189 Gross margin
(1,553 )
397
(1,229
) Operating expenses
193
1,572
3,064
2,554 Loss before income taxes
(193
)
(3,125
)
(2,667
)
(3,783
) Income tax expense
267
152 Loss from discontinued operations, net of tax
$
(193
)
$
(3,392
)
$
(2,667
)
$
(3,935
) The three and nine month periods ended March 31, 2009 included write offs of inventory of $1.5 million (including cost of goods sold) and a $1.1 million impairment of intangible assets (included in operating expenses). The following table sets forth the assets and liabilities of our discontinued operations included in the Condensed Consolidated Balance Sheets of the Company as of March 31, 2010 and June 30, 2009:
March 31,
June 30, Receivables
$
$
269 Other assets
17
25 Current assets of discontinued operations
$
17
$
294 Property, plant, and equipment, net
$
$
144 Non-current assets of discontinued operations
$
$
144 10
(Dollars in thousands, except per share amounts)
March 31,
March 31,
March 31,
March 31,
2010
2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
March 31,
June 30, Accounts payable
$
$
102 Accrued expenses and other current liabilities
389
229 Current liabilities of discontinued operations
$
389
$
331 Other long-term liabilities
$
365
$
Non-current liabilities of discontinued operations
$
365
$
Note 4: Restructuring and related costs In connection with ongoing cost reduction efforts during fiscal 2009, we initiated restructuring actions related to workforce reductions and the consolidation of manufacturing operations in Tucson, Arizona. During the nine months ended March 31, 2010, we recorded restructuring and related charges,
consisting primarily of additional severance charges, totaling $602, of which $383 was included in selling, general, and administrative, and $219 was included in research, development, and engineering. The following table summarizes the accrual balances and utilization by cost type for the fiscal 2010 and fiscal 2009 restructuring actions:
March 31, 2010
Severance
Facility
Total Balance at June 30, 2009
$
262
$
452
$
714 Restructuring charges
602
602 Payments
(569
)
(168
)
(737
) Balance at March 31, 2010
$
295
$
284
$
579
March 31, 2009
Severance
Facility
Total Balance at June 30, 2008
$
226
$
$
226 Restructuring charges
868
868 Payments
(741
)
(741
) Balance at March 31, 2009
$
353
$
$
353 Note 5: Earnings Per Share Basic and diluted earnings per share are calculated in accordance with U.S. GAAP. For the three and nine months ended March 31, 2010, an aggregate of 2,018,479 and 2,080,015, respectively, (for the three and nine months ended March 31, 2009, an aggregate of 2,486,612 and 2,403,324, respectively)
of the Companys outstanding stock options and restricted stock awards (Stock Grants) were excluded from the calculation of diluted earnings per share because they were antidilutive. The following table sets forth the reconciliation of basic weighted average shares outstanding and diluted weighted average shares outstanding for the periods presented:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Basic weighted average shares outstanding
17,341,731
16,872,396
17,090,750
16,826,303 Dilutive effect of stock grants
Diluted weighted average shares outstanding
17,341,731
16,872,396
17,090,750
16,826,303 11
(Dollars in thousands, except per share amounts)
2010
2009
Consolidation
Costs
Consolidation
Costs
March 31,
March 31,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Basic and diluted weighted average shares are the same for all periods presented due to the net loss in each period. Note 6. Fair Value Measurements Authoritative guidance related to fair value measurements and disclosures establishes a valuation hierarchy for disclosure of the inputs to the valuation method used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level
3 inputs are unobservable inputs based on managements assumptions used to measure assets and liabilities at fair value. A financial asset or liabilitys classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2010 and June 30, 2009: Assets and Liabilities Measured at Fair Value:
Total carrying
Fair value measurements at March 31, 2010
Quoted prices
Significant
Significant Trading security
$
980
$
980
$
$
Foreign currency hedge
30
30
Total
$
1,010
$
980
$
30
$
Total carrying
Fair value measurements at June 30, 2009
Quoted prices
Significant
Significant Trading security
$
499
$
499
$
$
Foreign currency hedge
(14
)
(14
)
Total
$
485
$
499
$
(14
)
$
Assets Measured at Fair Value on a Nonrecurring Basis:
Total carrying
Fair value measurements at March 31, 2010
Total Gains
Quoted prices
Significant
Significant Goodwill(1)
$
$
$
$
$
(2,003
) Total
$
$
$
$
$
(2,003
)
(1)
See Note 2 to the consolidated financial Statements
Trading security consists of a mutual fund invested in international corporations. The Company uses quoted market prices to determine the fair value of its marketable securities included in Level 12
(Dollars in thousands, except per share amounts)
value at
March 31, 2010
in active
markets
(Level 1)
other
observable
inputs
(Level 2)
unobservable
inputs
(Level 3)
value at
June 30, 2009
in active
markets
(Level 1)
other
observable
inputs
(Level 2)
unobservable
inputs
(Level 3)
value at
March 31, 2010
(Losses)
in active
markets
(Level 1)
other
observable
inputs
(Level 2)
unobservable
inputs
(Level 3)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) 1. The carrying value of other financial instruments, including cash, accounts receivable, accounts payable, and accrued liabilities, approximates fair value due to their short maturities. Note 7: Share-Based Payments We recorded share-based compensation expense for the three months ended March 31, 2010 and 2009 of $654 and $672, respectively, with a related tax benefit of $235 and $242, respectively. We recorded share-based compensation expense for the nine months ended March 31, 2010 and 2009 of
$1,824 and $2,324, respectively, with a related tax benefit of $657 and $836, respectively. For the three months ended March 31, 2010 and 2009, $12 and $10, respectively, of share-based compensation expense were recorded in discontinued operations. For the nine months ended March 31, 2010 and 2009,
$65 and $29, respectively, of share-based compensation expense were recorded in discontinued operations. Stock Options We utilized the Black-Scholes valuation method to determine the weighted average fair value of the stock option grants for both fiscal 2010 and 2009 stock option valuations. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest
rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. Under the assumptions indicated below, the weighted-average fair value of stock option grants for the three months ended March 31, 2010
was $4.72. The weighted-average fair value of stock option grants for the nine months ended March 31, 2010 and 2009 were $4.44 and $4.43, respectively. During the nine months ended March 31, 2010 and 2009, we issued options to purchase an aggregate of 515,000 and 137,000 shares of common stock,
respectively. During the three months ended March 31, 2010, there were 375,000 options to purchase shares of common stock issued. The table below indicates the key assumptions used in the option valuation calculations for options granted in the periods presented and a discussion of our methodology for developing each of the assumptions used in the valuation model:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Term
4.1-5.1 Years
4.1-5.1 Years
4.6 Years Volatility
45.7%-60.9
%
45.7%-60.9%
45.5
% Dividend yield
0.0
%
0.0
%
0.0
% Risk-free interest rate
2.0%-2.4
%
2.0%-2.5
%
2.9
% Forfeiture rate
0-10.8
%
0-10.8
%
9.5
% TermThis is generally the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of ten years. An increase in the expected term will increase compensation expense. VolatilityThis is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatilities are based on implied volatilities from traded options of Zygos shares and historical volatility of Zygos shares. An increase in the expected volatility will increase compensation expense. Dividend YieldWe did not make any dividend payments during the last five fiscal years and we have no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense. Risk-Free Interest RateThis is the U.S. Treasury rate for the week of the grant having a term equal to the expected term of the option. An increase in the risk-free interest rate will increase compensation expense. 13
(Dollars in thousands, except per share amounts)
March 31,
March 31,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Forfeiture RateThis is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense. Restricted Stock Our share-based compensation expense also includes the effects of the issuance of restricted stock and restricted stock units. The compensation expense related to restricted stock awards is determined based on the market price of our stock at the date of grant applied to the total number of shares
that are anticipated to fully vest, which is then amortized over the expected term. During the three months ended March 31, 2010, an aggregate of 40,000 restricted stock units were issued at a weighted average grant price of $10.57. During the three months ended March 31, 2009, there were no grants of
restricted stock. During the nine months ended March 31, 2010 and 2009, an aggregate of 309,000 and 156,700 restricted stock units were issued at a weighted average grant price of $6.06 and $10.68, respectively. Generally, the restrictions on the restricted stock and restricted stock units granted to
employees lapse at a rate of 50% after three years and the remaining 50% after the fourth year. Note 8: Receivables At March 31, 2010 and June 30, 2009, receivables were as follows:
March 31,
June 30, Trade
$
20,517
$
19,601 Receivable from Nanometrics for sale of certain assets
1,349
3,392 Other
227
431
$
22,093
23,424 Allowance for doubtful accounts
(2,622
)
(2,550
)
$
19,471
$
20,874 On June 17, 2009, we and Nanometrics Incorporated (Nanometrics) announced that Nanometrics purchased inventory and certain other assets relating to Zygos Semiconductor Solutions business for approximately $3,392 and that the two companies entered into a supply agreement. Under an
exclusive OEM supply agreement aimed at wafer-based markets, Zygo will provide interferometer sensors to Nanometrics for incorporation into the UnifireÔ line of products, as well as Nanometrics family of automated metrology systems. Under the terms of the agreement, Nanometrics assumed all
inventory, backlog and customer orders and support responsibilities. Note 9: Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At March 31, 2010 and June 30, 2009, inventories were as follows:
March 31,
June 30, Raw materials and manufactured parts
$
12,391
$
15,214 Work in process
9,332
11,313 Finished goods
3,434
3,925
$
25,157
$
30,452 14
(Dollars in thousands, except per share amounts)
2010
2009
2010
2009
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Note 10: Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Management evaluates, on an ongoing basis, the carrying value of our property, plant, and equipment and makes adjustments when impairments are identified. Depreciation is based on the
estimated useful lives of the various classes of assets and is computed using the straight-line method. At March 31, 2010 and June 30, 2009, property, plant, and equipment were as follows:
March 30,
June 30,
Estimated Land
$
615
$
615
Building and improvements
17,390
17,390
15-40 Machinery, equipment, and office furniture
55,880
55,938
3-8 Leasehold improvements
1,008
908
1-5 Construction in progress
373
570
75,266
75,421 Accumulated depreciation
(51,288
)
(48,096
)
$
23,978
$
27,325 Depreciation expense was $1,283 and $1,835 for the three months ended March 31, 2010 and 2009, respectively. Depreciation expense was $4,040 and $5,566 for the nine months ended March 31, 2010 and 2009, respectively. Note 11: Intangible Assets Intangible assets include patents, trademarks, and a covenant not-to-compete. The cost of patents and trademarks is amortized on a straight-line basis over estimated useful lives ranging from 3-17 years. We entered into a non-compete agreement with a former officer and director of the Company
effective February 28, 2009. The agreement calls for payments over a four year period of declining amounts totaling $878, which includes $27 of imputed interest. As of March 31, 2010, current liabilities include $156 and long-term liabilities include $157 related to the payments under this agreement. We
are amortizing the value of the non-compete over four years on a declining balance method. Intangible assets, at cost, at March 31, 2010 and June 30, 2009 were as follows:
March 31,
June 30,
Estimated Patents and trademarks
$
5,805
$
5,586
5-17 Covenant not-to-compete
851
851
4 Customer relationships
112
3 Technology
1,428
7
8,196
6,437 Accumulated amortization
(2,655
)
(2,226
) Total
$
5,541
$
4,211 Intangible amortization expense was $213 and $199 for the three months ended March 31, 2010 and 2009, respectively. Intangible amortization expense was $563 and $574 for the nine months ended March 31, 2010 and 2009, respectively. Amortization expense related to certain intangible assets is
included in cost of goods sold in the Condensed Consolidated Statements of Operations. 15
(Dollars in thousands, except per share amounts)
2010
2009
Useful Life
(Years)
2010
2009
Useful Life
(Years)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Note 12: Warranty A limited warranty is provided on our products for periods ranging from 3 to 24 months and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires management to make estimates for defective product return rates and expected
costs to repair or replace products under warranty. If actual return rates or repair and replacement costs, or both, differ significantly from managements estimates, adjustments to the expense will be required. The following is a reconciliation of the accrued warranty liability, which is included in the Other accrued liabilities in the Condensed Consolidated Balance Sheets:
Nine Months Ended
2010
2009 Beginning balance
$
1,614
$
1,263 Reductions for payments made
(688
)
(749
) Changes in accruals related to pre-existing warranties
(352
)
(122
) Changes in accruals related to warranties made in the current period
988
892 Ending balance
$
1,562
$
1,284 Note 13: Segment Information Zygos Metrology Solutions division (segment) consists of direct and OEM sales primarily for the semiconductor and industrial markets. The Optical Systems division (segment) consists of components and opto-mechanical assemblies primarily for the medical, defense, and aerospace industries, which
are included in the industrial market. For the three and nine months ended March 31, 2010 and 2009, segment revenues and gross margin were as follows:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Metrology Solutions Revenues
$
15,178
$
13,922
$
48,312
$
65,126 Gross margin
$
7,919
$
4,046
$
24,256
$
28,263 Gross margin as a % of revenue
52
%
29
%
50
%
43
% Optical Systems Revenues
$
10,261
$
6,098
$
24,533
$
25,787 Gross margin
$
3,558
$
663
$
5,348
$
5,189 Gross margin as a % of revenue
35
%
11
%
22
%
20
% Total Revenues
$
25,439
$
20,020
$
72,845
$
90,913 Gross margin
$
11,477
$
4,709
$
29,604
$
33,452 Gross margin as a % of revenue
45
%
24
%
41
%
37
% Separate financial information by segment for total assets, capital expenditures, and depreciation and amortization is not evaluated by our chief operating decision-maker. Substantially all of our operating expenses, long-lived assets, and depreciation and amortization are U.S. based. 16
(Dollars in thousands, except per share amounts)
March 31,
March 31,
March 31,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Revenues by geographic area were as follows:
Three Months Ended
Nine Months Ended
2010
2009
2010
2009 Americas
$
13,997
$
10,276
$
40,213
$
44,030 Europe
3,773
2,526
9,870
11,209 Japan
5,442
4,164
12,692
21,853 Pacific Rim
2,227
3,054
10,070
13,821 Total
$
25,439
$
20,020
$
72,845
$
90,913 Note 14: Transactions with Stockholder Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc. (collectively referred to as Canon), amounted to $3,067 and $2,991 (12% and 15% of revenues, respectively) for the three months ended March 31, 2010
and 2009, respectively. For the nine months ended March 31, 2010 and 2009, sales to Canon amounted to $6,087 and $15,112, respectively (8% and 17% of revenues, respectively). Selling prices of products sold to Canon are based, generally, on the terms customarily given to distributors. At March 31,
2010 and June 30, 2009, there were, in the aggregate, $988 and $592, respectively, of trade accounts receivable from Canon. Note 15: Derivatives and Hedging Activities We enter into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are not designated as cash flow, fair value, or
net investment hedges under authoritative guidance on accounting for derivative instruments and hedging activities and, therefore, are marked-to-market with changes in fair value recorded in the Condensed Consolidated Statement of Operations. These contracts are entered into for periods consistent with
the expected currency transaction exposures, generally three to six months. Any gains and losses on the fair value of these contracts are expected to substantially offset corresponding losses and gains on the underlying transactions. As of March 31, 2010, we had six currency contracts outstanding involving our Japanese and German operations with notional amounts aggregating $1,875. These foreign currency hedges are not designated as hedging instruments. For the three months ended March 31, 2010 and 2009, we recognized
net unrealized gains of $31 and $365, respectively, from foreign currency forward contracts. For the nine months ended March 31, 2010 and 2009, we recognized net unrealized gains of $43 and $8, respectively, from foreign currency forward contracts. These unrealized gains are substantially offset by
foreign exchange losses on intercompany balances recorded by our subsidiaries and are recorded in miscellaneous income (expense) on our Condensed Consolidated Statements of Operations. The following table summarizes the fair value of derivative instruments as of March 31, 2010: Derivatives not designated as hedging instruments Balance Sheet Location Foreign exchange contracts
6 Prepaid expenses
$
29 17
(Dollars in thousands, except per share amounts)
March 31,
March 31,
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued) Note 16: Income Taxes
Three Months Ended
Nine Months Ended
2010
2009
2010
2009
Amount
Tax
Amount
Tax
Amount
Tax
Amount
Tax Income tax (expense) benefit
$
(131
)
6
%
$
5,175
31
%
$
(505
)
8
%
$
6,497
32
% Income tax expense for the three months ended March 31, 2010 included tax expense on foreign operations and minor adjustments on domestic returns which were recently filed for the prior tax year. We recorded no increase in net deferred tax benefit for the domestic operating loss incurred in this
period. We continue to maintain a valuation allowance on all of our net deferred tax assets totaling $45,418 at March 31, 2010. We previously adopted the authoritative guidance for accounting for uncertainty in income taxes. Due to our net operating loss carry-forwards, we have accrued no interest and penalties for the unrecognized tax benefits; however, our accounting policy is to recognize interest related to unrecognized
tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense. In the normal course of business, we provide for uncertain tax positions and adjust our unrecognized tax benefits accordingly. For the quarter ended March 31, 2010, we did not recognize an
additional liability or realize any benefit for uncertain tax positions. The total liability for uncertain tax liabilities was $1,826 at both March 31, 2010 and June 30, 2009 which is included in long-term income tax payables. We are not currently aware of any tax positions that would require a material
adjustment to the amount of our unrecognized tax benefits (or liabilities). We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We remain subject to U.S. federal income tax audit adjustments for years after June 30, 2001 due to our significant NOL and credit carry-forwards. We are, generally, not subject to state and
foreign income tax audit or tax adjustments for years prior to June 30, 2006. We recently settled a federal U.S. income tax audit for domestic taxes for the periods ended June 30, 2007 and 2008 with no material changes as a result of the audit. Note 17: Commitments and Contingencies From time to time we are subject to certain legal proceedings and claims that arise in the normal course of our business. At March 31, 2010, we have a reserve of $1,360 for a potential royalty claim. In the opinion of management, any excess settlement of the royalty claims above the amount
recorded is not expected to have an adverse effect on our financial condition, results of operations, or liquidity. We are aware of certain levels of contamination on our property. In addition, we are aware of certain contamination on an adjacent property that we formerly owned. The future effect of
environmental matters, including potential liabilities, is often difficult to estimate. Presently testing of both properties has not shown contaminants above reportable levels. We are unable to determine or reasonably estimate the amount of costs, if any, that we might incur or for which we may ultimately
become responsible. We will record an environmental reserve when it is both probable that a liability has been incurred and the amount of any liability can be reasonably estimated, whether a claim has been asserted or unasserted. 18
(Dollars in thousands, except per share amounts)
March 31,
March 31,
Rate %
Rate %
Rate %
Rate %
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets. We conduct the majority of our manufacturing in our 153,500 square
foot facility in Middlefield, Connecticut and our 39,780 square foot facility in Tucson, Arizona. On January 19, 2010, Dr. Chris L. Koliopoulos was appointed President and Chief Executive Officer. With the commencement of his employment, Dr. Koliopoulos also became a member of the Board of Directors of Zygo. On January 22, 2010, we completed the acquisition of Zemetrics, Inc.
(Zemetrics), a small interferometric metrology company in which Dr. Koliopoulos was a major shareholder, for 361,217 shares of our common stock. The acquisition of Zemetrics, which has recently introduced an advanced product in the optical instrumentation market, further strengthens our offering in
our core markets, which is a strategic focus for us. Zemetrics is included in the Metrology Solutions segment. The purchase price for Zemetrics was valued at $3.9 million. The purchase price was allocated to tangible and intangible assets. Intangible assets included goodwill, technology, and customer relationships. The Company recorded an impairment charge of $2.0 million relating to acquired goodwill in the
period ended March 31, 2010 subsequent to the acquisition date. The Zemetrics reporting unit had minimal sales history and cumulative losses since inception. In addition, the fair value of common stock issued as consideration on the closing date was $10.80 per share, which was significantly in excess of
the implied value per share in the formula used in the purchase agreement to determine the number of common shares issued as consideration (which was based on the market price per share during the 40 day period prior to closing). In consideration of these factors, management determined the carrying
value of the reporting unit exceeded its fair value, and that the implied fair value of goodwill was zero at March 31, 2010. Technology of $1.4 million and customer relationships of $0.1 million will be amortized over seven and three years, respectively. For the third quarter of fiscal 2010, we reported a net loss of $2.7 million ($2.5 million loss from continuing operations), or a loss of $0.16 ($0.15 loss from continuing operations) per diluted share, as compared with a net loss of $15.1 million ($11.7 million loss from continuing operations), or $0.90
($0.70 loss from continuing operations) per diluted share, for the third quarter of fiscal 2009. The third quarter of fiscal 2010 loss from continuing operations included $3.3 million of operating expenses primarily related to costs for the acquisition of Zemetrics, including the subsequent charge related to
goodwill as part of the purchase price valuation noted above, the Companys evaluation of the unsolicited offer by II-VI Incorporated, and search costs for our new chief executive officer. The third quarter of fiscal 2009 loss from continuing operations included $9.8 million of charges primarily related to
the termination of the proposed ESI merger, inventory adjustments, severance charges, and asset impairment charges. Over the last four fiscal quarters, we have divested ourselves of our Semiconductor and Flat Panel Display (FPD) product lines and shut down our IC packaging operations in Singapore in order to concentrate on our core technologies. We continue to sell Original Equipment Manufacturer
(OEM) sensor heads related to semiconductor and FPD systems manufactured through our Instruments product line. The IC packaging metrology operations in Singapore have been shut down. These changes in our organization are expected to significantly reduce our research, development and
engineering (RD&E) spending in the remainder of our fiscal year as compared with the prior year. Our RD&E expenses included in continuing operations for the nine months ended March 31, 2010 decreased $6.0 million as compared with the prior year period. To a lesser extent, our selling, general and
administrative expenses are expected to decrease with these changes. The average sales price for the OEM sensors is significantly less than the average sales price of an in-line semiconductor or FPD system. Therefore, our total revenues related to these markets will be less than if we remained in the in-
line market. However, we believe these product lines will be more profitable in the future with the reduction in operating expenses, combined with the gross margin on the OEM sensor heads. 19
Bookings for third quarter of fiscal 2010 were $27.3 million, as compared with $28.6 million and $15.6 million for the second quarter of fiscal 2010 and third quarter of fiscal 2009, respectively. Bookings for our Metrology Solutions segment accounted for 59% of the bookings received for the three
months ended March 31, 2010, with the Optical Systems segment accounting for 41% of bookings. The decrease in bookings from the second quarter of fiscal 2010 was due to slight decreases in the Metrology Solutions segment of $0.5 million and in the Optical Systems segment of $0.8 million. This
decrease in Metrology Solutions segment bookings primarily resulted from lower bookings for our instruments products, but we do not expect this decline to portend a future trend. We can receive large optics bookings that have delivery dates that span several quarters and the timing of these bookings
can cause fluctuations in our bookings from quarter to quarter. The increase in bookings from the third quarter of fiscal 2009 is due to an increase of $9.2 million in the Metrology Solutions segment and an increase in the Optical Systems segment of $2.5 million. The increase in the Metrology systems
was primarily related to a volume increase in lithography and instruments bookings as the markets continue to rebound over the prior year. The increase in the Optical Systems segment was primarily related to an increase in contract manufacturing bookings. Our Optical Systems segment continues to
include our optical components and electro-optics contract manufacturing products. Our Metrology Solutions segment now includes an OEM product category, which consists of lithography products, display sensor heads, and semiconductor sensor heads. CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed
consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our condensed consolidated financial statements. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, inventories, marketable securities, warranty obligations, income taxes, long-lived assets, and share-based payments. Management bases its estimates and judgments on historical experience and current market conditions and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. As
discussed in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations of the Companys Annual Report on Form 10-K, as amended, for the fiscal year ended June 30, 2009, management considers the Companys policies on revenue recognition and allowance for
doubtful accounts; inventory valuation; other than temporary impairment of marketable securities; share-based compensation; warranty costs; accounting for income taxes; valuation of long-lived assets; and accruals for health insurance to be critical accounting policies due to the estimates, assumptions, and
application of judgment involved in each. On July 1, 2009, we adopted authoritative guidance that changes the accounting and reporting for minority interests. Minority interests have been recharacterized as noncontrolling interests and are reported as a component of equity separate from the parents equity. Purchases or sales of equity
interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the condensed consolidated statements of operations, and upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. We have classified noncontrolling interest (previously minority interest) as a component of equity for all periods presented. The new guidance is reflected in the condensed consolidated
financial statements for all periods presented. 20
RESULTS OF OPERATIONS Net Revenues
Fiscal 2010
Fiscal 2009
Amount
Net Sales
Amount
Net Sales
(Dollars in millions) Quarter ended March 31 Metrology Solutions
$
15.2
60
%
$
13.9
70
% Optical Systems
10.2
40
%
6.1
30
% Total
$
25.4
100
%
$
20.0
100
% Nine months ended March 31 Metrology Solutions
$
48.3
66
%
$
65.1
72
% Optical Systems
24.5
34
%
25.8
28
% Total
$
72.8
100
%
$
90.9
100
% Overall, revenues for the three months ended March 31, 2010 increased 27% as compared with the prior year period, reflecting increases in the Metrology Solutions segment revenues of 9% and in the Optical Systems segment revenues of 67%. The increase in Metrology Solutions segment revenues
of $1.3 million was primarily due to volume increases in lithography of $1.1 million and vision systems of $0.7 million, partially offset by larger semiconductor equipment sales in the prior year of $1.0 million. The Metrology Solutions segment was positively affected by additional revenue of $0.4 million
related to OEM heads. The decrease in semiconductor equipment revenues is due to the arrangement with Nanometrics in June 2009. With the sale of the semiconductor product line in June 2009, we will no longer have any large system revenues. Revenues related to semiconductor products will be
sensor head revenues that will be included in the Metrology Solutions segment related to OEM revenues. The increase in the Optical Systems segment revenues of $4.1 million was primarily due to increases in contract manufacturing of $2.3 million and optical components of $1.8 million. The increase in
contract manufacturing is primarily related to existing customers showing increased activity in the current year, especially related to medical devices. Revenues for the nine months ended March 31, 2010 decreased 20% as compared with the prior year period, reflecting decreases in the Metrology Solutions segment revenues of 26% and in the Optical Systems segment revenues of 5%. The decrease in Metrology Solutions segment revenues was
primarily due to volume decreases in display solutions of $7.2 million, lithography of $6.5 million, and instruments of $5.8 million, partially offset by increased revenues in vision systems of $1.6 million. New business in the Metrology Solutions segment related to OEM heads increased revenues by $0.8
million. The volume decreases in lithography and instruments revenues, in large measure, were due to a reduction in bookings that appears to be tied directly to the general global economic downturn, most notably in the semiconductor industry. A decrease in bookings from Canon accounted for the
majority of the decrease in lithography revenues. The decrease in display solution revenues was due to the arrangement entered into with Toho Technology Corporation (Toho) in October 2009. Future revenue related to display will be derived from the sale of sensor heads that will be included in the
Metrology Solutions segment related to OEM revenues. These OEM revenues are expected to be lower than the full display system revenues. The decrease in the Optical Systems segment revenues was primarily due to a decrease in contract manufacturing of $1.6 million, partially offset by increased
revenues in optical components of $0.4 million. The decrease in contract manufacturing was related to a reduction in bookings from key customers during the latter part of fiscal 2009 and early in fiscal 2010. We have recently seen an increase in bookings in both of these areas. Revenues in U.S. dollars for the three months ended March 31, 2010 and 2009 were approximately 71% and 80% of total revenues, respectively, with the remaining 29% and 20%, respectively, being in Euro, Yen, and Yuan. Revenues in U.S. dollars for the nine months ended March 31, 2010 and
2009 were approximately 71% and 78% of total revenues, respectively, with the remaining 29% and 22%, respectively, being in Euro, Yen, and Yuan. For our revenues which are 21
%
%
based in foreign currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in foreign currency until collection occurs. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar, or in the general economic conditions in our export
markets, could materially impact the revenues of our products in these markets and our Condensed Consolidated Balance Sheets and Statements of Operations. Gross Margin by Segment
Fiscal 2010
Fiscal 2009
Amount
Gross
Amount
Gross
(Dollars in millions) Quarter ended March 31 Metrology Solutions
$
7.9
52
%
$
4.0
29
% Optical Systems
3.6
35
%
0.7
11
% Total
$
11.5
45
%
$
4.7
24
% Nine months ended March 31 Metrology Solutions
$
24.3
50
%
$
28.3
43
% Optical Systems
5.3
22
%
5.2
20
% Total
$
29.6
41
%
$
33.5
37
% Gross margin as a percentage of revenues for the three months ended March 31, 2010 was 45%, which represents an increase of twenty-one percentage points from the comparable prior year period. Within the Metrology Solutions segment, the gross margin as a percentage of revenues was 52% for
the three months ended March 31, 2010 as compared with the prior year comparable period of 29%, which included charges for severance and inventory adjustments totaling $2.2 million. Excluding these charges, the gross margin for the three months ended March 31, 2009 would have been 45%. The
increase to 52% in the current year period was primarily due to increased factory production while we reduced factory costs. Within the Optical Systems segment, the gross margin increased as a percentage of revenues to 35% for the three months ended March 31, 2010 as compared with 11% in the
comparable prior year period, primarily due to improving revenues and product mix, as well as improved operations in the current fiscal year. The prior year period experienced production issues related to certain optics resulting in increased manufacturing costs and delayed shipments. Gross margin as a percentage of revenues for the nine months ended March 31, 2010 was 41%, which represents an increase of four percentage points from the comparable prior year period. Within the Metrology Solutions segment, gross margin increased as a percentage of revenues to 50% for the
nine months ended March 31, 2010 as compared with the prior year comparable period of 43%, which included charges for severance and inventory adjustments totaling $2.2 million. Excluding these charges, the gross margin as a percentage of revenue in the prior year period would have been 47%. The
increase to 50% in the current year period was primarily due to improved factory costs and a decrease in low margin display revenues. Within the Optical Systems segment, the gross margin increased as a percentage of revenues to 22% for the nine months ended March 31, 2010 as compared with 20%
in the comparable prior year period. The Optical Systems segment gross margin for the nine months ended March 31, 2010 would have been higher if it were not for production issues resulting in a negative gross margin experienced in the first quarter of fiscal 2010 related to certain optics, resulting in
increased manufacturing costs and delayed shipments in that quarter. Selling, General, and Administrative Expenses (SG&A)
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
8.1
32
%
$
15.1
76
% Nine months ended March 31
$
23.2
32
%
$
36.3
40
% 22
Margin %
Margin %
of Sales
of Sales
SG&A
expenses decreased in the three months ended March 31, 2010 by $7.0 million
from the comparable prior year period. SG&A expenses for the three months
ended March 31, 2010 included total charges of $3.3 million associated with
the Zemetrics acquisition, the Companys evaluation of the
unsolicited offer by II-VI Incorporated, and CEO search related costs. SG&A
expenses for the three months ended March 31, 2009 included total charges of
$6.7 million primarily related to the termination of the proposed ESI merger,
severance charges, and asset impairment charges. Excluding these charges in
each period, the SG&A expenses would have decreased to $6.8 million in
the quarter ended March 31, 2010 from $8.4 million in the comparable prior
year period. This decrease is primarily related to cost savings initiatives
and by a reduction in sales and marketing expenses of $1.0 million related
to the change in our focus in the flat panel and semiconductor markets with
the OEM agreements we signed in fiscal 2009 and earlier this fiscal year. SG&A
expenses decreased in the nine months ended March 31, 2010 by $13.1 million
from the comparable prior year period. The nine months ended March 31, 2010
included $4.6 million in total charges related to the items referred to above.
The nine months ended March 31, 2009 included $10.2 million in charges related
to the items referred to above. Excluding these charges in each period, the
SG&A expenses would have decreased to $20.6 million in the current year
nine month period from $26.1 million in the comparable prior year period.
The decrease in expenses was primarily due to expense reductions related
to our change in focus in the flat panel display and semiconductor markets
with the OEM agreements we signed in fiscal 2009 and earlier this year of
$2.1 million, reductions in salaries and wages of $1.2 million, a reduction
of $0.3 million in travel expenses, and reductions of an aggregate of $1.9
in various other expenses as part of our cost savings initiatives. Research, Development, and Engineering Expenses (RD&E)
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
3.5
14
%
$
6.3
32
% Nine months ended March 31
$
11.1
15
%
$
17.1
19
% RD&E for the three and nine months ended March 31, 2010 decreased by $2.8 million and $6.0 million, respectively, as compared with the prior year periods. RD&E for the three and nine months ended March 31, 2009 included charges of $0.4 and $0.9 million, respectively, related to asset impairment
and severance expenses. Excluding these charges, RD&E would have decreased to $3.1 million in the current year period from $5.4 million in the prior year period. The decrease in RD&E was primarily due to the elimination of costs related to the semiconductor and display product lines in June and
October 2009. Impairment of Goodwill
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
2.0
8
%
$
0
% Nine months ended March 31
$
2.0
3
%
$
0
% The Company recorded an impairment charge related to Zemetrics of $2.0 million during the three months ended on March 31, 2010 relating to acquired goodwill subsequent to the acquisition date. The Zemetrics reporting unit had minimal sales history and cumulative losses since inception. In
addition, the fair value of common stock issued as consideration on the closing date was $10.80 per share, which was significantly in excess of the implied value per share in the formula used in the purchase agreement to determine the number of common shares issued as consideration (which was based
on the market price per share during the 40-day period prior to closing). In consideration of these factors, management determined the carrying value of the reporting unit exceeded its fair value, and that the implied fair value of goodwill was zero at March 31, 2010. 23
of Sales
of Sales
of Sales
of Sales
Provision for Doubtful Accounts and Notes
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
(0.2
)
-1
%
$
0
% Nine months ended March 31
$
(0.1
)
0
%
$
1.0
1
% Provision for doubtful accounts and notes for the three and nine months ended March 31, 2010 decreased by $0.2 million and $1.1 million as compared with the prior year period, primarily due to changes in the purchase allocation relating to the Solvision asset acquisition of which a note receivable
was reserved in fiscal 2009. Prior to the acquisition, we had loaned $1.5 million to Solvision in October 2007. Other Income (Expense)
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
(0.1
)
0
%
$
(0.1
)
0
% Nine months ended March 31
$
0.1
0
%
$
0.6
1
% Other income (expense) for the nine months ended March 31, 2010 decreased by $0.5 million, as compared with the prior year period, primarily due to a decrease in investment income. We changed our investment portfolio and have a low risk government security bond, which carries a significantly
lower interest rate than corporate bonds. Income Tax Benefit (Expense)
Fiscal 2010
Fiscal 2009
Amount
Tax Rate
Amount
Tax Rate
(Dollars in millions) Quarter ended March 31
$
(0.1
)
6
%
$
5.2
31
% Nine months ended March 31
$
(0.5
)
8
%
$
6.5
32
% Income tax benefit (expense) for the three and nine months ended March 31, 2010 included income taxes in state and foreign jurisdictions which could not be offset by current and prior net operating losses. We continue to maintain a valuation allowance on all of our net deferred tax assets totaling
$45.4 million at March 31, 2010. In future periods, the valuation allowance could be reduced based upon sufficient evidence indicating that it is more likely than not that a portion of the deferred tax assets will be realized. Discontinued Operations
Fiscal 2010
Fiscal 2009
Amount
%
Amount
%
(Dollars in millions) Quarter ended March 31
$
(0.2
)
1
%
$
(3.4
)
17
% Nine months ended March 31
$
(2.7
)
4
%
$
(3.9
)
4
% The loss from discontinued operations for the three and nine months ended March 31, 2010 included charges related to closing the operation, including severance charges, write-down of assets, and the related effect of foreign currency translation losses. The loss from discontinued operations for the
three and nine months ended March 31, 2009 included operating losses, an impairment of intangible assets of $1.1 million and an inventory write-off of $1.5 million. 24
of Sales
of Sales
of Sales
of Sales
%
%
of Sales
of Sales
TRANSACTIONS WITH STOCKHOLDER Sales to Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc. (collectively referred to as Canon), amounted to $3.1 million and $3.0 million (12% and 15% of revenues, respectively) for the three months ended March
31, 2010 and 2009, respectively. For the nine months ended March 31, 2010 and 2009, sales to Canon amounted to $6.1 million and $15.1 million, respectively (8% and 17% of revenues, respectively). Selling prices of products sold to Canon are based, generally, on the terms customarily given to
distributors. At March 31, 2010 and June 30, 2009, there were, in the aggregate, $1.0 million and $0.6 million, respectively, of trade accounts receivable from Canon. LIQUIDITY AND CAPITAL RESOURCES We assess our liquidity in terms of our ability to generate cash to fund our operating, investing, and financing activities. Our principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect our overall management of liquidity include: capital
expenditures, customer credit requirements, investments in businesses, expenses related to our partnerships and leadership transition, and the adequacy of available bank lines of credit. The distress in the financial markets has led to severely diminished liquidity and credit availability, rating downgrades and declining valuations of certain investments, and extreme volatility in security prices. We have assessed the implications the distress in the financial markets has on our current
business and determined that there has not been a significant impact to our financial position, results of operations, or liquidity during the first nine months of fiscal 2010, other than the indirect effect that the current uncertainty in global economic conditions resulting from the disruption in credit markets
has had on customer demand for our products. At March 31, 2010, cash and marketable securities were $41.9 million, an increase of $5.2 million from $36.7 million at June 30, 2009. Our marketable security consists of $1.0 million in a United States Treasury Bill as security for bank guarantees and standby letters of credit. These are used primarily
overseas to cover certain warranty periods and are valued at 10% of the associated contract value. As of March 31, 2010, $0.1 million in standby letters of credit are outstanding and are expected to expire at varying dates through January 2011. The cash equivalents balance in our money market account, which is invested primarily in U.S. government securities, is $26.9 million as of March 31, 2010. We do not believe there is any risk to liquidity in the money market account, nor are there currently any limits on redemptions. We have $3.6 million of gross accounts receivable related to our display customers which are overdue. Of this amount, $1.7 million has been reserved. We have agreed to payment terms with several display customers and are in negotiations with other customers. Although we are pursuing the
collection of such amounts, our liquidity will be affected by the timing of the receipt of such payments. We have not experienced significant delays in payments from non-display customers. We currently have no debt or lines of credit. In the future, if the need for debt or credit lines arose there is no assurance that we would be able to secure such financing due to the lack of credit availability in the financial markets or our own financial position. We believe we have sufficient operating flexibility and cash reserves to maintain adequate amounts of liquidity and to meet our future liquidity requirements for at least the next twelve months. The impact of continued market volatility, however, cannot be predicted. Cash Flow from Operating Activities Nine
Months Ended
2010
2009 (Dollars
in millions) Net cash flows provided by operating activities from continuing operations
$
7.8
$
1.5 Net cash flows used for operating activities from discontinued operations
$
(1.4
)
$
(1.7
) 25
March 31,
Cash flows from operating activities from continuing operations for the first nine months of fiscal 2010 increased by $6.3 million as compared with the prior year period. This was primarily due to a decrease in net loss from continuing operations of $6.3 million compared to the prior period. Other
significant positive increases in cash flow from operations in the current year include a decrease in inventory of $6.0 million as we continue to manage our inventory levels and a decrease in net receivables of $1.3 million. The decrease in inventory includes a decrease in semiconductor and flat panel
display inventory of $2.6 million as we migrate to being an OEM supplier instead of an in-line system provider. Cash Flow from Investing Activities Nine
Months Ended 2010 2009 (Dollars
in millions) Net cash flows provided by investing activities
$
1.8
$
11.6 Cash flows provided by investing activities for the first nine months of fiscal 2010 decreased by $9.8 million as compared with the prior year period. This decrease was primarily related to a net decrease in proceeds and purchases of marketable securities of $13.7 million, partially offset by a decrease
in fixed asset additions of $3.3 million. Cash Flow from Financing Activities Nine
Months Ended 2010 2009 (Dollars
in millions) Net cash flows used for financing activities
$
$
(1.1
) Cash flows used for financing activities in the nine months ended March 31, 2010 decreased by $1.1 million as compared with the prior year period. For the nine months ended March 31, 2009, there was a dividend payment of $1.3 million to a minority interest partner. A dividend was not paid in the
nine months ended March 31, 2010. OFF-BALANCE SHEET ARRANGEMENTS We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating parts of our business that are not consolidated into our financial statements. We have not guaranteed any obligations of a third party. Item 3. Quantitative and Qualitative Disclosures about Market Risk There has been no material changes that have occurred in our quantitative and qualitative market risk disclosures during the nine months ended March 31, 2010 except for the ongoing economic uncertainty which is impacting us through decreased order levels and order push-outs by some of our
customers. Our exposure to market risk is presented in Item 7a., Quantitative and Qualitative Disclosures about Market Risk, of our Annual Report on Form 10-K, as amended, for the year ended June 30, 2009, filed with the Securities and Exchange Commission (the 2009 Annual Report). Current uncertainty in global economic conditions resulting from among other things, the recent disruptions in credit and financial markets, poses a risk to the overall economy that could impact customer demand for our products, impact our ability to manage relationships with our customers,
suppliers and creditors, or cause supplier or customer disruptions resulting from tighter credit markets, among other risks. Item 4. Controls and Procedures As previously disclosed in a Current Report on Form 8-K which we filed on May 14, 2010, we determined that accounting errors were made in our statements of cash flows. The errors relate to 26
March 31,
March 31,
the allocation of cash flows from operating activities between continuing operations and discontinued operations. Based on the impact of the aforementioned accounting errors, we determined to restate our interim financial statements as of and for the periods ending September 30, 2009 and 2008 and
December 31, 2009 and 2008. The Companys management has evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of December 31, 2009. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer concluded, as a result of the material weakness described in the following paragraph, that the Companys disclosure controls and procedures were not effective as of such date. Management has determined that the internal control deficiency that resulted in the aforementioned accounting errors is a material weakness in internal controls over financial reporting. The material weakness existed at September 30, 2009, December 31, 2009, and March 31, 2010 and was not
identified until May 10, 2010. We are in the process of developing a remediation plan to address such deficiency, which we expect to implement in the fourth quarter of fiscal 2010. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. In response to this material weakness in internal control, management performed additional analyses and other post-closing procedures to ensure our restated condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly,
management, including our Chief Executive Officer and Chief Financial Officer, believes the restated condensed consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. Except as described in the preceding paragraph, there have been no changes in the Companys internal control over financial reporting during the third quarter of fiscal 2010 that materially affected, or are reasonably likely to materially affect the Companys internal control over financial reporting. 27
PART IIOTHER INFORMATION Item 1A. Risk Factors In addition to the information set forth below and elsewhere in this report, the reader should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2009 Annual Report, which could materially affect our business, financial condition, or future results. The risks described in
our 2009 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. Our recent senior management change may impact our ability to execute our business strategy. On January 19, 2010, we announced the appointment of Dr. Chris L. Koliopoulos as our new President and Chief Executive Officer and member of our Board of Directors. Dr. Koliopoulos replaced J. Bruce Robinson, our former Chief Executive Officer, who in October 2009 announced his
impending retirement. Although Dr. Koliopoulos is considered a leading expert in optical interferometry and founded and led two successful optical metrology businesses, we cannot assure you that he will be successful in integrating with other members of our senior management or in executing our
growth strategy. Potential changes in U.S. tax law could materially affect our future results. In May 2009, President Obama and the U.S. Treasury Department proposed changing certain of the U.S. tax rules for U.S. corporations doing business outside the United States. The proposed changes include limiting the ability of U.S. corporations to deduct expenses attributable to offshore earnings,
modifying the foreign tax credit rules and further restricting the ability of U.S. corporations to transfer funds between foreign subsidiaries without triggering U.S. income tax. On February 1, 2010, President Obama and the Office of Management and Budget released the federal governments budget for
the 2011 fiscal year, which contained certain similar proposals. Although the scope of the proposed changes remains unclear and the likelihood of enactment is uncertain, it is possible that these or other changes in the U.S. tax laws could increase our effective tax rate and adversely affect our after-tax
profitability. Unsolicited proposals to acquire our common stock may require a significant expenditure of time and resources on our part. On January 5, 2010, we received an unsolicited proposal from II-VI Incorporated to acquire all of the outstanding shares of common stock of the company. Our Board of Directors hired an independent advisor, evaluated this proposal carefully in the context of several things, including our current
strategic plans, and unanimously rejected the offer. If we were to receive other unsolicited proposals, a financial review and consideration of a proposal may require the expenditure of significant time and resources by us, and be a source of distraction for our employees. Reorganization activities could adversely affect our ability to execute our business strategy. We have been in the process of reorganizing our business structure due to worldwide market conditions and other factors that have reduced the demand for our products and services. The reorganization includes the discontinuation of our Singapore IC packaging metrology operations and other
personnel cost reductions. As a result of these and other initiatives, our ability to execute our business strategy going forward could be adversely affected in a number of ways, including the loss of key employees; diversion of managements attention from normal daily operations of the business;
diminished ability to respond to customer requirements, both as to products and services; loss of reputation with our customers if we exit a business line; increased difficulty in maintaining existing bookings and collecting accounts receivable impacted by the reorganization; and disruption of our
engineering and manufacturing processes. Depending on market conditions, we may implement additional restructuring initiatives in future periods. 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The following table provides information about our purchases during the quarter ended March 31, 2010 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.
Period
Total number of
Average price
Total number of
Approximate dollar January 1, 2010January 31, 2010
13,602
$
10.87
$
5.0 February 1, 2010February 28, 2010
$
5.0 March 1, 2010March 31, 2010
$
5.0
(1)
Shares were repurchased from certain of our employees in satisfaction of withholding tax obligations arising from the vesting of their restricted stock. (2) In August 2007, our Board of Directors authorized the repurchase of up to $25.0 million of our outstanding common stock pursuant to plans in conformity with Rule 10b5-1 under the Securities Exchange Act of 1934. During the three months ended March 31, 2010, there were no repurchases of
common stock in the open market. We did not have any unregistered sales of our equity securities during the three months ended March 31, 2010, except for 361,217 shares of our common stock issued in connection with the acquisition of Zemetrics, Inc., as previously disclosed on our Current Report on Form 8-K filed on January 22,
2010. Item 4. Submission of Matters to a Vote of Security Holders The 2009 Annual Meeting of Stockholders was held on February 10, 2010. The following matters were submitted to a vote of the Companys stockholders: Proposal No. 1Election of Board of Directors The following individuals were elected as a result of the following vote:
For
Withheld Eugene G. Banucci
10,143,583
1,312,984 Stephen D. Fantone
11,161,181
295,386 Samuel H. Fuller
11,308,178
148,389 Seymour E. Liebman
11,082,852
373,715 Robert B. Taylor
11,185,665
270,902 Carol P. Wallace
11,288,302
168,265 Gary K. Willis
11,102,530
354,037 Bruce W. Worster
10,333,132
1,123,435 Drs. Banucci and Worster have since resigned from our Board. Proposal No. 2Ratification of appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal 2010 were as follows:
For
Against
Abstain
14,265,122
66,149
20,775 Proposal No. 3Ratification of election of Chris L. Koliopoulos as a director were as follows:
For
Abstain
10,693,980
211,033 There were no other matters submitted to a vote of our stockholders. 29
shares purchased(1)
paid per share
shares purchased as
part of publicly
announced
plans or programs(2)
value of shares that
may yet be purchased
under the plans or
programs (in millions)
Item 6. Exhibits
(a)
Exhibits:
31.1
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 30
SIGNATURE 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. ZYGO
CORPORATION (Registrant) /s/ Chris L. Koliopoulos /s/ Walter A. Shephard Date: May 17, 2010 31
Chris L. Koliopoulos
Chairman, President, and Chief Executive Officer
Walter A. Shephard
Vice President, Finance, Chief Financial Officer, and Treasurer
EXHIBIT INDEX
31.1
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Chris L. Koliopoulos, certify that:
|
||||||||||||||||||||
1) |
|
I have reviewed this quarterly report on Form 10-Q of Zygo Corporation; |
||||||||||||||||||
|
||||||||||||||||||||
2) |
|
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
||||||||||||||||||
|
||||||||||||||||||||
3) |
|
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
||||||||||||||||||
|
||||||||||||||||||||
4) |
|
The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
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5) |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 17, 2010
/s/ Chris L. Koliopoulos
Chris L. Koliopoulos
Chairman, President, and Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter A. Shephard, certify that:
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1) |
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I have reviewed this quarterly report on Form 10-Q of Zygo Corporation; |
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2) |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3) |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4) |
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The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
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5) |
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The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 17, 2010
/s/ Walter A. Shephard
Walter A. Shephard
Vice President, Finance,
Chief Financial Officer, and Treasurer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Chris L. Koliopoulos, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Zygo Corporation on Form 10-Q for the fiscal quarter ended March 31, 2010, as filed with the Securities and Exchange Commission (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zygo Corporation.
A signed original of this written statement required by Section 906 has been provided to Zygo Corporation and will be retained by Zygo Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: May 17, 2010
/s/ Chris L. Koliopoulos
Chris L. Koliopoulos
Chairman, President, and Chief Executive Officer of
Zygo Corporation
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Walter A. Shephard, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Zygo Corporation on Form 10-Q for the fiscal quarter ended March 31, 2010, as filed with the Securities and Exchange Commission (the Report), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Zygo Corporation.
A signed original of this written statement required by Section 906 has been provided to Zygo Corporation and will be retained by Zygo Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
Dated: May 17, 2010
/s/ Walter A. Shephard
Walter A. Shephard
Vice President, Finance,
Chief Financial Officer, and Treasurer of
Zygo Corporation